A PIIGS ear

1 February 2013 Despite continued protests and increased austerity measures, Europe’s most distressed markets may be through the worst of the economic gloom. Aaron Weinman investigates how the PIIGS region is using PPP s to resurrect their battered economies
It’s no secret that the PIIGS region, comprising Portugal, Italy, Ireland, Greece and Spain, has borne the brunt of the economic whirlwind hitting the eurozone over the past few years.

But is there light at the tunnel’s end for the struggling markets? In January, European Commission president José Manuel Barroso claimed that the worst of the eurozone crisis may now be over. “I think we can say that the existential threat against the euro has essentially been overcome,” he said. “In 2013, the question won’t be if the euro will or will not implode.”

As governments look to decrease their deficits and begin to focus on growth rather than cuts, there are signs in some countries that a pipeline of projects is re-emerging. With little money in the public coffers, private investment in long delayed public infrastructure projects is badly sought.

And regardless of the fact that the region’s recovery is still far from secure, several companies continue to support infrastructure PPPs, from Spanish highway concessions, through Italian hospitals to Greek waste programmes.

Nonetheless, the road to recovery remains long and rocky – and some significant differences remain between the countries. While Ireland might now be showing the way for the rest of the PIIGS, PPP opportunities in the region are likely to remain patchy in 2013.

Ireland
In November, Ireland’s Department for Education and Skills signed its first PPP deal since June 2010, finally launching its Schools Bundle Three contract.

Construction firm BAM and Dutch pension fund PGGM signed off on the deal to design, build, finance and maintain eight schools throughout the country. Since the last deal reached financial close in 2010, Ireland has seen a series of projects scrapped, as schemes such as the €2bn Dart Underground and €3bn Metro North schemes – both in Dublin – failed to attract private finance.

Brian Murphy, chief executive of Ireland’s National Development Finance Agency, which signed the latest deal, says its conclusion “sends a positive message to stakeholders”, given the degree of difficulty Ireland has faced over the last three years.

“The debt side of funding has pulled out of Ireland in the past few years, mainly because projects were cancelled and the affordability wasn’t there,” Murphy says. “However we did retain the schools programme, and over the last 12-18 months the signs have been encouraging – public finances have improved, indicated by the bond market, and the government realised the need for a stimulus package.”

Ian MacFarlane, director at JCRA financial risk consultants, adds that the Irish government has successfully implemented its stimulus package and austerity measures – but is not out of the woods just yet.

“Ireland’s market is far more open than other PIIGS nations, but risks remain as its major problem is a lack of a proper functioning bank system,” MacFarlane says.

Like Scotland’s booming market, many projects in Ireland’s pipeline are tendered out in bundles, which Murphy says helps attract bigger players from the private sector. “[The] minimal size to generate interest and value for money is in excess of €70m-€80m,” he says.

The government is looking to stimulate infrastructure with its own funds. “Our sovereign debt fund will be re-directed as an infrastructure investment fund,” explains Murphy. “Part of this will support the PPP market and so far the dialogue between investors has been positive.” The European Investment Bank and local Irish banks have also begun to express interest in the country’s pipeline once again.

And there is plenty to show interest in: more than 30 buildings at the Grange Gorman University; 20 primary care health centres; two bundles of courthouses; plus new police regional headquarters are all being planned for 2013.

“Ireland’s pipeline is highly varied,” says MacFarlane. “Some players prefer smaller-scaled projects, while others are looking for greater economies of scale.”

Murphy admits that after the past few years, the Irish market’s credibility is on the line. “Our PPP pipeline forms a critical part of our infrastructure programme and investors’ confidence will wane should we incur more delays.”

Spain
Spain remains mired in debt, and therefore procuring infrastructure is proving a tall order. Like in other PIIGS countries, projects were culled by ministers forced into a heavy dose of austerity. However the little pipeline it has left is likely to be developed via PPP, according to Raul Perez Lopez, infrastructure and PPP manager at Ernst & Young’s Madrid branch.

“Right now it’s difficult to issue any kind of project, because the biggest challenge is financing,” Lopez says. “But the thing is that if there are any big projects, they will probably be launched under a PPP schedule, as the government works to reduce its deficit.”

Early December saw the Catalonian government appoint a preferred bidder for its Cadí and Valvidrera tunnels, but other projects will be few and far between. “Most of the activity in Spain will be related to the secondary market, so it would appear that there is no need for new infrastructure for some years,” says Lopez’s colleague, Carlos Andres.

With a continuing decline in toll users, roads are not the attractive investment they once were, and Lopez says private investors are shifting their interest to the hospital sector, despite the criticism the market has attracted of late.

“Spanish society is suffering with cuts on health and education and there is concern about plans for health privatisation,” he says. Nonetheless, Lopez believes the coming year is likely to spawn a series of health projects. Given the concern surrounding out-and-out privatisation in healthcare, Lopez says a PPP model may gain popular support because of “the people’s realisation that PPPs produced successful projects”.

Assets with higher levels of demand risk as opposed to government risk are safer bets, says Lopez. Funds wanting a solid investment platform and an exit after five-to-eight years may even view Spanish highways in a positive light.

“Nowadays we’re seeing double digit discount rates on Spanish assets, and developers are willing to sell them to clean debt from their books,” Perez says. “It could be a good opportunity if you want to exit in the short-term, or even if you did want to invest longer-term, you could benefit as it will be difficult to achieve cheaper prices in the future.”

That, though, requires confidence that the Spanish economy and euro itself will make a good recovery in the longer term.

Portugal
Previously reliant on its toll road operations, Portugal – much like Spain – has seen weak traffic volumes in the last 12 months. This is expected to decline further in 2013, says Joanna Fic, assistant vice president at analysts Moody’s.

“The issuers most exposed to traffic declines are Brisa Concessao Rodoviaria (BCR),” says Fic. “Truck volumes are hit the hardest after lower manufacturing production in Portugal and weak domestic demand.”

According to Moody’s research, BCR experienced a 15% drop in traffic numbers last year. Alongside Portugal’s austerity measures hitting traffic volumes, Fic says Portugal’s toll roads were further affected because they aren’t transcontinental through-routes.

“Traffic in these areas is dependent on the general economy and disposable income,” she says. “In the current climate of falling disposable income, people are turning to alternate, cheaper modes of transport.”

Portugal’s PPP costs are estimated at approximately €26bn, and as part of the mandatory conditions of the European Union’s bailout, Prime Minister Pedro Coelho intends to cull 30% of the country’s PPP obligations.

But while there may not be many opportunities for new infrastructure projects in Portugal, investors could be attracted by the country’s eagerness to privatise many of its assets. Its airports in Lisbon, Faro and Porto moved another step closer to completing privatisation in 2012, shortlisting five firms to take over the airport operations.

Italy
Italy’s toll road operators have reported significant declines, with Atlantia and Society Initiative Autostradali and Services reporting traffic decreases bordering on 8%, says Fic. Traditionally reliant on cross-country logistics, Italy’s truck volumes have decreased between 17% and 20% since the crisis hit.

Like Portugal, some road infrastructure is pursuing a completely privatised option, decreasing the likelihood of further PPPs in 2013. A source close to Italy’s Brebemi toll road project says tenders in the country’s pipeline going back as far as 2003 are struggling to reach financial close.

“The only project getting close is the Brebemi toll road in northern Italy,” the source says. “The project came under pressure after it was lucky to achieve an extension to its loan, and even though it was supposed to close at the end of the year, the project’s financing is still up in the air.”

The country’s public roads body Autostrade agreed to a financing structure late last year with banks including UniCredit, MPS, Centrobanca, BIIS and Banco di Brescia on board. However the project’s inability to move forward, “paints a negative picture for infrastructure PPPs”.

Hospitals remain the country’s solitary area of PPP growth, with three hospitals keeping the market alive Treviso’s €200m hospital, the €171m San Gerardo health centre and the Trento hospital project are the most promising PPPs in the pipeline, says an adviser close to the projects.

“The authorities have appointed a preferred bidder for Treviso, and the other hospitals are both at shortlist stages,” the source says. “The pipeline for infrastructure is really low right now, but these three projects should make an impact, given the level of interest from the private sector.”

Greece
Greece continues to produce PPP tenders, particularly in waste and energy. Last year, Greece shortlisted bidders on waste management facilities in the towns of Serres and Ilia, with preferred bidder announcements due later this year. And last November, four waste treatment projects were launched in the Attica region alone.

But given the financial strain the current administration faces from the International Monetary Fund, it’s believed the government will push to privatise its assets. After two bailouts totalling $325bn, the Samaras government has pledged to close many government departments alongside the sale of state assets, a move which could potentially harm its future pipeline of PPPs, a spokesperson from the PPP Secretariat admits.

Nonetheless, he says its waste management schemes “are in no danger of being procured differently, and will appoint preferred bidders over 30-year contracts”.
“We realise the utilisation of a PPP model fosters healthy competition and the selection process promotes transparency and safeguards the public interest.”

But finding investors willing to put their money into the country could prove difficult. So far, the country has found plenty of home grown firms willing to bid on projects, largely because they have precious few other opportunities.

The lack of international presence on the deals leaves a huge question mark over whether the debt market will be willing to invest when these projects get nearer financial close.

This page was last updated on:
15 July 2013.

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