Norway Ahead

1 March 2017 Norway’s new road programme is attracting significant interest from international investors. Dan Colombini reports on how the country has overcome political adversity to deliver an exciting pipeline of deals

Good things take time. Not an uncommon theory of course, but certainly true of the fledgling Norwegian PPP space as 2017 gets underway.

Although far from a traditional bastion of the model, Norway is beginning to make in-roads into partnering with the private sector for its infrastructure.

With little resembling a pipeline over the years, the country has recently launched a new road programme to be procured under a PPP model and overseen by the country’s public roads administration, Statens Vegvesen.

The country does have some prior experience of PPPs, after three successful road deals were procured between 2003 and 2006. However, with an anti-PPP Labour government in place since the last of those, the model has fallen into disuse. But under the Conservative government, led by Prime Minister Erna Solberg, which has now been in place since 2013, this is starting to change.

“The Norwegian government recognises the benefits of PPP,” says a spokesperson for Statens Vegvesen. “The Ministry of Transport and Communications has asked the Norwegian public roads administration to prepare three new projects.”

At the end of last year, first details began to emerge on the plans, which will see three deals hit the market in the coming year. First up will be the Rv.3/Rv.25 PPP in Hedmark. This will be followed by the Rv.555 Sotrasambandet in Hordaland and the E10/Rv.85 in Nordland and Troms.

Progress has clearly been slow, as the Conservative government grappled with various political issues to get the programme off the ground, but in the latter stages of 2016, details were finally issued on the projects. And it has caused ripples of excitement across the market.

“PPPs in Norway – as in the Nordics generally and many other countries – are a political hot potato,” explains Fredrik Lindblom, partner and head of finance at law firm DLA Piper. “The government and the politicians have been hard at work over the past few years finding a model that is the least politically controversial.”

Norway has fought hard to ensure this programme did not attract the kind of negative attention that similar deals have generated in other countries across the world.

After all, developing a PPP pipeline is never an easy thing. And so it is no surprise that teething issues have appeared when making this kind of leap with what is essentially publicly owned infrastructure.

“There is an inherent reluctance in the country against privatisation as a concept or having too much private capital into what is inherently public tasks,” adds Lindblom.

“The current government was elected in 2013 with these projects being part of their electoral campaign items and due to these issues it has taken much more time than I think any of the market anticipated.”

It may just be worth the wait however. Norway is starting to gain many friends with the way it has moved ahead with the first deal in the pipeline, at least.

With PwC working with the government as advisers, Statens Vegvesen has been shrewd not to run before it can walk – a mistake so frequently made when trying to launch a project pipeline.

So, after much due diligence from all concerned, the inaugural project will hit the market imminently. At the time of going to press, the procurement of the Rv. [National Road] 3 / Rv. 25 Ommangsvollen — Grundset/Basthjørnet PPP was anticipated to commence on 1 March 2017.

Construction will then begin a year later and be completed in 2020. It will be operated under the PPP until 2040.

The PPP comprises the design, financing, construction, operation, management and maintenance of the road from Ommangsvollen in Løten to Grundset in Elverum, with a new National Road 25 Åkroken — Grindalsmoen in Elverum, including associated crossing and side facilities. It will cover 14.2km of four-lane motorway, 1km of four-lane approach road to Elverum and 10.5km two/three-lane road with central reserve.

This also includes design, financing and construction of restored local roads and service roads, as well as foot and bicycle paths. That is in addition to designing, financing and building a new control and traffic station at Ånestad in Løten.

When the stretch of road is completed and ready for commissioning, the tenderer will receive a capital subsidy from the authority and annual remuneration during the contract period.

Enabling legislation for the project was submitted to parliament by the Ministry of Transportation just before Christmas. The document focuses mainly on tolling and related issues such as accounting and funding. There are also comments on technical aspects, including what will be covered by the PPP contract.

Partnerships Bulletin understands there will also be a 50% capital contribution at traffic opening, as well as payment of all VAT funds/amounts related to construction at the same time. There is no traffic risk and three core payment components: capital contribution, availability payment and payments based on operational quality/performance.

The operational period will be 20 years, which differs from the earlier 25-year periods employed for the three pilot projects from the previous decade.

The financial model is based on fixed interest through the operational phase, but the final choice between fixed, floating or a combination will be decided through the procurement process.

“The pipeline of projects is technically well-developed, and the risk allocation and procurement plans appear reasonable and transparent,” says Alex Kornman, senior vice president at Macquarie Capital Europe.

“The stable Norwegian legal and political systems are attractive to investors, as is the use of PPPs to drive innovation and risk transfer – as opposed to pure cost reductions – since the Norwegian government does not face the funding constraints that some other governments do.”

So, lessons have been learned. One of the major criticisms of the first pilot deals back in the early to mid-2000s was that the government was thought to be facing too many financing costs compared to more traditional ways of funding such deals. As a result, the government has been careful to avoid this issue under the new contracts.

“The government has gained experience from the first projects,” explains Jan Einar Barbo, partner at Norwegian law firm BA-HR. “The financing side of things will be different with these new deals, with the total remuneration to be paid after the road has been opened in a bid to avoid the previous concerns.”

And there are certainly no shortage of investors around to contribute to the capital cost of the new projects.

“Given the size of the deals, at €500m- €1bn each, international investors can offer debt and equity at highly competitive rates,” adds Kornman. “Additionally, international players can bring technical solutions and financial structures that minimise cost and maximise deliverability to Statens Vegvesen.”

There is now talk that the organisation will put out two additional projects this summer – above the three already in planning. Whether or not the government sticks to this timeline, there is an expectation that it will at least provide more concrete information on where the programme is heading in the coming years.

“That would give a total project pipeline of five projects,” says Lindblom. “They’ve been very meticulous about choosing the right projects and in particular which ones are best suited to a PPP model, so now they have to deliver on these proposals.”

“We see these projects, and particularly the first one (Rv3), as a test-case for PPPs in Norway, and if successful we expect additional projects to be added to the pipeline,” adds Kornman.

This leaves the agency in a strong position to finally deliver on the market’s potential in Norway. A successful set of deals in the coming months could open the door for more opportunities going forward. After all, if there is one thing that investors want to see, it is proof that a government entity can come good on its intentions.  

This page was last updated on:
1 November 2017.

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