PORTUGAL:Real tolls and shadow tolls

This country’s warmth, picturesque cities and beautiful topography have made it a great tourism/holiday destination for other Europeans. It has $8b of new highways under construction or shortly to be bid. They are either toll projects (concessao’ in Portuguese) or shadow-tolls (‘SCUT’ in Portuguese).

Nigel Purse, a London based partner, project finance at PricewaterhouseCoopers (PWC) is a specialist in Portuguese toll roads. He points out that the Northern (N on map) concession at about $1.3b is large by world standards. Indeed it is often referred to as the largest toll road project in Europe (Maybe if you exclude the big Danish/Swedish toll crossings and the Cofiroute A86W tunnel in Paris?)

It’s a network of roads from the northern plains to the coast, whereas the others are mostly corridor roads. Virtually all involve taking over existing stretches of road. The IP5, for example, involves widening an existing stretch of road (175km out of a project total of 180 km). By contrast the Grande Porto (GP) is primarily about new construction (46km out of a project total of 63km.) Purse says the idea of including in the projects existing stretches of road is attractive to investors: it reduces traffic risk because the existing traffic reduces a project’s dependence on traffic forecasts for revenue projections, and provides a cash flow during construction, which reduces funding requirements.

This “semi privatization, semi project finance approach” in the Portuguese program provides a useful model for road financings elsewhere, Purse says.

The projects are developed and run under the Junta Autonoma de Estradas (“JAE”), which acts as the government agency for each road. (‘junta’ doesn’t have the same sinister meaning in Portuguese, it just means organization.) Each concession is the subject of competitive bidding in which bidders must bid to a standard project package but may also bid variants that they propose. Once bids are submitted they are all publicly opened and then evaluated. The two best bidders are then invited to submit a Best and Final Offer (“BAFO”), following an intensive period of negotiations in which the concession agreement and most of the principal documentation is negotiated.

Bids are evaluated according to a number of criteria: (1) expected net present value of toll payments (2) degree of risk transferred to the concessionaire (3) dates of entry into service of each stretch of road (4) corporate, financial and contractual robustness of the concessionaire (5) technical quality of the bid (6) safety and service levels to be provided. A full evaluation is published at the point of selection for BAFO, justifying the selection.

Fifteen projects so far put out include seven real tolls and eight shadow-tolls (ST). Purse says it is not clear what criteria the government uses to decide whether projects will be real or shadow tolls. There’s undoubtedly a lot of local poltiics involed but in the case of the Costa de Prata (CDP) it has a free road alongside and there is a desire to encourage traffic to use the new road.

Under a shadow toll (ST), developers design, build and finance the construction and operate the road (DBFO) but instead of levying a toll on motorists they are paid by the government according to a formula that gives heavy weight to the number and class of vehicles and the miles they travel - hence the term shadow tolls.

The British pioneered the idea under Margaret Thatcher. The UK Highways Agency instituted eight ST projects between 1994 and 1997 and in the Spanish capital of Madrid five ST roads were concessioned between 1997 and 1999. Finland has a couple and New Brunswick Canada recently converted the Fredericton-Moncton toll road to STs. In Australia ST is being examined for sparsely trafficked rural roads.

Advantages of STs are said to be (1) avoidance of the need for toll plazas and onsite toll collection, though electronic tolling and imaging are reducing those costs anyway, plus (2) the political bonus of presenting the public with a ‘free road’ and (3) the lack of ‘diversion’ of traffic to parallel free roads by a toll road.

Disadvantages are that the state still has to raise money for the road by taxes and that users are not subjected to the real costs of using the road. The government remains the master in the case of ST, whereas with real tolls the tollster is being paid directly by those he serves. Since the users pay nothing under ST they will tend to overuse the road as compared to a toll road, which motorists only use up to the point where the value of the trip is matched by the toll rate. Real toll roads have the opportunity with variable toll rates to encourage a small but important margin of users to move the time of their trips. Real tolling is therefore a potent traffic management tool.

The European Investment Bank (EIB) has been a supporter of all these Portuguese road deals and has lent up to half of project costs. It requires a guarantee and this has been provided largely by commercial banks, who have also provided the balance of the senior debt funding. The arranging banks have mostly been Portuguese. However, Bayerische Landesbank was an arranger bank to STs and Credit Lyonnais to the West Concession, which was successfully syndicated to a wider European banking market in 1999. Most of the bidding groups on the latest roads includes some international banks.

The father of the current road projects is the Second Tagus Crossing (or Lusoponte concession) in Lisbon, the capital and principal city. The concessionaire took over the existing Tagus Bridge and built a new one in exchange for the right to collect tolls on both. That contractual framework are the template for the three road deals so far completed. Part of the finance for the Tagus was raised in Deutschmarks, raising issues of foreign exchange risk since tolls are paid in Escudos. Sit-down protest demonstrations on the old bridge were staged when the tolls were raised by large amounts at the start of the concession.

Europhilia

The advent of the Euro has been crucial to the funding of the later projects, Purse says. The writing of toll rates and everything else about these deals in Euros eliminates the foreign exchange risk. The Portuguese projects have mostly been bid by Iberian (Spanish and Portuguese) companies, plus the French Eiffages/Egis. The Portuguese toll projects have used bank lending not bonds. The ST roads have used loan insurance guarantors like MBIA, AMBAC and FSA. The Portuguese program, Purse says, shows that one of Europe’s smaller countries can develop an “enormous and unprecedented program of transport infrastructure investment on a private sector basis.” It demonstrates, too, that there is a strong appetite for such projects both from project developers and the capital markets, and that banks in general have come to terms with the requirements of such projects - in particular the very long term maturities with flexibility over structure and innovative interest rate mechanisms. Lenders for road projects are just as willing to lend for real toll risk as they are for the shadow toll projects, Purse says.

PWC has been lead financial adviser on about a quarter of the Portuguese toll projects. It most recently advised on the Costa de Prata, a 102km ST project south of the country’s second city Porto. (Contact Nigel Purse PWC 44 7710 151 975)