Governments: Easing the risk transfer

What do Poland’s €1.6 billion A2 road concession, the UK’s £750 million (€854 million; $1.2 billion) Manchester Waste project and Australia’s €2.1 billion Victoria desalination plant have in common? Besides all being big deals that managed to close last year, the answer is: they all benefitted, in one form or another, from government help in order to reach financial close.

likes PPPs

Whether governments chose to implement more structured guarantee programmes or one-off guarantees, 2009 was the year they had to swallow hard and attenuate the risk transfer to the private sector that was one of the main selling points for doing public-private partnerships in the first place.

In Europe, France was perhaps the first government to realise that it would have to throw its weight behind PPPs in the wake of the financial crisis if it wanted to have any hope of progressing its multi-billion-euro project pipeline.

It tackled the problem forcefully when President Nicolas Sarkozy announced a €20 billion stimulus plan for the French economy, with PPPs at the heart. To make sure procurement continued smoothly and financial close could be achieved, the French government said it would set aside €10 billion to guarantee up to 80 percent of the senior debt on individual PPP projects.

Francois Bergere, the head of French PPP unit MAPPP, tasked with implementing the guarantee, says it was “essential in allowing us to get final offers on a number of big-ticket PPP projects and to push the procurement process forward”.

About €8 billion in savings funds from state-backed bank Caisse des Dépôts et Consignations were also earmarked to finance up to 25 percent of each project and, acknowledging the difficulty in securing commercial bank commitments, the government allowed bidders to submit best and final offers without committed bank financing.

The UK took a different approach and in March created The Infrastructure Finance Unit, which would lend directly to projects alongside commercial banks and the European Investment Bank. So far, it has only lent to one project but its £120 million debt tranche was essential to guarantee financial close for the Manchester Waste deal.

Belgium’s Flanders region took a different approach and decided to guarantee the refinancing risk for its transportation projects. But many countries, such as Poland and Australia, provided one-off guarantees when they found it necessary to make sure their projects found a way to closing.

Case Study: Poland’s A2 Highway: the structure that raised eyebrows

The 106-kilometre stretch of Poland’s A2 highway, connecting Nowy Tomysl and Swiecko, was one of 2009’s biggest PPP deals at €1.6 billion. But it initially had a hard time attracting commercial banks in the wake of the global downturn, even though it was backed by availability payments.

At first, banks demanded EIB participation but later guarantees from the Polish state were also necessary. As such, the government essentially bullet-proofed the PPP agreement by guaranteeing that senior lenders would be repaid by the Treasury for any outstanding facilities in the event the concessionaire defaulted.

This structure raised some eyebrows, as it allowed banks to charge between 350 basis points and 400 basis points on a 20-year loan that was, effectively, provided against the government’s A- sovereign rating, with some doubting the European Commission would approve the deal. It did so last November.

But commercial banks paid a bittersweet price for their demands when the government restricted their contribution to €400 million, even though they had got credit committee approval to fund some €700 million. The government insisted the EIB fund at least €1 billion of the project (it had approval to fund up to €1.2 billion of it) since it offered cheaper rates than commercial banks.

A somewhat ironic twist, considering commercial banks had threatened not to participate in the deal without strong involvement from the EIB. Now, it seemed that involvement was a little too strong.