Portugal: The sun goes down

POLITICIANS USUALLY LIKE rankings, especially if they are positive and their countries score near the top. Were Portugal not so mired in debt, news that the European PPP Expertise Centre crowned it Europe’s third-largest public-private partnership (PPP) market last year might have given the nation’s ruling classes cause for celebration.

But Portugal also came third in a much less desirable list: it became the third Eurozone country to have to call on its peers and the International Monetary Fund (IMF) for a €78 billion bailout package, after markets pushed its funding costs to unsustainable heights.

To the chagrin of PPP investors, the new Conservative government sees a direct correlation between these two rankings. That is to say, it believes the excessive use of PPPs by the previous Socialist government is one of the reasons why the country is now buried in debt.

This had the immediate consequence of the suspension of all new PPPs, including a projected high-speed rail link between Lisbon and Madrid. Following a meeting with Spanish transport minister José Blanco on August 17, Álvaro Pereira, his Portuguese counterpart, said a final decision on the fate of the high-speed rail line will be announced by the end of September.

For a consortium of local developers including Brisa and Soares da Costa, which had secured fi nancing in late 2009 for the €1.65 billion first stretch of the line, a cancellation might prompt an indemnity
payment of at least €150 million.

But a drought of new PPP projects is not investors’ only concern: as part of the European Union/IMF bailout, Portugal was also tasked with assessing “the feasibility to renegotiate any [PPP] contracts to reduce the government’s fi nancial obligations”.

At press time, the only example of these renegotiations was the government’s decision to ditch construction and maintenance on portions of the Baixo Tejo road concession, awarded to Brisa, in a bid to save €270 million. According to a local market source, construction had yet to start on the portions to be cancelled.

The source suggested the government might target similar savings in other road concessions launched by the previous Socialist government, given that many of them include the refurbishment and construction of secondary roads in addition to the main highways being built.

TRICKY SALES

With PPPs very much a non-starter for the foreseeable future, infrastructure investors can take succour in Portugal’s upcoming €5 billion privatisation programme. The good news is that many of the companies that are of interest to infrastructure investors turned a healthy profi t during the fi rst half of 2011.

REN – the operator of the country’s electricity and natural gas transmission networks, in which the state owns a 51 percent stake – saw its profi ts increase by 14 percent to €68.3 million. ANA, Portugal’s airports operator, recorded a €28.9 million profit increase, a 9.6 percent surge. Electricity generation and distribution powerhouse EDP – 25 percent-owned by the state – saw its profits grow by 8 percent to €609 million.

So what’s the catch? Mainly: the lack of clarity surrounding the privatisation programme and its calendar, as well as some disturbing caveats.

Take REN, for example. As it stands, there are legal constraints that prevent third-party shareholders from holding more than 10 percent of its capital. That figure goes down to 5 percent if a potential shareholder is actually a sector rival. Without a change in the law – which is said to be under discussion – the privatisation is unlikely to be appealing, except to the most passive of investors.

Things get politically supercharged when you look at a company like AdP, the country’s water operator, in which the government plans to sell a 49 percent holding. In its 2010 annual report, AdP recorded losses of €175.5 million. That figure is the result of €310.8 million in losses from its core water services minus a surplus of €135.3 million, generated by other company activities.

The main reason behind AdP’s deficit is that local authorities have considerable outstanding debts to AdP, born of subsidising the water tariffs they charge their constituents.

Complications like these are potential turnoffs for the foreign capital the Portuguese government so desperately wants to attract. The obvious upside remains the possibility of acquiring companies with a
monopoly position in their sectors at fire sale prices.