Case Studies: Lusoponte Bridge, Portugal

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Project Overview
Lusoponte1.png
Figure 1: Vasco da Gamma Bridge - Overview
Vasco da Gama Bridge (Lusoponte), Portugal
Project Type: Brownfield
Type of Project Financing: DBOMT
Contract Duration: 32 years
Budget 645 million Euros
Project Time Line: 1992-2028
Other important dates for the project:
1992: Date Project conceived
1993: Date of Tender Call
1994: Date Contract Approved (signed)
1994: Date of Financial Close
1996: Lusoponte begin to operate the older bridge “25 de abril”
1998: Opening of the new bridge “Vasco da Gama”

Introduction

In the early 1990s, the Lisbon urban area south of the Tagus river, representing a significant part of the metropolitan area of Lisbon, was connected to the main city by just one bridge. This situation presented a major constraint on traffic, not only in the city but also between the northern and southern parts of the country. In 1992, the government decided to open a bidding process for a second bridge. This new bridge, called ‘Vasco da Gama’, connected the eastern part of Lisbon to the southern rim in Alcochete. A design, build, finance, operate, maintain and transfer (DBOMT) model was set up in 1993 to build the new bridge (to open in 1998). There was a condition that the operation and maintenance of the older bridge (the ‘Ponte 25 de Abril’) also be incorporated as of 1st of January 1996.

The Contracting Authority (Public Party)

The contracting authority was directly the national Government. For all the preparatory activities of the project, including the tender process and the interaction with the tenderers, the Government created the cabinet GATTEL (Gabinete de Travessia do Tejo em Lisboa) in 1991, which was later dissolved in 2001. Currently, the contractual relationship with Lusoponte is managed by Infraestruturas de Portugal, a State owned company responsible for the management of the national network of road and rail infrastructure, and regulated by the Instituto da Mobilidade e dos Transportes, the transport regulator.

The Concessioner (Private Party)

The concessioner Lusoponte consisted of a consortium of mostly construction companies mainly of Portuguese, Norwegian and French origin. The list of the initial project sponsors and respective shares was the following:

Kvaerner Group (24.8%); Campenon Bernanrd SGE (22.0%); Bento Pedroso Construções (14.8%); Mota e Companhia (13.8%); Somague (13.8%); Teixeira Duarte (7.5%); H.Hagen (2.8%); Edifer (0.4%).

The shareholder structure changed during the project and nowadays the two main shareholders are Macquarie Infrastructure Limited (UK, 31%) and Vinci Construction Grands Projects (31%), together with several Portuguese construction companies.

The construction of the new bridge was contracted with another company, Novaponte, which is owned by the same shareholders of Lusoponte. Operating and maintenance (O&M) was also contracted with other company, Gestiponte, owned by the same shareholders.

Sources of Financing

The initial concession was financed by private funds and European Union funds, along with the revenues from the Ponte 25 de Abril, but without public funds.

An important source of private debt was released from the European Investment Bank (EIB). In 1993, before the Euro, Portugal was only able to finance in medium term (usually on a 3-5 years maturity, even for government bonds). A 20 year loan was only possible by the EIB. Therefore, most of the debt came from EIB and not commercial banks.

List and respective contribution:

  • EU funds - 319 M€;
  • “25 abril” bridge revenues - 50 M€;
  • EIB loan - 299 M€;
  • Banks loan - 120 M€;
  • Equity - 199 M€.

Users

Two types of users represent most of the traffic in “Vasco da Gama” bridge: users from the east side of the Lisbon urban area, along with national traffic linking the north and south of the country. On the opposite, for the old bridge (“25 de Abril), traffic comes most from urban users from the west side of the Lisbon urban area. An important goal of the project was to divert the north-south traffic in the country from passing through the city. Nowadays, almost no heavy-duty vehicles use the old bridge, using the alternative Vasco da Gama bridge instead.

Key Purpose for PPP Model Selection

The Vasco da Gama bridge was the first road infrastructure project in Portugal to be implemented on the basis of a PPP. The main driver for the use of the PPP model was political and referred to the lack of capacity of the State to finance the construction of the bridge, as expressed by the Minister of Public Works responsible for the decision. In a moment where Portugal was investing intensively in infrastructures, and at the same time, reducing the public budget deficit, in order to meet the Euro zone convergence criterions, using PPP, as an off balance-sheet operation, was seen as critical. The efficiency and risk allocation issues don’t seem to have been major decision factors compared to the financing issue.

Project Timing

The following dates characterize the most important events of the project:

1992: Date Project conceived 1993: Date of Tender Call 1994: Date Contract Approved (signed) 1994: Date of Financial Close 1996: Lusoponte begin to operate the older bridge “25 de abril” 1998: Opening of the new bridge “vasco da Gama” 2028: End of the concession contract (as a result of former renegotiations)

The concession period was to end when 2.25 billion vehicles had crossed both sides of the river - expected to occur between 2019 and 2022 - or in March of 2028, whichever came first.

Project Locality and Market Geography

The bridge connects two sides of the Metropolitan Area of Lisbon, an area with 2,5 million people. Previously this area was served by only one, congested, bridge. The existing bridge served not only the two sides of the metropolitan area, but was also the main north-south connection of the country, linking the relevant highways on each side. The existing bridge had no relevant alternatives (only ferries) or competition. The new bridge provided mostly a channel for the north-south traffic and became an alternative to a small share of the traffic within the metropolitan area. It also created an effect of making available a whole new area to be part of the connected metropolitan area, triggering some local real estate development in the southeast margin of the river.

Procurement & Contractual Structure

Tendering

The concession was chosen through an international public tender with two stages, to which 8 consortia have applied. The second stage consisted of negotiations with the two best consortia.

Contract Structure

The contract is for the design, finance, construction, operation and maintenance of the Vasco da Gama bridge, as well as for the operation and maintenance of the 25 de Abril bridge.

During the concession period, Lusoponte would have exclusive rights on all River Tagus crossings. The absence of future competition for Tagus Crossings was an important incentive to access private funds for the project, and the financial scheme depended on these pre-conditions. The contract included a number of renegotiation clauses based on the same pre-conditions. Renegotiation could also be triggered by exceptional events in the currency market (unfavourable movement of the Escudo/Deutschmark exchange rate prior to the introduction of the Euro) and specific legislative changes with a direct impact on the concession.

Risk Allocation

In order to secure financial sustainability three conditions were agreed upon at the time of contract:

  • Toll prices on the existing crossing (25 de Abril bridge) would gradually increase, so as to be equivalent to those on the Vasco da Gama bridge by 1998.
  • After 1994, the existing exemption on toll payments during the month of August on the 25 de Abril bridge should cease.
  • During the concession period, Lusoponte would have exclusive rights on all River Tagus crossings.

The absence of future competition for Tagus Crossings was an important incentive to access private funds for the project, and the financial scheme depended on these pre-conditions.

The contract included a number of renegotiation clauses based on the same pre-conditions. Renegotiation could also be triggered by exceptional events in the currency market (unfavourable movement of the Escudo/Deutschmark exchange rate prior to the introduction of the Euro) and specific legislative changes with a direct impact on the concession.

Risks to the public sector requiring possible financial compensation to the PPP were limited to unilateral changes to the contract, force majeure, specific legal changes, delays in EU grant payments, or delays in land expropriations. If any of these occurrences happened, the project would be rebalanced to meet minimum financial stability requirements:

  • Debt coverage ratios stated in the contract: 1.13 (1998), 1.19 (1999) and 1.25 (after 2000) reaching 1.69 throughout the lifetime of the loan);
  • Minimum IRR for the project of 11.43% before taxes, mainly measured through dividend policy.
  • Compensation could be based on any of the following three mechanisms, or a combination thereof:
  • Increase in the concession period;
  • Increase in tolls;
  • Direct financial compensation.

Vasco.png
Figure 2: Risk allocation - initial

Performance

In 1994, the government increased the 25 de Abril bridge tolls, which led to a major political crisis involving street riots and a bridge blockade. To avoid future conflicts, the government decided not to increase the toll, maintain the August exemption and start a discount scheme for frequent users. However, these changes were valid for one year only, and had to be renewed each year in the period 1995-2000.

As mentioned previously, the private sector investment was initially to be paid for by tolls from both bridges. The fact that the 25 de Abril bridge tolls did not increase reduced the expected revenues, unbalancing the financial base case. This loss of revenues lead to renegotiations, and consequently an annual compensation in the form of the first five financial rebalancing agreements (FRAs). The financial model included in the initial contract was used to assess the financial impact of government decisions. This base case model included projections for traffic volume, inflation, economic growth, costs and revenues.

In 2001, a global agreement (referred to as FRA 6) was reached to end the need for successive FRAs. It had three main objectives:

  • To create a pricing policy that differentiates between toll prices on each bridge by keeping prices on the 25 de Abril bridge lower than those on the Vasco da Gama bridge;
  • To adapt the initial financial model to the new toll conditions;
  • To end all remaining renegotiation requests and conflicts, and adapt the concession to the new financial conditions of the Eurozone.

These new conditions allowed a refinancing of the concession, and substantially lowered the interest rate and cost of debt. Portugal’s entrance into the Eurozone, along with conditions in the financial markets during that period, had significantly reduced interest rates in the country as a whole, making credit abundant and cheap. The private sector fully benefitted from the new financial conditions at Lusoponte.

The global agreement compensated the private partner in different ways:

  • Direct financial compensation (a total of EUR 306M, divided between 2001 and 2019);
  • An increase in the concession period until 2030, adding 7-11 more years;
  • A change in the risk allocation matrix, reducing the risk to the private partner;
  • The ending of Lusoponte’s responsibility for the operation and maintenance of the 25 de Abril bridge, reducing the overall cost to the private sector;
  • Continuation of the concession at a pre-tax IRR of 11.43%;
  • Compensation for any future corporate tax rate changes of more than 1%.

In spite of these benefits given to Lusoponte, there was no claw-back clause that would have allowed the public sector to share any future additional (unexpected) benefits.

In 2007, Lusoponte asked for an FRA 7 following changes in corporate tax rates, a reclassification of vehicles in terms of toll payments, the introduction of tolls in the month of August, and additional maintenance works necessary on the 25 de Abril Bridge. As a consequence, the government paid Lusoponte EUR 22M directly.

In conclusion, several renegotiations that have taken place over the past 15 years have significantly changed the concession characteristics. As described, there were changes in the risk allocation matrix and the cost of debt has decreased. The most significant change is that the project is no longer privately funded but, instead, has received various types of public funding such as direct financial compensation, an increase in the concession period and a reduction in concession maintenance costs.


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Figure 3: Risk allocation - current

Project Outcomes

Lusoponte was the first case in Portugal of project finance in large transport infrastructure projects and set a model for future projects.

The project was delivered in time and with no cost overruns, despite the high construction risk associated with the construction of a bridge in a difficult terrain.

The traffic level expectations were generally met, except for the period after the crisis which caused the traffic to be significantly below expectations.

The quality of the infrastructure during the 19 years since construction is considered to be of high level both from the perspective of the contractual specifications, as well as the concession’s accomplishment of those specifications, with a high user satisfaction.

The initial funding model partly failed due to the major backlash originated by the fact that part of the costs of the new bridge were being funded by an increase in the toll of the existing bridge. The backlash led the Government to withdraw the intention to use this funding mechanism, replacing the corresponding share by public subventions.

In terms of public opinion, the Lusoponte project is publicly perceived as damaging for the public interest. This idea has some backing from the fact that the concessioner was favoured in renegotiations by, as pointed by the Court of Accounts, not decreasing its rate of return following reductions of revenue risk (by replacement of toll revenues for subventions) and maintenance risk (by passing the responsibility for the operation and maintenance of the 25 de Abril bridge to the State). The negative public opinion about the project is aggravated by the fact that the ex-Minister of Public Works during the preparation phase became part of the administration of Lusoponte after he left the office, even though there was a 12 year gap and the main shareholder changed inbetween; therefore, these ethical claims seem exaggerated.

References

  • Carbonaro, G.A. (2011) PPP and project finance in transport - the Tagus Bridge in Lisbon. European Investment Bank.
  • De Lemos, T., and Eaton, David, and Betts Martin, and Tadeu, Luis de Almeida. 2004. Risk management in the Lusoponte concession—a case study of the two bridges in Lisbon, Portugal. International Journal of Project Management 22: 63-73.
  • Diário da República, Portaria n.º 366-A/93, Consurso internacional para a nova travessia rodoviária sobre o Tejo em Lisboa, 31 de Março de 1993.
  • Diário da República, Decreto-Lei 168/94, bases da concessão da concepção, do projecto, da construção, do financiamento, da exploração e da manutenção da nova travessia sobre o rio Tejo em Lisboa, bem como da exploração e da manutenção da actual travessia, , 15 de Junho de 1994.
  • Diário da República, Decreto­lei 9/97, regime de realização dos concursos com vista à concessão de lanços de auto­estrada, 10 de Janeiro de 1997.
  • Garcia, José Luís; Subtil, Filipa (1998) Conflito social e ambiente — a Ponte Vasco da Gama. Análise Social, vol. XXXIII (151-152), 1998 (2.º-3.º), 707-746.
  • Manteigas, Rui (2010) O Programa de PPP e seu Desenvolvimento. Apresentação no 6. Congresso Rodoviário Português.
  • Miranda Sarmento, J. & Renneboog, L. 2014. The Portuguese Experience with Public-Private Partnerships.
  • Miranda Sarmento, J., & Renneboog, L. D. R. (2014). Anatomy of Public-Private Partnerships: Their Creation, Financing, and Renegotiations. (CentER Discussion Paper; Vol. 2014-017). Tilburg: Finance.
  • Pinto, E. (2012) The Lusoponte Concession: Case Study – Net Present Value of Government Transfers and Risk Allocation Analysis. Dissertation MSc Economics.
  • Tribunal de Contas, Relatório Auditoria do Tribunal de Contas nº 31/2000, available in: http://www.tcontas.pt/pt/actos/rel_auditoria/2000/31-2000v1.pdf
  • Tribunal de Contas, Relatório de Auditoria ao Acordo Global celebrado entre o Estado e a Lusoponte; Relatório 47/2011 da 2ª secção do Tribunal de Contas, available in: http://www.tcontas.pt/pt/actos/rel_auditoria/2001/47-2001v1.pdf
  • Verhoest, K., Carbonara, N., Lember, V., Petersen, O. H., Scherrer, W., & Hurk, V. d. 2013. Public private partnerships in transport: trends & theory, P3T3.