A driving partnership
The Portuguese government joins forces with private enterprise to build road infrastructure projects
written by ◦ Marco Antônio Antunes photos by ◦ Américo Vermelho

Portugal is now one of the world’s most active countries in terms of the development of public infrastructure with private-sector financing and participation. Such relationships are called Public-Private Partnerships, or PPPs. Begun in 1995, the project financing and construction of the Vasco da Gama Bridge was a successful venture that helped local financial agents gain experience in that area and gave the country a positive image in the eyes of international finance agencies looking to engage in this kind of partnership. Acting through its subsidiary Bento Pedroso Construções – BPC, Odebrecht was there at the beginning of the Vasco da Gama Bridge project, which resulted in the construction of one of the largest spans in Europe. Since then, the company has continued playing an active role in similar partnerships.

In 1997, the Portuguese Government decided to speed up construction of the roadways included in the National Road Plan, using the PPPs as the driving mechanism. Since then, it has issued calls for tenders for 12 highways, four of which are open to traffic and eight are under construction. Five of these routes are run by concession companies that are paid with real tolls, and seven use virtual tolls called SCUT (without charge to users). This system is already in use in Great Britain, where it is known as Shadow Tolls.

According to Carlos Armando Paschoal, Managing Director of BPC, these PPPs have a number of advantages for the Portuguese Government, particularly by enabling it to invest in infrastructure works right away because it can count on the private sector’s participation in these projects. “This program shows how important the private sector is for this type of project, because it ensures that the State will be able to build these projects in much less time than it could on its own.”

Renato Mello is BPC’s Investments Director and representative on the boards of the concession companies in which it is active in Portugal. He observes: “The component set aside for the social sectors has had growing weight in national budgets, including European countries, which limits their outlays for infrastructure.” In the case of European countries like Portugal, which are subject to budgetary restrictions due to commitments undertaken when adopting the EU’s common currency, the euro, the adoption of the SCUT model is a way to finance the sort of infrastructure projects that make countries more competitive because they can ship their products to market more efficiently, attract foreign investors and give a boost to tourism.

The Portuguese program is adding 1,500 km to the existing 1,200 km of modern highways in the country. In terms of roadways per inhabitant, this places Portugal on a par with major potential partners in Central Europe. Private-sector investments in this program over the course of a decade total 6 billion euros.

BPC Concessions

Aenor - Northern Highways

Because there are limits to the amount of debt that private-sector companies can take on, each project is paid for with sophisticated financial engineering based on the “project finance” system, in which the guarantee offered to the financing banks is the project’s cash flow once it is completed. “Concession and loan agreements are signed with SPE (specific purpose) concession companies and the initial promoters are the shareholders of those corporations,” says Carlos Dias, the BPC officer responsible for Support for Structured Loans.

Each concession company is responsible for all stages of the project it undertakes: engineering design, execution of the works, financing, operation, maintenance and management of the route. “They are specifically created to carry out a well-defined project. Normally, there are several partners involved – mainly construction companies and more recently financial agencies,” explains Renato Mello. Shareholders come in with about 15% of the total investment required for each project, while the financing banks are responsible for the remaining 85%. The funds used to pay off these loans and provide returns on shareholders’ investments come from the tolls paid by users. In the case of SCUTs, the government pays per-vehicle amounts to the concession company for the use of the infrastructure facility during the 30-year concession period.

Concession companies use bank loans that do not impact on the financial statements of the shareholder-companies because these corporations are minority shareholders, their holdings divided by the number of partners, which can total as many as 13 on each project. BPC’s share of the projects in which it takes part is approximately 15% per venture.

What is a SCUT?

The main advantages for the Portuguese Government include equipping the country with the infrastructure facilities it needs without compromising public debt and, according to comparative studies of the British experience, it affords real savings for the public sector because private companies have greater management capacity. “Thanks to this concession system, the Government is building roads in five years, on average, and paying for them in 30 years through virtual tolls,” says Antônio Marcondes, the BPC Contract Director responsible for construction of all four road concession projects in which the company is a partner: Lusoscut Costa de Prata, Lusoscut Beiras Litoral e Alta, Lusoscut do Grande Porto and Aenor – Northern Highways, the only one using conventional tolls.

On road concessions, the concession company assumes the risk of changes in traffic volume. Therefore, traffic projections are very important to the success of this model, explains Marcondes, who has been with Odebrecht for 32 years and was one of the people responsible for CNO’s first road concession contracts in Brazil.

The engineering and construction risk undertaken for each project is transferred to the ACE (Complementary Group of Companies) Contractor under a back-to-back contract that ensures transparency and establishes the rights and responsibilities of all the parties involved in the venture. Since subcontractors also sign back-to-back contracts with the ACE and the partner companies charged with building the facility, they are all interlinked: the Concession Agreement, the Engineering and Construction Contract, and the Sub-Contractor’s Contract. “This makes contract management more complex during the construction stage,” says Isaac Chazan, BPC’s representative on the Executive Boards of the ACEs.

One of the biggest challenges for the people responsible for BPC concession projects is dealing with the interests of all the partners of each ACE, which are in charge of construction contracts, not to mention the banks’ involvement in the concession companies. “You have to reconcile each party’s interests. As the Odebrecht Entrepreneurial Technology teaches us, we always have to influence others and be influenced with a focus on what is right, and not on who is right,” says Marcondes.