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BANK FUNDING FOR MEGA-PROJECTS IN DOUBT BECAUSE OF ECONOMIC DOWNTURN

PPP highway construction projects go ahead

SLOVAKIA, suffering from various impacts of the global economic downturn, sees public-private partnership (PPP) projects for highway construction as one of the tools to propel its slowing economy. The Slovak government has prepared three PPP packages which should pave about 157 kilometres of highways and dual carriageways and join the more developed west with the less developed east of the country by the end of 2010.

SLOVAKIA, suffering from various impacts of the global economic downturn, sees public-private partnership (PPP) projects for highway construction as one of the tools to propel its slowing economy. The Slovak government has prepared three PPP packages which should pave about 157 kilometres of highways and dual carriageways and join the more developed west with the less developed east of the country by the end of 2010.

The financial crisis has made the banking sector more cautious, complicating ways to raise the funds needed to finance these mega projects. The Slovak government strongly supports the PPP projects and is going ahead with them.

Ľubomír Vážny, the Minister of Construction and Regional Development, announced on February 18 that a consortium led by French company Bouygues Travaux Publics is the preferred bidder to construct and operate 75 kilometres of the D1 highway between Martin and Prešov. Apart from the French company, other members of the winning consortium are the Slovak companies Doprastav and Váhostav, the French company Colas, Hungarian Intertoll-Europe and Portuguese Mota-Engil.

The preferred consortium submitted a bid of about €3.3 billion, with €2.5 billion being investment costs, said Igor Choma, the director of the National Highway Company (NDS), as reported by the SITA newswire. The second lowest bidder proposed €4.1 billion and Choma said that the lower price was the decisive factor in selection of the winner.

Now Slovakia has to wait for two weeks to see whether there will be any appeals and whether revision procedures are necessary. Vážny expects that after this period the ministry will definitively announce the winner and invite the consortium to talks that should result in a signed agreement.

Originally six bidders enrolled in the tender for the 75 kilometres of highway known as the ‘first package’ of PPP projects. The contract is to project-manage, build, fund, operate and maintain five sections of the D1 highway, also known as northern connection between Bratislava and Košice, from Dubná Skala to Turany, Turany to Hubová, Hubová to Ivachnová, Jánovce to Jablonov and Fričovce to Svinia.

The contract could last up to 30 years.

Crisis may restrict bank funds for projects

“In the context of the financial crisis... it is more difficult to fulfil the promise, as it has bound our hands a bit from the point of view of time,” said Vážny, as cited by SITA. The government of Prime Minister Robert Fico has promised to build the highway infrastructure to connect the eastern and western part of the country by the end of 2010, except for demanding stretches requiring tunnels. These final parts should be finished during 2012.

The total cost of the 157 kilometres of highways and dual carriage ways is estimated at €3.485 billion excluding VAT, according to SITA.

“The crisis has narrowed the financing opportunities from banks,” the Construction Ministry wrote about the impact of the unfavourable financial market on PPP projects, as cited by the TASR newswire. “The liquidity shortage has a much bigger impact on the banks’ decision-making than the quality of the projects or the financial standing or rating of the Slovak Republic.”

The ministry is looking for ways to finance the PPP projects from the European Investment Bank and the European Bank for Development and Reconstruction. Reportedly, these banks are prepared to provide €1.35 billion for construction of the D1 stretches in the first package, the Sme daily wrote. The winning consortium will then need to borrow the remaining financing of about €2 billion from commercial banks.

Propelling the economy with PPPs

The government regards PPP projects as a way to help propel the country’s economy and keep it from suffering further from the economic downturn.

“Slovakia needs highways and dual carriage ways like a dose of salt,” Ľubomír Palčák, the director of the Transport Research Institute (VÚD) based in Žilina, told the Slovak Spectator.

“Analyses which we have made of the impact of acceleration of highway construction have shown huge economic effects.”

These are the direct effects from the construction itself, which can even be multiplied during the economic crisis. And the secondary effects of better road connections with the east should help those regions of Slovakia to further pursue economic development as only 50-60 percent of their potential GDP is currently being generated, according to Palčák. Western Slovakia is using roughly 90 percent of its potential, he says.

“So if we want Slovakia’s GDP to grow further, the biggest development potential is in eastern Slovakia,” said Palčák, adding that he is aware of all the risks accompanying the PPP projects. “However, when we look abroad at how they work, positives prevail over negatives.”

For public acceptance of the concept of PPPs, it is necessary for Slovakia to start its initial project, according to Palčák. The project that is the most prepared is the second PPP package which includes construction of a dual carriageway between Nitra and Tekovské Nemce and a bypass road around Banská Bystrica.

The Construction Ministry is now negotiating with the winning French-Dutch consortium, Vinci Concessions-ABN Amro Highway, over the concession agreement. The consortium will be remunerated by means of an annual royalty paid by the government.

The second PPP package covers highway stretches of about 53 kilometres from Nitra to Selenec, Selenec to Beladice and Beladice to Tekovské Nemce and a northern bypass around Banská Bystrica. They are part of the R1 dual carriageway, known as the southern route between Bratislava and Kosice. The winning consortium has offered €1.503 billion, with construction costs estimated at €553.2 million without VAT, SITA wrote.

“It is very important to gain the acceptance of the public,” said Palčák. “This is also the experience from abroad. Experts as well as the lay public will be convinced that Slovakia is able to prepare, to carry out, as well as to successfully complete such a project.“

It is important that Slovakia now signs proper concession contracts, in which the state and the private sector are in balance, according to Palčák.

This requires proper definition of all technical and legal details and a clear distribution of responsibility.

The least prepared PPP project is the third package. It includes 29 kilometres of the most technically-demanding sections of the D1 highway between Žilina and Martin. This includes stretches from Hričovské Podhradie to Lietavská Lúčka, from Lietavská Lúčka to Višňové and a 7.5-kilometre long tunnel between Višňové and Dubná Skala.

Construction costs are estimated at €1.4 billion, according to the Pravda daily.

The ministry is expected to request construction companies to submit bids for construction and operation of these stretches in March 2009 and the winner might be announced as early as summer this year, the Sme daily reported.

Topic: Transport


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