Failure by two Spanish banks to syndicate the debt for the first major road project has put future PPP deals at risk, writes Cliff Taylor, Economics Editor

The move to funding road construction through public-private partnership (PPP) deals is entering a crucial phase, with the National Roads Authority (NRA) planning to finalise three major projects over the coming months and go to tender on others next year.

The terms of these deals will be closely scrutinised in the financial markets. This is because it has emerged that the two Spanish banks which are funding the first major road PPP project - the N4/N6 Kilcock-Kinnegad motorway - have so far failed to syndicate the debt raised for the scheme.

Banks would normally syndicate such debt packages to take some of the risk off their own balance sheet.

The failure of the two Spanish banks to syndicate the loans has led to questioning in the financial markets about whether the NRA set conditions which are too onerous on the deal.

Other institutions are believed to have been reluctant to take up part of the debt package, believing that the agreement between the NRA and the project promoters left too much of the risk with the financiers.

However, the NRA strongly defends the terms and says it expects continued strong interest from the private sector in the schemes.

The contract for the 39 km Kilcock-Kinnegad scheme was awarded to the Eurolink consortium, comprising SIAC Construction, an Irish company, and Cintra, a large Spain company. The deal was financed by two Spanish banks, Banco Bilbao Vizeaya Arentinara (BBVA) and Banco Santander Central Hispano (BSCH).

The two banks put together a €235 million financing package and the European Investment Bank also participated in the funding.

Under the deal, the NRA will pay €146 million over the period of construction and €6 million during the period of operation. Construction is expected to take about 3.5 years and Eurolink will be responsible for collecting tolls for the following 26.5 years, an unspecified share of which will be paid to the State, dependent on the level of traffic.

The difficulties in syndicating the debt - and the criticism of the deal terms by some in the financial community - relate to the terms ensuring that the private sector consortium take most of the risk if traffic volumes - and thus tolls - are lower than expected. Also, power to set tolls remains with the NRA.

A number of sources in the financial community - who did not wish to be quoted by name - argued that the NRA's stance may limit the interest in future schemes. However, the NRA itself says that it was merely doing the best deal possible and that it remains confident of a high level of interest in future schemes. It also says that it will take on board some of the market concerns in setting the terms for forthcoming deals.

The terms of three major projects in the pipeline will now be closely watched. All three attracted strong bidding interest, although initial tenders were lodged before the terms of the N4/N6 deal became clear. The next project is the €120 million Dundalk by-pass - which will link to the recently extended M1 motorway. Two shortlisted bidders are due to lodge final offers by September 8th. The two short-listed are the Eurolink consortium and a group called Celtic Roads, including the Irish group NTR, the construction company Ascon and Dragados of Spain.

Two other projects - the €180 million Fermoy by-pass and the €250 million Waterford by-pass - are also down to two bidders each and are due to be finalised over the coming months.

The market will be closely assessing the terms of these deals and particularly the share of risk between the private and public sectors, a key factor in PPP schemes. In turn, this will be a key factor in determining interest in future schemes, such as the Limerick tunnel and the Ballinasloe-Galway schemes, due to go to tender next year.

As Exchequer finances become tighter, PPP schemes are seen as crucial to accelerating the delivery of major infrastructure projects. A number of school and nursing home schemes are either under way or under discussion, as is the giant Metro project for Dublin.

However, the development of the roads infrastructure is likely to remain a key focus, with the NRA under pressure to accelerate the upgrading of the road network.

Under the National Development Programme 2000-06, private finance is meant to contribute some €1.27 billion, or 23 per cent, to road construction costs over the period.

So far, 11 projects have been identified (including the second phase of the West Link toll bridge, currently under construction) which would involve total private finance of €890 million.

However, the programme is running behind schedule and the Exchequer now faces pressures as it looks to finance the programme.