Finland paves road for future PPPs

Author: | Published: 1 Feb 2006
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The year 2005 marked the beginning of a new era for public-private partnership (PPP) projects in Finland. After completing Finland's largest-to-date project finance transaction, effected through the cooperation of the public and the private sector, the country has taken a big leap towards the proliferation of this financing method, achieved with the increasing expertise and experience that both the state and the companies and advisers involved have to offer. The project in question is the construction of the E18 Muurla – Lohja motorway section, the largest road project ever carried out in Finland. The total value of the concession was about €640 million and the construction totalled nearly €300 million. The design, build, operate and finance contract (the concession agreement) for the project, along with the related project and finance documentation, was signed on October 27 2005. E18's predecessor, the Highway Four project for the connection between Järvenpää and Lahti, was an indisputable success – it was completed a year ahead of schedule, improved traffic safety and provided a boost to the business life in the towns it affected – so hopes are high for the E18 Project to achieve the same, if not more.

The project

The E18 Project relates to the last outstanding section of the motorway connecting the Finnish capital Helsinki and the city of Turku, a port and business centre on the south-western coast of Finland. The total length of the road section is 51.3 kilometres, and it will feature seven highway tunnels (including the longest road tunnel in Finland), 76 bridges and eight rotary interchanges. After the Finnish parliament allotted a €700 million allowance for the project in the national budget, a bidding contest was carried out by the Finnish government agency responsible for the maintenance and development of the road system, the Finnish Road Administration (Finnra). The winning consortium was formed by a Swedish construction company, Skanska Infrastructure Development AB, the British Laing Roads Ltd and Lemminkäinen Oyj, a construction company from Finland, who jointly established the project special purpose vehicle Tieyhtiö Ykköstie Oy (the company). The consortium was able to offer to complete the project one year ahead of Finnra's original requirement regarding the time frame, which means the road will open to traffic in November 2008. The term of the concession is 21 years and the contractor responsible for carrying out the work in practice is the joint venture of Skanska Tekra Oy and Lemcon Oy, group companies of the Swedish and Finnish consortium members.

The financing syndicate for the project consists of European Investment Bank, Nordic Investment Bank, Nordea Bank Finland Plc as the global agent and the security agent, The Royal Bank of Scotland Plc and Svenska Handelsbanken AB (publ). The senior loans from these banks total about €300 million. Additional financing will be provided by the parent corporations of the company in the form of subordinated and capital loans.

Finnra will pay a service fee to the company from the moment the road is completed and opened to traffic. A distinct difference between the E18 Project and the Highway Four project is the manner in which the service fee has been structured. In Highway Four, service payments were contingent only upon the traffic flow, but in the E18 Project the amount of the service payments will take account of the availability, functionality and safety of the road section. When the concession period expires in 2029, the road will be transferred to Finnra's control without any additional fee.

The documentation

The extent and complexity of the documentation involved in the E18 Project is notable, especially given the general consensus in the market that Highway Four's documentation models could to a large extent be used in future PPP ventures. The situation can partly be attributed to the unprecedented magnitude of the project and also to the large bank syndicate, consisting both of commercial and non-commercial banks, from different jurisdictions, in which differences exist in the legal environment governing PPP projects. Naturally, the fact that the Finnish PPP culture is still young was also a factor contributing to the parties' desire to create comprehensive documentation providing for a course of action in every eventuality.

The documentation forming the backbone of the project is the concession agreement entered into between the company and Finnra. Other pivotal documents are the design-and-construct contract and the operation-and-maintenance contract between the company and the joint venture acting as the contractor, as well as the risk-allocating three-party agreement and the direct agreements, discussed in more detail below. The chosen structure of the loan documentation featured a common-terms agreement in which all the banks and the company were parties, setting out all the clauses governing the loans and their general terms. Separate loan agreements were also prepared for the commercial banks, European Investment Bank and Nordic Investment Bank, respectively. To create a complete documentation security net, agreements need to be carefully inter-linked so that everything leads back to the main loan agreement. This has been ensured in the E18 Project by means of a sufficiently wide definition of an event of default under the common terms agreement including, among others, the termination of the concession agreement or the breach of any one of the transaction documents, essentially linking every document in the project with the event of default provisions under the main loan agreement.

The main considerations

A collection of focal questions arose, which, from the financiers' perspective, were crucial to financing the project. Some of the main considerations for the financiers in the E18 Project consisted of obtaining enough security and enough control over the company's cashflow, as well as efficient risk allocation, combined with the possibility of stepping in to complete the project or to nominate, with the approval of Finnra, a third party to complete the project, should the company prove unable or unwilling to do so.


The general trend in the financing market has already been moving away from the requirement to provide traditional security and leaning more in the direction of security provided by controlling the cashflows of the company in question. Traditional security in the form of share pledges and floating charges was used in the E18 Project, but it was clear from the outset, as it often is with SPVs, that this security would be marginal compared with what could be obtained through harnessing the company's future cashflows for the benefit of the financiers because an SPV is, after all, an empty company. This was achieved through an appropriate waterfall structure and pledging all cashflows due to the company from its contracts in the project, including the contracts with the joint venture contractor under the concession agreement and encompassing all potential insurance indemnity receivables. All monies must be paid by the relevant payer to a designated blocked bank account, and all accounts must likewise be pledged to the financiers. In practice, the security agent in this way controls all of the company's income, and the company can use the monies from the pledged accounts only upon their release by the security agent, satisfied that the company is in no way in default.

Given the so-called earnings principle under Finnish law, it is important that financiers structure the security arrangements in relation to future cashflows properly.

Risk allocation

One of the perceived benefits and underlying rationales of the PPP model is that risks for the project are allocated to the party best equipped to shoulder them. In the E18 Project, the risks related to the project have been vested extensively with the company. The contractual vehicles for risk allocation in the E18 Project, in addition to the concession agreement, consist of the three-party agreement and the direct agreements. The three-party agreement is an agreement between the financiers, Finnra and the company, stipulating that the financiers may, in certain circumstances, replace the company with another entity if it appears that the work is not being conducted as planned and Finnra contemplates terminating the concession agreement. The arrangement provides the financiers with leverage over the performance of the company and decreases the risk that they are taking in relying on the company to perform as required. The same result is also achieved through the direct agreements, among others, between the company, the joint venture and the financiers in relation to the company's performance under the design-and-construct contract and the operation-and-maintenance contract. Accordingly, the financiers also have step-in rights under these agreements, allowing them to appoint an entity replacing the company to assume the company's obligations under the said contracts. Alternatively, the financiers may choose to retain the company as the party to the agreements but replace its management at their discretion.

Another factor that comes into play when dealing with projects involving the construction of new infrastructure, such as roads, is sufficient insurance coverage. In the E18 Project, extensive insurance cover, in accordance with the expert opinion of a separately appointed independent insurance adviser, was obtained for the entire concession period.

The road ahead

The foundation for future Finnish PPP projects has never been as solid as it is now, after the successful completion of the Highway Four project and the promising beginnings of the E18 Project. The Finnish market now boasts a collection of advisers and experts that have experience drafting and negotiating the project documentation needed for demanding PPP projects. Now that the groundwork has been laid, carrying out of future PPP projects in Finland should be a smooth ride.

Castrén & Snellman represented the finance parties: Nordea Bank, Handelsbanken, Royal Bank of Scotland, Nordic Investment Bank, and European Investment Bank, in the E18 Project. It also represented the finance parties in negotiating the construction and maintenance agreements, the concession agreement, and the three-party agreement signed between the Finnish Road Administration, the service provider Tieyhtiö Ykköstie Oy, and the finance parties. Castrén & Snellman is the only law firm in Finland that has represented the finance parties in both the PPP road projects that have been implemented in Finland.

Author biographies

Pekka Lehtinen

Castrén & Snellman Attorneys Ltd

Pekka Lehtinen has many years of experience in banking and finance, capital markets, and mergers and acquisitions. He has been the lead counsel in complex cross-border projects such as syndicated lending and acquisition finance deals, structured financing transactions such as PPP projects, securities offerings and IPOs, public tender offers, as well as sale and purchase transactions of shares or assets of various Finnish and foreign corporations. Lehtinen is internationally acknowledged as one of the leading Finnish experts on banking and finance law.

Tero Tuomisto

Castrén & Snellman Attorneys Ltd

Tero Tuomisto specializes in banking and finance, environment and real estate law, and commercial agreements. He has been involved in numerous domestic and cross-border financing transactions of various types and has been responsible for negotiating and preparing documentation in several such arrangements. Tuomisto is a well-recognized lecturer on financial topics in Finland and has also written several books and articles on this area. In addition to an LLM, Tuomisto holds an LL Lic, which is the second highest legal degree in Finland.

Irina Mikkola

Castrén & Snellman Attorneys Ltd

Irina Mikkola specializes in capital markets and banking and finance. She has acted as adviser in a variety of transactions, including listings of debt instruments and private placements, as well as acquisition and project finance transactions. Mikkola also advises on cross-border regulatory issues, such as the provision of investment and banking services into Finland, operation of MTFs and registration of funds. Through the firm, Mikkola worked at OMX Exchanges Ltd, concentrating on various questions relating to securities trading.