PPPs high on the government's agenda

Author: | Published: 1 Sep 2005
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Since the 1990s, several projects based on partnerships between the public and private sectors have been implemented in Portugal. However, it wasn't until 2003 that a legal framework was put in place in Portugal for public-private partnerships (PPPs). Before that, PPP initiatives were governed by the general legal provisions that applied to contracts submitted to the public legal regime (such as public service concessions), and were launched and regulated through specific legislation tailored for each project.

The PPP is a coalition of public and private entities that is based on a long-term contractual relationship where the rights and obligations of both parties are specified. The contractual relationship is aimed to meet a certain purpose, common to both the public and private parties, which renders a certain service of public interest in a more efficient way, within the scope of a programme or policy designed by public entities.

PPPs are seen as a means of implementing public infrastructures and important public services. They have the following advantages:

  • efficiency in the performance of the relevant public service;
  • less expenditure of public funds;
  • often, better management skills exist in the private sector, engaging the private party in the performance of a public service; and
  • the risks are shared by the private and the public parties, which enables the transfer of an important part of project risks to the private sector.

The legal framework for PPPs in Portugal is mainly the following:

  • Article 180 of the Administrative Procedure Code (Código de Procedimento Administrativo, approved by Decree Law 442/91 of November 15), applies to contracts submitted to the public legal regime in general, and sets out the powers of the grantor/public entity within the scope of its contractual relationships.
  • Decree Law 86/2003 of April 26 is the first legal statute to include the legal concept of PPP, and includes general provisions applicable to PPPs.
  • Decree Law 185/2002 of August 20 sets out the legal regime of health PPPs that resort to private management and funding.
  • Regulation (Decreto Regulamentar) 10/2003 of April 28 also governs health PPPs with private management and funding.
  • Regulation (Decreto Regulamentar) 14/2003 of June 30 approves a standard tender programme and tender specification applicable to health PPP projects launched in Portugal.

The Portuguese government gained plenty of experience using PPPs in the nineties (especially in road projects) and is increasing its experience among other areas of activity, such as health projects.

Table 1 provides a brief description of the main PPP initiatives implemented in Portugal.

Table 1: PPPs implemented in Portugal in the 1990s
Year Project Concessionaire
1994 Concept, project, building, financing, operation and maintenance of new Tagus river, and operation and maintenance of the already existing bridge Lusoponte
1998 Concept, project, building, financing, operation and maintenance of a highway in the west of Portugal Auto-Estradas do Atlântico
1998 Porto underground railways system Metro do Porto
1999 Concept, project, building, financing, operation and maintenance of a highway in the north of Portugal AENOR
1999 Concept, project, building, financing, operation and maintenance of a highway in Beira Interior (eastern Portugal) SCUTVIAS
1999 Concept, project, building, financing, operation and maintenance of a highway in Algarve (southern Portugal) EUROSCUT
2000 Concept, project, building, financing, operation and maintenance of a highway in Costa da Prata LUSOSCUT
2000 Concept, project, building, financing, operation and maintenance of a highway in north-eastern Portugal NORSCUT
2001 Concept, project, building, financing, operation and maintenance of a highway in the north-west of Portugal EUROSCUT Norte
2002 Concept, project, building, financing, operation and maintenance of a highway in Porto LUSOSCUT
2002 Concept, project, building, financing, operation and maintenance of underground railways system on the south bank of Tagus river MTS
2004 Operation and maintenance of several regional road sections VIAEXPRESSO
2004 Concept, project, building, financing, operation and maintenance of a highway in the central-western area of Portugal BRISAL

Portuguese governments have launched two models to finance road PPPs: shadow-toll projects (usually called SCUT) and toll projects. In shadow-toll projects, the state launches a bid for a highway concession and the users do not have to pay the toll. The state pays it directly to the concessionaire, according to traffic figures but, ultimately, it is the taxpayer that will bear the cost. In toll projects, the state launches a bid for a highway concession, and the users have to pay for the toll.

Besides the projects identified above, several projects related to water supply and waste water services were awarded to private parties by municipalities using the PPP model.

In the past year the Portuguese government has widened its PPP activity to include the health sector, by launching tenders for projects related to the construction, operation, and maintenance of public hospitals in Loures and Cascais, including clinical services. These projects are designed in accordance with PPP model established by the above-mentioned PPP legislation. In 2005, the tender for the construction, operation, and maintenance of Braga hospital was also launched according to this PPP model.

The tender procedures regarding these PPP projects are still pending, and no award has been approved yet.

The PPP model designed for these health projects envisages two different scopes: (i) the building, financing, operation and maintenance of the hospital building; and (ii) the performance of clinical services within the public health care service (Serviço Nacional de Saúde).

Therefore, the management contracts entered into between the public and the private entities for the implementation of these projects will have three parties: (i) the public entity; (ii) a company owned by the sponsors that will be engaged in the activities regarding the building and operation of the hospital building (InfraCo); and (iii) another company owned by the sponsors committed to the performance of clinical services (ClinicalCo). The relationship between the InfraCo and the ClinicalCo will be governed by the contract of use of the hospital building. Another important aspect of the contractual scheme established by the health PPP model used in Portugal regards its duration. The part of the management contract regarding the hospital building has a 30-year term, and the part that regards health care services has a 10-year term, subject to renewal provided certain conditions are met.

Future projects

On June 30 2005, the government approved in a Programme of Investment in Priority Infrastructure that outlines the projects its considers to be a priority, and which will be implemented before 2008. Although this programme was publicly announced, there has not yet been a final decision regarding the implementation of the projects, with the exception of the eolic energy project mentioned below.

According to the Programme of Investment in Priority Infrastructure, the public effort will be concentrated in developing activities that generate private investment, either through PPPs or private ventures, and especially in transport, energy, healthcare and the environment.

Since this programme was announced, a great debate started in Portugal over two of the projects envisaged: a high-speed train system (TGV), and a new airport in Ota. The heavy cost of these investments has raised issues regarding the Portuguese budgetary situation and prominent economists have said that these projects lack economic feasibility and that they do not advise their implementation. Recently, the Ministry of Public Works, Transport and Communication and the Ministry of Finance announced the creation of a joint team committed to assess the economic feasibility and the budgetary impact of these projects. The conclusions of the joint team will be announced soon. So the implementation of the TGV and Ota projects is far from assured, and will depend on the outcome of the discussions over their economic feasibility.

Although not a PPP, one project in the energy sector that will be financed according to project finance model is in the pipelines. The project, which follows the guidelines of the Programme of Investment in Priority Infrastructure approved by the government, aims to contribute towards compliance with Kyoto commitments, that is, to have 39% of the electricity used in Portugal generated by renewable sources by 2010.

The Government has already approved the project and the relevant tender is expected to be published in the official gazette (Diário da República) soon. This project will include the award for the production of wind energy up to the global capacity of 1.700 megawatts (MW), and will include two tenders that initially will refer to two different lots of energy, one of 800 MW and another of 400 MW. More power might be awarded to the bidders, but that will depend of the merits of the relevant bids.

This project not only seeks to help Portugal meet its Kyoto commitments and to develop renewable energy sources, but also envisages the creation of an industrial cluster in Portugal engaged in the manufacturing of eolic energy equipment. The evaluation of the bids will be based both on the merits of the offer made in terms of production of energy (notably, in the tariff), and on the industrial project envisaged by each bid.

This is a major infrastructure project and, although not a PPP, it illustrates the government's intention to pursue the development of public interest projects with the contribution of private financing and investment.

Irrespective of the measures that may be adopted regarding the TGV and Ota projects, PPPs are on the agenda of the Portuguese government. The current economic situation, notably the need to attract private investment, will certainly contribute to the growth of the PPP market in Portugal.

Author biographies

Diogo Perestrelo

Gonçalves Pereira, Castelo Branco & Associados

Diogo Perestrelo joined the firm in 1992 and has been a partner since 1999. His main areas of practice are mergers and acquisitions, project finance, associated financing, corporate restructuring, and private equity

In 1996, he advised on the first project finance for the concession of a motorway in Portugal and has since worked on several projects connected with the construction of infrastructures. He had advised clients such as Somague, MSF, Sociedade Portuguesa de Concessões, Alstom, Finerge, AirLiquide, and Thames Water on a variety of project finance matters, including the financing, construction and operation of motorways, hospitals, wind farms, power stations, waterways and transport lines.

Perestrelo was born in Lisbon in 1968. He holds a law degree from the Catholic University of Lisbon (1992) and was admitted to the Portuguese Bar in 1992. He is a member of the International Bar Association (IBA).

Rita Roque De Pinho

Gonçalves Pereira, Castelo Branco & Associados

Rita Roque De Pinho has been a lawyer at Gonçalves Pereira, Castelo Branco & Associados since 1997. Her main areas of practice include commercial law, mergers and acquisitions, and finance law.

Projects on which she has advised in recent years include acquisitions in the energy sector, due diligence on companies in several sectors, mergers, project finance for wind farms, and the preparation of a proposal for the first tender for a public-private partnership in Portugal.

She was born in Mozambique in 1972. She holds a law degree from Universidade Lusíada of Lisbon (1995) and was assistant professor of community law at that university in 1996. She was admitted to the Portuguese Bar in 1997. She completed post-graduate studies in financial markets, institutions and instruments in 2000.