ESSEC Executive Master in Strategy and Management of International Business: a presentation for Project Finance.

1. Vasco de Gama
Bridge
Project Finance Case Study
ESSEC Executive Master Strategy & Management Of International Business 2012-2013
Tarek EL BITAR
Kheira KADRI
Audrey KIST GASPARD
Mariétou SARR
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2. Summary
• A green-field bridge project in Portugal
▫ Why this project?
▫ History
• Risk analysis
▫ Country Risk and Political Risk
▫ Financial risk
▫ Market risk
▫ Technical risk
• Project Financial Structure
▫ Contractual structure
▫ Shareholders
▫ Refinancing
• Project Assessment
▫ Financial Appraisal Of The Project
▫ Project Global Evaluation
• Key Takeaways
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3. Construction and operation of a new bridge between Sacavem and Montijo, called Vasco de Gama Bridge
In parallel : improvement of the 25 de Abril bridge, but SPV does not include
these works.
Very high estimated cost: EUR 897-910 mn
GATTEL (Portuguese Government Agency) manages the project.
The SPV is called Lusoponte. The Concession associated with a toll (BOT) is awarded to an industrial
consortium of British, French and Portuguese companies
Initial financing entities are the Cohesion Fund,European Investment Bank, 25 de Abril bridge revenues, &
others.
A green-field bridge project in Portugal
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4. Why this project?
• Initial situation:
▫ only a single bridge between : the 25 de Abril between Lisbon on the
Tagus’s North and South banks
▫ Traffic congestion
Decision to build a new bridge between North bank and South bank
• Objectives of the project:
▫ Improve the traffic between North and South banks, reducing commuting
time
▫ Boost the local economy.
• Constraint:
▫ open the bridge on 29th march 1998 for the world exhibition.
• Chosen road:
▫ Sacavem-Montijo to open new urban develoment fronts.
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5. History of Project
• January 1991: Creation of GATTEL, a government agency in charge to find a solution to traffic congestions
between Lisbonn and Almada
• 1991: GATTEL decides to create the future Vasco de Gama bridge
• June 1992: Prequalification of 5 competitors to carry out the project
• April 1993: Call for tender is launched
• October 1993: Reception of 3 bidders offers
• 29th April 1994: A consortium called Lusoponte is awarded the contract
• 1995: Construction of the Vasco De Gama bridge starts, Creation of the CAO – The observation committee
for the new bridge (operational in 96)
• 24th March 1995: DBFOM agreement is signed
• 1st of January 1996: DBFOM agreement comes into force
• 29th March 1998: the Vasco de Gama bridge is constructed and inaugurated on time.
• 3rd July 2000: a global settlement agreement (GSA) is signed and loans are renegotiated
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6. Risk Analysis - Country risk and political risk
• Initial Risks
▫ Risk of population opposition due to expropriation
▫ Risk of NGO opposition
▫ Risk of non honoring of government guarantee
▫ Risk of change of government impacting technical and financial choices
▫ Risk of bad decision-making
• A series of bad political choices occurred, enforced by the pressure of perspective of the Expo ’98. (-)
• Lack of coordination with cities and bad integration in land management plan led to a bad location choice
and the urban development objective is not satisfied (uncontrolled development). (-)
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7. Risk Analysis - Financial Risk
• Initial Risks:
▫ Risk of population opposition due to expropriation
▫ Risk of NGO opposition
▫ Risk of non honoring of government guarantee
▫ Risk of change of government impacting technical and financial choices
▫ Risk of bad decision-making
▫ Change risk linked to different currencies before the EUR (PTE, FRF, GBP), but limitated
• State at the end of the project: the contract contains dangerous clauses that transfer most of the risks
to the Portuguese Government.
▫ Protestations led to a limitation of toll increase as planned so the Government pays a compensation to
Lusoponte. (-)
▫ Encouraging Public Transportation would lead the Government has to pay compensation fees to
Lusoponte, which is contradictory with his global objective of improving transportation means. (-)
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8. Risk Analysis - Market Risk
• Initial Risks
▫ Risk that the users do not take the bridge due to bad location choice or high pricing
▫ Risk of general decrease of the traffic (e.g. due to Public Transportation development)
• State at the end of the project: Not a lot of bridge users due to above mentioned reasons: not enough tolls
are perceived. This has had a negative impact on the Business Plan (level of expectations in Free Cash
Flow). (-)
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9. Risk Analysis - Technical Risk
• Initial Risks
▫ Risk not to avoid traffic congestion
▫ Environmental risk: the road is crossing an SPA (Special Protection Area)
▫ Technical risks: difficult engineering due to 20km large and local seismic activity
▫ Project management risk due to complexity, technical interfaces and multinational workers
(Portuguese, French, British)
▫ Risk of additional construction costs
• State at end of project
▫ A bad location has been chosen for the bridge so the bridge does not divert traffic (-)
▫ The new urban front has developed incontrolably (mobility problems, little recreational areas...). (-)
▫ The SPA has been deeply severed. (-)
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10. Project Financial Structure - Entities
Lusoponte
GATTELEIB
25 de Abril Bridge
NovaponteGestiponte
Cohesion Fund
Others (shareholders,
gov, support…)
Equity
Concession
agreement
Shareholders (UK-France-
Portugal)
Operation and
maintenance agreementConstruction
agreement
Commercial Banks
(after refinancing)
Debt
Equity &
Subordinated debt
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11. Project Financial Structure - Shareholders
Kvaerner CI & Macquarie Infrastructure LTD, UK
24,8%
Vinci Group, France 22%
BPC, Portugal 14,84%
Mota & Cia, Portugal 13,83%
Somague, Portugal 13,83%
Teixera Duart, Portugal 7,5%
Vinci Group, Portugal 2,8%
Edifer, Portugal 0,4%
The shareholders of Lusoponte are 53,2% Portuguese
companies, and 46,8% foreign participation.
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12. Project Financial Structure – Refinancing
Before refinancing
Cohesion fund 35%
EIB 33%
25 de Abril Bridge 6%
Others 26% (Portuguese
gov, equity other loans)
after refinancing
Cohesion fund 30%
EIB 29%
Commercial Banks 11%
25 de Abril 6%
Others 24%
Initial budget reviewed due to
- Additional construction costs and
- Traffic not meeting former expectations for debt recovery.
New EIB loan of EUR 120 mn on 19Y at 9.3% in 2000, backed
by commercial banks.
High impact on grossed-up interests.
80 80
415 415
415 535
Before After
Loans
Subsidies
Equity
In EUR mn
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13. Financial Appraisal Of The Project 1/2
• At the beginning of the project, equity represents 9% of the total financing (D/E = 11,4). This may be to
optimistic, given the risk profile of the project, based on a toll.
• The revenue is below expectations.
▫ This is due to a bad location choice and an ill-adapted pricing.
• Increase of loan tenor and debt volume during the construction period. Interest rates are high.
▫ The initial loan were negotiated under difficult market conditions.
▫ The debt has risen due to high interest rate new loans.
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14. Financial Appraisal Of The Project 2/2
• DSCR is just as the acceptable limit.
▫ Decreasing from 1,49 (2002) to 1,4 (2007) due to extra loan.
▫ Just at threshold for EIB loan and senior loan
▫ A good minimum DSCR would be 1,5
• ROE is not satisfactory for shareholders.
▫ 11,43% which is quite low (should be between 15 and 20%),
▫ even if reduction of equity level (8,8% to 7,7%) has mechanically increased ROE.
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15. Project Global Evaluation
None of the project objectives has been reached:
• No traffic diversion on the 25 Abril Bridge, nor global improvement,
• No development of new economic fronts,
• Negative social, economical and ecological impacts.
The financal rebalancing indicates that the contract was not designed correctly, especially concerning cash
flow previsions.
Although initial market risk had been attributed to the shareholders in the contract, it has been completely
transferred to the government through heavy refinancing and compensations.
This project has been only possible thanks to heavy public financing and a series of bad decision-making.
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16. Key takeaways
• The CAO succeeded in accomplishing their main goal: to control Lusoponte environmental
performance and avoid further environmental crimes.
• The positive impact of the project is mainly in the improvement of the decision making process for
future projects in Portugal and in Europe.
▫ Give more credibility to environmental NGOs,
▫ Public consultations,
▫ More grounded decisions.
• As highlighted by the CAO, “it takes both political will and technical staff to achieve meaningful post-
work evaluation.”
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