Going public

How many more roads can built
in Germany?
So why don’t international investors take a look at some of the many motorway, water supply and stadium projects on offer in Poland? And are investments in public real estate projects more attractive than commercial ones?

There could be many reasons why an investment institution might be looking to get involved in such projects in Poland. But according to Marek Borek, a partner in charge of the financial infrastructure department of the Ernst & Young consultancy in Warsaw (which recently won the contract to advise on finding investors for the Baltic Arena stadium project in Gdańsk for Euro 2012): “The main advantages for investors are the returns and the growth in the market, which is quite a green one with lots of potential projects needing to be done.” He adds that another incentive might be provided by the situation in western countries, where returns “for infrastructure projects are quite high, but are now getting lower. There is no doubt that Poland offers a good opportunity in this sector. There are so many different players in this market that they will have to come to places like Poland – how many more roads can you build in eg. Germany?”

Prof. Charles Ward of the University of Reading in the UK agrees: “Over recent years, there has been a shortage of normal investment stock, so lots of investment funds have been trying to widen the scope of their investment. For this, going outside their home countries is one option. Infrastructure and public projects are to be expected to be readily available in countries such as Poland.”

But Prof. Ward points to another big incentive for investors with public projects in general: “The big advantage is that there is more security in government aided contracts – in other words, the counter-party risk is much lower. If you are a western outsider wanting to do projects in countries where you are not familiar with the institutional environment, with public projects there is much less operational risk. Normally, there is a lot of due diligence to be carried out, but with public projects this shouldn’t be the case,” argues Prof. Ward.

Money in the bank

The risk reduction applies also to the public side of the venture, according to Łukasz Pierzkała, director of the department of corporate banking at WestLB Bank Polska. The bank was involved in structuring the finance of the new Wembley Stadium, as well as forming part of the consortium of banks financing the upgrading and operating the Katowice-Kraków section of the A4 motorway. In his opinion, a PPP is “a combination of the know-how of a private company and the need of the public sector. For example, as far as sports events are concerned, there is a promise that the event will actually take place, thus, the services have been already sold.” Mr Pierzkała describes how this worked in the case of Wembley Stadium: “We had a cash-flow model indicating how much revenue would be made from football matches and concerts. Thus, the private investor reduced their risk, and so is the public side in terms of construction and performance risk” He goes on to explain how such an arrangement can also lower costs: “In France we can treat these agreements as quasi-guarantees – if it is a 30-year contract, for example, we can provide 30 years of financing and assign the rating of this project to give us the possibility for an investment conduit, which is a fund which collects assets and then issues them as bonds, selling them to buyers. As a rule, investment conduits are for pension funds and safe long-term investments. In Ireland we have a EUR 8 bln conduit, giving us the opportunity to execute investments with much lower pricing.”

Turn on the waterworks

But the fact is, up until now, very few public projects in Poland have involved partnerships with the private sector. One of the few notable counter-examples was the modernization of the Gdańsk water and sewage system, which was done through a special purpose vehicle set up between France Saur and the city authorities in 1992 – Saur-Neptun-Gdańsk. Under the terms of the 30-year agreement signed, France Saur owned 51 pct of the company, with 49 pct being held by the local authorities - the private company being responsible for running it, while the public side retained ownership of the infrastructure. The city is also responsible for capital investment and financing and the setting of tariffs. Although it is cited as a success by the European Commission, PriceWaterhouseCoopers in their Forms Of Private Sector Participation In Water Sector report of 2002, point out the drawbacks, which have led to frequent renegotiations of the original contract, causing delays in proposed investments.

Much to do and nothing

It was perhaps due to such problems and the lack of similar projects that the Polish government decided to push through the Public Private Partnership Law. This was enacted in 2005, but was amended last year, before another new draft was proposed this July with the aim of speeding up investment for Euro 2012. However, no investments have yet taken place under the new law.      

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Nathan North