EU/IMF tell Portugal to renegotiate PPP contracts

Portugal has been instructed to hire an international accounting firm to review all of its existing concession and public-private partnership (PPP) contracts with a view to assessing “the feasibility to renegotiate any contracts to reduce the government’s financial obligations”.

The PPP review is a condition of the €78 billion bailout the country will receive from the European Union (EU) and the International Monetary Fund (IMF) and was outlined in a memorandum of understanding, obtained by Infrastructure Investor, signed by Portugal’s caretaker government and the country’s main opposition parties. 

The document also urges the Portuguese government to “avoid engaging in any new PPP agreements before the completion of the reviews on existing PPPs and the legal and institutional reforms proposed”. That puts a question mark on the country’s high-speed rail plans and Lisbon’s new airport. Given the timeline outlined in the document, Portugal is effectively being told not to sign any new PPP agreements before the second quarter of 2012, at the earliest.

In addition to a comprehensive review of the country’s PPP contracts, to be finalised by the last quarter of this year, the bailout also asks Portugal, with the assistance of the European Commission and the IMF, to provide an initial assessment of the country’s 20 most significant PPP contracts, including its major road PPPs, by the third quarter of 2011.

In 2012, Portugal will have to strengthen its institutional framework and beef up the Ministry of Finance’s capability to better evaluate the fiscal risks of PPPs and concessions before entering into these agreements. This will be followed by more comprehensive reporting on the country’s PPP obligations, including an annual review of PPPs providing sectoral details and “an analysis of credit flows channelled to PPPs through banks”. 

Many in the opposition ranks had complained about the size of the country’s PPP commitments – Portugal’s PPP liabilities to 2050 are estimated at some €48 billion – with the EU/IMF bailout now seeming to implicitly confirm this.

Portugal had to service over €1 billion of PPP commitments in 2010, equivalent to some 0.7 percent of its gross domestic product (GDP). Between 2014 and 2024, the country is expected to have to pay about €2 billion a year, or 1.24 percent of its GDP, to service its PPP obligations. Portugal’s GDP currently stands at about €158 billion, according to World Bank data. 

But PPPs are not the only area where the government is being urged to seek savings: renewable contracts are also on the EU/IMF hit-list. And while it’s unsurprising to see the bailout urging Portugal to reduce feed-in tariffs for new renewable contracts, the EU/IMF team also asks government to “assess in a report the possibility of agreeing a renegotiation of [existing] contracts in view of a lower feed-in tariff,” raising the spectre of the controversial retroactive cuts implemented in the Spanish solar market.