Property 6 May 2022, 10:06pm

Hungary announces winner of 35-year motorway concession

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The Hungarian government has concluded the 35-year motorway concession contract, the procedure is now at an end, all formal requirements have been met, Antal Rogán, minister responsible for concessions, announced at a press conference on Friday. The decision was published in the public procurement notice. There were three bidders, and the winning tender was submitted by Hungarian private equity funds linked to billionaire businessmen Lőrinc Mészáros and László Szíjj, both of whom have been winning mammoth public procurement deals from Prime Minister Viktor Orbán’s government. At the announcement it has turned out that the Concession Council recommends to the government to review the existing concession contracts for the M5 and M6 motorways, which are not beneficial to the Hungarian state and have resulted in significant additional profits for foreign-owned companies. Domestic players will be stronger as a result of the awarded concession, but competition will remain, according to the minister. Antal Rogán also said that the government had not given up on buying back the Budapest airport, but that this was not a timely issue at the moment.

How big is the road network?

The above was announced and discussed by Antal Rogán, Orbán's cabinet chief, Marcell Biró, President of the Regulatory Activities Supervisory Authority and Zsolt Csekő, President of the National Concession Office, at a press conference on Friday on the subject of concession contracts related to expressway networks.

Three years of preparation preceded the decision. The main explanatory factor is that no EU funds will be coming from the EU for this purpose, and after 2022 only budget or other sources will be available for this, Rogán explained. In the meantime, the government's road building targets have not changed, he reminded.

To organise the task from the state budget would boost public debt and delay investments.

The other way is a general EU solution, where the government involves the market, and the construction is financed by the market. This would allow the government's road construction targets to be met in a shorter time. They have given themselves a 10-year timeframe for this.

Motorway construction and maintenance can be handled together, otherwise it makes no sense, the Minister of the Prime Minister's Cabinet Office said.

Accordingly, the procedure covered these tasks:

New construction: 317 km to be completed by 2032.
Lane widening: 265 km over the first 10 years.
Operation and maintenance: 1,044 km over the entire concession period.

Rogán also recalled that these concession solutions are common practice throughout Europe. The concession procedure should be declared a priority investment.

A financial model

The economic model of the concession project was defined as follows: the state pays an availability fee, and pays the full amount over 35 years.

But it is the concessionaire's responsibility to finance it, which means that it has to take out the loans at its own risk, the minister explained, adding that the state does not keep maintenance equipment. Later, in response to a question, Zsolt Csekő said the decision thus affects Magyar Közút's maintenance tasks and thus its business. The tender also stated that the winning bidder would be obliged to purchase this business and related assets of Magyar Közút.

The principle of toll coverage should apply: tolls collected by the state should cover the full availability charge over 35 years, he pointed out. There are two toll revenues: (i) tolls collected on freight traffic, which should cover the availability charge, and (ii) revenues from [passenger] cars that are not part of the concession fee.

A special financial arrangement had to be put in place, under which Eurostat would give the concession an off-budget classification, i.e. a classification outside the general government budget. This is provided for the construction under the current practice, he mentioned. Other EU countries also apply the same principle, so there is a realistic chance that the classification will remain so throughout the concession period, he added.

Neither the new nor the old motorway sections will be owned by the concessionaire

, stressed Rogán.

If the state had completed the road works in ten years, it would have resulted in a significant increase in public debt. The government wanted to avoid this, Antal Rogán underlined.

Specific road works

Rogán Antal konkrét útépítéseket is felsorolt, ezek a következők lesznek 2032-ig:

Rogán Antal also listed specific road works to be completed by 2032:

M1: Bicske-Komárom lane extension
M7: Székesfehérvár-Szabadbattyán-Balatonvilágos lane extension
M3: Extension affecting Gödöllő, and Bag
M3: extension of the motorway to the eastern border
M81: construction of the Mór-Bodajk-Székesfehérvár-Sárbogárd section to M8

Later, Zsolt Csekő said that for both the new sections and the sections taken over for operation, the technical specifications require higher quality infrastructure for the winners / implementers.

Winner and the public fee to be paid

There were three bidders and many people were interested. The Strabag-Colas consortium was eliminated because they had legal problems, a competition procedure was launched in Austria, Antal Rogán pointed out.

There were two players left, in fact two final bids were received: Dömper Ltd. and the concessionaire led by the private equity fund Themis. The latter bidder won.

The concession fee is HUF 95.2 million per kilometre per year in present value.

The winning bidder includes: a consortium led by the private equity fund Themis, and also includes the Opus Bridge, Via and Vesta equity funds.

Existing concession contracts will be reviewed

Marcell Biró, Chairman of the Authority for the Supervision of Regulated Activities, said that the authority has two tasks in relation to concessions. Firstly, it can veto the outcome, and secondly, it has to develop and regulate the legal framework.

There are 100 similar contracts in the EU for the road network, with a similar structure. To this end, the Concession Council has examined good practices at international level and has also examined concession contracts concluded up to 2008.

Two documents have been prepared by the Council in this respect: a legal assessment and a financial assessment.

The Council is proposing that the government initiate renegotiation of existing concession contracts.

On this basis, the M5 and M6 concessions would be modified on the basis of the Council's proposals, due to factors detrimental to the Hungarian state. He pointed out in this context that while the M5 and M6 sections account for 6% of the total section, they generated 40% of the toll in some years.

The concessionaires have so far taken out 53.3 billion forints more in dividends, and by the end of the concession period they will take out 225 billion forints more in dividends, said Bíró. This is due to the fact that 90% of the financing is euro-based, meaning the group has also gained on the exchange rate, while corporate taxation in Hungary has become more favourable.

Also in the context of the M5 contract, the Council noted that the concessionaire had taken out a loan at market terms, and that it would expire 5.5 years earlier than the end of the concession period. This will give the concessionaire a net benefit of HUF 160 billion, he said.

According to Antal Rogán, overall, they will get 1.5 times more profit from the two previous contracts than the consortium that won the new concession.

In response to a question, Bíró explained that concessionaires have received hundreds of billions of forints in extra profit from previous concession contracts. However, the review of the contracts requires the other party's consent.

How to make the competition stronger

Answering a question, Antal Rogán also said that the conditions are now becoming more level, and competition will only increase as Hungarian-owned players are given more space.

Bíró pointed out: the notice was published in the EU public procurement, so there was competition in the tender.

In response to another question, Rogán said that there is not a single cent of EU money in this project, so it is none of the EU's business.

The fact that the winning concession is run and formed by companies linked to Lőrinc Mészáros was not a factor in the assessment,

Rogán answered to another question. The serious conditions have simply narrowed down the field of applicants to those who are already major players on the Hungarian market.

A situation is developing in the Hungarian market where - while there may be coordination between operators and competitors in the future - competition is not getting undermined, but becoming fiercer, the minister said. I understand that in the end everyone will start mentioning the names of Lőrinc Mészáros and László Szíjj, but it is gratifying that these companies were able to grow up to the point where they could compete with or even beat Strabag or Colas in a concession procedure like this, he added.

Colas and Strabag previously had signed a much more advantageous concession contract with the Hungarian state than the current winner will,

he added.

In his view, the Hungarian consortium has taken a major risk, especially in the current deteriorating financing environment.

Later, the issue was raised that the state would invoice the consortium on a monthly basis and would carry out a rigorous audit to check that the contractor was fulfilling its contractual obligations. If not, a deduction could be made from the availability fee.

What will motorists feel?

The minister said that motorists will see that the quality of motorway sections will improve, but the government will continue to decide on the retail charges and

There will be no increase in fees compared to current legislation.

The current legislation allows tolls to be increased by the annual rate of inflation.

Budapest Airport

The airport should be brought back,

Rogán replied to a question. However, this would require a significant amount of money and the international financing situation has rather deteriorated recently, he added. The buyback will not be due in the short term, but we will not give up our intention because that contract was not to Hungary's advantage, he said.

Until the war is over and until we see how the international financing environment is changing, we need to talk about this with caution, he said.

Background

2021 júniusában derült ki, hogy a magyar kormány koncessziós eljárásban 35 évre átadná a hazai sztrádahálózat üzemeltetését és a még hiányzó szakaszok építésének finanszírozási terhét a kormányzati szektoron kívül levő piaci szereplő(k)nek. A nyertes 35 évre szerez jogot a már meglévő gyorsforgalmi úthálózat teljes körű karbantartására és a további építésére.

It was revealed in June 2021 that the Hungarian government would transfer the operation of the Hungarian motorway network and the burden of financing the construction of the missing sections to operators outside the government sector for 35 years through a concession procedure. The winner would be granted the right to fully maintain the existing motorway network and to build the new ones for 35 years.

The case was previously reported in these articles: