A man with a (€17bn) plan

When Spanish transport minister Jose Blanco finished presenting his €17 billion infrastructure initiative – a key step to help resuscitate the country’s moribund economy – the local construction industry’s applause echoed loudly throughout Madrid’s historic Chamartin railway station.

It would not have been surprising to hear the Spanish construction industry breathe a collective sigh of relief after Blanco’s announcement. After all, 2009 was truly an annus horribilis for an industry that was dealt a severe blow when the financial crisis burst Spain’s housing bubble.

By the end of last year, unemployment in the Spanish construction industry had increased by more than 32 percent compared with 2008, standing at a whopping 782,000 people. That number represented almost a quarter of Spain’s four million unemployed at the end of December 2009.

Publicly, therefore, you will hear nothing but praise for Blanco’s efforts. Privately though, the mood of expectant optimism is tempered by questions about the nature of the projects to be tendered and also by the elephant in the room – namely, will the government bail out the concessionaires managing Madrid’s ring roads, which have been hit by ballooning land expropriation costs, poor traffic and high leverage ratios?

The plan

Blanco’s €17 billion stimulus comes amid southern Europe’s unfolding budget crisis. While Greece has undoubtedly been suffering the lion’s share of market pressure, Spain and neighbouring Portugal were not far away from the epicentre of the crisis. This led the Spanish government to announce austerity measures at the end of January designed to cut its deficit by €50 billion over the next four years, reducing it from 11.4 percent to 3.0 percent of GDP by 2013.

To make sure infrastructure investments don’t falter and help find employment for the country’s construction workers, Blanco plans to tender these new projects over the next two years to counteract the decrease in public sector spending mandated by the new austerity measures.

He estimates the tenders will help create up to 400,000 jobs in the short term with 15,000 jobs to be maintained over the long term to help with the management and maintenance of the new infrastructure.

Under the announced plan, 70 percent of the €17 billion will be channelled to rail projects – including high-speed rail, freight transport, rail superstructure and suburban rail – with the remaining 30 percent to be split between refurbishing and upgrading several roads across the country as well as a greenfield road tender.

Investors will be remunerated via availability payments – a form of regulated public contribution paid against the asset being made available in good condition by the private partner.

This system has the advantage of taking demand risk away from the private sector and ensuring that the government will only need to start paying contributions from 2014 onwards, when construction work will be nearing completion and the budget is expected to be under control.

Doubts

There is, however, one important caveat. “Which projects will be tendered as part of the stimulus plan remains a mystery,” says the head of infrastructure at a leading Spanish bank.

For traditional developers – companies like Cintra and Abertis that specialise in managing infrastructure – the question is whether these projects’ internal rates of return (IRR) will be attractive enough to warrant participation.

“No one knows for sure what projects will be tendered. But looking at what is known about the roads, a lot of the tenders will be to refurbish old roads. These projects might attract a lot of attention from construction companies keen to increase their backlogs and this might drive the IRR down to levels which are not interesting for us,” says a source at a well known Spanish developer.

Another potentially troubling question is whether the new tender documents will solve the expropriation risk that has caused so much trouble for Madrid’s ring-roads (see adjacent box). David Taguas, head of construction association Seopan, told local newspaper Expansion that the latest draft contracts still transferred land expropriation risk entirely to the private sector.

But if Blanco keeps to his announced timeline, these questions will all be answered by the beginning of summer, when the minister expects to tender his first projects.
 
Who will pay for it?

€17 billion is a hefty sum, but Blanco has been able to secure some big guns to back his plan. First and foremost, recent reports suggest the European Investment Bank is ready to finance up to 50 percent of the stimulus. Spanish-backed credit institution ICO should foot the bill for 20 percent of the programme, with sponsors and commercial banks funding the remaining 30 percent.

Given that sponsors will have to fund 20 percent of each project’s cost from their balance sheet, a developer source said commercial banks should have no problems financing these projects: “If you were offered what is basically a government treasury paying a higher coupon, why wouldn’t you buy it?,” a source says, referring to the security provided by the availability payments and the lack of demand risk in the government’s new projects.

BBVA, Caja Madrid, La Caixa and Santander are expected to take the lead in financing the stimulus plan although several international banks are also likely to participate, market sources indicate.

Madrid’s ring road wreckage

Perhaps the thorniest issue threatening the success of Blanco’s stimulus plan is how to help the beleaguered concessionaires that operate Madrid’s ring roads.

Put simply, these concessionaires are in deep trouble after traffic for the roads fell way below both the government’s and their own original traffic forecasts. To add insult to injury, land expropriation costs ballooned from an original €300 million to about €2 billion after landowners appealed to the courts and obtained judgements instructing concessionaires to pay more for the land they had already bought.

As such, concessionaires have said they will stop injecting equity into the roads and turn them over to their creditors unless the government helps rebalance them. In fact, a consortium comprising Abertis, Sacyr, ACS and Global Via have asked for a delay in refinancing some €600 million in bank debt, which expired on March 15, in the expectation of government help.

A potential solution could come in the form of low-interest, long-term government loans that would allow companies to refinance their debt for the outstanding length of the concessions. These loans would cost 150 basis points and would only need to start being repaid after a two-year “grace” period. To facilitate repayment, toll prices and concession life-cycles could be increased.

Whether this would be enough to rebalance the concessions in light of the increased expropriation cost remains unanswered. But the pressure is on the government as a disagreement with the private sector would generate “a lot of bad headlines” ahead of the new stimulus plan, a developer source says.

Also, under Spanish law, the government always maintains responsibility in contracts involving the public party.

This means that, ultimately, it would have to step in and take over the ring roads, an operation that could add some €23 billion to the public balance sheet, according to newspaper Cinco Dias. And that is not a prospect it would relish after announcing plans to cut Spain’s deficit by €50 billion over the next four years.