Road to riches

Judging by the falling spreads on recent Portuguese and Spanish sovereign debt issues, late summer may turn out to have been a watershed moment for the two Iberian countries.

After all, the two neighbours – together with Ireland and, to a lesser extent, Italy – can claim to have been in the unenviable position of being among those suffering the most from Europe’s sovereign debt crisis. The reigning crown goes, of course, to Greece, which only narrowly escaped defaulting on its obligations thanks to an unprecedented European Union- sponsored bailout.

But if Spain and Portugal spent most of the year sharing the same grim economic outlook, when it comes to privately financed infrastructure, particularly in transportation, the Iberian nations are at two very different stages of their infrastructure life cycles.

Portugal

From whichever angle you choose to look, it’s hard not to conclude that Portugal’s infrastructure programme has hit a temporary snag in 2010, at least when it comes to the multi-billion euro transportation projects that comprise the bulk of it.

 After successfully procuring close to €5 billion of roads in the midst of the 2008 to 2009 financial crisis, the government’s infrastructure programme has had difficulty withstanding the impact of the sovereign debt crisis.

In the face of unrelenting pressure from the international money markets, an empowered opposition upped the pressure on Prime Minister José Socrates’ government and forced it to hit the pause button on part of its infrastructure programme for fear that the required spending might be unaffordable in the current economic climate.

In practical terms, the sovereign crisis has led to the downsizing of Portugal’s high-speed rail programme and the postponement of plans to build a new, €5 billion airport for the capital, Lisbon – all set to be procured using the public-private partnership (PPP) model.

Its high-speed rail programme, which at one point was estimated at more than €8 billion, has been reduced most entirely to the Lisbon-Madrid connection. But even that line has not been immune to the crisis’ effects.

While the first portion of the line has already been awarded, the tender for the second stretch was cancelled in its final stages, just as a consortium led by Spanish construction company FCC was getting ready to claim the contract.

“The government was forced to cancel the tender due to force majeure,” explains Sergio Monteiro, managing director at state-backed investment bank CaixaBI, which has played a major role in helping to finance the country’s infrastructure ambitions. “The problem is that it had bound itself to certain deadlines under the previous tender that it was in no condition to keep given the outbreak of the crisis,” he explains.

The discussion around the project, which includes the construction of a third bridge over the Tagus river, is now centring on whether to include a road crossing in the bridge or just stick to the rail component.

If the road portion is not included in the contract, it should cut €200 million to €300 million from the original €2 billion price tag. The previous contract would require the winning consortium to build (but not operate) a road on the bridge. A tender for the road’s operation would subsequently be launched by roads agency Estradas de Portugal.

But Monteiro is quick to stress that, despite these delays, the tender for the second part of the Lisbon-Madrid line is going ahead, pointing out that construction works for the first portion will start this autumn.

He is more circumspect regarding the other lines that form part of the programme, such as a projected line connecting Lisbon to Porto, Portugal’s second-largest city, located in the north of the country.

“The current Lisbon-Porto connection is completely saturated and its capacity will need to be doubled,” he says. “Now whether that happens through a high-speed line or a slightly slower alternative remains to be seen,” Monteiro adds.

Monteiro is bullish regarding Lisbon’s €5 billion new airport, highlighting that it enjoys broad political consensus and will not cost a penny from the public budget. Contrary to the roads and high-speed rail concessions, the new airport does not require any availability payments. As such, he expects to see a tender go out to market during the first semester of 2011.

Transportation aside, though, Monteiro expects three smaller projects that form part of the country’s healthcare programme to reach financial close over this year and the following year. Concomitantly with the roads programme, three hospital PPPs reached financial close over the course of 2008 to 2009.

In addition, there are two large-scale project finance deals in the energy sector on track to reach financial close this year. One is a 345-megawatt onshore wind farm to be built by wind power specialist ENEOP, worth more than €500 million. CaixaBI is leading one of the competing bank teams, also comprising Barclays and BBVA, which is looking to lend to the project.

In a way, some of these delays are not necessarily bad news for local developers and banks, as it gives them some breathing space before embarking on new bids.

Recent data from Portugal’s central bank shows that, between January and May 2010, the country and its institutions were unable to obtain long-term debt from foreign investors, with the European Central Bank lending massive amounts to Portuguese banks and going large on its sovereign debt to avoid the worse.

It’s a situation Monteiro is well aware of as he readily admits that the crisis “has degraded our competitive position”, which is not really expected to improve until Portugal’s risk perception decreases with international investors.

It will also allow the Portuguese government some respite in meeting the funding commitments it assumed with the new roads programme. These commitments, in the form of availability payments, will have to start being repaid fairly soon. This is because banks demanded quicker repayment periods as a result of the financial crisis, potentially creating a bottleneck if some of these loans aren’t refinanced in the meantime.

Spain

Crossing the border to Spain, the situation is markedly different, with Prime Minister José Luiz Zapatero’s government preparing to tender the first projects that form part of its €17 billion infrastructure stimulus plan, to be procured via the PPP model.

In fact, what started out as a two-year PPP add-on to Spain’s multi-billion euro, publicly procured, infrastructure programme has now became the focal point of the country’s infrastructure spending over the next two years – “the jewel in the government’s crown”, as one Spanish banker put it.

That’s because the government has recently announced that it will cut its publicly funded public works programme by some €6.4 billion over the next two years, putting the government’s stimulus plan front and centre.

In a way, the difference between both countries’ infrastructure programmes reflects the difference in their procuring philosophies at a central government level.

Whereas the Portuguese government has traditionally favoured PPPs as the way to procure its infrastructure plans, in Spain, PPPs have, in recent years, been mostly used by the regions, with the central government funding its public works programme from its balance sheet.

This difference is not without reason. As Monteiro pointed out, Portugal would have been unable to procure the amount of infrastructure it did – which he argues has been the engine behind the country’s growth over the last 20 years – if it had to shoulder costs upfront. In comparison, Spain, one of the world’s ten largest economies, has more budgetary capacity to publicly procure its infrastructure.

So it’s not surprising to see Spain’s central government now turning to the PPP model as it implements tough austerity measures and seeks to contain costs.

Currently, the PPP programme’s biggest enemy seems to be the lack of concrete details regarding which projects it will comprise. For a long time, since the programme’s announcement earlier this year, only a general breakdown of investments was known. Namely, that 70 percent of the programme would comprise projects in the rail sector (including high-speed rail and freight rail) with the remaining 30 percent involving refurbishment works to several of the country’s roads.

It was only in late July that a list of 12 projects emerged. These were part of longer list of public works projects the government decided to either delay or cancel, with these 12 to be re-tendered as PPPs.

The absence of specific details has not been lost on local bankers, which attribute the delays partly to ongoing discussions between Fomento (Spain’s infrastructure ministry) and the finance ministry on how to foot the availability payments that will back the projects that form part of the €17 billion stimulus.

But they point out that the programme is well structured and should not be a problem for local commercial banks to fund.

 “You have to consider that the €17 billion refers to total investment costs, including construction, operation and maintenance costs. In practical terms, only about 80 percent [or €13.6 billion] of that amount will have to be financed,” a local banker pointed out.

Of that €13.6 billion, 42 percent will come from public institutions such as Spain’s ICO and the European Investment Bank. And while the remaining amount has to be financed by the private sector, commercial banks should only need to lend about €6 billion to the programme. That’s because the Spanish government is demanding that participants fund at least 20 percent of the programme’s total cost via equity commitments.

Importantly, four of the country’s top banks – BBVA, Caja Madrid, La Caixa and Santander – have already pledged to take the lead in financing the programme. Their willingness is directly connected to the way the programme has been structured, the banker explains, with all projects backed by availability payments and individual tenders kept to a manageable size of between €50 million and €300 million.

“Things would be different if the government would try to launch bigger projects that would require the participation of foreign banks,” the banker points out, adding that international banks would likely be unwilling to participate until the situation with Madrid’s ring roads – Las Radiales – has been solved.

For those following the Spanish infrastructure market, Las Radiales have become symptomatic of the type of judicial and political risks that would give most infrastructure investors nightmares. Hit by the unholy trinity of the financial crisis, over-optimistic traffic predictions and ballooning land expropriation costs, the concessions are now hovering on the brink of default.

To add insult to injury, some of the previous infrastructure minister’s decisions also helped these concessions on the road to disaster, the banker claims.

“The previous transport minister had a policy of not allowing any tolled infrastructure that wasn’t complemented by a free alternative. This didn’t help,” he deadpans. While the current administration has pledged its support to helping solve the problem, the banker admits it is not yet clear how to compensate for the ring-roads’ underperforming traffic.

However, it is likely that neighbouring Portuguese banks may come in and help plug whatever funding gap remains, much in the same way that Spanish banks helped finance Portugal’s roads programme when other international banks expressed displeasure with the intermediary nature of roads agency Estradas de Portugal, an independent public company.

CaixaBI’s Monteiro hinted as much when he said that his bank is looking with interest at Spain’s infrastructure projects and plans to participate as a “friendly” partner, complementing Spanish banks.

With the first tenders that form part of the two-year, €17 billion stimulus expected to start coming to market in September, Spain’s most recent PPP journey, unlike Portugal’s, is only now beginning. Investors looking for a robust pipeline of transportation projects should keep an eye on Iberia as a whole over the next two years.