Feature Story

The pain in Spain

Roger Miralles, Managing Director of INFRA Emporion, explains how poor business deals and public asset sales elsewhere in Europe have affected the nation's PPP industry.

The European sovereign debt crisis has led to a significant rise of capital costs. The interest rate premium is now above the Euro Interbank Offered Rate by 200 basis points (bp) thanks to the downgrades in the credit rating of Portugal, Ireland, Greece and Spain. The market pressure in Spain was due to a lack of control on public finances; the government's official deficit figure of 6% of GDP was hiding, according to some experts like Fitch Ratings, the deficits of regional and local governments. Public debt is not, in itself, a problem. Spain's debt in relation to GDP, at 65-70%, is quite low by EU standards, while Italy's is above 100%. However, economic activity has declined dramatically since 2007 and now is picking up but with much lower prices – adjustment has happened, but recovery remains in the distance.

Most of the PPP projects in Spain have had to rebalance their economic and financial plans (EFP) agreed in the tender. Companies have renegotiated with governments to upgrade fees for tolls in order to regain the balance of financial profitability or alternatively have extended the number of years of their concession. The private sector is facing higher capital costs, which raise the internal rate of return requirements to above 10-15% to make PPP deals profitable. Banks have also raised covenants such as debt service coverage ratios by more than 20%.

The result is that Spanish developers are therefore looking outside of Spain for more projects. Latin American countries are holding events to invite Spanish companies to tender; for example, in Colombia 170 companies recently met with President Santos. As there are no language constraints and there is a cultural history between Latin America and Spain, it is the natural foreign market. The PPP industry is also becoming more selective in the projects it tenders for and there are more joint ventures than ever before. Competition between groups is not very aggressive and markets have been segmented in different regions – comunidades autónomas.

The aftermath of the elections in regional and local governments will, without doubt, alter the official financial reports, a result of extraordinary audits from the private sector. In Catalonia, the regional government hired Deloitte-Faura Casas to review the official numbers of 2010-2011. Similarly, seven regions have new administrations, so this could become an area of pressure. The need for improvement in public finances requires the sale of some public infrastructure – such as hospitals, parking facilities, buildings, offices, airports, rail, ports – to the private sector to recover some resources, while some sale and lease back deals are expected too.

The bad experience in Portugal, Ireland, Greece and lately Italy is putting pressure on the Spanish economy to slash some expenditure. The announcements of asset sales in Greece and Portugal, however, are reducing interest in Spanish assets. The overall effect is a down valuation trend for PPPs in Southern Europe. According to new SEOPAN data, the market pressure and the lack of public finance munitions reduced public tenders for capital expenditure from the central and main regional governments by 90% in the first half of 2011.

On reflection, some regional governments did bad business on PPP projects that made no economic sense. Large investment in High Speed Rail – AVE – has now been analysed as bad business in terms of a cost benefit analysis as there is not going to be a return on the large investment, with the exception of certain lines like Madrid-Zaragoza-Barcelona or Madrid-Valencia.

In conclusion, the PPP sector needs a new era with economic feasibility criteria for projects to accomplish their social function. They can no longer be a mere cash cow to keep construction giants alive during a recession.

Roger Miralles
Managing Director
INFRA Emporion