White Elephant Inc: This is What I Love about Spain

No risks, all rewards – the perfect business model!

By Don Quijones, Spain & Mexico, editor at WOLF STREET.

December 22 was Christmas Lottery day in Spain. The so-called El Gordo (the fat one) is a landmark event in which thousands of people up and down the land win thousands – or even hundreds of thousands – of euros, while many others quietly curse their misfortune and slightly lighter wallets and purses, promising never to do it again, until next year!

Yet while the general public is barely able to contain its excitement over the tiny prospect of winning a few thousand euros, most people are blithely unaware that the Rajoy government is about to leave them holding a tab estimated to be worth €4.7 billion.

White Elephant Inc.

When it comes to squandering public money on white-elephant projects, Spain is in a league of its own. Its ill-fated infrastructure projects include ghost airports (including one that boasts Europe’s longest runway), high-speed-train stations located slap bang in the middle of nowhere, Valencia’s fast-crumbling City of Arts and Sciences, and hundreds of kilometres of empty toll roads. One way or another, taxpayers end up paying the price, sometimes twice.

Spain’s latest, and arguably most costly, white elephant project is the Castor Project, a madcap scheme to convert an abandoned oil field off the country’s Eastern coast into a natural gas storage facility. Many experts warned that the idea would not work and that the risks were too great, but they were summarily ignored.

The project was owned and developed by Escal UGS S.L., a Spanish company majority owned by Actividades de Construccion y Servicios SA, Spain’s biggest construction and infrastructure group. The funds used to finance the project included a €200 million letter of guarantee and €300 million in senior bonds provided by the European Investment Bank.

In 2013, Escal drilled 12 offshore wells and completed construction of offshore and onshore facilities. The problems began in September of that year when a series of small earthquakes was detected in the area surrounding the Castor Project. In total more than 500 tremors, the largest measuring 4.2 on the Richter scale, were felt in towns across a 125-mile stretch of coastline from southern Catalonia to the northern Valencia region. Under local pressure, the Spanish government eventually decided to suspend the project. In July 2014, Escal exercised its right to relinquish the concession to the Spanish authorities.



The government was more than happy to take the worthless gas storage facility off the company’s hands. It even changed Spanish law to ease the process. Once the law was changed it took just a week for Escal to get all its money back – all €1.35 billion of it.

ACS’s billionaire owner (and Real Madrid president) Fiorentino Perez was no doubt pleased by the promptness of the government’s response; for most normal people in Spain being owed money by the government is an interminable torment, lasting not days but months or even years. If you’re a small business it can be the death of you.

The High Price of Compound Interest

The €3.35 billion question is: how did €1.35 billion in costs (what was originally paid to Escal) more than triple in size, to become a total debt of €4.7 billion?

You see, the people who, thanks to the government, now owe the money – i.e. Spain’s seven million natural gas users, including yours truly – will not pay it off in one lump sum, which would have been very inconvenient before the crucial election last Sunday. Instead, it used its most creative minds to come up with an alternative form of payment. What they came up with was a monthly installment program lasting 30 years and debt financed by three of Spain’s biggest banks. Call it a win-win-win.

The installments will be tacked on the end of everyone’s gas bill, until the year 2046! For the three banks financing the deal — Bankia, itself a recipient of Spain’s biggest ever taxpayer-funded bailout, Catalonia’s Caixabank and Banco Santander — there’s the juicy inducement of receiving an annual interest rate of 4.27%, when the benchmark interest rate in Europe is currently 0.05%.

In sum, seven million Spanish households are now contractually tied into a 30-year debt deal they were never asked to sign, for something they never received, and in most cases never even wanted! Meanwhile, Fiorentino Perez and the European Investment Bank have been paid back in full, despite the fact that the Castor Project faces multiple lawsuits, both in Spain and Brussels. These lawsuits are unlikely to prevent the government from forcing Spanish gas companies to start recouping the €4.7 billion debt from ratepayers starting at the beginning of January.

Finally, it’s worth noting that ACS is one of a number of Spanish construction firms alleged to have donated millions of euros to the illegal multi-decade political kickbacks scheme run by Mariano Rajoy’s governing (for now) Popular Party. It’s no surprise that the company got all its money back in record time and with the least amount of fuss. No risks, all rewards – the perfect business model! Everyone else, meanwhile, can dream of winning the lottery. By Don Quijones, Raging Bull-Shit.

Picking a teetering, over-indebted, financially engineered corporation, hiring its CEO, then shorting the shares. What a deal! Read… Mother of all Shorts: How BlackRock Made a Killing from Spain’s Biggest Ever Corporate Meltdown



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  4 comments for “White Elephant Inc: This is What I Love about Spain

  1. Petunia says:

    The guys involved in this deal must vacation in Palm Beach, FL. Some years back, not too many, the county bought two rock mining pits for $300M, supposedly for water storage. They managed to actively ignore all evidence that storing water in these pits, created by dynamiting, would poison the water. The mine owners hit el gordo, surely a coincidence.

  2. chris hauser says:

    as it turns out, spectre is real.

  3. Christoph Weise says:

    It has been widely acknowledged that banks receive bail-outs which is another term for benefitting a few at the expenses of many. Energy companies are probably No. 2 on the list of beneficaries of the new kind of fraud – probably endorsed by Draghi and his kind of scum.

  4. Bruce Adlam says:

    Why are the public happy to allow companies to get to big to fail and waste money then we print money and bail them out . Debt is a dirty word you end up paying far to much unless you can pay it off quickly or pass it off to someone else

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