It “could be” a good deal for taxpayers….
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
Spain’s government continues to raise the bar when it comes to the ubiquitous practice of kicking the can down the road: in Spain, the roads in question, snaking around or sprouting from the nation’s capital, Madrid, are very real. They’re also largely empty. And broke.
These toll roads have been bleeding funds at such a rate that their owners — a consortium of concessionary companies, including six of Spain’s biggest hitters in the construction industry (Sacyr, Ferrovial, FCC, Acciona, Abertis and OHL) — have ended up liquidating their assets and are now handing over full ownership rights to Spain’s long-suffering taxpayers, as is common practice these days for many failed large enterprises.
Thanks to the timely intervention of Spain’s government and a friendly judge or two in Madrid’s mercantile courts, the companies will get much of their money back. And that money will go straight back to the banks that helped fund the ill-conceived projects.
All of this was agreed to well over a decade ago when the Aznar government decided, against all advice, to open to public tender nine privately built and managed toll roads to cover routes around Madrid that were already amply covered by “free” public roads. The government also quietly inserted in the fine print a provision that the state would serve as ultimate guarantor for each project.
When the crisis hit with full effect in 2009, Madrid’s already quiet toll roads became virtually empty, save for the occasional luxury car shuttling a senior politician, business executive or banker. Now, seven years later, the bill has come due after a previous agreement that would have unleashed a 50% haircut for all parties involved fell through. The outstanding bill could now reach as high as €5 billion.
Two of the roads in question, the R-3 and R-5, were due to be closed indefinitely on Saturday Oct 1. But then a judge in Madrid intervened at the last minute demanding that the state take full control of them while compensating the concessionaires for their losses. On Monday Spain’s Minister of Industry Rafael Catalá, said that the state’s purchase of the toll roads “could be” a good deal for taxpayers, adding that [comments in brackets my own]:
We would have preferred for the concession to have been sustainable [as many experts said was impossible from its very inception], we have worked to that end and we even proposed a renegotiation of the debt, but today the (roads) are bankrupt and the State will have to take over responsibility for them as stipulated in the contracts [which the government, under Catalá’s own party, helped draw up 12 years ago, with a little help from the concessionaire’s lawyers].
This is not the first time Spain’s government has lent a very large helping hand to some of the country’s biggest construction companies, many of whom have been accused of contributing generously to the governing Popular Party’s decades-long kickbacks scheme. The pattern is always the same: a project gets built, often at the construction company’s behest. Then when it fails, the government’s state guarantees kick in.
Here are three of the worst examples from recent years:
Project Castor: This was 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 had to be closed in 2014 after more than 500 tremors, the largest measuring 4.2 on the Richter scale, were felt in towns Spain’s north-eastern coastline. Once the project was closed, the company behind it, Escal, a subsidiary of Spain’s global construction behemoth ACS, got all its money back — all €1.35 billion of it! Now the European Commission is investigating whether the pay out represented illegal state aid.
Panama Canal: The hugely ambitious project to double the canal’s capacity was led by Spanish construction giant Sacyr, which put in a bid for just over $3 billion — $2 billion less than the government’s expected budget. It’s a classic ruse: in Spain, firms habitually underestimate total costs when submitting bids and then ask for more money later. It’s not just common practice, it’s enshrined in law. But when Sacyr tried to pull the same stunt in Panama, asking for an extra $1.6 billion to finish the project the government would not cave in quite so easily. In the end, the Spanish taxpayer had to pick up part of the tab in the form of state guarantees — nobody knows exactly how much. The settlement of the outstanding cost overruns is now in international arbitration.
The High-Speed Train to Mecca: Spain is in second place globally, behind China, in terms of high-speed rail infrastructure. But when a consortium of Spain’s biggest construction companies tried to apply their expertise to linking Medina with Mecca, the problems quickly began to mount – in form of sand. It was constantly blowing across the tracks, despite the construction of a 1.5 meter containment wall to keep it out. Hence cost-overruns, by now around €1.5 billion. And the House of Saud is neither in the mood nor financial position to shell out more. Ominously, a summit has been arranged this month between Spain’s Minister of Industry, Rafael Catalá, and Saudi Arabia’s Minister of Transport, Sulaiman bin Abdullah Al-Hamdan, to find an amicable solution to the cost overruns. And that can only mean one thing: Spain’s taxpayers will once again be left on the hook.
There are plenty more examples of white elephant projects that have bled and will continue to bleed dry Spain’s taxpayer funds, including a desalination plant in Murcia, myriad ghost airports, high-speed train stations located slap bang in the middle of nowhere, a barely used tunnel through the Pyrenees connecting France and Spain’s rail networks, and Valencia’s fast-crumbling City of Arts and Sciences. The supposedly private sector restructuring of Spain’s green energy giant Abengoa also includes state guarantees.
And on it goes… Harebrained infrastructure projects that should never have been conceived and whose existence is owed to two preconditions — easy credit and a government that is willing to backstop any large-scale project as long as it enriches the same corporations that have helped fund its multi-decade kickbacks scheme — will continue to be refunded at or as near as possible to 100 cents on the euro. It’s hardly any wonder that more and more Spaniards are warming to life without a government. By Don Quijones, Raging Bull-Shit.
It just doesn’t let up in Spain. Read… Stealth Bailout of 2 Franken-Banks Now Happening in Spain
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Well….it is Spain…?
I’m sorry DQ if this sounds bad, but since you are so obviously a realist do you think there is something in Latino culture that tends to approve of projects that are fanciful?
On the other hand the Chunnel between the UK and France went bankrupt and had to be taken over- so Anglos do dumb things.
Also there are big frauds all the time in the US, but when you get caught you can go to jail for years.
It seems like in Italy and Spain, Argentina etc. people just shrug it off.
The corruption in “Latino Culture” as you put it. Which also encompass. The Philippines, parts of Africa, and south America. Most defiantly, has a cultural root.
However one must be very careful how “it” is discussed.
As “it”, is in, “The Vatican”
In this case I don’t think it’s a Latin thing; it’s a feature that is largely unique to Spain. Thanks to the way the country developed in the late 20th century — i.e. through an abundance of cheap credit coming from Northern Europe that ended up financing a massive tourist boom that continues to this day — many of the country’s biggest companies ended up being construction firms. From the late sixties Spain opened up its borders, huge resorts and other infastructure were built and vast sums of money were made by construction firms that were close to the government of the day, beginning of course with Francisco Franco’s military dictatorship.
Many of those companies are now global behemoths (OHL, ACS, Abertis, Sacyr and Ferrovial) but they continue to enjoy exceptionally close ties to Spain’s current government, and that government has shown that it is perfectly happy to serve as guarantor for just about any project they propose, whether at home or overseas. Without the government doing that, many of these projects would never get done. If they did get done, the inevitable cost overruns would have to be covered by the companies themselves.
Unlike, say, the Chunnel, building airports that are never going to attract travellers, roads that serve routes that are already amply covered or fast-train stations slap bang in the middle of nowhere serves no purpose other than to pockmark Spain’s countryside with even more cement and provide easy, guaranteed (and that is the key word) profits for the construction firms. As long as profits are guaranteed by a nation’s taxpayers, where’s the risk side of the risk-reward equation?
In the meantime key infrastructure such as the country’s public schools and hospitals continue to deteriorate in the face of an accute — and growing shortage — of public funds.
As you said, in Spain (as in Mexico and many other parts of Latin America) political fraud is generally tolerated by the system (and to a lesser degree the populace at large). One of the main reasons for this is the extreme politicization of the judicial system. Unfortunately, Montesqieu’s separation of powers is still a foreign concept in many Spanish-speaking countries. Hence the culture of impunity that reigns throughout the political system, especially at the top.
In places like the US and the UK, political corruption exists but it’s a lot more discreet, while financial corruption is state of the art. Tony Blair, for example, did not receive any cash-filled envelopes in his time as prime minister (at least as far as I’m aware) but within days of retiring he was in the employ of JP Morgan and Zurich insurance. Llike the Clintons he operates a foundation with exceedingly complex, deeply opaque structures. Many of his clients are hardly what you’d call upstanding members of the international community (read more here: http://wolfstreet.com/2015/04/22/don-quijones-tony-blair-ambassador-of-rotten-national-global-governance/).
Dont worry :) Highly efficient North Europe -Finland – is building nuclear power plant which is 10y late and will cost 5,5 billion more than original cost estimate. Great thing is that -of course – taxpayers will not subsidize this.
“Also there are big frauds all the time in the US, but when you get caught you can go to jail for years.”
No, you get bonuses, golden parachutes, promoted, and re-elected. Note that Stumpf, Dimon, and Blankfiend are still footloose and fancy-free, and so are thousands of others. Lesser cons retire as high-priced lobbyists, tax evasion is the national sport, and terminal venality is a requirement for national office.
Maybe I just missed the punch line.
“Also there are big frauds all the time in the US, but when you get caught you can go to jail for years.”
What planet are you on?
Charles Keating of the S&L debacle pulled 20.
Dozens maybe a hundred also did some time,
The Clintons old buddy McDougal was one of the few who stood trial and was found not guilty.
Later on when Ken Starr was trying to nail the Clintons over their two- bit real estate venture White Water, Susan McDougal was jailed for over six months for refusing to testify. She was one of the last people to be held in chains until the ACLU complained.
PS: I know all you guys think everyone in banking or government should have gone to jail after 2008, but the root of the problem,
the US housing bubble, was actually popular until it burst.
The most responsible may be Greenspan who presided over the 20 year run-up with, not coincidentally, never- ending cuts to interest rates.
But he was popular right up till he handed the grenade off to Bernanke who was holding it when it blew up a little over a year
Also note that not all the guys DQ is talking about are bankers. Many are CEO’s of cos that have pulled frauds- but no one went to jail.
In the US we’ve jailed quite a few re: World Com, Enron etc.
Spanish energy Abendoga (sp?) is pretty much an Enron, but will anyone go to jail.
In the US jail isn’t likely but it’s possible.
From what I understand NO ONE in Spain or Italy has gone to jail for this type of white-collar crime ( the only kind that pays big bucks)
“Charles Keating of the S&L debacle pulled 20.”
Keating served only four years, and that was 20 years ago.
“From what I understand NO ONE in Spain or Italy has gone to jail for this type of white-collar crime”
There are almost none anywhere, because, as has been pointed out, the perpetrators are almost always rewarded, and not prosecuted.
There is a general disregard for authority in Latino culture. As the Latino population has grown in the US, I have seen the attitude spread into the general population. The attitude comes from the reality that they have to survive in the Latino world in spite of the institutional oppression, which is endemic. While this creates the strength and endurance many people admire in Latinos. Changing addresses doesn’t change attitudes.
You are correct in detecting a fanciful component to Latino culture. Much of Latin American literature has a fantasy component. Even the made up stuff isn’t imaginative enough to describe the realities. The American saying “you can’t make this doodoo up” doesn’t have a good Spanish equivalent, yet.
I’m not sure how different this is from all of the “shovel ready” projects financed through TARP funds in the US. At some point the government will “borrow” money to employ contractors to build their way out of an economic mess. I took one of these beautiful roads from St. Sebastian to Madrid last summer and it was FANTASTIC. San Francisco is the beneficiary of a 6+ year, multi billion $, two mile long TARP financed project to redevelop Doyle Drive into Presido Parkway connecting the Golden Gate Bridge to the Marina District. A beautiful road, epic engineering and massive tunnels covered with grass roofs. Built for 90 mph speeds with a speed limit of 35 mph so cops can collect $600 speeding tickets 20 times every day. Not sure Spain is alone just more obviously criminal. Anyway, I can’t be too negative today since the SF Giants just beat the NY Mets in the wild card game. Ready to start the division series in Chicago, a city so corrupt that it makes Spain seem like Switzerland in comparison.
But, but, but… Doyle Drive isn’t empty ever. It can turn into a parking lot with great views, even now that it is mostly finished after I don’t know how many years of construction, detours, and traffic mess. One of the big reasons they replaced it was that the new thing is supposedly less likely to collapse during an earthquake than the prior structure.
Cubbies vs Giants, does not matter who wins.Neither stands a chance against the Red Sox!
Correction for the detail oriented. The Presido Parkway cost $1.4B and is one mile long. It was largely financed by “stimulus” legislation, separate from TARP. The remainder, not paid by the FEDS, was “borrowed” by SF to be paid to the concessioneers (German and French engineering companies) over the next 30 years.
“The High-Speed Train to Mecca: Spain is in second place globally, behind China, in terms of high-speed rail infrastructure. But when a consortium of Spain’s biggest construction companies tried to apply their expertise to linking Medina with Mecca, the problems quickly began to mount – in form of sand.”
God works in mysterious ways. ‘Sand’, who would have thought.
Now a train is a great idea for transporting (at high speed) all the boys who want to return Spain to the new and improved Ottoman Empire. No doubt a tunnel will be built very soon.
Although corruption and cost overruns existed far before the ECB ever existed ,the underlying enabler of all this corruption on the current huge scale is the ability to pay for this corruption .So how does Spain pay for this.Simply, by borrowing more and more money.As long the markets retain their confidence in the ECB,the governments will continue to issue bonds at absurdly low rates.When the ECB stops buying bonds and rates explode much higher,Spain will no longer be able to fund these ridiculous projects .
The US is hardly a paragon of virtue.We are estimated to have the highest or very close to the highest constructions costs in the world.
An example is the subway in NYC
Indeed. Plenty of big examples. Check out the new span of the San Francisco Bay Bridge. Part of the old east span collapsed in 1989 Loma Prieta earthquake. It was then patched up, while plans were drawn up to build a new east span and upgrade the west span (the big suspension bridge everyone knows).
The first cost estimates in 1995 came in at $250 million. Then the fancy tower was added (making it a suspension bridge) to create a landmark. By the time the job was done, years behind schedule, in September 2013, the price had jumped to $6.5 billion, not including interest on the debt, which some folks estimate will take the total cost beyond $12 billion.
And now they’re having all kinds of problems already, such as corroding and cracking steel bolts that are supposed to anchor the bridge during an earthquake….
But it’s pretty!
Are you referring to the Chinese steel and imported Chinese labor used? If so, I have seen pictures of those bolts…not pretty.
Actually, the bolts (or rods) I was talking about were not made in China, but by Dyson Corp. in Ohio.
Nearly identical rods by the same supplier already failed on a Washington state bridge 2009. And this was apparently not known to our great construction overseers here in the Bay Area.
The bolts were installed in the Bay Bridge in 2008. This is what happened according to the SF Chronicle:
“Thirty-two of the rods sat in rainwater for five years, exposing them to corrosive hydrogen, then snapped after they were cinched down in March 2013.”
I think we’ll be talking about this bridge (and paying for it) for a long time. But I love driving across it. It’s really beautiful. Gorgeous views. I can see the tower from our place … it’s that tall.
The tower however was made in China, shipped in segments by barge, and assembled on location. My understanding is that it is for now holding up.
Its not a can! Its a time capsule of derivatives that were suppose to blow up after 6 months and are still growing 8 years later! (Another so called market with mark to fantasy values?)
The interest rates never turned against anyone , so moral hazard takes everyone together……..π
An earth shattering KA -BOOM!