Government gets ready to cave.
By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.
Spain is home to some of the world’s biggest names in the infrastructure business, but many of those firms could soon be deprived of one of their most lucrative sources of income: the domestic road concessions business. Multi-decade contracts for some of the country’s busiest toll roads, some built as far back as the late 1960s, are about to end. To the companies’ horror, the government has repeatedly stated that the tolls will be abolished once the contracts run their course.
This has prompted frantic lobbying efforts from Spain’s biggest construction lobby, Seopan. The group has urged the government to renew the toll program for the AP-1, which crosses a well-traveled section of Northern Spain and whose concession ends on November 30. The lobby argues that it would be wrong to force cash-strapped taxpayers to pay for the maintenance and upkeep of a road that is used frequently by non-Spanish drivers. As part of a road network that links up Spain’s two main territorial neighbors, France and Portugal, the motorway averages daily traffic of 20,000 vehicles, of which some 30% are estimated to be foreign.
Instead of forcing taxpayers to pay for the road’s maintenance, the government should draw up a new concession, Seopan helpfully suggests — one that would be slightly cheaper given the road’s initial construction costs were paid off long ago. That way, cash strapped taxpayers would be spared unnecessary additional expenses while one or more of Seopan’s members could continue to cream off guaranteed juicy profits from the tolls for many more years to come.
The government could even take advantage of “current favorable conditions” in the financial markets to strike new long-term public-private partnerships (PPPs) with concessionaires. These deals are all the rage in “the most advanced economies,” Sepoan enthuses. Everywhere, that is, except in the UK, the country where PPPs, or PFIs (Public Finance Initiatives) as they’re locally termed, were first pioneered. PFIs have lost much of their lustre there following the collapse in January of the country’s PFI king, Carillion.
PFI deals effectively allowed (and continue to allow) the British government of the day to harness big sums of private capital to invest in public projects without paying any money up front — thus keeping the level of current public debt relatively low — but at the cost of mortgaging everyone’s future. For the construction firms, outsourcers, and banks, the deals provide a guaranteed source of funds over an exhaustively long period, with usurious rates attached. Taxpayers in the UK are estimated to owe a mind-watering £121.4 billion on public projects that are worth just £52.9 billion. And the compound interest continues to grow.
Now, some of Spain’s construction firms want similar deals for the toll roads — but only the really profitable ones! For instance, they’re no longer interested in the nine loss-making toll roads that were built at the turn of this century, largely at the construction firms’ own insistence, to cover routes around Madrid that were already amply covered by “free” public highways. Experts at the time warned that the scheme would backfire since most people would continue to use the free roads, but their warnings were ignored in the mad dash for quick, easy, publicly subsidized money.
The end result was a €5 billion financial black hole on the concessionaires’ books, at least part of which was filled by a taxpayer-funded bailout that could end up costing anywhere between €2 billion to €5 billion. The alternative would have been for six of Spain’s biggest construction firms — Sacyr, Ferrovial, FCC, Acciona, Abertis and OHL (all members of Seopan) — to be hit by a whopping 50% haircut on their initial investment. The banks that had financed the doomed projects would also have been left out of pocket, which is also a definite no-no!
The story is a familiar one in Spain: a massive infrastructure project is conceived, often by a construction company (or companies) which, as a slew of scandals have revealed, may be paying illegal kickbacks to senior representatives of the respective local, regional or central government that ends up paying for the project. The project gets built, is inaugurated, spectacularly fails, and is then rescued by the government’s state guarantees. So common is this practice in Spain’s construction sector, it’s safe to say that if Carillion had been a Spanish company, it would probably have avoided the chop.
Through Seopan, some of Spain’s biggest construction companies, starved in recent years of the large-scale public infrastructure projects that helped fuel their growth, are now desperate for the government to let them enjoy just a few more decades operating the most profitable freeways, at significant extra cost to drivers, hauliers, and the end consumers of the products transported along the roads.
And they’ll probably get it. One of the most important toll roads, the AP7, which stretches the entire length of Spain’s Mediterranean coast, is currently operated by Catalonia-based Abertis, which was taken over in March in an €18.2 billion joint-bid by Italian rival Atlantia and Spanish construction giant ACS. It’s highly unlikely that one of the most valuable jewels in the acquired company’s crown will be allowed to be transferred into public management after such a costly deal.
The Rajoy government is already walking back some of its original commitments, made when memories were still fresh of the controversial bailout of the companies involved in the Madrid toll roads. Instead of pledging to return the roads to public management as previously promised, the new official line is that “all options are back on the table,” which really means there’s only one option: to keep things just as they are. By Don Quijones.
UK regulators may be on the verge of doing something right, but doubts remain over how genuine their stated intentions are. Read… After a String of Corporate Scandals & Collapses, “Big Four” Accounting Giants Face Breakup in the UK
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