Spain courts private finance for infrastructure

Author: | Published: 25 Apr 2003
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The Spanish project finance market has been active since 1993 when the first non-recourse financing took place (Elcogas). Now a mature market, Spanish project finance covers a wide range of areas and structures which have benefited from very positive developments in case law concerning the validity and enforceability of securities and new regulation. Since 1997, for example, there has been no doubt that the pledge over rights is fully valid under Spanish law.

Recent trends

Despite some doubts on the performance of some projects previously and the uncertainties arising from the draft Basel II Accord, the market is strong and growing.

Project finance techniques are now widely used in fields which had not benefited from this kind of structures and this particularly the case for environmental infrastructure. Water projects such as channels, dams and transfers ike the ones handled by the state owned companies Hidroguadiana, Acusur or Segarra / Garrigues are financed in this manner for a global amount of approximately €1.700 million ($1.8 billion). Theme park financing is also booming through projects like the €250 million financing of Xanadu.

Although most foreign independent power project (IPP) developers are now pulling out of Spain, the traditional area of power finance is still very active in the country. Spanish utilities are acquiring projects like this and most of them will be off-balance-sheet financings. 2003 has already seen the financial close of Bahía de Bizkaia Energía, the first IPP in Spain and a wholly-owned subsidiary of Electricity Supply Board of Ireland, and Bahía de Bizkaia Gas the first gas infrastructure project in Spain which involved a liquid natural gas plant owned by BP, Repsol, Iberdrola and the Basque government. Project finance in the renewable energy sector is reaching record levels after the 2001 €800 million financing of Energías Eólicas Europeas (EEE), the largest wind farm financing in the world. New regulation has tried to encourage construction of combined cycle plants by allowing the electricity tariff to be increased if the gas price has risen in the previous year.

Bank debt continues to be the more usual source of financing, though some bond finance is being structured, as was the case with part of the Nuon refinancing of the windfarm portfolio acquired by Abengoa. Syndication under the Spanish law is becoming very frequent after EEE and the refinancing of the highway operator Avasa. Securitization status will be enhanced after new regulations are passed.

The European Investment Bank is becoming the main source of financing for many infrastructure projects and monoline insurers are required to participate in most of the projects, playing a very influential role in the structuring of the transactions.

Regulatory and administrative law advice has become an essential part of the structuring of a project.

New regulations

The Spanish government has approved a very ambitious infrastructure plan to be carried out in the year 2010 and due to budgetary constraints, private initiative will be entrusted with providing financing for at least one third of the programme. Some projects have already been closed, like the second radial Madrid highway, or the two tranches of the Barcelona tramway. Many others are in the pipeline, like the third and fifth radial Madrid highways, the Barcelona, Seville and Malaga underground systems and the Figueras-Perpignan high-speed train.

A consequence of the February 2000 implementation of the new Eurostat accounting criteria is that the Spanish model, which involves using a wholly state-owned company as sponsor of a project whose financing is not considered as public deficit or debt, is no longer viable. Instead the government has announced new legislation which tries to offer a more attractive and secure legal framework for sponsors and financiers of infrastructure. The main reform affects the Public Works Law which regulates public concessions. Concessions will now be offered for Public Private Partnerships (PPP) / Private Finance Initiative (PFI) development in Spain.

The reform will be approved before summer 2003 and will have a number of features. Private initiatives to build infrastructure will be recognized. The traditional principle of risk and venture (riesgo y ventura) which meant that the concessionaire built at their own risk will be mitigated by the new law which will try to secure the concessionaire's sources of income.

The new law also provides for the possibility of the administration contributing (in cash or in kind) to the project both during the construction and exploitation phase and even at the end of the concession. It also establishes the possibility of securing a minimum income to the concessionaire in the conditions to bid.

The income of the concessionaire could come from the payment of the tariff by the users of the infrastructure, and from the use of the commercial zones adjacent to the infrastructure such as hotels and gas stations, the exploitation of which is also granted to the concessionaire.

Additionally, the reform states that the concessionaire might be paid in kind through the granting of an exploitation of other public works or part of a concession which has a functional relationship with the project they have been contracted to work on such as a road. The concessionaire might also be paid through the granting of a public domain concession in the influence area of the concession such as the exploitation of a parking lot.

The changes also make the tariff a maximum and adjustable depending on the demand for the use of the infrastructure and on the benefits of the commercial zone. The possibility of a canon por demanda or shadow toll payment of the tariff by the administration is established as a possibility available for any kind of concession.

These advantages are compensated by the establishment of the progress clause, implying the obligation to maintain the infrastructure in the best available technical conditions and by the fact that the principle of the maintenance of the balance of the concession becomes bilateral. Until now, this principle allowed the concessionaire to request an improvement of the tariff conditions or an extension of the term of the concession if such concession was not performing in accordance to what had been foreseen. This is maintained, but the principle will be also applied the other way round: if the concessionaire is obtaining more income than forecasted it will have to return it.

The financiers are granted the right to collect the payment of their credits with preference to other creditors if the concession is terminated. The new law also establishes new means of financing. Revenue bonds representing a participation in the income arising either from the tariffs, the exploitation of the commercial zone or contributions from the government are permitted. Securitization of these revenue bonds or of the direct source of income is permitted and the bonds issued will not be part of the bankruptcy state of the concessionaire.

Title holders of revenue or securitization bonds will be heard by the granting authorities in order to fix the amount of their credits when the concession is terminated. If termination arises for a reason not attributable to the concessionaire, the creditors are guaranteed a minimum value for the repayment.

The mortgage of the concession is reformed in order to make sure that enforcement of the mortgage is possible. Prior to enforcement, the mortgage creditor is entitled not only to request that the Administration take the necessary measures to maintain the infrastructure, but also to offer to the Administration its subrogation instead of the concessionaire, if the concessionaire was not performing adequately. Mortgage creditors could also demand that the Administration assign concessionaire income directly, as well as directly exploit the commercial zone, if an event of default occurs.

Acquirers of a mortgage structure have to be approved by the Administration. If no bidder appears, the mortgage creditor can propose a new concessionaire. If the concession is terminated the mortgage creditor will receive a minimum indemnification.

This very positive and long-awaited reform will create a more secure framework for the financing of infrastructure. It is expected that after the approval of the new law, the Spanish project finance market's growth will accelerate.