Competition to win the first project in Spain's latest national road programme is intense, with bids from 16 consortia received on the June 12 deadline. For contractors starved of tendering activity in the build up to May's regional elections, the project – for the upgrade of a 57km stretch of the A2 motorway between Madrid and Zaragoza – marks a chance to begin strongly in the tussle for the biggest slices of pie.

The programme generating excitement in Spain's project finance community involves upgrading four motorways built in the 1980s running in different directions out of Madrid. It is being parcelled up into 16 projects, which will mostly range in cost between Eu100 million and Eu300 million.

But the anticipation with which contractors and banks have greeted these projects serves to highlight just how slim pickings have become in the Spanish road sector compared to its heyday a few years ago. Estimates vary as to what the overall size of the programme will turn out to be, but the lower end estimate of around Eu2 billion ($2.7 billion) is small compared to some of the real toll concessions of yesteryear. "There was a big boom in road building at the beginning of the decade, but now the size of the infrastructure market is reducing," says Isobel Lopez of Caja Madrid. "This year there is the national highway network upgrade, but there is not much apart from that."

Poll troubles

A large part of the reason for the fall off has been the disruption caused by the regional elections. The roll out of real toll projects came to an abrupt end after the national elections of 2004 brought in a government opposed to them on political grounds, since when the mainstays of the road PPP market have been regional shadow tolls.

"The central government's finances are fine in terms of their sustainability, so it only needs to do PPP in order to maximise value for money," says Jesus Gonzalez of BBVA. "Regional governments frequently lack money in general, so the only way to get big projects done is through PPP. But some of the regions are now in the process of forming new governments, and it may be a few years before a substantial pipeline begins to re-emerge from them. Right now, there are maybe Eu300-600 million worth of projects coming through from the regional governments, with maybe in a few more in the works."

According to law firm DLA Piper's 2007 European PPP report, the capex value of projects tendered in Spain dropped by 71% between 2004/05 and 2005/06, from Eu10.3 billion to Eu2.9 billion.

Such a levelling off was always likely after the country's early PPP activity, and has been the experience of other mature PPP markets like the UK's. Yet players in the PPP industry remain upbeat despite the lack of activity, insisting it is a matter of when rather than if the market picks up again.

"The political calendar determines the market calendar and it's been a tough year with a lack of projects," says Carlos Reyero, financial director of Iridium Concessiones, a subsidiary of construction giant Dragados. "But it is clear there are some in the pipeline that will arrive eventually. The country needs the infrastructure."

From the shadows

It is against this backdrop that the latest national road programme has been launched – a little later than anticipated having originally been scheduled for 2006. Spain's construction companies have all pounced on them, but for the industry's majors these are morsels compared to the multi-billion euro projects they are doing abroad.

"These projects are more operation and maintenance or pure maintenance than true PPPs," says Reyero. " Size-wise they are on the border for attracting both big and medium constructors, which is why we are seeing huge numbers of bidders. We are much happier with greenfield projects, the size and strength of the company is far better suited to greenfield."

The four roads to be upgraded are 235km of the A1 between Santo Tome and Burgos, to be tendered as two projects, a 325km stretch of the A2 from Madrid to Alfajarin in Catalonia (four projects), the A3, traversing 414km between Madrid and Alicante (four projects), and the 587km A4 between Madrid and Seville (six projects). The concession length for these projects is 20 years and revenues will come from shadow toll payments.

Apart from the first A2 project, bids are now in for two more projects, while tenders have been launched for a further five, with bid deadlines spread out to September. Although it is not known when the eight still to be tendered projects will be launched, everything is expected to be out by the end of the year. "General elections will be held in March and the government wants to get a lot done before then to give the impression of being active," says a local banker.

Several people involved in the process say they have been given to understand that the projects will be distributed fairly evenly among Spain's many contractors. However, any fears that this may lead to the public sector shelling out more for the roads than they necessarily need to are partly assuaged by the aggressiveness with which Spain's contractors have bid for the first projects on offer.

"Everyone has bid very aggressively for the first project as they want to be competitive throughout the process," says one banker. "Some bids are so low and that they could be disqualified on the ground that they are undeliverable. The most aggressive bids are probably around 20% lower than the average."
But others take a more sanguine view.

"If the consortium reduces the revenues it requires by 20% and reduces capex requirement by double that, this would make the project bankable," says BBVA's Gonzalez. "But as bids are made on the basis of toll revenues, only the consortiums know how much capex they need. In the end it could be very comfortable."
Reyero, for his part, insists that his company's bids have been among the most competitive and that he has underwriting commitments from the banks for 150% of the required debt.

Real difficulties

One concern about the programme is that it may affect the performance of the existing "radiales", real toll roads connecting Madrid with its surrounding areas, which were procured using PPP between 2002 and 2004. Since becoming operational these roads have already been struggling with lower than expected traffic volumes, and it has been suggested that the widened free motorways could hurt them even more. However, most bankers feel this won't be the case.

"The roads in the programme already exist and are in use, they just need renovation," says Caja Madrid's Lopez. "The radiales shouldn't be affected because the competition is already there from these highways."
Others have put it in slightly blunter terms: traffic volume is already so low on the radiales that the only way it is likely to go is up.

The Ministry for Public Works, which is tendering the projects, has three months from bid submission before it has to appoint a preferred bidder, meaning the first award will be made in September. It is hoped that three projects will be closed by the end of the year.

Pricing on Spanish shadow tolls has for some years now been at around the 80bp mark or lower. Margins show no signs of picking up yet, and bankers are saying they will be extremely surprised if the pricing on any of the three projects hits triple digits.

More to come

Bankers and sponsors alike insist that plenty more investment is needed in Spain's infrastructure sector. Some of the work they insist is needed includes a completion of the radiales network and projects in Andalucia, which is yet to see much road building or improvement.

However, despite their optimism, it is unlikely that the drop off in PPP volume is wholly attributable to the regional elections that have taken place. Activity has also dropped off in other mature markets, like the UK's, and the willingness of Spaniards to continue paying for ever-expanding road networks indefinitely is likely to drop off. The difficulties the radiales have had, in particular, makes it unlikely more of them will be built in the near future.

The radiales have also turned traffic risk into a particularly sensitive issue at present, and it seems no roads are going to be refinanced until they have already demonstrated a few of years of strong performance. However, a restructuring of the radiales could occur.

The weakened state of the market highlights the importance for Spanish constructors of their continued success in foreign fields. For example, the value of Cintra's two concessions to date in Greece alone – the Eu1.5 billion E65 and the Eu1.1 billion Ionian Road projects – could conceivably end up together being worth more than Spain's current national road programme.

But Spain's early success with PPPs put the country's construction companies in a wonderful position to capitalise on PPP capitalise elsewhere, and they have so far managed to dominate in Europe and North America's growing markets.

"With the current size of the concessions and the construction companies, we can't rely exclusively on the local market," says Iridium's Reyero. "We have to develop foreign branches in markets where we have a comparative advantage with our concession know-how. We're talking obviously about the US market, but also Eastern Europe and anywhere else that PPP is growing."

For the next few years at least, it is more important than ever for Spanish constructors that their hot streak in winning foreign tenders continues.