Spanish road crash: What next?

Ashurst’s Gonzalo Jimenez Blanco and José María Anarte offer the legal lowdown on the troubles affecting Spain’s roads sector.

Several of Spain’s road concessionaires have been hit by a slew of problems, including higher-than-expected land expropriation costs, much lower-than-expected traffic, and competition from free motorways, to name a few.

With five road concessionaires having already taken to the courts and filed for bankruptcy proceedings, Infrastructure Investor quizzed Ashurst’s Gonzalo Jimenez Blanco (managing partner and head of finance at the Madrid office) and José María Anarte (senior associate in the energy, transport and infrastructure department) for a legal perspective on the troubles affecting the Spanish roads sector and to find out what lies ahead.

What was the legal basis for the court sentences in Madrid that led to higher-than-expected land expropriation costs? Was it foreseeable that this could happen at the time the original concession contracts were signed?

GJB/JMA: The court sentences are based on a change in the expropriated land’s valuation criteria which determine the expropriation price to be paid to the original owners.

In this sense, the court sentences found that the original price paid to the expropriated land owners was erroneously calculated since it was based on the qualification of the relevant land as ‘rural land’.

However, according to the applicable case law, some of the affected plots should have been considered ‘buildable land’ at the time the expropriation price was determined. As a result, relevant land owners were granted a review of their expropriation price in order for it to be re-evaluated, taking into account the ‘buildable land’ [classification].

In the end, concessionaires have suffered a sevenfold increase in the expropriation price to be paid to the original owners. The concessionaires have applied for a rebalancing of their concession contracts on the basis that the increased costs were unforeseeable at the time they submitted their bids. They also argue that the above-mentioned [price] reviews break the base-cases’ financial expectations that govern the concession contracts’ financial life.

The unforeseeable nature of the expropriation cost increases has been expressly recognised even by the Spanish government which, in response, has implemented specific measures to compensate the financial damages suffered by the concessionaires. They include the granting of special loans (préstamos participativos), extending the term of [affected] concession contracts, and an increase in the applicable tariffs.

Nevertheless, these compensatory measures have not prevented several motorway concessionaires from applying for insolvency under the Spanish Insolvency Act.

Some of the affected road concessionaires complained that local governments opened parallel free roads. Why did the concession contracts not legally exclude this from happening?

GJB/JMA: The court sentence which allowed the rebalance of the concession contract in this case recognises the right of the concessionaire to apply for a rebalance of the concession when, among other things: (i) a supervening, extraordinary and reasonably unforeseeable fact non-attributable to a deficient management of the concessionaire occurs; and (ii) that this fact breaches the financial balance of the concession contract.

However, the same court sentence found that the opening of a parallel free road beside a toll road awarded to a concessionaire did not fall within the above scenario. Such development of new infrastructures alongside existing ones could not be considered as an extraordinary and unforeseeable event since this falls within the administration’s duties to provide a better and safer service for citizens.

Therefore, the bidder should have anticipated this possibility and provided for it in its financial expectations at the time it submitted its offer and before it became a concessionaire.

All of the roads that have filed for bankruptcy proceedings so far have mentioned that the government has failed to rebalance these concessions, as it agreed to do. From a legal standpoint, can the courts force the government to rebalance these contracts?

GJB/JMA: The right for the rebalancing of a concession contract is legally recognised in favour of the concessionaires under the Spanish Public Contracts Law as an obligation for the contracting authority. This is to mitigate the prejudicial effects which may arise from a strict application of the risk-and-venture principle, which determines that the concessionaire executes its concession contract at its own risk and venture.

The existence of this right is particularly important when taking into account the long-term life of these agreements, the significant investment required to carry out the object of the concessions (e.g. civil works such as roads, motorways, high-speed rail lines or hospitals) and the public nature of the services provided once the works are completed and operational.

The leverage which is usually needed to finance these projects introduces a third-party agent (i.e. financial institutions, infrastructures funds, etc) in the relationship between the contracting authority and the concessionaire. This obviously adds complexity to the projects.

Taking into account the complex nature and the number of stakeholders involved, the courts’ participation as a mechanism to solve the conflicts inherent to these projects is not unusual. Likewise, the recognition of the existence of the resulting imbalance and the creation of measures to implement a rebalancing is market practice.

In this regard, in the event a contracting authority does not recognise said rebalancing in relation to a concession contract which qualifies for a rebalancing, the court can force the contracting authority to do it.

Can you talk us through how a typical road bankruptcy proceeding is likely to unfold and what are the multiple outcomes that can result?

GJB/JMA: Due to the lack of applicable case law – the declaration of insolvency of road concessionaires is relatively new in the Spanish market and none of the insolvency proceedings of existing road concessionaires have finished – it is very difficult to anticipate any outcomes.

It has been recently published that the Ministry of Development and Public Works (Fomento) is planning to create a sort of public entity which will be in charge of managing the concessions belonging to those road concessionaires which have become insolvent. It is envisaged that the insolvent road concessionaries’ creditors (i.e. financial institutions) may take part in the equity of this public management company.

We have been told by numerous sources that, should these road concessions all go bankrupt, the Spanish government would legally have to take responsibility for them. Is this correct – and if so, why? Also, legally, what exactly would the government have to do for these roads (e.g. would it have to take over the concessions’ debts and pay banks, for example)?

GJB/JMA: According to the Spanish Public Contracts Law the contracting authority may: (i) declare the early termination of a concession contract upon the declaration of insolvency of the concessionaire; and (ii) is obliged to declare the early termination of a concession contract if, during the insolvency process, a voluntary arrangement with creditors is not reached and the insolvency proceedings reach the liquidation phase.

Once the concession contract is effectively terminated pursuant to the occurrence of an early termination event as set out above, Spanish Public Contracts Law states that the concessionaire is entitled to recover the amount spent in relation to expropriation of land plots, execution of civil works and acquisition of assets necessary for the operation of the concession contract’s object. These amounts will be paid net of the amortisation calculated taking into account the remaining time until the end of the concession contract and the financial plan of the concessionaire.

On a related issue, the law sets out that the concessionaire is obliged to deliver to the contracting authority, in a good condition for use, the works included in the concession contract together with the assets and installations requested for its operation.

The above means that in the event a concession contract is terminated early pursuant to an early termination event, the relevant contracting authority will have to take responsibility for the concessions. This conclusion reinforces the idea for the incorporation of a public entity responsible for the management of bankrupt concession contracts, as mentioned earlier.

Regarding concessionaires’ creditors, the Spanish Public Contracts Law states that, if these creditors have not been repaid, the contracting authority will negotiate with their representatives the amount of the debt to be repaid and its repayment calendar. The amounts to be paid to the financial institutions by the contracting authority under this arrangement will be capped depending on whether or not the relevant concessionaire is to blame for the early termination of the relevant concession contract.

In addition, the tender conditions governing the concession contracts may set out specific rules under this scenario, such as an obligation for the contracting authority to pay the concessionaire’s creditors first – and only then the concessionaire.