Wednesday 1 May 2013

Spain's growing network of bankrupt toll roads

Spain was once lauded for having a large network of first class privately financed toll roads.  Now it looks like many of those roads were commissioned by government, and built by the private sector based on overly optimistic forecasts of growth off of the back of Spain's property led boom, that was a bubble which has popped.

Phys.Org reports from AFP on the debacle of the roads heading for bankruptcy, and it isn't just rural highways, but big urban highways near Madrid:

Two highways, Radial 3 and Radial 5, opened in 2004 at the height of Spain's construction boom. Now the company owes 660 million euros ($850 million) to the bank, 340 million to the builders and 400 million to residents evicted to build it.

Six toll roads have entered bankruptcy proceedings since May 2012, when the Madrid-Toledo (AP-41) toll road was the first.  It was managed by  Grupo Isolux Corsan SA, Comsa SA, Azvi and Banco Espiritu Santo SA, and owed over US$646 million in debt. 

Many more more are also heading for bankruptcy.

It isn't just roads, as Spain built high speed railways and airports, with some of both of those now looking like woeful investments.  

The craze drove Spain to break records: it became the country in Europe with the most kilometres of motorways and the most commercial international airports, and was second only to China in the world for the length of its high-speed train lines.

Meanwhile, the government already upgraded existing roads as well, untolled roads.  At a time of deep recession, it is clear that Spaniards are preferring to save money over time, so are avoiding the toll roads in favour of the untolled government roads.  

Motorway traffic is now at levels not seen for over 15 years. 

The report continues:

On the Accesos de Madrid roads, "where there were supposed to be 35,000 vehicles a day, there are 10,000," said Jose Antonio Lopez Casas, director of Accesos de Madrid, the company that manages two major highways around the capital.

What is the lesson?  

That road projects should be driven not by political imperatives, but commercial ones.  The private sector assumed that perpetual growth would continue and that forecasts of growth were robust, but ignored the bubble economy (like so many others did).  Instead of project let concessions, it may have made more sense to commercialise parts of the network, letting the private sector manage existing highways and decide on the merits of upgrading them instead of building new tolled roads.  

However, there is a bright side in that the risk has been born by the private sector.  The roads are built, and the cost to maintain them is a fraction of the capital cost to build them, which in most cases will be wiped out and born by the creditors.

Spain is obviously "overbuilt" for toll roads, and bankrupt toll roads may see prices cut to encourage demand, but may also put pressure on government to change how it charges its untolled network (through fuel tax).  The bigger issue is whether the sheer scale of this bankruptcy overwhelms, and is likely to create mergers and require more fundamental reform of the highway sector, or if government feels pressured to nationalise the roads (unnecessary and unwise in my view).

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