Rain-making Spanish irrigation project
Spain’s €1.5 billion (US$1.9bn) Segarra-Garrigues irrigation project to breathe life into a large part of central Catalonia is one of those projects that will effectively transform the region’s arid plains to verdant countryside, writes Marc Roca.
However this deal stands out for many reasons beyond its environmental impact. It is the largest ever structured finance deal in the autonomous community and is also the most expensive public works project ever awarded in a single tranche in Spain.
After more than 40 years in planning, a unified approach from the Spanish government and the autonomous Catalan government finally got it off the ground.
The first phase of work – the Canal Segarra-Garrigues – will see the construction of an 85.4km-long canal to relocate water to irrigate more than 70,000 hectares across 66 municipalities in the province of Lleida.
The Spanish government tendered and financed most of the €445m (US$549m) initial phase, leaving the Catalan government – Generalitat de Catalunya – to finance the second part.
This second phase of the project saw the autonomous region foot the €1bn (US$1.2bn) bill, €884.5m (US$1bn) of which was financed off balance sheet.
The second phase, the Segarra-Garrigues irrigation project, is only possible once the construction of the €445m main canal was approved. Once this project – which is being overseen by the Spanish state through public company CASEGA – received the green light, it was automatic that the next phase would follow as it delivers the water to the customer – farmers.
The Catalan government, through public company REGSEGA, awarded the project in the end of 2002 to the Aigues Segarra-Garrigues (ASG) consortium, which includes:
FCC AGBAR COPCISA COPISA and a number of local contractorsASG on 29 June 2005 closed the €884.5m structured financing deal that involved a deferred payments mechanism for project costs with a syndicate of four banks.
The regional government’s agriculture councillor, Antoni Siurana, says: ‘This deal represents the largest credit operation ever in Catalonia with a group of companies, which will construct and operate this irrigation system that will transform a large area of the province of Lleida.’
Teresa Paz-Ares, partner at Uria & Menendez – legal adviser to the authority – adds: ‘This transaction is the biggest financing of an infrastructure in Catalunya so far. It is also the most expensive public works project awarded in one tranche in Spain.
‘There have been works with higher overall values, as in highways or railways, but in this case the authority decided to award all of the project at once to a single consortium.’
Fernando Garcia, the project’s manager for Dexia-Sabadell bank, says: ‘This project singular and complex structured-finance deal, instead of a typical project finance deal. It is better described as a sell of syndicated credits rights, in which there is no debt-service cover ratio.’
The Parties
The Segarra-Garrigues secondary network irrigation is being overseen by the Catalan government which negotiated with the Spanish government in the 1990s a way to co-develop it.
After the state rated the project as being of national importance in 1994, it went on in 1999 to create a public company to undergo the initial phase. The Generalitat set up REGSEGA in May 2002 to put together the €1bn second phase.
At the end of 2002, REGSEGSA awarded the project to the ASG consortium which is owned by five players:
Grupo FCC (24 per cent), a major Spanish construction company ACSA AGBAR (22 per cent), part of the Barcelona-based AGBAR Group COPCISA (21 per cent) COPISA (20 per cent) a joint venture of local contractors Constructora Pirenaica, Benito Arnó e Hijos, Áridos Romà, Constructora de Calaf, José Antonio Romero Polo, M y J Grúas, Aquàlia and Sorea (13 per cent)The syndicate of banks – all of which acted as mandated lead arrangers – includes:
CajaMadrid Dexia-Sabadell Banco Local La Caixa BBVA Banc de SabadellDexia-Sabadell and CajaMadrid also acted as financial advisers for ASG during the bidding process.
ASG took legal advice from Uría & Menéndez, while Garrigues acted for the bank syndicate.
The Project
The project consists of the construction of a secondary irrigation network in the province of Lleida in central Catalonia, which when completed will irrigate about 70,000 hectares of arid land, providing water to almost 20,000 farmers. It continues the separate state-funded 85.4km canal.
The infrastructure requires the construction of 40 reservoirs and more than 3,000km of piping, as well as numerous sites in the six sub-regions (comarques) involved – La Noguera, Segriá, Plá d'Urgell, Urgell, Segarra and Les Garrigues – all in the province of Lleida.
The 30-year concession-style contract involves the construction, operation and maintenance of the entire irrigation network. At financial close, the project was more of a master plan as it is made up of some 150 smaller projects, each to be constructed independently.
The project is divided into 15 areas representing different branches of the irrigation network, with up to 150 smaller contracts. ASG will seek permission for the detailed version of each of these projects and assign them to one of the consortium members.
Dexia-Sabadell’s Fernando Garcia says: ‘ASG will allocate the projects so that each company in the consortium builds a part of the total construction equivalent to their capital participation.
‘They will not act as SPVs, the four main companies and the fifth local JV all build separately, and so do not share construction risks.’
Garcia adds: ‘In total we have 150 projects to build – only a few being constructed simultaneously – so that once each is finished irrigation can start in that area. However, construction somewhat depends on progress of the main canal [the initial, separate project], which provides the water flow.’
Teresa Paz-Ares, partner at Uria & Menendez, says: ‘Even if it is a project that will be operated for 30 years, it is legally not a concession because of minor details. The applicable law is that of a contract with a public administration, so it is not subject to a concession regime.’
Works are scheduled to start in October 2005 and the whole irrigation project is expected to be fully functional within 12 years.
The financing
The project has a total value of €1.023m (US$1.2bn), of which €884.5m is senior debt. Equity amounts to €30m (US$37m) and the rest will come from the farmers as buyers of the water.
The financing – closed at the end of June in Tarrega – is similar to Spain's traditional ‘metodo aleman’ which involves a deferred payment mechanism for project costs. Under this scheme, funders have committed to purchase future supplies of water to be paid over the life of the concession agreement by REGSEGA.
ASG's contractors will build the project in different phases and, following each phase's completion, the consortium will be in charge of operation and maintenance, receiving fixed and variable payments from water users.
Under the framework agreement, ASG sells to a syndicate of financial groups the credit rights it will generate against REGSEGA, which arise from the works already completed.
ASG will also be allowed to sell the future credit rights that arise from the commencement of the works of a section of the project which has not yet been completed and approved by REGSEGA.
The syndicate has been supporting ASG’s bid since before the award and also acted as mandated lead arrangers. It includes:
Caja Madrid (25 per cent) Dexia-Sabadell Banco Local (25 per cent) La Caixa (25 per cent) BBVA (25 per cent) Banc de Sabadell (5 per cent)The president of ASG, Jaume Regany, says: ‘With the signing of this bank loan all the complete construction of the Segarra-Garrigues will be totally assured.’
In effect, while the main canal project was always going to be state-funded, private financing was deemed as necessary for this larger second phase.
Teresa Paz-Ares says: ‘For this phase, a very solid financing structure was needed, so that the debt would not qualify as on-balance for the public authority.’
Dexia’s Fernando Garcia adds: ‘More than strictly project finance, the structure is a session of payment rights with a financing structure so that the public administration can qualify the project’s debt as off-balance. It is a non-recourse loan for the whole amount, there is no debt-service cover ratio.’
The loan will be repaid through 20 pre-established yearly payments made by REGSEGA, which include interest and amortisation. Debt starts at zero and rises as projects are completed. ASG will make money from REGSEGA for the works it keeps completing and also from the water is sells to the farmers.
The financing took so long to close – from June 2003 to June 2005 – because the project was paralyzed until the main canal project started construction.
Fernando Garcia says: ‘It made no sense to close the financing for something as we did not know when it would start as it depends on the main canal.’
Many banks were interested in the project for a combination of reasons. The size made the deal attractive, but also the low risk was a strong lure added to entry to the Catalan market.
Teresa Paz-Ares says: ‘Banks don’t bear much risk, just the standard risks for construction, but not for operation as there are fixed payments. They are more or less just creditors.’
She adds: ‘Banks were very interested because there are important construction companies in the project and some are working in the Catalan market for the first time, helping the government in a landmark project. For the banks participating in such a showy financing, an original structured finance, was an extra motivation.
‘The major hurdle was that banks accepted that ASG sell the credit rights as a non-recourse sale. Once the credit rights are sold, it doesn’t bear any more risk if the contractor build according to plan.
‘When the credit right is sold once materialised – not future – no warranty is needed because it bears the right to earn from REGSEGA.
Conclusion
Segarra-Garrigues stands testimony to the way in which public authorities can finance huge projects using private finance in original ways, keeping debts off-balance sheet but assuring they close.
It also goes to show how ambitious public works projects that have been shelved for many years – it was an electoral promise back in 1983 – can finally be closed through a structured finance approach.
As Fernando Garcia puts it: ‘We call such financing despresupuestacion’ – which translates into something like de-budgeting, or budget deconstruction.
Project at a glance
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