The €325m (US$385m) Barcelona Judicial Courts PPP project serves as the pioneer of non-road project financing in Spain. Even if it closed at the end of 2005, its experience since award more than two years ago is that of a true pathfinder deal in the Iberian PPP market

The courts complex project is not only a true survivor - just after its award it nearly foundered over the change in government - but stands out in many other ways.

It was Spain's first public buildings and non-road PPP and the largest one to close to date - larger by far than any of Madrid's pathfinder hospital PPPs. It is also one of the largest court PFIs in to make it to market in Europe.

The project is innovative in Spain because it is the first project that was not a road to be wrapped by a monoline insurer.

Alberto Ramos, managing director and head of XLCA's global infrastructure group, is clear on the subject: 'We believe this concession structure will serve as a model for future PPP deals in Spain.'

Background

The Catalan government - the Generalitat de Catalunya -  which has devolved rights to run the justice system and police in the north eastern autonomous region, wanted to unite most of the courts that are scattered around Barcelona into one major site, a courts complex or 'judicial city'.

The authority opted to keep the expense off balance sheet and went for private financing.

In mid-2002, the Generalitat's public infrastructure company - GISA - put the Barcelona courts project out to procurement as a 35-year concession following the UK PFI-style model. All major Spanish construction companies expressed interest.

In September 2003 it was awarded for €263m (US$318.5m) to a consortium including:

• FCC (30 per cent)
• Ferrovial (22 per cent)
• OHL (20 per cent)
• Copisa (24 per cent)
• Emte (5 per cent)

The two other shortlisted bidders were a consortium with ACS, Copsa, Entrecanales, Sacresa, Saba and Copcisa; and an SPV comprising Dragados, Comsa and Corsán Corviam - which was eliminated early on.

The project then went through a baptism of fire when the Catalan ruling party - the centre-right nationalist CiU - lost the election to the centre-left Socialist party just two months after the award.

The change of government itself and the Socialist party's rise to power meant that the project had to stand up ideological and financial scrutiny from an unfriendly viewer.

Scepticism over the project's viability and private involvement, though, eventually waned and only led to a downsizing of the scheme.

The technical project had to be re-written, taking it down almost 25 per cent from 278,000m² to a total surface area of around 210,000m², as well as a number of other modifications.

The project

The new-build courts complex will comprise eight buildings and more than 200,000 square metres which will cater for the courts for the cities of Barcelona and L'Hospitalet de Llobregat, as well as 1,700 parking spaces, offices and commercial premises.

It will be one of Europe's largest justice centres with almost 3,000 people working there.

The project is being built on a former military base in the largest suburb of Barcelona - L'Hospitalet de Llobregat - which is just off the southern end of the city.

Once construction is complete, most of the complex will be occupied by more than 200 of the city law courts. The remaining space - around 20 per cent of the surface - will be leased to the private sector for offices, restaurants, shops and parking facilities.

The consortium signed a contract for the construction, operation and maintenance of the complex, for which the Catalan government will pay a yearly fee during the 35-year concession period amounting to more than €1bn (US$1.2bn).

Uria Menendez lawyer Gabriel Nuñez says: 'A particular characteristic of the deal is that it was signed as a traditional concession, not under the new law - which provides more flexibility and comfort for the financiers.'

Nevertheless, it is still a UK-style PPP in a region were most projects are based on 'derechos de superficie' or 'land rights' - a local type of lease or deferred payment system.

Construction work restarted in late 2005 after an initial interruption due to the project's modifications. They are expected to continue until January 2008.

Financing

Two banks were involved in the deal since its award back in September 2003, Santander Central Hispano and Banc de Sabadell. The closing, though, was delayed until 20 December 2005 by the political change and changes to the project design.

In addition, the Spanish unwritten rule by which financial close comes late once the works are well started also applied to the Barcelona deal. As Uria Menendez's Gabriel Nuñez puts it, 'in Spain, we make equity work first.'

The €325m (US$385m) deal involved a €282.1m (US$335m) senior loan facility, granted by Santander Central Hispano and Banc Sabadell to finance the project.

Banc Sabadell also granted a stand-by credit line worth €14m (US$17m) to cover the risk of interruptions in the cash flows and VAT for the construction stage was financed by a €27m (US$32.7m) credit line. As a result, the project's debt-to-equity ratio is 89:11.

XL Capital Assurance's Spanish branch wrapped the deal - in what was the first deal to be secured by a monoline insurer in Spain in any non-road sector. XCLA issued a triple-A rated financial guarantee for the €296.6m (US$352.5m) loan for the project, also guaranteeing the liquidity facility of up to €14m (US$17m) - which is equivalent to a maximum of six months' worth of debt service. The term was established at 28 years.

Nuñez says: 'The bond route was chosen because it was cheaper and made possible a notable increase in leverage - and a better debt service cover ratio for the sponsors.'

He also notes how the project was more of a UK-style PPP - not like many Spanish deals which are based on leases with guaranteed payments - with a high flexibility and no performance risk.

The majority of the debt will be repaid from proceeds from contractually fixed payments made by the Generalitat during the operational phase of the concession in exchange for the use of office space occupied by the Barcelona law courts.

Another source at Uria Menendez describes the financial structure implemented in the project as a significant novelty in Spain. Its total cash flow is expected to exceed €1bn (US$bn) combining different types of risks - public and private - but also different degrees of risk transfer in terms of demand and availability, all of which are independent from each other.

The Generalitat provides the payment of two different fees:

• one for the use of the premises where the courts will be located
• and another fee for the soft services assumed by the licensee - cleaning and security, amongst others

While the fee for the use of the premises is not subject to any reduction or penalty, the maintenance fee could be subject to deductions. In addition, the licensee will be entitled to receive from the users an additional rate based on the use of the secondary facilities such as parking, offices and meeting halls, among others.

The project also incorporates another innovation concerning payments owed to the licensee in the event the concession is terminated due to a breach of contract. Although in standard concessions the licensee has the right to receive compensation in cash from the public administration, it was agreed in this project that - regardless of the termination of the concession - the Generalitat would be entitled to terminate any services pending - i.e. soft services - and continue paying the availability fee to the licensee as established in the original calendar.

Although it does not affect the financers' expectations of receiving enough cash flow to make repayments within the terms established, this novelty favours the public administration insofar as it will not have the obligation to make an unexpected significant payment in unforeseen circumstances.

Conclusion

The Barcelona Judicial City project, which probably is the first non-road PPP in Spain to reach financial close, lays the groundwork for future deals in the country.

Its close came at a time when social infrastructure PPPs in Spain were on the cusp of taking off with projects like other courtrooms, police stations, prisons and schools - as well as hospitals - on the verge of making it off the drawing board.

Even if it moved excruciatingly slowly - and in a somewhat erratic manner - the scheme has definitely closed 'in style', using bond financing for the first time and showing how large non-road projects can be dealt with innovatively.

If you are looking for a Spanish health PPP pathfinder, it will most certainly look at Madrid's hospital scheme - but if the interest is in any other type of non-road PPP developments, the deal to scrutinise will have to be the Barcelona courts complex.

The project at a glance