Garrigues Presentation - CG/LA's North American Leadership Forum - NOV. 2009

THE SPANISH PUBLIC-PRIVATE
PARTNERSHIP MODEL
Alfredo Fernández Rancaño

Washington, September 22, 2009
Introduction (I)
Public authorities can currently choose to go down two routes to execute major
infrastructure projects:
The budgetary route, i.e., using revenues raised from collecting taxes paid by citizens.
The nonbudgetary route, which entails using existing capital in the financial sector coming from
private sector investment.
The latter route, used by public authorities to take advantage of the experience and know-
how of private sector firms specializing in the construction and operation of public
infrastructure projects, and to try to comply with the legal constraints on public debt,
requires there to be sufficient private sector confidence: only a model that is safe and
reliable is a “bankable” model.
The ability to give the necessary reassurance to the private sector depends, in my opinion,
on a set of factors:
The existence of a stable political framework that inspires confidence in the actions of the public
authorities.
2
Introduction (II)
The existence of a developed legal framework that guarantees that the actions of the public
authorities are legally accountable and that the rights of the private sector are effective.
The existence of model contracts, the terms of which are all technically, legally and financially
well-defined.
Flexibility to limit the contractor’s risk in two ways:
First, the possibility of devising means of maintaining the economic and financial balance
of the contract in situations such as the following:
Where the decisions of the contracting authority impact the contract directly.
Where the decisions of the contracting authority or of other public authorities do not relate
directly to the contract, but affect it nonetheless.
Cases of force majeure.
3
Introduction (III)
Second, the possibility of predicting with certainty the potential consequences of the contracting
authority’s decisions for the private contractor, such as early termination of the contract, the elimination of
contractor-managed services, etc.
Together with the relevant provisions in the contract to regulate the consequences of such situations, in
practice public contributions to the private contractor can be established in Spain to ensure the economic and
financial balance of the contract, such as:
Subsidies: for investment (for instance for job creation), or for operations (subsidy for part of the price of
the rates to be charged to future users of the infrastructure).
Returnable advance payments, guarantees, performance bonds, exchange rate hedges, or capital
contributions.
Structurally subordinated loans, the repayment of which can be deferred until a certain amount of the
commercial debt has been repaid.
Secondary guarantees to ensure a certain level of revenues for the private partner.
Termination clauses, which enable the private operator to transfer the project to the public authority and
recoup its investment plus a specific return if infrastructure use does not reach projected levels.
Contribution of land, buildings, facilities, etc.
4
Introduction (IV)
The simultaneous coexistence of this factors gives the private sector in Spain an
attractive incentive to work together with the public sector in the execution of major
projects.
In Europe, the challenge is to achieve sufficient transfer of risk in order to avoid legal
constraints on public debt without reducing the attractiveness of the transaction in the
market.
Having reached this point, the flexibility in operation of a public-private partnership will
basically depend on how developed each country’s public infrastructure and procurement
legislation is.
Unlike the model in English-speaking countries, the extensive regulation of public

procurement in Spain has meant that most of the elements of a contract (as much as 80%)
are predetermined legislatively.
This avoids the need to have to negotiate all the elements of each contract and
significantly cuts down on any delay caused by such negotiations in practice.
5
Introduction (V)
Public Sector Contracts Law (2007)

Special legislation about each kind of infrastructure (airports, railways, etc.)
Partial implementation of the Public Sector Contracts Law (2009)
General Administrative Tender Terms
Special Administrative Tender Terms

Special Technical Tender Specifications governing each contract
Contract
The level of negotiation in Spanish public procurement

depends on the award procedure chosen by the contracting
authority:
• In open and restricted procedures, negotiation is not

permitted.
• Negotiated and competitive dialog procedures do allow
some room for negotiation between the public and
private sectors.
6
Types of PPPs used in Spain
In general, two different types of PPPs are used in Spain:
“Institutional” PPPs, which entail the creation of a specific entity, via:
Joint participation of public and private sector.

The taking up of stake by the private sector in a pre-existing public enterprise.
“Purely contractual” PPPs, which entail the conclusion of a contract between the parties. In turn,
a distinction can be made between the different systems available:
Concession system: existence of a direct link between the private partner and the end user.
The private partner delivers the service to citizens. Characterized by the operation of the
infrastructure.
Other contracts in which the partner executes and manages the infrastructure for the public
authority owner, with no direct link to the user.
7
Reasons why PPPs are used in Spain
The following factors have led to the use of PPPs in Spain:
They enable the adequate infrastructure to be put in place, which has a positive impact on
productivity and economic growth, and improves the quality of life of citizens.
They help overcome budgetary control and public debt-related issues, driving the pace of
investment and encouraging effective and efficient public spending, ensuring the best
price/quality ratio while maintaining public interest objectives.
They ensure the successful outcome of complex, sophisticated and lengthy legal transactions
and operations.
They entail a whole new definition of activities: the private partner tends to take a leading role in
the different stages of the project, while the public authority assumes, essentially, control
functions.
The distribution of activities between the partners ensures an adequate distribution of risk
between the private sector and the project developer (public authority).
8
Contribution by PPPs to meeting budgetary
stability objectives
The Treaty on European Union introduced the principle of budgetary balance as a basic criterion of economic policy.
This principle means that the ability of the public sector in the Member States to borrow money is limited.
To ensure compliance with this constraint, at EU level the “European System of National and Regional Accounts in the
Community” (ESA 95) has been developed as an instrument for calculating the level of domestic debt in the Member States.
Under the ESA 95, not all transactions entailing public debt affect the budgetary stability of the Member States [i.e. the
investments made by institutional public market entities (AENA, ADIF, Puerto del Estado)], but rather only those carried out
by certain public sector entities.
Where the indebtedness of a public sector entity affects the deficit of the Member State in question, an infrastructure project
can only be executed if the risks are transferred appropriately to the private sector.
If there is no transfer of risk, it might even become impossible to execute the infrastructure project, since budgetary stability
requirements and the legal limits on public debt would not be met.
(As I have told before, the challenge is to achieve sufficient transfer of risk in order to avoid legal constrains on public debt
without reducing the attractiveness of the transactions in the market.)
9
Transfer of risk to the private sector (I)
The limit on public borrowing has been precisely one of the main drivers for the expansion
of PPPs in Europe, albeit not the only one.
PPPs allow risks to be transferred to the private sector and, therefore, the limits on
indebtedness, to which certain public sector entities are subject, to be complied with.
At EU level, a distinction is drawn between three general categories of risk:
Construction risk (delays in handover of infrastructure, nonfulfillment of contractually stipulated

criteria, additional costs possibly incurred, technical defects, and adverse external effects).
Demand risk (variation in demand, regardless of the conduct of the private partner, as a
consequence of the economic cycle, new market trends, competition, etc.).
Availability risk (failure to deliver volume agreed on in the contract and noncompliance with
predetermined quality standards).
10
Transfer of risk to the private sector (II)
The Statistical Office of the European Communities (EUROSTAT) takes the view that assets
linked to a public-private initiative should not be considered when calculating public debt
if two conditions are met:
The private partner must bear the construction risk.
The private partner must also bear the availability risk or the demand risk.
The construction risk may be transferred to the private partner by attributing the
consequences of the following factors:
Delays in completion and subsequent handover of the project where they are for reasons
attributable to the private partner.
Noncompliance with the project technical specifications.
Increase in costs during construction of the infrastructure.
Damage to third parties during the execution of the project.
Any technical defect or adverse external effect that may arise during the contract term.
11
Transfer of risk to the private sector (III)
To transfer either of the other two risks (demand and availability) to the private partner, the methods
used in Spain are based on private partner remuneration mechanisms: (i) demand risk transfer-
based mechanisms, and (ii) availability risk transfer-based mechanisms.
The demand risk transfer-based mechanisms are as follows:
Conventional toll:
The private user of the infrastructure pays the private enterprise directly according to the rates set by
the developer (public authority).
To ensure the viability of the project, it is advisable to insert into the contract maximum and minimum
performance thresholds based on which enterprises must submit their economic bids to perform the
contract.
Shadow toll: the public authority pays the private partner according to the volume of use by citizens of the
infrastructure and pursuant to certain predetermined rates.
Operation of commercial or ancillary areas by the private partner.
12
Transfer of risk to the private sector (IV)
Availability risk transfer-based mechanisms are characterized by making the private

partner’s remuneration dependent on the degree of compliance with the quality standards
predetermined by the authority developing the infrastructure:
Deductions applicable for noncompliance, according to the seriousness and duration of the
noncompliance in question.
Examples of noncompliance as regards availability:
TYPES OF NONCOMPLIANCE DEDUCTION
Noncompliance that renders inoperative and prevents the use of an entire functional area of the 100 %
project
Noncompliance that renders inoperative and prevents the use of part of a functional area of the 70 %
project
Noncompliance that seriously affects operability but does not prevent the use of all or part of a 50 %
functional area of the project
Noncompliance that moderately affects operability but does not prevent the use of all or part of a 30 %
Noncompliance that slightly affects operability but does not prevent the use of all or part of a 10 %
13
Transfer of risk to the private sector (V)
Deductions for defects in the quality of the services can be set in proportion to the degree of
compliance with the quality indicators established by the authority, as in the following example:
% COMPLIANCE WITH EACH INDICATOR DEDUCTION
100 % - 90 % 0%
90 % - 80 % 5%
80 % - 70 % 10 %
70 % - 60 % 15 %
60 % - 50 % 20 %
50 % - 40 % 30 %
40 % - 30 % 55 %
30 % - 20 % 70 %
20 % - 10 % 85 %
10 % - 0 % 100 %
14
PPPs in Spain: some data of interest (I)
In recent two decades, Spain has enjoyed a significant boom in investment and, through this, Spanish
companies have developed a high profile expertise in the construction, renewal, maintenance and
operation of public infrastructure (airports, ports, motorways, high-speed rail, subway, hospitals, etc.).
Public infrastructure investment (US$ million) in concessions in the last five years in Spain, according to
SEOPAN (Spain’s construction industry observatory):
TYPE OF INFRASTRUCTURE 2003 2004 2005 2006 2007 2008
PORTS 146,1 426,90 10,9
ROADS
NEW INFRASTRUCTURE 3.388 378,1 2.382,7 609,2 3.975 702,2
MAINTENANCE 2.208,9 1.017,6 8.305,9

RAIL 2.106,7
AIRPORTS 164,9 270,1
WATER-RELATED 306,6 17,5
DESALINATION 290,5 52,4 1.382,6 221,9
URBAN MOBILITY 151,8 616,9 1.378,2 530,4 3.635,9
PARKING FACILITIES 48,1 114,1 281,7 414,6 125,4 296,3
HEALTHCARE 629,2 2.076,5 70,8 99,4
SOCIAL SERVICES 1.156,4 38,8 387,6 13,2 88,4 31,3
OTHER 1.007,6 536,8 2.841,1 2.230,5 795,7 2.572,5
TOTAL 8.308,3 4.057,7 10.083,4 6.615,9 14.131 7.737,4
15
PPPs in Spain: some data of interest (II)
The 2005-2020 Strategic Plan for Infrastructure and Transportation in Spain envisages that
at least 40.5 % of new project funding will come from PPPs:
FINANCING
TYPE OF INVESTMENT % TOTAL INVESTMENT
BUDGET PPP
ROADS 75 % 25 % 26,81 %
RAIL 81,4 % 18,6 % 48,00 %
AIRPORTS 2,2 % 97,8 % 6,60 %
PORTS 9,7 % 90,3 % 9,72 %
OTHER PROJECTS 27,7 % 72,3 % 8,87 %
TOTAL 59,5 % 40,5 % 100 %
16
Examples of projects in Spain
RAIL INFRAESTRUCTURE
1980s Arrival of high-speed rail, 1992
17
High-speed train (AVE), 2009
18
Santa Justa AVE Station, Sevilla, 1991
19
Zaragoza AVE Station, 2003
20
Antequera AVE Station, 2006 Málaga AVE Station, 2006
21
Spanish high-speed rail (AVE) network, 2009 Characteristics of the Spanish

AVE network:
• The aim of the Ministry of

Development is for Spain
to have an AVE network
spanning 2.230 km in
2010.
• This would make Spain

the leading country
worldwide in terms of
kilometers of high-speed
rail line, ahead of France
or Japan, whose networks
are very developed.
• The 2005-2020 Strategic

Plan for Infrastructure and
Transportation in Spain
contemplates an
investment of $ 182.500
million (48 % of the total)
for expansion of the AVE
network.
• By 2020, 90 % of Spanish
In service citizens will live within 50
Under construction km of an AVE station, and
In development will be able to use a
Under study network of 10.000 km of
high-speed lines.
22
SUBWAY AND LIGHT TRAIN
Madrid Subway, 1970s
23
Madrid Subway, 2009
24
Alameda de Osuna Station, Madrid, 2006 Chamartín Interchanger, Madrid, 2007
25
San Francisco Station, Madrid, 2006 Olympic Stadium Station, Madrid, 2007
26
Madrid Ligth Railway
27
Madrid railway evolution (kilometres)
Some data of interest:

2008: 321,2 Km.
• Between 1999 and 2008, the
Community of Madrid, through the
managing agency MINTRA
infrastructure, has invested $
12.244,5 mill. in transport
infrastructures (that are operated by
the company METRO DE MADRID).
• The planned investment for the

period 2007-2011 is $ 8.120,84 mill.
• Approximately 15,7 % of this

investment will be
financed through the budget, and
84,3 % from nonbudgetary sources.
28
Sarriko Subway Station, Bilbao, 1995
29
Moyua Subway Station, Bilbao, 1995
30
ROAD INFRAESTRUCTURE
New Madrid radial highways (2004)
R2 Motorway
31
R3 Motorway R4 Motorway
32
R5 Motorway
Radial 2 Radial 3 Radial 4 Radial 5 Total
Length (Km) 61 33,9 87,99 27,5 210,39
Investment (US 730 430,7 868,7 351,8 2.381,2

Million $)
33
First Generation Main Road Conditioning
Madrid-La Coruña Road, 1980s Madrid-La Coruña Motorway, 2008
34
Madrid-Andalucía Road, 1980s Madrid-Andalucía Motorway, 2008
35
Los Viñedos Motorway, 2005
36
Evolution of the Spanish road network (km)
State roads Regional roads Underregional roads

Years Total High capacity Other roads High capacity Other roads High capacity Other roads
roads roads roads
1992 158.324 5.443 15.862 1.316 70.245 229 65.229

1993 159.630 5.714 15.862 1.456 70.626 234 65.738
1994 162.196 6.002 15.534 1.489 71.076 257 66.838
1995 162.617 6.274 15.652 1.572 70.981 287 66.851
1996 162.100 6.534 16.597 1.667 70.499 299 66.504
1997 162.795 6.919 16.478 1.821 70.623 323 66.631
1998 163.273 7.423 16.419 1.664 68.910 562 68.295
1999 163.769 7.657 16.467 2.032 69.048 617 67.948
2000 163.557 7.656 16.449 2.088 68.749 699 67.916
2001 166.799 8.082 16.376 2.362 68.492 708 67.779
2002 164.139 8.368 16.273 2.245 67.214 793 69.246
2003 164.584 8.794 16.063 2.361 67.909 854 68.603
2004 164.152 9.164 15.991 2.407 68.094 873 68.623
2005 165.646 9.465 15.950 2.746 68.009 945 68.531
2006 166.339 10.081 15.723 2.812 68.183 979 68.561
37
AIRPORT INFRAESTRUCTURE
Madrid-Barajas Airport, 1980s New Madrid-Barajas Terminal 4, 2006
Budget: $ 9.030 mill.
38
New Madrid-Barajas Terminal 4, 2006
39
Sondika Airport, Bilbao, 2001
40
Tenerife Norte Airport, 2008
In 2006, the Ministry of Development decided to invest $ 26.280 mill. for the expansion and improvement of the 48 Spanish
airports network.
41
PORT INFRAESTRUCTURE 2009
Expansion project of the Port of Gijón
2005
The expansion project:

• Construction of a new breakwater that, starting from Cape Torres and running for a total length of 3.834 meters along
three differently structured alignments, was to form a wharf containing 140 Ha of sheltered waters.
• Construction of a quay located to the north of the wharf that measured 1.250 meters in length with draughts ranging
between 23 and 27 meters and a width of over 400 m to allow for the simultaneous berthing of three bulk carriers of
230.000 DWT and 20 meters of draught.
• Backfill protection, with a length of 1.732 meters to give a total surface area of 145 Ha with land entirely reclaimed from
the sea.
• The new dry bulk terminal to be established in these facilities will have an unload capacity of over 25 million tons and a
60 Ha storage area to allow for the storing of up to 2 million tons of iron ore and coal.
• Budget: 845.691.860 $ 42
Expansion project of the Port of A Coruña (Punta Langosteira)
The expansion project:

• Building of a floating dock of
3.360 meters long, a dock of
900 lineal meters (with a
draught of 16-22 meters), and
the building of an open area
and its land accesses by
connecting the road to the
industrial area of Sabon
nearby.
• Seawall of prefabricated
concrete drawers, located to
230 meters since the beginning
of the jetty head and parallel to
it, 390,90 meters long.
• The final dock will have a
surface of 230 hectares of
sheltered water and 143
hectares de port yard (91 of
them will be land that has been
reclaimed from the sea).
• Budget: 626.632.573 $
43
PUBLIC HEALTHCARE INFRAESTRUCTURE

New Puerta de Hierro-Majadahonda Hospital, 2009
Puerta de Hierro Hospital, 1990s
44
Infanta Sofía Hospital, Madrid, 2008 Henares Hospital, 2008
45
Infanta Elena Hospital, Madrid, 2008 Sureste Hospital, Madrid, 2008
46
Infanta Cristina Hospital, Madrid, 2008 Tajo Hospital, Madrid, 2008
47
Infanta Leonor Hospital, Madrid, 2008
In the Community of Madrid, between 2004 and 2007, have been built 8 new hospitals in Madrid:
• 2.000 new places for patients.

• 75 new operating rooms.
• 749 new doctor’s offices.
48
Torrevieja Hospital, Alicante, 2006
Investment: $ 189,8 mill.
49
WASTE TREATMENT INFRASTRUCTURE
Valdemingómez Biomethanation Plant, Madrid, 2009
Valdemingómez Biomethanation Plant:
• Can generate each year 34 million cubic

meters of biogas that, once processed,
will be sufficient to move 405 buses on
natural gas, supply electricity to 20.500
houses or 4% of the entire industry
capital.
• Can remove up to 369.000 tons of

organic matter (60 % of this waste
generated in the city of Madrid) and
produce 390.000 megawatts of
renewable energy.
• Investment: $ 116 mill.
50
Zabalgarbi Plant, Bilbao, 2004
Zabalgarbi Plant:
• Can incinerate 242.000 tonnes of

waste per year.
• Can generate 586.6 million kWh

per year, equivalent to domestic
and commercial consumption of
about 300.000 people. Is expected
to further increase power
production to 760 million KWh.
• Investment: $ 224 mill.
51
JUSTICE INFRAESTRUCTURE
Justice City, Valencia, 2003 Justice City, Málaga, 2007
52
SPORT INFRAESTRUCTURE
The Magic Box, Madrid, 2009 New Marina, Valencia, 2007
53
CULTURAL INFRAESTRUCTURE
Alfredo Kraus Auditorium, 1997 Canal Theater, Madrid, 2008
54
Fair of Madrid, 2002
55
City of Arts and Sciences, Valencia, 2002 Guggenheim Museum, Bilbao, 1997
56
Garrigues: ‘Spanish Law Firm of the Year’ 2009
Garrigues: ‘Independent European Firm of the Year’ 2008
Garrigues: ‘Best Managed Firm (Europe)’, ‘Best sustainability report’, ‘Best

Management of Facilities’ in the 2008 MPF European Practice Management Awards

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THE SPANISH PUBLIC-PRIVATE

Alfredo Fernández Rancaño

Flexibility to limit the contractor’s risk in two ways:

Unlike the model in English-speaking countries, the extensive regulation of public

Public Sector Contracts Law (2007)

Partial implementation of the Public Sector Contracts Law (2009)

General Administrative Tender Terms

Special Administrative Tender Terms

The level of negotiation in Spanish public procurement

• In open and restricted procedures, negotiation is not

In general, two different types of PPPs are used in Spain:

“Institutional” PPPs, which entail the creation of a specific entity, via:

Joint participation of public and private sector.

The following factors have led to the use of PPPs in Spain:

At EU level, a distinction is drawn between three general categories of risk:

Construction risk (delays in handover of infrastructure, nonfulfillment of contractually stipulated

The private partner must bear the construction risk.

Noncompliance with the project technical specifications.

Increase in costs during construction of the infrastructure.

Damage to third parties during the execution of the project.

The demand risk transfer-based mechanisms are as follows:

Operation of commercial or ancillary areas by the private partner.

Availability risk transfer-based mechanisms are characterized by making the private

Examples of noncompliance as regards availability:

TYPES OF NONCOMPLIANCE DEDUCTION

% COMPLIANCE WITH EACH INDICATOR DEDUCTION

PORTS 146,1 426,90 10,9

NEW INFRASTRUCTURE 3.388 378,1 2.382,7 609,2 3.975 702,2

MAINTENANCE 2.208,9 1.017,6 8.305,9

AIRPORTS 164,9 270,1

WATER-RELATED 306,6 17,5

DESALINATION 290,5 52,4 1.382,6 221,9

URBAN MOBILITY 151,8 616,9 1.378,2 530,4 3.635,9

PARKING FACILITIES 48,1 114,1 281,7 414,6 125,4 296,3

HEALTHCARE 629,2 2.076,5 70,8 99,4

SOCIAL SERVICES 1.156,4 38,8 387,6 13,2 88,4 31,3

OTHER 1.007,6 536,8 2.841,1 2.230,5 795,7 2.572,5

TOTAL 8.308,3 4.057,7 10.083,4 6.615,9 14.131 7.737,4

RAIL 81,4 % 18,6 % 48,00 %

AIRPORTS 2,2 % 97,8 % 6,60 %

PORTS 9,7 % 90,3 % 9,72 %

OTHER PROJECTS 27,7 % 72,3 % 8,87 %

TOTAL 59,5 % 40,5 % 100 %

1980s Arrival of high-speed rail, 1992

High-speed train (AVE), 2009

Santa Justa AVE Station, Sevilla, 1991

Zaragoza AVE Station, 2003

Antequera AVE Station, 2006 Málaga AVE Station, 2006

Spanish high-speed rail (AVE) network, 2009 Characteristics of the Spanish

• The aim of the Ministry of

• This would make Spain

• The 2005-2020 Strategic

SUBWAY AND LIGHT TRAIN

Madrid Subway, 1970s

Madrid Subway, 2009

Alameda de Osuna Station, Madrid, 2006 Chamartín Interchanger, Madrid, 2007

Madrid Ligth Railway

Madrid railway evolution (kilometres)

Some data of interest:

• The planned investment for the

• Approximately 15,7 % of this

Sarriko Subway Station, Bilbao, 1995

Moyua Subway Station, Bilbao, 1995

New Madrid radial highways (2004)

Garrigues Presentation - CG/LA's North American Leadership Forum - NOV. 2009

Garrigues Presentation - CG/LA's North American Leadership Forum - NOV. 2009