Indebted Greece hits infrastructure funding pothole

By Angeliki Koutantou and Greg Roumeliotis – Analysis

ATHENS/AMSTERDAM (BestGrowthStock) – Cash-strapped Greece faces an uphill struggle to sustain infrastructure spending by matching European Union aid and attracting private investment as its first recession in 16 years weighs on construction firms.

As it became clear on Tuesday that Greece would not benefit from immediate economic support from the EU, eyes turned on how it can tap into existing EU money to support its construction sector, which provides work for one in eight Greeks.

Under an agreement with the EU, Greece has to find the funds to partially match EU financing to claim some 26 billion euros of development money — when it already faces calls by other member states to slash spending further to curtail its swelling public debt.

Its effort will affect the fortunes of Greek builders such as Ellaktor, J & P Avax and GEK Terna, whose shares have dropped by more than a third since October, when deficit figures were revised sharply higher.

“EU funds of about 7.5 billion euros, seen pouring into Greek infrastructure by 2013, are crucial for Greek builders’ performance in the next five years,” said Kostas Ntounas, an analyst at National P&K Securities.

“The current ample backlog offers some cushion but core construction activities’ turnover and profitability medium to longer term largely depend on EU funds absorption rate.”

Greece absorbed just 3.6 percent of the funds available under the EU’s National Strategic Reference Framework (NSRF) in 2009 and wants to increase that rate to 15 percent in 2010. It is preparing a law to cut red tape in approving NSRF projects.

According to the most recent data, Greek building activity in the first 11 months of 2009 was down 15.1 percent year-on-year. Adding to the builders’ woes is the country’s sharp economic downturn.

Greek GDP contracted 2 percent in 2009 versus the government’s projections for a contraction of 1.2 percent, increasing the reliance of builders on public works projects. Construction accounts for about a tenth of Greece’s GDP.

GREAT EXPECTATIONS

In its 2010 budget, the government plans to increase public investments year-on-year by 8.4 percent to 4.2 percent of GDP, or 10.3 billion euros, of which 6.95 billion euros will be used for co-financing with the NSRF.

At this time of crisis for the Greek economy, the government has invested a lot of political capital in sustaining its public investment programme. It is due to hold a press conference on Wednesday to outline how it can absorb more NSRF funds.

“Right now finding the funds is not a problem, we have the funds,” Deputy Economy Minister Stavros Arnaoutakis told Reuters when asked about Greece’s problems in tapping into EU money.

“It is the maturity of the projects we should have and simplification,” he said. “Our bet is to achieve the 15 percent absorption target. How can we absorb another 5 billion euros, if the projects are not mature?”

Two major projects for which the government is looking to attract private investment are the 1.8 billion euros extension of the Attiki Odos toll road in the greater Athens area and a new 1 billion-euro airport in Kasteli, Crete.

The government has decided to retender those projects, arguing delays were necessary to shield them from any appeals by local mayors and environmentalists. Yet industry sources point out that public financing is emerging as a major issue.

“Even with 12 million passengers per year, the economics of Kasteli Airport do not work without a significant contribution from the government,” said Vangelis Baltas, chief business development officer at investment conglomerate Copelouzos Group.

Ellaktor has said it will team up with French Vinci, the world’s largest public works group, to bid for the project. Germany’s Hochtief, which already has a stake in Athens airport, is also seen as a major contender.

Other construction firms that have looked at opportunities in Greek infrastructure in the past include France’s Bouygues, Austria’s Strabag, Italy’s Impregilo and Spain’s Ferrovial and ACS.

TIGHT FINANCING

Concessions and public-private partnerships (PPPs) may help the government attract private funds. Yet only one in a series of planned PPP projects, whose total value exceeds 4 billion euros, has reached financial close.

Greece’s lower credit rating and higher bond spreads have raised financing costs for Greek banks. Bankers say that a Greek PPP project financed now would get a loan at around 400 basis points over EURIBOR, but this could rise if spreads stayed high.

“When financing costs for projects go up, they can be compensated with more favorable terms from the government, such as a longer concession or a better pricing regime to maintain the financial and economic equilibrium,” said Alexandre de Lestrange, an infrastructure analyst at Standard & Poor’s.

“The obvious alternative is the consortium having to put in more equity. Greece may now have a lower credit rating but it is still solid investment grade and investors tend to take a long-term view of infrastructure based on project economics.”

RISKS LOOM

Investors looking at the prospects of Greek infrastructure acknowledge their visibility is limited by the uncertainty over Greece’s troubled public finances. A lot will depend on the future stance of the EU toward supporting Greece.

One scenario that has been mooted is frontloading Greece’s structural funds to help it absorb the 18 billion euros that remains earmarked. This has happened previously in Eastern Europe but EU sources suggest this is not likely for Greece.

The European Investment Bank (EIB) has already stepped up its financing efforts. Its head of lending operations in Greece, Themis Kouvarakis, said that when EIB lending numbers come out for 2009, they will show an increase from the total 1.165 billion euros of loans from the EIB in the country in 2008.

“EIB’s lending to Greece is demand rather than supply driven,” Kouvarakis said when asked about the bank’s plans for Greece in 2010.

Investing Basics

(Additional reporting by Jan Strupczewski in Brussels, Editing by Sitaraman Shankar)

Indebted Greece hits infrastructure funding pothole