Financial Times

January 21, 2013 7:52 pm

Dispute threatens Spain’s deficit target

By Miles Johnson in Madrid

A legal battle over a €1bn privatisation in Catalonia is threatening to wreck the heavily indebted Spanish region’s budget plans and risks forcing Spain to overshoot the 2012 deficit targets it agreed with the EU last year.

The consortium awarded a contract to run Barcelona’s water operator is preparing to sue the Catalan government after its concession was revoked by a regional regulator just days after it was awarded in December.

A legal opinion drafted by lawyers for the consortium and seen by the Financial Times argues that Catalonia cannot include the contract in its public accounts for 2012 until the regulator lifts the suspension, throwing into doubt the region’s ability to meet its budget obligations.

With Catalonia making up about a fifth of Spanish economic output, a miss for the region increases the chance of Spain itself overshooting a budget deficittarget of 6.3 per cent of GDP agreed with Brussels for 2012.

The Catalan government, which needs the proceeds of the €1bn privatisation – worth 0.5 per cent of the region’s GDP – to meet a deficit target of 1.5 per cent for 2012, is now appealing against its own regulator to allow the contract to proceed.

The consortium, led by Acciona, an infrastructure and construction group, and the Brazilian bank BTG Pactual, had already paid the Catalan government €300m on December 27 when the contract was suspended by the region’s own public contracts oversight regulator on January 2. The consortium is waiting for the Catalan government’s appeal to take place before launching a formal legal challenge.

Catalonia, which has an economy the size of Portugal’s and debts of €42bn – the highest of Spain’s 17 regions – was last year forced to request an emergency €5bn from the central government in Madrid at a time when the region’s leader, Artur Mas, launched triggered a snap election to win a mandate to push ahead with a referendum on independence from Spain.

The November poll saw Mr Mas’s Convergència i Unió party lose seats, but press ahead with a plan to form a loose governing pact with other independence parties to hold a future independence referendum the Spanish government says would be illegal.

Catalonia’s public contracts oversight regulator – which is independent from the Generalitat, Catalonia’s regional government – suspended the contract after a rival bidder contested the time the winning consortium would take to complete the contract.

The Catalan ministry of economy said it regarded the contract as still valid to be counted within the 2012 accounts, and was confident that the dispute would be resolved.

The Spanish budget ministry, responsible for ensuring each of the country’s regional governments sticks to their deficit targets, said a successful legal challenge could result in the privatisation being disqualified from the Catalan accounts.

The Spanish government itself pledged to reduce its deficit from nearly 9 per cent of GDP to 6.3 per cent for last year. Ahead of a final number being calculated by around late February or early March, it expects to miss this target, but achieve a deficit of below 7 per cent of GDP for the year.

Last year the Generalitat privatised the tunnel operator Tabasa Cadi for €360m as it sought to raise funds to reduce its deficit, pay for public services, and repay maturing debt.