Papandreou Highway Roadblock Damages Ellaktor: Freight Markets

Greece's prime minister George Papandreou
Greek Prime Minister George Papandreou is trying to clear a $12.5-billion funding roadblock for highway projects that threatens to stymie efforts to pull the economy out of recession. Photographer: Jock Fistick/Bloomberg

Greek Prime Minister George Papandreou is trying to clear a $12.5-billion funding roadblock for highway projects that threatens to stymie efforts to pull the economy out of recession.

Construction of four freeways linking Athens to the country’s regions and ports has been stalled for more than a year in places as a shrinking economy saps toll revenue, slow land expropriation delays building and banks withdraw loans.

Shares of Ellaktor SA and J&P-Avax SA, Greece’s two largest construction companies, have plunged more than 48 percent since the start of 2010, more than the 41 percent decline in Greece’s benchmark ASE Index.

Papandreou’s government is seeking to reach an accord this month with banks and companies as investors cast doubt on his ability to revive growth, shrink the budget deficit and avoid default. While the prime minister has pledged a 500 million-euro guarantee to persuade banks to release lending, failure may add a further barrier to recovery and hurt builder shares even more.

“Despite the government’s focus on austerity measures lately, they also need to find ways to make the road projects work,” said George Satlas, head of investments at TT ELTA Mutual Funds Management SA, which has about 300 million euros under management, including shares in Ellaktor and GEK Terna SA. “If the road projects aren’t fixed it’s going to be harder to attract investment for other key infrastructure projects.”

Greek Builders

The highways are among five being built and operated at a cost of 8.7 billion euros by consortia of overseas and domestic companies, in which Ellaktor, J&P Avax and GEK Terna hold stakes of as much as 72 percent.

While road construction makes up a small share of revenue for Vinci SA and Ferrovial SA, domestic companies are feeling the pinch. Greek building in January was down 73 percent from a year before, according to the Hellenic Statistical Authority.

“When the Greek public sector has a problem gaining access to international financial markets to finance projects, to not do everything, for whatever reason, to complete what’s already underway is a very big mistake,” said Anastasios Kallitsantsis, chairman of Ellaktor, said in an interview on May 19.

The quality of Greece’s transport network threatens to hold back an economy that the European Commission says will contract 3.5 percent this year after shrinking 4.4 percent in 2010. Its ports ranked 21st out of the European Union’s 27 members, its roads came 19th and its railways 24th among 25 of the bloc’s nations, according to the World Economic Forum’s 2010-2011 Global Competitiveness Report. The island states of Cyprus and Malta don’t have railroads.

Behind Schedule

Of the four projects where construction is behind schedule, work has stopped completely on two, neither of which is more than one-fifth finished, GEK Terna chairman George Peristeris told investors on an April 4 conference call.

The 43 banks that lent to the projects, including Banco Bilbao Vizcaya Argentaria SA, Credit Agricole SA, UniCredit SpA and EFG Eurobank Ergasias SA, started withholding funds for projects as early as March 2010 after construction deadlines were missed due to archaeological finds and slow land seizures and planning approvals.

A settlement that resumes work and frees traffic could boost share prices of companies involved in the concessions, said Theodore Krintas, who helps manage 100 million euros for Athens-based asset manager Attica Wealth Management.

“It makes sense to look at companies that are in these types of projects,” said Krintas, who holds shares in Ellaktor and says he would increase his positions in the building companies if a settlement were reached.

Attica Ring Road

“Works that are self-financing, like the Attica Ring Road and other roads like that, are very effective in their own right, but they also give good returns and cash flow to the construction companies,” he said.

The Attica Ring Road, a freeway that eased driving in and out of the capital in time for the 2004 Olympics, provided Greece with a model for attracting private finance for building roads in which toll revenues were shared between the state and the contractors over 30 years.

Similar agreements were negotiated by 2008 for roads running along the country’s east and west coasts and through its center, and two roads encircling the Peloponnesian peninsula.

Ellaktor owns a 72 percent stake in the Corinth-Tripoli-Kalamata road, the only one of the five currently under construction without delays, and a 59 percent stake in the Attica Ring Road. Net income fell 86 percent to 1.8 million euros in the first quarter compared with the same period a year before partly because of falling toll revenue at those projects.

Bulgarian Slowdowns

Greece’s northern neighbors, some with little or no coastline, rely on Greek ports for imports and exports, according to Koycho Russev, head of Bulgaria’s National Transport Chamber.

“The delays in Greek road construction have slowed down our business,” Russev said in a phone interview. “It’s important to have good transport links with the Greek ports that attract large cargo traffic.”

Greek exports by road to neighbors including Albania, Bulgaria and Romania of products such as detergents and aluminum shutters grew 40 percent in the first two months of the year amid stronger consumption growth in those markets. Exports to Italy, including fresh and frozen fish, increased 43 percent. Imports of livestock from those destinations rose 19 percent.

Olympia Odos SA, an Athens-based concession company including Vinci SA and Hochtief AG, in 2008 started building and upgrading a 365-kilometer freeway from Athens to southwest Greece via the port city of Patras. On some stretches delays of up to two years have accrued, the company said in response to e-mailed questions.

‘Drastic Increase’

Greece’s economic crisis has hit revenue at completed sections of Hochtief Concession’s two Greek projects, said spokeswoman Donatella Gasser, blaming the declines on “drastic increases” in value-added and fuel taxes and a rising number of motorists refusing to pay tolls.

Obstacles to a long-term solution include the “complex” terms of the negotiations, said Javier Martin Rivals, chief executive officer of two concessions dominated by Spain’s Ferrovial SA. A restructuring needs to balance the need for investment funding “with the sources of incomes during the life of the projects,” he said in an e-mailed response to questions.

Another incentive for Greece is the contribution highway completion could make to its target of raising 50 billion euros by the end of 2015 from state asset sales.

Greece’s cabinet on May 23 approved plans to raise money through Hellenic Motorways SA, a special purpose vehicle that will hold the state’s toll revenue rights on existing and future road projects.

The government also will sell early next year as much as 100 percent of its stake in Egnatia Odos, the country’s only freeway under state control. It was completed in 2009 and runs for 670 kilometers from the Turkish border to the western port of Igoumenitsa.