The final audit report of the Madrid 30 joint venture, issued on December 29 by the Chamber of Accounts of the Community, detects irregularities in the creation and concludes that the management model of this joint venture is harmful to the municipal coffers , has highlighted the City of Madrid in a statement.
According to the report, the privatization of the management model, which has already cost the City 554 million euros, was not accompanied by the necessary technical, legal and financial studies. In addition, the annual payment to the private partner is not calculated based on an economic feasibility study of the service, but based on a fixed yield of 7.053 percent.
Also, the Chamber of Accounts questions the maintenance of the subordinated loan of the awarded company due to its excessive cost and recommends its early amortization.
WHO SHOULD ASSUME THE ELECTRICAL COST
It also mentions the report that the City Council assumes the costs of the electrical supply of the infrastructure despite the fact that according to the list of administrative clauses the private partner should do so.
The City Council has already announced that it will take into consideration the report before the commission of inquiry that will analyze the management model of the Madrid 30 joint venture. The company is owned by the City Council, with 80 percent of the capital, and by the private partner EMESA, with the remaining 20 percent. The private company is formed by Ferrovial Servicios, Dragados and API Conservación.
The document emphasizes in its conclusions concepts that manifest omissions of the process of incorporation of the company or possible deficiencies detected in its activity and contractual scope. He comes to question the change of management model to joint venture, which is harmful to the municipal coffers, according to the document.
After the publication of the preliminary draft report on March 17, 2016, the document already ratified by the board of directors of the Chamber of Accounts verifies the most important conclusions and recommendations already known.
Madrid Calle 30 was created in 2004 and, at the end of that year, the Plenary Session of the City Council agreed to modify the form of service management, which went from direct to indirect through a mixed economy society. In August 2005, the tender was awarded in favor of EMESA. After the concession was established the financial economic model that had to be fulfilled during the life of the project, until the year 2040.
STUDIES DO NOT APPEAR
One of the most important conclusions of the report of the Chamber of Accounts states that the transformation of a local company into mixed, which implies a change from direct to indirect management model, must be based on a “comprehensive memory”, including technical studies, legal and financial.
These studies are not included in the documentation provided and analyzed in the file. This change in management model derives the high costs that the City of Madrid must assume while maintaining the current and that have been around 554 million euros since the constitution of the mixed economy company.
The oversight body notes that in the design of the provision of services the City Council did not transfer risks to the mixed society. Thus, the construction risk was transferred to the final contractor of the works, while the availability of remuneration is very limited because the economic model is based on guaranteeing income that covers all costs and allows obtaining sufficient benefits to distribute dividends that ensure the profitability of the partner’s services.
PROFITABILITY OF THE PRIVATE PARTNER
In addition, the Chamber of Accounts indicates in the opinion that the remuneration of the services of Madrid Calle 30 is not calculated based on an economic feasibility study of the operation of the service but on the basis of the profitability that the private partner must obtain from the contract , established in 7,053 percent of the sum of the capital contribution and the subordinated loan contributed by said private partner.
In practice, they stand out from the City Council, the profitability is much higher because the calculation does not take into account the compensation that EMESA receives from the Consistory through Calle 30 Madrid for the provision of maintenance and conservation services, which increased in 2007, going from 12 million to more than 23. The company that was awarded the bidding process raised the highest profitability of the four bidders.
In the recommendations section the report states that the economic model is harmful to the municipal coffers since, to maintain the profitability of the private partner and the corresponding distribution of dividends, the company must bear expenses derived from the taxes it must assume.
These taxes do not correspond to the amount actually allocated to the operation and maintenance of the road, but are the result of the economic-financial model.
The City Council annually allocates around 140 million euros to Madrid Calle 30 being the only annual source of income for the company. Of these, only about 28 million are destined to the maintenance and exploitation of the infrastructure.
The rest is destined to the payment of interest on the debt, distribution of dividends to the private partner, payment of VAT and corporate taxes, although a portion reverts to the distribution of dividends to the Madrid City Council. A large part of these expenses could be eliminated if one opted for another more efficient management model, highlighted by the Consistory.
LOAN WITH EXCESSIVE COST
On the other hand, the report shows that the subordinated loan from EMESA is an excessive cost, once the financing against the project has disappeared from the company as the financial debt and the investment were transferred to the City Council in 2011. The recommendation underlined at the end of the document of the Chamber of Accounts is to amortize this loan early.
Another of the resolutions highlights a significant discrepancy with respect to who should assume the cost of the electricity supply of the Calle 30 operation. According to the list of administrative clauses should be assumed exclusively by the private partner but according to the technical conditions who must pay the payment is the company mixed
To date, Calle 30 has been Madrid who has been supporting this expense: until the end of 2016 it has paid close to 55 million euros.
Finally, the oversight body emphasizes that there has not been sufficient preparation of the works contracting dossiers since they do not include the essential data of the execution project, nor does it refer to the status of processing of this document that defines the content and budget of the service that is tendered.