MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT -

UNCLAS SECTION 01 OF 03 MADRID 001801 SIPDIS SIPDIS EUR/WE, EEB/EFD/OMA E.O. 12958: N/A TAGS: ECON EFIN EIND ENRG ETRD SP EINV EAGR SOCI ELAB SUBJECT: MADRID WEEKLY ECON/AG/COMMERCIAL UPDATE REPORT - SEPTEMBER 10-14 MADRID 00001801 001.2 OF 003 Table of Contents: EINV: Growth forecasts for Spain in 2007 and 2008 strong but somewhat lower for 2008 EFIN/PGOV: First VP and Finance Minister Pedro Solbes publicly overruled on spending by President Zapatero once again EPET: Major oil reserve reportedly found by Repsol in Cuenca de Santos, Brazil EINV: Spanish engineering company Typsa wins engineering contract for expanding Panama Canal ELAB/SOCI: Fewer jobs being created EINV: Abertis wins two airport contracts in Georgia, USA EFIN: Santander sets its sights on Italy's biggest fortunes EAGR/TBIO: New record for biotechnology corn plantings in 2007 ENRG/EINV: Solar power subsidies attract investors ECON/ELTN: Madrid makes a play for more infrastructure funding PGOV/ENRG: Election year economics: GOS to freeze electricity rates ENRG/EINV: Proposed French merger may result in unfair competition on the Spanish energy market EINV/ENRG: Iberdrola to purchase electric plant in Klamath, Oregon GROWTH FORECASTS FOR SPAIN IN 2007 AND 2008 STRONG BUT SOMEWHAT LOWER FOR 2008 ¶1. (U) The European Commission released growth forecasts on 9/11/07. The Commission maintained its 3.7% GDP growth forecast for Spain in 2007 compared with 2.5% for the eurozone and 2.9% for the UK. Fourteen private sector entities also maintained an average growth forecast of 3.8% for Spain in 2007, but they recently lowered their average 2008 growth forecast from 3.3% to 3%. More generally, while there has been a lot of talk in the Spanish press about the possible impact in Spain of the subprime mortgage problem in the U.S., leading business daily Expansion surveyed Ibex-35 companies and found them still to be relatively bullish about prospects for their companies. Telefonicas's CEO, Cesar Alierta, and BBVA's CEO, Francisco Gonzalez, publicly agreed with Santander CEO Emilio Botin's statements last week that Spain was well positioned to withstand international financial market turbulence. (El Pais 9/9/07; El Pais 9/11/07; Expansion 9/13/07) FIRST VP AND FINANCE MINISTER PEDRO SOLBES PUBLICLY OVERRULED ON SPENDING BY PRESIDENT ZAPATERO ONCE AGAIN ¶2. (U) This week, Finance Minister Solbes publicly expressed doubts about Health Minister Bernat Soria's proposal to provide free dental care to children between the ages of 7 and 15. However, President Zapatero subsequently supported the idea. This comes on the heels of a number of ideas that Solbes has expressed doubts about, including exempting books and CDs from turnover taxes; indexing the minimum wage; extending to all working mothers a monthly 100 euro payment; tax deductions for renting housing; payment of euros 2,500 to the parents of every newborn child; early retirement for civil servants; guaranteed housing in Andalucia for anybody earning euros 3,100 or less; and the free dental plan for children between the ages of 7 and 15. (Comment: Solbes has won a few of these battles, but he has tended to lose more as the elections get closer, notably the euro 2,500 payment for newborns. It is somewhat surprising that these spending disagreements seem to get discussed in public consistently, a fact not unnoticed by the opposition conservative PP party, which made some hay out of this latest spending spat at the 9/12/07 parliamentary debate.) (Expansion, 9/12/07) MAJOR OIL RESERVE REPORTEDLY FOUND BY REPSOL IN CUENCA DE SANTOS, BRAZIL ¶3. (U) Repsol reportedly has found a major oil reserve in Cuenca de Santos, 120 km off the Brazilian coast near Rio de Janeiro. This could turn out to be the second largest oil field in Brazil. However, it will be a year before reserve levels are finally confirmed. (Comment: Given the fact that Repsol recently had to lower estimated reserves and pay a number of American investors compensation for allegedly overestimating reserves, the company will likely be cautious before coming out with more definitive figures on the dimensions of its find, which is 2000 meters under water.) (Expansion, 9/10/07) SPANISH ENGINEERING COMPANY TYPSA WINS ENGINEERING CONTRACT FOR EXPANDING PANAMA CANAL MADRID 00001801 002.2 OF 003 ¶4. (U) The lead contractor is the American company, CH2M Hill, but Typsa and the Dutch DHV firm have been chosen to work with CH2M Hill on this contract, which is estimated to be worth USD 5.25 billion. (Comment: It appears that President Zapatero's recent trip to Panama paid commercial dividends for Spain.) (Expansion, 9/11/07) FEWER JOBS BEING CREATED ¶5. (U) The autonomous community of Madrid is the most affected by the decelerating creation of new jobs in the last months according to a study by Adecco. The study concludes that employment in the Madrid autonomous community will increase by only 2% this year, the lowest rate of increase in the last decade. (20 minutos) ABERTIS WINS AIRPORT CONTRACT IN GEORGIA, USA ¶6. (U) Spain's leading toll-road operator Abertis, jointly owned by La Caixa and construction firm ACS, won a 10 year contract to manage two airports in the U.S. state of Georgia for an undisclosed amount. Abertis will manage the U.S. airports of Middle Regional Georgia and Herbert Smart Town, both located close to the transportation hub of Atlanta. (EL Pais) SANTANDER SETS ITS SIGHTS ON ITALY'S BIGGEST FORTUNES ¶7. (U) Emilio Botin, head of Santander, inaugurated Friday the entity's first private banking branch in Milan, Italy's financial capital. This represents Santander's first effort to export its private banking business and part of a wider strategy to open 20 private banking branches in Italy in three years to develop business from wealthy customers. (El Pais) NEW RECORD FOR BIOTECHNOLOGY CORN PLANTINGS IN 2007 ¶8. (U) Spanish corn farmers set a new record for biotechnology corn plantings this year, marketing year (MY) ¶2007. According to the Spanish Ministry of Agriculture, the number of biotechnology corn hectares planted, and soon-to-be-harvested, reached another record this year surging to over 75 thousand hectares, up from about 54 thousand planted last year. This is the biggest year-on-year increase in the last three years and one of the most impressive increases in the entire history of agriculture biotechnology in Spain. ¶9. (U) We noted in a previous report that farmers in the western part of Spain (Extremadura) were going to add additional plantings, but the real surprise came in the eastern corn-growing region of Aragon. Corn farmers in Extremadura increased their planting threefold. However, in Aragon, where biotechnology corn has been relatively strong since its meager beginnings in 1998, corn farmers increased biotechnology corn plantings from about 24 thousand in 2006, to about 36 thousand this year, a new record for the region. SOLAR POWER SUBSIDIES ATTRACT INVESTORS ¶10. (U) GOS subsidies for solar power continue to attract investors, raising some concerns from industry leaders and the GOS. The solar industry expects to reach no later than next year the GOS' 2010 goal of solar representing one percent of Spain's total energy production (400 megawatts). Due to generous subsidies from the GOS Ministry of Industry, Tourism and Commerce that began in May, Spanish solar companies are considering expanding solar capacity by as much as 6,000 to 18,000 megawatts. The GOS' Renewable Energy Plan provides a 25 year subsidy for solar plants with annual capacity of 0.1 to 10 megawatts, guaranteeing investors returns of eight to twelve percent. A spokesperson for Abengoa, one of Spain's original solar energy providers, expressed concern over the number of new solar plants being constructed. The Association of Renewable Energy Producers told El Pais that officials from the Ministry met in July with Acciona Energy and several banks to request a "slow down" in the number of planned solar projects. (El Pais, 10/10/2007) MADRID MAKES A PLAY FOR MORE INFRASTRUCTURE FUNDING ¶11. (U) In a September 10 meeting between President Zapatero and Governor of the Autonomous Community of Madrid Esperanza Aguirre, Zapatero agreed to devote more infrastructure funding to Madrid's roadways and airports. According to Aguirre (from the opposition Partido Popular),the GOS has MADRID 00001801 003.2 OF 003 not made any significant investments in Madrid's infrastructure over the past 3 years. Zapatero also agreed to allow Madrid to participate in the management of Madrid's commuter train system and Barajas airport, Spain's preeminent airport ranked 10th worldwide for passenger volume. (Comment: Madrid brings in a large portion of revenues to the central budget. It is one of the Autonomous Communities that has felt neglected by recent announcements that the GOS will increase infrastructure spending for Catalonia and Andalusia. However, some experts do assert that Madrid,s infrastructure is advanced compared with other areas of Spain, and hence does have the same level of infrastructure investment as other localities.) ELECTION YEAR ECONOMICS: GOS TO FREEZE ELECTRICITY RATES ¶12. (U) The GOS will attempt to freeze electricity prices for this upcoming election year despite concerns that the rates may be insufficient to cover electric company costs. Electricity rates, reviewed and set quarterly by the Ministry of Industry with input with electric companies, have consistently increased since 2002. In 2006, the Ministry increased rates by a surprising 4.5 percent, largely in an effort to pay down the GOS "electric budget deficit." (The GOS subsidizes electric companies for any amount the rates are unable to cover.) The new proposal, currently under review at the National Commission on Energy (CNE),modifies the cost calculation formula, and projects a "cost savings" of approximately $900 million euros. This new formula would allow the GOS to freeze rates for the average customer during an election year, but has inflamed electric companies who are preparing their rebuttal to the CNE. PROPOSED FRENCH MERGER MAY RESULT IN UNFAIR COMPETITION ON THE SPANISH ENERGY MARKET ¶13. (U) The GOS is preparing an objection to the proposed merger between French energy companies Suez and Gaz de France. According to press reports, the GOS is planning to argue to the EU that the merger would enable the combined company to illegally leverage indirect state subsidies - the result of high electricity and gas tariff set by the French government - to compete unfairly in the liberalized energy market in Spain. The GOS' efforts reflect its fear that the merger would result in aggressive expansion into the Spanish energy market. The GOS' fear is being fueled by Suez' existing presence in Spain, with ownership of nearly ten percent of Gas Natural and investments in a Barcelona-based water company, as well as the strategic intentions of Suez's largest single shareholder, Belgian billionaire Albert Frere. In addition to his holdings in Suez, Frere is one of Spanish energy giant Iberdrola's largest shareholders, causing speculation that he intends to drive consolidation in the industry. Reminiscent of the GOS' failed attempt last year to block the takeover bid of Spain's Endesa by German utility company EoN, the GOS' efforts are being criticized by some in the press as protectionist. (El Pais, Financial Times, 9/11/2007) IBERDROLA TO PURCHASE ELECTRIC PLANT IN KLAMATH, OREGON ¶14. (U) Iberdrola has agreed to purchase a combined cycle electricity generation plant in Klamath, Oregon for 290 million dollars. (NOTE: Combined cycle electricity generation is a cleaner, more efficient method that uses exhaust gases from burning fossil fuel to power steam turbines. END NOTE.) The plant has production capacity of 506 megawatts and provides electricity to customers in Oregon and California. The acquisition is being managed through PPM Energy, Iberdrola's U.S. subsidiary. (El Pais, 9/14/2007) AGUIRRE