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  • 1. Companies Latin Infrastructure Quarterly 1China’sInvestmentIn Latin AmericanInfrastructure ValueBNDESProject Structuring Division for Money and PPPsAPM Terminals: EcuadorCosta Rica’s Largest InfrastructureInfrastructure Project pushed from the top
  • 2. 2 Latin Infrastructure Quarterly
  • 3. 3 Welcome to the second issue of Contributors Latin Infrastructure Quarterly (LIQ)! Adrian Barrios T PricewaterhouseCoopers he content and design of our first issue was object of great feedback Ana Fernández González from many practitioners so we are now bringing you the second issue hoping for it to be up to the standards set by LIQ 1. We have assembled Aniceto Zaragoza a second issue that covers a lot of very interesting issues and features a Foro de Infraestructuras y Servicios couple of new ideas. Antonio De Santiago We conducted insightful interviews with the Vice President of the Colombian Infrastructure OntarioInfrastructure Chamber, the Managing Director of APM Terminals Moin, and themanagement of the influential ForoPPP. Cesar A. Guimarães Pereira Added to the interviews we are bringing you numerous articles submitted by Justen, Pereira, Oliveira &practitioners from all around LatAm. These articles cover a wide array of subjects Talamini advogadosranging from project profiles in Central America and Paraguay to the growing partici-pation of China in the region and infrastructure development in Ecuador. Darin Bifani Puente Pacífico InvestmentAs was mentioned, LIQ 2 also features a couple of new ideas: Advisory Ltda.1. research on the Project Structuring Division of the BNDES and many of the Eduardo Zúñiga infrastructure projects it is currently working on; and Arias & Muñoz2. coverage of infrastructure development outside LatAm. It is our intention to of- Gustavo Morales Cobo fer in each issue going forward an outlook on the industry in one other emerging Colombian Infrastructure Chamber market and in a more consolidated market. LIQ 2 covers, through to the con- tribution of two experts, infrastructure development in Ukraine and in Ontario, Ignacio Galvez Canada. We feel that, as it happens in every other field, LatAm infrastructure Ineco practitioners can learn from the state of the industry in other parts of the world. Irina Zapatrina Personally, I am very excited to be presenting at the AgReturn InfraReturn Latin Ukrainian Public-PrivateAmerica conference on January and the Latin American Energy & Infrastructure Fo- Partnership Developmentrum on February and I certainly look forward to meeting you personally at any of Support Centerthose events. Jaime Jesus Betalleluz Fernandini Infrastructure, Government & Utilities Advisor Julian Sastre Foro de Infraestructuras y Servicios Luis Pedro del Valle Arias & Muñoz Patricio Abal. Ofilio Mayorga Arias & Muñoz Director & Editor Paul Gallie APM Terminals Rodolfo Guillermo Vouga Vouga & Olmedo Abogados
  • 4. 4 Companies
  • 5. Companies Latin Infrastructure Quarterly 5 CONTENTS Spain’s Foro de Infraestructuras y Servicios.................................................................6 The relationship between Spain and Latin America 16 The titanium industry in Paraguay (project profile).....................................................11 Infrastructure development in Ukraine.........................................................................12 A look at what is needed to attract the private sector. The Colombian Infrastructure Chamber.......................................................................14 An authoritative outlook of one of LatAm’s most active markets Ecuador: infrastructure pushed from the top................................................................16 Politics and infrastructure Value for Money............................................................................................................20 A necessary methodology Mexican Highways.......................................................................................................24 38 A comprehensive analysis on Mexico’s push to improve its road network Infrastructure debt funds and exchange rate risk..........................................................29 Ideas on risk management Chinese investment in Latin America Infrastructure....................................................32 Synergies, Opportunities and Challenges Ontario’s Infrastructure.................................................................................................38 A look at the most active infrastructure market in Canada The Moin Container Terminal......................................................................................42 APM Terminals’ project in Costa Rica The Brazilian Development Bank................................................................................44 48 A focus on the Project Structuring Division Company profile: Vestas...............................................................................................48 Guatemala – Generation Expansion Plan (project profile)...........................................53 Costa Rica – Reventazón Hydroelectric Project (project profile).................................55 Nicaragua – Brito Hydroelectric Project (project profile)............................................57 Infrastructure and Dispute Resolution in Brazil...........................................................59 The Compagás Case and Brazilian Arbitration 59
  • 6. 6 Latin Infrastructure Quarterly Institutions Foro de Infraestructuras y Servicios LIQ speaks with Aniceto Zaragoza and Julian SastrePlease describe the purpose of the Foro place for discussion which would serve tion and a better working relationshipde Infraestructuras y Servicios (“Infra- as a meeting point for likeminded per- between the involved parties;structure and Services Forum”)(www. sons, and for the exchange of experiences • being aware of and amongst professions in a sector which is up-to-date data and informationAll agents involved in the development at the forefront of modern economies. for its members and those ex-of infrastructures and services are faced The main aims of the Infrastructure ternal agents who have a say inwith a new challenge, set out by a series and Services Forum are the following: these infrastructures and services.of guidelines, among which the scarcityof resources, the development of new and • promoting the development and shar- In order to achieve these aims, themore efficient management techniques, ing of knowledge and innovation Infrastructure and Services Forum hasthe incorporation of new technologies regarding new technologies which, undertaken a wide range of activitiesand the need to put into practice new fi- through the creation, management worthy of special mention: conferences,nancial instruments in order to guarantee and financing of infrastructures, may seminars and studies, appearances inthe constructions, operation and mainte- be of use to the agents involved and the mass media, the drafting of studiesnance of future projects cannot be stressed to the society which they serve; and reports on issues of its concern, theenough. • fostering the acceptance on the part creation of working-groups to analyze With this framework in mind, the In- of society of said infrastructures; specific problem areas, the promotion offrastructure and Services Forum was born • Provide criteria in terms of quality publications on issues relating to infra-as an independent and multi-disciplinary and profitability which aid efficiency structures and services, etc. The Forumtask force formed by sector professionals in the decision-making process and is based mainly on individual members(lawyers, economists, engineers, journal- thus affect the associated infrastruc- but institutions can also be partners ofists, etc.) with the aim of sharing these tures and services; the Forum.aforementioned concerns and creating a • striving towards improved coordina-
  • 7. Institutions Latin Infrastructure Quarterly 7We are aware of examples of  Spanishbankers, architects and lawyers that, LatAm is a huge opportunity fordue to the current economic downturnaffecting  Spain,  are  developing busi-ness relationships  in LatAm. Do you private investors due to the culturesee that as a growing trend? How canthese professionals and their compa- of development based on PPPnies compete against local players?Indeed, the economic downturn is having projects, foreseeable economica significant effect on Spain, and Spanishprofessionals and companies are looking growth and urgent need.towards internationalization on an increas-ingly greater scale. Though fortunately ourmost important representatives in the busi-ness world already had a major presencebefore the recession. To quote from theirfigures, the following stand out: Spanish construction companies arepresent in 68 countries spread over allfive continents. Spanish companies hold seven of thetop ten places of the main transport con-cessionaries in the world. If we observe the worldwide rankingin terms of capital invested, Spain hasparticipated in US$133.677 billion divid-ed between 173 concessions, representing47.7% of the world top. In terms of percentage of the tendersoperating worldwide per country, Spainoccupies the first place on the list, with39% of the operations, following byFrance with 15% and China with 10%. Likewise, specific contributions fromSpain to LatAm are notable:• Aside from the technical ability which can be seen from transport, energy and hydraulic infrastructures, fields in which we are world lead- ers, a common language and cultural similarities make it easier for us to work together.• Also, the rapid economic growth of LatAm countries such as Brazil, Ar- gentina, Colombia, Peru, Ecuador and Mexico means that they urgently require infrastructural developments in order to prevent any stifling of this economic growth. This demand of be- ing able to carry out a project properly and swiftly has meant that these coun-
  • 8. 8 Latin Infrastructure Quarterly Institutions tries turn to Spanish companies first. . Do you see  Spanish financial institu- tions (commercial and/or development banks)  partnering up with  Spanish professionals and companies when de- veloping projects abroad, particularly in LatAm? If so, can you name a couple of examples?      Of course we could name numerous ex- amples; however, I shall focus on Spanish institutions that are partners of the forum: • OHL is one of the world’s top 10 concessionaire companies and has a very strong presence in Argentina and Brazil. • INECO, the Spanish public sector agency for consultancy on trans- port infrastructure and engineering issues, is undertaking the transport master-plans in Costa Rica and Ecuador. • INDRA, with thousands of work- ers already operating in Brazil and Chile, for example, is at the fore- front of modern technology. • ALSA, a company with over one- hundred years of history, is another leading light in the transport sector, running services as far afield as Chile and China, and operating internation- ally for more than 20 years. Where do you see LatAm in terms of private sector involvement in  infra- structure development? LatAmis a huge opportunity for private investors, firstly due to the culture of de- velopment based on PPP projects, though also for other reasons which have already been touched on, such as its foreseeable economic growth and urgent need for infrastructures which can withstand the increase in mobility and consumption as- sociated with development. There is obviously room for improve- ment. Can you name some areas and give some examples?
  • 9. Institutions Latin Infrastructure Quarterly 9The Regional Government of Madrid has signed with the IADB, the CRTM hasdeveloped a program of technical assistance which it lends to the Brazilian Gov-ernment as part of the definition of the integration framework of Line 4 of the Riode Janeiro Metropolitan Railway.In terms of transport: Underground Rail collaboration among Spanish companies in in the field of public transport. Its yearlyNetworks and BRT systems in the urban the field of internationalization. In any case, budget is EUR2.2 billion without takingand metropolitan areas, expansions of air- we would like more support on the part of into account investments, and it has aports and trains with the latest technology the embassies for Spanish companies. highly qualified and renowned technicaland features. The great challenge and way forward staff. This Forum’s Secretary, Mr. Dioni- Reservoirs and supply networks. for an even more pronounced presence of sio González, is the Technical Director of In terms of energy the range of pos- Spanish companies is by SMEs joining the CRTM.sibilities is extensive, including thermal forces and working together, rather than Through the collective agreementand nuclear power stations as well as re- working alone, as the effort required is ti- the Regional Government of Madrid hasnewable energy sources. tanic and not always fruitful. signed with the IADB, the CRTM has de-   veloped a program of technical assistanceNeedless to say, Spanish players have Can you tell us about the agreement which it lends to the Brazilian Govern-invaluable resources and experience, between the Inter-American Develop- ment as part of the definition of the in-what are the most suitable channels for ment Bank and the Madrid Regional tegration framework of Line 4 of the RioLatin American actors to reach out to Transport Consortium? de Janeiro Metropolitan Railway. Finally,those resources? (Embassies, forums studies are being performed into mobilitysuch as yours, banks, etc.) The Madrid Regional Transport Consorti- and the planned Quito Metropolitan Rail- um (CRTM) is the transport authority for way in association with the Madrid MetroFrom the viewpoint of state institutions, the the Madrid region and runs all the modes and Spanish companies such as TaryetICEX body of the Spanish Foreign Secre- of transport. It is a flagship throughout the and ETT- Deloitte.tary’s Office is making great strides towards world thanks to its major developments Tenth Anniversary of the Foro de Infraestructuras y Servicios More than one hundred professionals from the infrastructure and services sector in Spain met Monday, November 7, to debate the policies followed in this sector during the last ten years, with an eye to future challenges. The meeting took place as part of the events marking the tenth anniversary of the Infrastructure and Services Forum, with awards were given to outstanding projects undertaken in the sector. Held at the Association of Civil Engineers, the meetings attracted more than 100 attendees, all sector professionals keen to discuss the sector’s past, present and future. For this reason, the seminar’s agenda included specific addresses and three round-table discussion groups: one geared towards listening to the opinion of the different associations that constitute the sector (AERCO, ANCI, CNC, TECNIBERIA and SEOPAN) expressed through the thoughts of their MD’s; a second round-table in which Forum members highlighted the most relevant aspects of their professional activities over the last ten years; and, finally, a third table in which the political parties (Andrés Ayala-PP, Montserrat Candini-CIU and Rafael Simancas-PSOE) and the Trade Unions (Juan Carlos Barrero-UGT andVíctor Sánchez-CCOO) were represented, expressing their viewpoints on the poli- cies regarding infrastructure and services developed over the last ten years, and the possibility of new, future strategies. After the seminar came the moment for the prize-giving ceremony, with awards given by the Infrastructure and Services Forum acknowledging the most outstanding projects and workers from the sector. The award for the most outstanding professional in the sector was given to the MD of Albertis, while the Barcelona Eco- nomics Round Circle Award went to Salvador Alemany Mas, who was present to collect the award himself. The Saragossa Logistics Platform was considered the most outstanding infrastructure project, while the recognition for the best service fell to the team at Canal Isabel II, led by Adrian Martin. Finally, the 2011 Special Award was given to the former MD of the Spanish Transport Association and International Railways Union, Antonio Carbonell, who sadly passed away recently.
  • 10. 10 Latin Infrastructure Quarterly Institutions Aniceto Zaragoza: Aniceto Zaragoza, Oficemen CEO, has a PhD in Civil Engineering from the Poly- technic University of Madrid (UPM). He has a Degree in Economics and Business Administration and a Degree in History from UNED . He is also associated profes- sor in the Transport Department at UPM. He has participated in over one hundred research projects and technical re- ports, co-authored 15 books, published more than 40 articles and given more than 300 speeches in 15 different countries all over the world. Among his major research projects, Mr Zaragoza has been the Project Director of GIROADS, with a budget of over EUR6 million, and of the Oasis Project, with a budget of over EUR30 millions. He is President of EUPAVE (European Concrete Paving Association), President of the Infrastructures and Service Forum, Vicepresident of PTECO2, former President of IVIA (Latin American Road Institute), former President of the ERF (European Road Federation) and former President of ITS Spain. In his previous role as Head of the Spanish Motorways Association, he took part in the beginnings of the development of Chilean concessions, which was a pleasure. Julian Sastre Julián Sastre González holds a PhD in Civil Engineering from the UPM, specializing in the fields of Transport and Town and Land Planning, and has twenty-five years’ professional experience. His career in the sector began at the Madrid Regional Transport Consortium (PTA of Madrid), where he worked from 1986 to 1989, later devoting his time to transport consultancy and assessment in diverse fields both in Spain and abroad (since early 90ths, Europe, Latin America, Maghreb and Asia). He speaks English, French and Portuguese. As well as being Vice-president of this Forum, he is also an independent consult- ant, mainly focusing on international projects, most importantly as a consultant for the IADB and the World Bank. Specializing in PPP projects, he has worked as advisor for projects such as the bullet train from Rio to Sao Paulo, various public and private partnerships for building intermodal stations in Montevideo and the Rosario city public transport network (Argentina) as well as projects in El Salvador. In Chile he has dealt especially with ITS issues applied to the field of transport since 2000. He is also the author of the following publications, among others: • Manual for the planning, financing and implementation of urban transport systems.” Madrid Regional Transport Consortium (June 2004). (ISBN: 84-86803- 60-8). • Manual for tramways, light rail networks and systems using reserved platforms. Design, project financing and implementation.” Madrid Regional Transport Consortium (2006). • Green Paper on Town Planning and Mobility.” Civil Engineering Association (2008). • Green Paper on Transport and Climate Change.” Civil Engineering Associa- tion (2010).
  • 11. Projects Latin Infrastructure Quarterly 11The titanium industry’sinroads into ParaguayIn November 2010, David Lowell, CEO of CIC environment, experts already pointed out the dangers the pilot plant poses to theResources Inc., announced the discovery of what environment are minimal, not yet being ais thought to be the largest titanium deposit in the full-fledged plant. At this stage, the pilotworld, in the Paraguayan district of Minga Porã, plant will only wash the soil to separate the ilmenite and the clay, a process whichnear the border with Brazil.M in itself is not contaminating. Metálicos y No Metálicos Paraguay etálicos y No Metáli- The company invested US$5 million S.R.L. is now carrying out studies to ex- cos Paraguay S.R.L., in setting up the pilot plant. During the actly determine the project’s infrastruc- a subsidiary of CIC experimental period, the plant is projected ture and energy needs. The results are Resources Inc., has to produce 500 tons per month. However, due this December. If the studies show secured a permit to once the plant goes into full production, the project is economically viable and theexplore 30,000 has in the Minga Porã area production is estimated to increase hun- Paraguayan Congress gives it the greenand is concluding the construction of a pi- dredfold and reach 5 tons per hour. light, Metálicos y No Metálicos Paraguaylot plant to precisely assess the deposit’s Currently, the Project is in the process S.A. will enter into a concession contractreal prospects. The company started the of obtaining the approval for its Environ- with the Paraguayan Government.project expecting to eventually obtain be- mental Impact Study. Although some ob- This will in turn probably entail thetween 5 and 10 million tons of titanium jections have been raised fearing the pilot need for numerous infrastructure projectsore per year. plant might have a negative impact on the to supply the energy and transportation needs of the potential mine. Although LatAm has played a crucial RODOLFO G. VOUGA ZUCCOLILLO role in the mining industry for a long time, is a Senior Associate at Vouga & Paraguay’s mining potential remained Olmedo Abogados. He graduated unexplored until now. All of this is set with Honors from the National Uni- to change as the latest news from pros- versity of Asuncion (J.D., summa pecting efforts put Paraguay on the center cum laude, 2007) and was award- stage of the international mining industry. ed a Masters in Law (LL.M.) degree Between 2008 and November 2010, the from Columbia Law School (LL.M., Ministry of Public Works and Communi- 2010). He passed the New York Bar cations (MOPC) granted 14 permits to 10 exam. His fields of expertise are: Liti- companies for the prospecting of different gation, Arbitration and Mediation; areas showing mining potential. M&A; Foreign Investments; Cor- Mining projects are known to be porate and Commercial; Capital closely and almost inevitably linked to Markets; Tax and Customs Law. He very demanding energy and communica- has been actively involved in vari- tion needs, for which reason it would not ous projects related with foreign be surprising to expect that, assuming the investments. He is a former assistant professor in Legal Technique at mining efforts become successful, Para- the National University of Asunción. Languages: Spanish, English, Por- guay could become a hot spot for interest- tuguese, German. ing infrastructure ventures.
  • 12. 12 Latin Infrastructure Quarterly Institutions Public-private partnership and its LIQ Speaks with I. Zapatrina: Chairman of the Board of the Ukrainian Public-Private Partnership Development Support Center U kraine is now taking its many normative-legal acts that regulate first steps in the devel- the procedures of preparation of the simi- of infrastructure opment of public-private lar projects, competitions, the selection partnerships (PPP). Today of winners, and the monitoring of PPP in Ukraine there is a lot of conversa- projects. We can not say the current leg- tions regarding the necessity to attract the islation is perfect. It contains a number private sector for infrastructure moderni- of contradictions, difficulties and conflict zation, and a number of normative-legal clauses. The most problematic issue in acts that regulate preparation of projects this field is absence of regulation of state in the form of PPPs have been adopted, as support, both methodological and institu- role in modernization well as mechanisms for their implemen- tional, for PPP projects. At the same time, tation. Currently, however, there are no projects in the form of PPPs could be pre- examples of successful PPP projects in pared and implemented in the conditions Ukraine. of current legal regulation. The legisla- tion could be improved later based on the Why is this so? What are the prerequi- experience of the implementation of such sites for changing the situation in this projects. field? Investment climate and political sta- It is well known that in order to prepare bility (succession of public authority) are and implement viable projects in the form much more problematic issues for poten- of a PPP it is not enough to have the leg- tial private investors that consider oppor- islation regulating relations in this field, tunities to implement similar projects in even though the availability of such regu- Ukraine. lation is certainly an extremely important element for the development of PPPs. Political Stability The most important factors for intro- duction of similar long-term, complicated Unfortunately, for the last 20 years, as a and high-risk projects are: investment cli- result of many political changes, the in- mate in the country, political stability and stitutional memory of public authority a well developed institutional environ- has been very weak, and there has been ment. These factors are now indeed the no succession of ideas, approaches and most critical for the development of PPPs management decisions. The priorities and in Ukraine. personalities among the authorities are changing all the time and this results in Legislation complications with the preparation and implementation of any strategic long- The laws on concessions, production term projects, in particular PPP projects. sharing and rent have been effective in Ukraine for more than 10 years. In 2010 Investment Climate laws were adopted on PPPs and the pe- culiarities of transfer into rent or con- The investment climate in Ukraine is cession of such objects as DH heating, extremely low according to the evalua- water supply and sanitation, along with tion of the international community. Our
  • 13. Institutions Latin Infrastructure Quarterly 13country comes in last positions in the methodology, the preparation of training (1.5 years). But for such a short period,world ratings that appraise the environ- program and the development of commu- quite a lot have been done: a number ofment for business activity, taxation sys- nicative strategies. analytical researches and scientific andtems, court systems, corruption, etc. At In the current situation it is very im- scientific-popular publications on PPPthe same time, in 2010 the President of portant to attract scientists, professional issues have been prepared, a number ofUkraine,Victor Yanukovych, adopted the consultants and specialists to prepare the conferences and round tables on PPP is-program of economic reforms that covers methodological basis in the PPP field, as sues have been conducted and trainingswide circle of issues, including adminis- well as study the experience of infrastruc- for the representatives of the public au-trative, court, budget, tax, housing and ture project implementation in countries thorities have been held. It has startedregulatory reforms. It is very difficult to that have started the similar processes work on the development of pilot projectsimplement such serious reforms simulta- in conditions similar to Ukraine’s to- that will allow for the preparation and im-neously in many fields of economic activ- day, spreading the experience among the plementation of PPP projects in Ukraineity. It requires attracting highly qualified public authorities and population. In our in various different spheres of economicspecialists, experience conducting such opinion the most useful for our country activities and ensure its replication. Thereforms in the world, and of course time. could be the experience of LatAm, where Center actively cooperates with the Na-Yet there is optimism over the beginning the active implementation of PPP projects tional Academy of Sciences and publicof wide-ranging reforms of the economy started in the 1980’s. authority bodies in Ukraine and aboard,and social sector in Ukraine, with im- The establishment of the Ukrainian and it participates in international activ-provements to the climate for conducting Public-Private Partnership Development ity on PPP issues. The specialists of thebusiness, allowing the country to attract Support Center (, a Center have started serious scientific re-international capital in the near future for non-governmental, non-commercial or- searches on the development of public-the implementation of large-scale infra- ganization representing Ukrainian scien- private partnership in Ukraine. We hopestructure projects based on PPP. tists, was realized due to an understand- that our activity will make it possible to ing of the importance of attracting private speed up the creation of a favorable envi-Institutional Environment capital for infrastructure modernization in ronment for attracting of private business Ukraine. The center is still very young to modernization of economy of Ukraine.At the moment Ukraine is not ready in-stitutionally to actively promote PPPprojects. Only this summer, the Decree I. Zapatrina:of the President of Ukraine established aspecially authorized body on PPP issues, • Ph.D. in economics, 1985the Ministry of economic Development • Doctorate in economicsand Trade. There is still no regulation (finance), 2009of its work on PPP projects. The role of • Professor, 2011ministries in this process is not specified. • Member of the UNECE Team ofThe role of the institutions authorized in Specialists on PPP 2011 ,the PPP sphere regarding the objects of • Member of the expert councilmunicipal property is not determined. on macroeconomics, trans-(In Ukraine such objects include district formations, international andheating, water supply and sanitation sys- regional development (eco-tems, objects used for utilization of sol- nomic sciences) of the High-id waste, local electrical transport, city est Attestation Commission ofroads, bridges, etc.). The public author- Ukraine.ity lacks the knowledge and experience • The Honorary Award of the Nnecessary for the implementation of PPP ational Academy of Sciencesprojects, which causes over-expectations of Ukraine for assisting the sci-in this field and increases the probability ence, 2009making non-optimal decisions for society. • The Honorary Award of the National Agency of Ukraine on EnsuringCertainly, it is easier to change the situa- of Efficient Use of Energy Resources, 2010tion in this sphere than to implement eco- • The Honorary Award of the Ministry of Economy of Ukraine for many yearsnomic reforms. It requires a system and of diligent work related to economic policy implementation, 2011.weighted approach, the development of
  • 14. 14 Latin Infrastructure Quarterly Institutions The ColombianLIQ Speaks with Infrastructure Chamber a significant number of projects, due to the technical weaknesses of the governmental agencies, is currently the main issue block- ing private sector investment in public in- frastructure. This issue could be solved with more generous incentives for the private companies that, at their risk and with their money, assume the task of preparing and structuring infrastructure projects. What are the sectors receiving most of the infrastructure investment money? The 10-year plan issued by the Santos´s Administration calls for an investment in roads of about US$31 billion, of US$21.1 billion in railroads, and of US$14 billion in urban massive transportation systems. What are the main projects in those sectors? And what projects are in the What´s the overall environment and think that the government agencies in works (planning, procurement)? reality for private sector participa- charge of the structuring of new projects The single most important infrastructure tion in the development of public – and of the monitoring and follow–up of project in Colombia in the next 10 years infrastructure? current projects – could be strengthened, will likely be the new subway for Bogotá, In general, Colombia´s government in so as to have better technical and manage- the capital. But this project still depends on the last two decades has been a friendly ment capabilities. We also think that in aligning the political will of the city admin- promoter of private sector participation in the case of “private initiatives” –projects istration and the national government. the development of public infrastructure. where the initial proposal and the viabil- In roads, the state agency in charge Since the early 90´s, Colombia has turned ity studies don´t originate from the gov- of promoting private sector investment to the private sector for the building, op- ernment but from private investors – the in public infrastructure (Instituto Na- eration and maintenance of roads, ports incentives regime is still not adequate cional de Concesiones, INCO, soon to and airports, with successful results. The enough. President Santos´s administra- be renamed as Agencia Nacional de In- current government is also a believer in tion is working on a new bill to improve fraestructura, ANI), is currently struc- the free market and in the benefits of rely- the current regulation on this subject. turing the upgrade of the corridor that ing on the private sector for tasks that can connects Bogotá with Buenaventura, free public resources for other vital state Other than legislative obstacles, what the main Colombian port at the Pacific duties, such as education and health care. are the main issues blocking private sec- Coast, and the construction of two high- tor investment in public infrastructure? ways that connect Bogotá with two dif- What´s your take on the current PPP Security and safety concerns used to ferent points of the Venezuelan border. framework in Colombia? What could be the main obstacles, but thanks to the be improved? strengthening of our law enforcement in- Who is mainly responsible for infra- Within a general positive take on the stitutions in the last decade, this is not cur- structure development: central or local current PPP framework in Colombia, we rently a main issue. We think that the lack of governments?
  • 15. Institutions Latin Infrastructure Quarterly 15 The general policy on infrastructure, and Plan, the royalties from oil and mining (Ruta del sol), and (iii) a tunnel (La Líneathe execution of the main strategic infra- projects will also be a new source of fi- Tunnel) that will cut through the centralstructure projects (national highways, ports, nancing for infrastructure projects. mountain range, to connect the capitalrailroads, airports), is part of the central more rapidly with the Pacific Coast.government´s constitutional responsibili- Is there a specific political leader, par- On the local level, the expansion ofties. The local governments are responsible ty, NGO, think-tank, ministry, that has Bogotá´s massive transit system is thefor infrastructure with a local scope (streets, pushed for and/or is pushing for increas- main project currently under construc-provincial highways, mass transportations ing involvement of the private sector in tion. This does not include the subway,systems). In general, the legal framework the development of infrastructure? which is still in a preliminary phase.aims to promote coordination and joint ef- In general, the Colombian govern-forts. For example: Bogotá´s subway is ment, led by President Juan Manuel San-mainly a local responsibility, but it cannot tos, is the main promoter of increasingbe done without the financial and technical involvement of the private sector in thesupport of the national government. development of infrastructure. In pursu- ing this policy, the current administrationHave those governments made the is deepening a strategic vision that hasdevelopment of infrastructure with been promoted by various administrationsprivate sector participation a state in the last two decades. Congress has sup-policy? ported these policies, at least since 1993. At the national level, there is indeed The Colombian Chamber of Infrastruc-an explicit policy for the development ture, the main trade association that rep-of infrastructure with private sector par- resents the builders, consultants and con-ticipation. It has been in place since the cessionaires of infrastructure, has beenearly 90´s, and nowadays most of the an active participant and promoter of themain national highways are operated by public policy discussions in this area.private companies, as well as the airportsand ports. The new national development Last year we saw the launching of a few Gustavo Morales Cobo is aplan includes many provisions aimed to infrastructure funds in Colombia. Have lawyer. This year he joinedpromote public-private partnerships, not these funds allocated part of their capital? the Colombian Infrastructureonly in this sector, but also in education, What projects are they looking into? Chamber as deputy, and housing. We do know for certain that at least one He has also worked as deputy At the local level, some provinces of these funds has allocated some capital justice at the Colombian Con- stitutional Court, deputy C.E.Ohave also promoted private sector par- in one of the main highway projects cur- of the national insurance as-ticipation, in state highways, for example. rently under construction: the highway sociation, and legal coun-But they still depend mostly on traditional connecting Bogotá with Girardot, a port selor of various governmentalpublic works schemes that do not involve located on the shore of the main riverway agencies such as the Ministryrisk-taking from private companies. in Colombia, the Magdalena River. We of Finance, the National Plan- also know that some of these funds are ning Department and the Ministry of CommunicationsWhat are the main sources of fi- looking into new ports or the projected and Transportation.nance available for big infrastructure expansion of existing ones. At the endprojects? of September, the administration will an- The national state budget and the pro- nounce a set of new projects, specificallyvincial and municipal budgets are still structured with these kinds of funds orthe main sources of financing available other institutional investors in mind.for big infrastructure projects. But in thelast couple of decades, airports, ports What are the most important projectsand highways have financed themselves currently under procurement andthrough various schemes or private sec- construction?tor participation, such as tolls. Pension There are at least three very big impor-funds and private equity firms are willing tant projects under construction right now:to participate, but they feel the regulatory (i) the upgrade of Bogotá´s airport; (ii)framework needs some adjustments. Ac- the construction of a 1,000-kilometer high-cording to the new National Development way from Bogotá to the Caribbean Coast
  • 16. 16 Latin Infrastructure Quarterly PoliticsEcuador:Infrastructure pushed from the topAs one of the most popular presidents in Ecuador dur-ing recent years, Rafael Correa began 2011 strong. Hisreferendums on constitutional reforms showed withouta doubt that there is popular support for an extensionof his mandate, which has August 2013 as a horizon,with the option of being re-elected until 2017.C orrea therefore has time work to improve the Pedernales-San Vi- to deliver one of the main cente highway for refurbishment, expan- concerns of the population: sion and maintenance. Also, the Montec- infrastructure investment. risti-Jipijapa highway should be finished As we mentioned in a pre- by this year.vious article in LIQ, economic develop- The country has around 40,000 km ofment cannot be achieved if infrastructure highways, of which only 20% are paved.development is not in place. Without Buses and even cheap taxis provide non-roads, bridges, ports, airports you cannot stop city transport for reasonable fares.export or import products. Without ef- The poor quality of the network has toficient infrastructure facilities, transport date hindered the country’s competitive-costs will increase and you will become ness. The trans-Ecuadorian railway, builtless competitive in the global market. towards the end of the 19th century and It seems that the Ecuadorian gov- terminated in 1908, unites Guayaquil, aternment has this clear. In March 2011, sea level, with Quito, high in the northPresident Correa announced that the gov- central Andes. This railway which ex-ernment is seeking US$7 billion in infra- tends for about 800 km needs renovationstructure concessions over the next five and is used mostly for freight purposes.years, with a focus on port, airport and Because of the significant changes inhighway concessions. terrain and altitude in Ecuador that make Highways will be necessary for the road travel slow and difficult, the use ofpotential development of the mining in- in-country flights is common. Ecuato-dustry. There are expected investments of riana, Saeta, and Tame are national com-at least five mining projects that involve panies that provide flight services withinCanadian, American and Chinese com- Ecuador and from the international air-panies. Ecuador is preparing the table ports in the capital Quito and the portfor these investment demands by setting city of Guayaquil to international routes.up an $800 million program of highway MTOP is seeking to invest nearly US$200projects. Ecuador’s transport and public million to overhaul airports under its na-works ministry (MTOP) is carrying out tional airport modernization plan.
  • 17. Companies Latin Infrastructure Quarterly 17In March 2011, President Correa announced that thegovernment is seeking US$7 billion in infrastructureconcessions over the next five years, with a focus onport, airport and highway concessions.
  • 18. 18 Latin Infrastructure Quarterly Politics The main ports in Ecuador are (PPP) projects. Judicial shortcomings to in 2001 setting out the structure of theGuayaquil, Manta, Esmeraldas and Puer- regarding concession dispute arbitration, new Quito International Airport. The Cityto Bolivar. Ecuadorian ports specialize contract enforcement and protection of of Quito accepted the proposal and signedin the movement of products related to investor rights could be especially prob- the concession and construction contractsthe action area: Esmeraldas movement lematic. There is always the concern of with CCC in 2002 for the design, financ-predominates in the northern part of the the risk of government expropriation. ing, construction, and operation of the newcountry, Manta specializes in sea prod- Regulations established that the eco- Quito International Airport, as well as theucts, Guayaquil in general cargo and Bo- nomic equation of a contract must be administration and operation of the currentlivar in banana transport (80% of Ecuado- maintained, paving the way for multiple Mariscal Sucre International Airport.rian banana production goes to Europe). contract renegotiations and excessive In 2005, CCC signed a $400 millionThe country’s largest port is Guayaquil, transfer of commercial risk to the state. contract to act as prime contractor for thewhich is facing problems with its access Still, the new 2008 state constitution construction of the New Quito Internationalchannel, which only allows the entry of made significant changes to the previ- Airport in Ecuador. Since then, the projectships with drafts (partially submerged in a ous frameworks. Article 314 states that has been expanded to over $400 million toboat) of 9.75 up to 11 meters. The move- the government is responsible for public accommodate increasing passenger trafficment of cargo into and out of this main and universal service provision, ensur- and demand for cargo space.port is around 70% of the total. Other ing “fair” prices. Article 316 of the con- Corporacion Quiport S.A. was a 100%smaller private terminals, such as Balao stitution states that “the state may, as an privately owned capital firm originallyand La Libertad, maintain the largest flow exception, delegate…exercising these formed by Canadian companies AECONof movement by transporting oil from services…out to private initiative”. Arti- and Airport Development Corporationeastern Ecuador. cle 318 points out that public water and (ADC), which later added U.S.-based Granted that there is a strong political drainage services and the supply of drink- HAS Development Corporation (HAS-will supported by the population to upgrade ing water will be rendered exclusively by DC) and the Brazilian Andrade Gutierrezaging and insufficient infrastructure, how state-owned or community legal bodies. Concessões (AGC). Quiport won the con-well prepared Ecuador is to fulfill this? These constitutional rules make ex- cession, which awarded a 35 year-conces- Ecuador states explicitly in its constitution and laws that water and sanita- tion services must be provided publicly, making any concession projects in this sector an exception rather than the rule. Ecuador must improve the consisten- isting concession initiatives highly vul- sion contract for the new airport and thecy and quality of its legal, regulatory and nerable to expropriation and obligatory management of the existing Quito airportinstitutional frameworks to better facili- contract changes, also decreasing the through the CCC. Since then, Quiporttate concession projects. Also, compared likelihood of developing new projects. claims to have invested more than $70to other countries in LatAm, Ecuador Better regulation will require the estab- million of its equity investment as well asmust improve its investment and finan- lishment of dispute-resolution options more than $350 million in international fi-cial climates. Ecuador states explicitly in for both the concessionaire and the state nancing for this US$650 million project.its constitution and laws that water and that will limit hold-up and expropriation On 2009 a decision by the transitionalsanitation services must be provided pub- risks, more reliable arbitration schemes, Ecuadorian Constitutional Court whichlicly, making any concession projects in improved criteria for awarding bids, more found that the financing plan for the con-this sector an exception rather than a rule. transparency and fairness for contract struction of the new airport found in theHowever, legal and regulatory frame- adjustments and better definition of risks original concession contract was partiallyworks tend to be more open to road, port that by law must be borne by the State. unconstitutional under the new constitu-and airport concessions. The Ecuadorian government has al- tion of 2008. Under the concession con- Another issue is that Ecuador is in- ready attempted to annul existing con- tract Quiport was supposed to pay loanscreasingly reluctant to recognize inter- cessions such as the Port of Manta, the to international lenders, recoup its invest-national arbitration rulings, which makes Quito airport and select drinking-water ment and make a profit through the fees itthe competitive playing field highly une- concessions. was given the authority to charge to airportven for private-sector firms that base their A concession experience: the New users both at the old Quito Airport, whichstrength on efficiency grounds, reducing Quito International Airport it also manages, and at the new airport dur-their incentive to participate in conces- The Canadian Commercial Corporation ing the life of the concession. Howeversions or in Public-Private Partnership (CCC) made a proposal to the City of Qui- the Constitutional Court ruled that the fees
  • 19. Politics Latin Infrastructure Quarterly 19charged to airport users were actually taxes “technical objections.” Correa criticized under a PPP approach is higher than un-which could not be handled by a private the business model assumed by the Mu- der a traditional approach. But they forgetcompany under the new Constitution law. nicipality for the construction of a new air to quantify the amount of risks that a gov- Following the decision, the sides were terminal and said that there was minimal ernment would save by transferring themforced to enter renegotiations of the conces- investment made by the Canadian consor- through a contract to a private party. Thesesion contract. The Municipality of Quito, tium partner in the project. include environmental risks, design andwhich was set to receive US$1.5 million “Unfortunately, the news is not good construction risks, financial risks, opera-per year as a concession fee, took the op- with respect to the Quito airport, which tion risks, etc., many of them, if allocatedportunity to seek a larger share of the profits is being built by the Municipality, with to the private partner, would represent afrom the new airport. After 18 months of in- money from all Ecuadorians, by the way,” tangible relief to the government.tense negotiations, the parties successfully Correa said in his regular Saturday radio To talk about risk-identification andreached agreement on legal, commercial program. He also said that “it was a lie” risk quantification could be a matter forand financial terms for the project. that the Canadian partner of the Munici- another article, but part of the “PPP cul- In August 2010, during a ceremony pality is investing enough, since, accord- ture” that must be known and spreadwith President Correa, the Mayor of ing to the President, the bulk of the fund- around our infrastructure environment isQuito and a range of other high-level of- ing comes from revenues generated by that you cannot compare a PPP approachficials, the parties executed the strategic the existing Mariscal Sucre airport. with a traditional approach without quan-alliance agreement, an amendment to the Airport charges that travelers pay to tifying the transferred risks.concession contract and an affirmation exit the airport Mariscal Sucre are among Another thing of course is that a badof the investment protection agreement, the highest in the continent, with a value agreement was made between the gov-which set forth the renegotiated terms of exceeding $40, Correa recalled, stressing ernment and the private partner. A badthe concession for the Project. that this item is what, in his view, supports value-for-money analysis could certainly The new airport will have a 4.1 km truly the construction of the new terminal. be detrimental for a government’s inter-runway and be equipped to handle more “There is no foreign investment. The ests. But in this case, Correa’s commentsthan five million passengers and 270,000 investment is all from Ecuador. Maybe referred only to the “lack of investment”tonnes of cargo each year. The Ecuado- there has been US$40 or US$70 million of the private party without mentioningrian government is set to receive nearly from the Canadians over a proposed 600 anything about how the risk and responsi-$900 million from the concession. million” in total, added the President. bilities were allocated. But things from the top were not as Therefore, he reiterated that “in addition Despite this incident, we consider Ecua-smooth always. to an extremely questionable business dor a good prospectus for infrastructure in- President Correa was initially very model, the problem is that (the new air- vestment. It is a country that is pushing fromcritical to this project and made a typi- port) has serious technical limitations.” the top of the government an open agendacal mistake many government authorities However, President Correa did not to receive foreign investments (as Presidentcommit when they evaluate concession or mention anything about the transfer of Correa noted some months ago). PotentialPPP projects. risks within the contract and who was as- deals at pre-procurement stage also in- In 2007 Correa said that the new air- suming them. The typical (and sometimes clude mining (over US$6 billion), oil (overport in Quito, built by the Municipality of intentional) mistake of many government US$1.5 billion), ports (over US$300 mil-Quito in an area near the city, had several authorities opposing PPPs is that the cost lion) and tourism (over US$200 million).Author BiographyPwC Canada | Vice President, Infrastructure & Project Finance | Mon-treal Barrios has 10 years of professional experience in project finance,business valuation, mergers and acquisitions, financial modeling, feasibil-ity analysis, microfinance and financial audit. In the last 5 years he has ledmore than 50 business valuations and transaction projects in Canada,Peru and Ecuador. His experience comprises the mining, energy, financialservices, agribusiness, infrastructure and commercial sectors. He holdsan MBA from ESADE Business School and is BA in Economics from theUniversidad del Pacífico.
  • 20. 20 Latin Infrastructure Quarterly Infrastructure Financing Value for Money When are PPPs the best alternative?
  • 21. Infrastructure Financing Latin Infrastructure Quarterly 21AValue for Money may be used to indicate the cost of public The PSC is a hypothetical estimated provision and determine if the best pri- cost of a project under the public sector if growing number of vate sector quotation for a PPP contract the government runs it, and is also a cost countries have created is more profitable for the state in terms model (and in some cases an income mod- Public Private Partner- of optimizing the effectiveness and effi- el) associated with a project implemented ships (PPP) to promote ciency of spending. This is called value by the government based on the most ef- the offer of assets and for money (VFM). ficient method of providing a result that isservices of infrastructure by the private VFM is an analytical methodology that currently available to the public sector. Itsector. The experiences gained in dif- compares the cost of public infrastructure also takes into consideration the potentialferent countries could indicate that eco- development under the traditional imple- impact of risks on the costs (and revenues)nomic infrastructure is generally a more mentation approaches in charge of the associated with the project during its life.conducive environment for the creation public sector and PPP with private sector Developing the Financial Model will in-of these kinds of partnerships than social support. clude an estimation of the present value ofinfrastructure (e.g., health care and edu- The comparison is performed based costs for the Government to develop andcation) for three main reasons. on the total project cost over a period of maintain the project with exactly the same First, the solid project designed to time. Because the costs are taken into con- standards required for performance fromsolve obvious limitations of infrastruc- sideration for an extended period and the the private sector investor.tures such as roads, railways, ports and costs are incurred in a comparable man- Alternatively, private execution of anelectricity. The economic infrastructure ner by the public sector, under a tradition- infrastructure project is measured throughprojects usually have high rates of finan- al approach and under a PPP, the costs are a shadow bid, which represents the cost tocial profitability and therefore are attrac- expressed at net present value. The VFM run a project as a PPP and constitutes thetive for the private sector. Second, often also takes into consideration the risks, be- simulation of the cost that a bidder wouldthe collection of user fees becomes more cause the risks are an integral part of total propose, reflecting all costs that the pri-feasible and more convenient in econom- project costs. This analysis will integrate vate partner will assume:ic infrastructures projects. Third, usually the information from previous activities,economic infrastructure projects have a of the financial models prepared: the pub- • Design and construction costsmore developed market to combine the lic sector comparator and the test result • Operating Costsconstruction with the provision of serv- value for money. • Maintenance costs and life cycleices (e.g., construction, operation and The cost of implementing a project • Financing costsmaintenance of a toll road) than social in- under the traditional implementation ap-frastructure projects. Given these consid- proach is called determined by what is Inside the structure of the privateerations, it is not surprising that PPPs are called a public sector comparator. The partner entities there are several differ-used preponderantly for road infrastruc- cost of a project under a PPP approach is ent sources of funding. This should beture, as in several LatAm countries. given as a “shadow bid” or “shadow offer” reflected in the shadow bid, including any In general, the decision to make a PPP because it represents the cost that a bid- user fee or revenues from third partiesshould be adopted if it is properly justi- der may propose. The comparison of the that the private partner may receive.fied, which can follow a two stage proc- PSC and the shadow bid shows whether The description of the shadow bidess. The first stage consists of defining if or not there is VFM to run a project under must be from the technical project andit is desirable to undertake a particular a PPP. contain:project, based on solid investment plan- VFM is an analytical methodologyning procedures and evaluation of projects(e.g., using cost-benefit analysis). Animportant step in this first stage is clas-sifying all projects in order of importance that compares the cost of public infra-according to their profitability (economicor social) and decide which are accessiblefrom the fiscal point of view and worth structure development under the tra-undertaking. The second step is to decide whether ditional implementation approachesa project that is considered convenientshould be approached through a tradition- in charge of the public sector and PPPal procurement system or PPP. For thispurpose a public sector comparator (PSC) with private sector support.
  • 22. 22 Latin Infrastructure Quarterly Infrastructure Financing • Project description and evaluation the remuneration in exchange for certain regarding both economic and social infra- horizon defined services that always comply fully structure development when determining • Description of the services to be with a battery of performance indicators. the best choice for development. In the contracted From the economic point of view APP particular case of Peru, the Law of Pub- • Schedule of work scheme presents significant differences lic Private Partnerships the DL. No. 1012, • Program investment and total with the traditional method as may be includes the extensive implementation of investment seen in the figure below: the methodology of VFM to all projects • Operation and maintenance That is, in the traditional scheme the of PPPs from 2012 with the application of program government pays from the start the work the Comparator Public Peruvian. • Structure of private financing and then the operation and maintenance • Description of the payment while the PPP scheme only pay for serv- JAIME JESUS BETALLELUZ mechanism ices when they are received (after the FERNANDINI • Analysis of risks and conclusion of the work). responsibilities. The test of value for money involves Infrastructure, Government & Utili- comparing both values to which they have ties Advisor In conjunction with the analysis of risks incorporated the most probable value ofand responsibilities, the shadow bid should the identified risks to determine if the PPP Business Administration, Master’sinclude measured services to be contracted contract would be more convenient for studies concluded, with over 15with the basic principle that responsibili- the government than traditional develop- years of professional experience, mainly in consultancy work, coun-ties and risks should be assigned to the en- ment methods. In the event that it would seling and teaching. Among thetity best able to develop them. not be beneficial to the state, other options main areas of professional devel- The result will be a document describ- should be explored that would yield simi- opment can be highlighted: or-ing the Project, the determination of serv- lar results. ganizational improvement, finan-ices to be contracted, the general descrip- The main objective of PPP projects is cial evaluation of projects and thetion of the payment mechanism and the to achieve a higher VFM for the public promotion of investment in publicestimated annual payment for contracted sector. This specific point is one of the infrastructure. Financial Special-services. most complicated in the structuring of ist of “El Metropolitano” project for Finally, the shadow bid must be based PPPs because, to properly determine the the Metropolitan Institute of Trans-on a partnership agreement (the PPP con- VFM, the costs must be well determined portation of Lima (PROTRANS-tract) that the public authority must pro- and the risk well localized and quantified PORTE). He has worked the pastpose to the market if the project was ex- to avoid reaching erroneous conclusions. three years as General Coordi- nator of Government Services inecuted as private sector participation. Public Sector Comparator is a tool that PricewaterhouseCoopers Peru, re- allows determine if you are getting value sponsible for the implementationValue for Money determination for money. The comparison to make is of projects for the improvement of shown in the figure below: public services and infrastructureFor a VFM analysis, the same discount It is worth noting that the essential development through PPPs.rate should be used to compare the cost of part of analysis is the initial estimate ofthe PSC and shadow bid both expressed investment costs by a technical advisor toas Net Present Value (NPV) calculated on the government, as well as the risks iden-the same date. The discount rate should tified. This will include an estimation ofbe based on the risk-free cost of funds ac- all investments according to the specifi-cessible to the public sector authority. cations required for the project, operating As already mentioned the PSC is the and maintenance costs. The cost estimatespresent value of all costs incurred by the should reflect various adjustments thatgovernment for services included in the will be determined in accordance with thecontract for the provision of long term accounting and tax treatment to considerservices for the duration of this, based on in the shadow bid. When the Public Sec-cost estimates that are affected to reflect tor Comparator performs the VFM test,the value of identified risks. the best alternative must correspond to For its part the shadow bid is the what generates a lower NPV.present value cost of the services con- Currently the implementation of thistracted to an investor. It is not the pay- methodology allows countries like Can-ment for work or specific activities but ada and Chile to make better decisions
  • 23. Companies Latin Infrastructure Quarterly 23
  • 24. 24 Latin Infrastructure Quarterly PoliticsMEXICANHIGHWAYSTowards a new service conceptMexico’s Infrastructure Plan ing considered, to be split as shown • Improving coordination among fed-(NIP) 2012 below: eral, state and local administrations. • MXN$33.06 billion Private • The Government’s goals for 2012 areIn order to attain its 2030 goal of being Investment the following:ranked in the top 30 of the World Eco- • MXN$8.7 billion National Infra- • Build or modernize 17,598 kilom-nomic Forum’ s Infrastructure Competi- structure Fund (NIF) eters of highways and rural roads.tive Index, Mexico has developed a new • MXN$5.33 billion Banobras: Na- • Increase from 72% to 90% the areastrategic plan that will steer the country tional Development Bank of federal highway network operat-into raising the coverage and quality of • MXN$147.2 billion National Budget ing in good condition according toits infrastructure net by 2012. international standards. According to that index, Mexico was A total amount of MXN$226 billion • Reduce the accident rate from 0.47ranked 71st out of 133 countries in 2009- will be invested throughout 2007- 2012, to 0.25 for every million vehicles per2010, with the following itemization: of which MXN$150 billion will be de- kilometer. AIRPORTS 56TH voted to roads. RAILWAYS 66TH The NIP establishes priority projects Highways Strategic Plan: BANO- PORTS 82ND and will increase public and private re- BRAS leading Role HIGHWAYS 57TH sources allocated to their development by TELECOMMUNICATIONS 65TH means of the following: Mexico has taken a decisive step in im- The aim of the plan is to increase proving its road network, which is vi-economic growth as well as permanent • improving the planning, prepara- tal for interconnecting the country’sjob creation by developing transporta- tion, administration and execution vast territory of nearly 2 million squaretion, communications, water and energy of the projects by considering tech- make Mexico one of the main logistic nical, economic and environmental The network now covers over 360,000platforms and promote regional develop- feasibility; kilometers, of which nearly 4,000 are tollment and tourism. • actively promoting public-private roads administered by Banobras. One of partnerships; these is the 148-kilometer main road join-• Regarding the financial requirements • eliminating unnecessary regulations and ing Guadalajara, the country’s second- for 2012, MXN$189.8 billion is be- simplifying contracting procedures; largest and second-most populous city, to
  • 25. Politics Latin Infrastructure Quarterly 25the town of Colima, and finally to Manza-nillo, the most important port on Mexico’sPacific coast. The following strategies are to be fol-lowed in order to achieve the goals pre-viously pointed by the NIP ( Complete the modernization of the transversal and longitudinal road net- work (national corridors) that com- municates the country’s main cities, ports, borders and tourist centers with high-specification highways.2. Build inter-regional roads to improve communication among regions and improve connectivity of the highway network.3. Place special emphasis on the con- struction of bypasses and access roads to facilitate the continuous flow of vehicles.4. Improve the condition of all highway infrastructures and reduce the acci- dent rate. Banobras is the Mexican National De-velopment Bank in charge of financinginfrastructure, acting both as a develop-ment bank and as a Trustee of the Nation-al Infrastructure Fund (NIF). As a development bank, it providesclients such as municipalities with limitedpotential leverage capability, to pack theirinfrastructure projects in order to create abankable standard vehicle that eases loanrequirements. On the other hand, its project financehelps to reduce the risk on the first stages(with less cash flow) by offering financialguarantees and loan syndications, there-fore lowering equity requirements andpublic resources. As a trustee of the NIF, it promotesprivate partnership by supporting projectswith limited financial profitability andowning non-desired investor’s risks. To sum up, Mexico will guaranteemacroeconomic stability and financialmarkets development to proceed with theinfrastructure agenda, funding all projectsthrough Banobras and the NIF, thoughinternational investment is possible for
  • 26. 26 Latin Infrastructure Quarterly PoliticsMexico has taken a decisive step in improvingits road network, which is vital for interconnect-ing the country’s vast territory of nearly 2 mil-lion square kilometers.
  • 27. Politics Latin Infrastructure Quarterly 27 economical and improvements in services (which will support the development of the are a way to get it. The highest traffic attrac- management and monitoring system) tion will depend on the quality of possible al- ternative routes. Mexican authorities looking Strategic Hub for a way to change and to prioritize service and safety decided to change these roles. On Located in Mexico’s Central-Western re- the other hand, it’s a fact that in Mexican gion, the highway that links the towns of Motorways the high toll payment evasion, Guadalajara, Colima and Manzanillo runs sometimes, even by the own concessionary. northeast to southeast, crossing the Mexi- In any toll highway we can separate can States of Jalisco and Colima. five different actions to be done: An average of 10,000 vehicles trav- The new idea, developed by Banobras in els it daily, of which 28% are for heavy order to apply to its highways network, is to transport, largely from the port of Manza- divide these functions in different individual nillo. It has two toll collection points and agents – though some of these could be joined a four-lane roadway, except for one 58- to get better results. To divide and make in- kilometer section where work has already dependent the different tasks and to pay de- begun to enlarge the road. pending on the real administration objectives It was built in 1983 and belongs to one allows for better controls and checking. of the country’s five major logistical cor- • External audits: AE agent ridors, linking east to west with another • Technical direction and control: AAs major port, Tampico, on the Gulf of Mex- agent ico. From there, it connects the country • Operation: O agent to its two major markets in the north: thestrengthening financial structures and ac- • Maintenance: M agent United States and Canada. Once the fivecelerate all processes. • Rehabilitation: R agent pending sections of main road are com- By focusing investments towards Different models have been studied pleted, the Manzanillo–Tampico corridorearly stage projects, organizational speed and compared depending on their advan- will reduce the distance between the twoas well as portfolio size has considerably tages or disadvantages in order to find the coasts to less than a thousand kilometersincreased. best way to obtain the objectives and to In this vein, legal and institutional make the project attractive for the differ- The Routeupdates will accelerate tender procedures ent interested agents.and will generate new investments by de- In February 2011, INECO, a leading a The main road connects four major popu-leting private partners’ uncertainties. group of Spanish and Mexican companies lation centers (with over 100,000 inhabit- won a contract for the total amount of 620 ants each) and 20 smaller towns. It starts inFrom Guadalajara to Colima: a million pesos (roughly EUR 37 million) Guadalajara, capital of the State of Jaliscoroute to efficiency for Mexico to perform this supervisory work for the and Mexico’s second-largest city. Ciudad next 14 years. Guzmán, 139 kilometers to the south, is A new, alternative concession model Two other Spanish companies will also located in the State of being applied to this new toll road, in be participating: APIA XXI (involved The section covered by the concessionwhich, unlike traditional models, opera- in project supervision and management, ends in the State of Colima, in the city bytional, management, maintenance and structure monitoring and pavement the same name. Another 97 kilometersother tasks are divided among different management) and TEKIA (in charge of away is the port enclave of Manzanillo,independent companies, monitored by an electronic toll collection and Intelligent for which the main road represents an es-“administrative and supervisory agent.” Transport Systems, or ITS). sential communications link. A total of Traditionally, the organization of toll They will be joined by three Mexican 455,000 people reside in the metropolitanhighways has been assumed by a unique firms: SEMIC (which will be providing area located around Colima, Manzanillo,operator that played all the possible roles support for instrumentation and control, Villa de Álvarez and Tecomán, compris-and only reported to the Administration. preparing informative profiles and moni- ing 70% of the state’s total population.This THC (Toll Highway Concessionary) toring standards), the law firm Casares- The area’s economic hub is the port ofwas paid by highway tolls. Castelazo-Frías-Tenorio-Zárate (which Manzanillo. Its location gives it a privileged A change was necessary, at least in Mex- will be responsible for legal mattress and position on commercial routes to Asianico Motorways, basically by two different consultancy on insurance, easements and markets in the west, the United States to thereasons. The principal aim of concessions is administrative processes) and GRADO 3A north and South America to the south.
  • 28. 28 Latin Infrastructure Quarterly PoliticsThe Expansion Project Dirección Norte, hacia la frontera con EE UU, Dirección Este, hacia el interior por la costa del Pacífico GUADALAJARA y la costa del Caribe. 251 km hasta Aguascalientes. 336 km hasta San Luis Apostol.The expansion project of the Guadala- Corresponde al gran corredor Manzanillo–Tampico.jara–Colima highway represents a step Peaje de Acatlánforward in the economic development of Inicio del tramo objeto CHAPALAthe entire area. del contrato 38km Dirección D.F. In February 2011, the first phase of the Laguna de Chapala Entronquework began to enlarge 58 kilometers of the Tijuana México Las Flores Nogales Esquema de la redroadway from two to four lanes, with fi- Ciudad Juarez principal de carreteras 68km ZACOALCO DE TORRESnancing from Banobras. This will increase Piedras Negras Nuevo Laredo SAYULAroad capacity and reduce travel times. Torreón Monterrey Peaje de During this first stage, improvements San José del Cabo Zacatecas Aguas Calientes Tampico Cancún San Marcos Méridaare being made to the section between Querétaro Guadalajara D.F. Veracruz UN EJE ESTRATÉGICO Manzanillo Morelia CIUDADSayula and Tonila. The second phase will Puebla Oaxaca GUZMÁN Situada en la región Centro-Occidente del país, la autopista Guadalajara–Colima–Manzanillo Acapulco 80kmstart in 2012, on the section running along Dos carriles Cuatro carriles Tapachula discurre en dirección noreste-sureste cruzando dos Estados: Jalisco y Colima. Cada día lathe Colima volcano, more complicated Fuente: Elaboración propia, a partir de información de la Unidad de Autopistas de Cuota (SCT). TONILA recorren una media de 10.000 vehículos, de los EL TRAPICHE que el 28% son transportes pesados, en grandue to the ruggedness of the terrain. parte procedentes del puerto de Manzanillo. COLIMA The project includes additional works, Dispone de dos puntos de peaje y una calzada de cuatro carriles, a excepción de un tramo desuch as the expansion of 17 structures, 12 53km 58 km, donde se han comenzado ya las obras de ampliación. Se construyó en 1983 y formabridges, four overpasses and one underpass, 54km Final del tramo objeto parte de uno de los cinco grandes corredores del contratoin addition to the modernization of the two MANZANILLO logísticos del país, que enlaza de este a oeste con otro gran puerto, el de Tampico, en eltoll booths in Acatlán (at the beginning of Autopista de peaje Golfo de México. Desde allí conecta hacia TECOMAN el norte con los dos grandes mercados dethe route) and San Marcos. Banobras will 4 Carriles 2 carriles México: EE UU y Canadá. Una vez concluidosinvest the equivalent of EUR 240 million Autopista libre los cinco tramos pendientes, el corredor Manzanillo–Tampico reducirá a menos de 4 carrilesduring these two phases of the project. 2 carriles Océano Pacífico 1.000 km la distancia entre ambas costas. Special thanks to Ineco’s Communi-cation Department. Ana Fernández González MS in Civil Engineering from Madrid Polytechnics University, she has broad professional experience in dif- ferent fields of transportation and construction business, especially in railways and highways, developed in INECO and PROINTEC, both Spanish consultancy companies. In recent years, as well as working in the Spanish High Speed Railway network, she has focused on inter- national projects in different countries such as Romania, Ireland, Portugal or Russia. She holds an Executive MBA from EOI Business School and is currently obtaining the PMP Certification. She speaks Spanish, English and French. Ignacio Gálvez Torres MS in Civil Engineering from Madrid Polytechnics University, PDG from IESE and member of several AENOR and GEHO committees. Since 1982, he has developed his career in the construction company Agromán for 14 years as Project Team Manager in the company’s Technical Division. He joined Ineco in 1995, as Managing Director of Roads and Highways in the Transport Engineering and Consultancy Department, where he has successfully coordinated a wide range of infrastructure projects and studies both scattered throughout the country and worldwide. Between 2008 and 2009 he also worked as Technical Manager in Teconsa.
  • 29. Infrastructure Financing Latin Infrastructure Quarterly 29InfrastructureDebt & Exchange Rate Risk in Latin America A few months ago, we were consulted by an investment professional at aFunds certain infrastructure advisory firm on how managers of an infrastruc- ture debt fund (IDF) in an emerging market could hedge against the ex- change rate risk.T his matter is of critical importance when GPs lend to The use of forward contracts. an IDF in a hard currency (e.g., U.S. dollars, euros, yen) and the IDF’s assets are in the project’s currency. When two parties execute a forward contract they are basically At this point, we would like to highlight the value of agreeing to exchange an asset at a determined future moment but providing debt financing in the same currency as that at a price agreed upon said execution.of the borrower’s revenue. Not only is it critical for the borrower itself The customary maximum duration of these contracts can bebut it is also convenient for the lender and the economy as a whole helpful in dealing with the issue at hand. Because these are con-because the number of potential borrowers exponentially increases. tracts and not options, fund managers would have to make sure High levels of foreign direct investment, fiscal conservatism that there is a safe incoming cash flow (reviewable tariffs andand favorable trade conditions have resulted in wealthy LatAm off-take agreements, assignments) to service the debt.treasuries. An unthought-of problem a decade ago, the matterof currency appreciation often makes the headlines in LatAm’s The use of currency options.newspapers. Due to the solidity of several domestic currencies,providers of finance have begun to explore and implement the Given the nature of options, should the local currency go throughidea of lending in domestic currencies. an appreciation phase, the option holder is not obligated to ex- Still, of course, the issue of hedging against possible exchange ercise its right to purchase a certain amount of currency at arate fluctuations should be considered by managers of IDFs when determined rate.their investors have provided them with a hard currency. Managers of an IDF have several possibilities to hedge against Sharing the risk with the project company.the risk of currency movements. Note that some of these ways aremore conventional than others and that some of them require a This is a more unorthodox solution but one that may be worthlegal feasibility analysis and structuring. It is interesting to note considering. The structure would be as follows (it should bethat, in some cases, these ways can supplement each other. adapted to the local scenario): a collateral trust would be opened
  • 30. 30 Latin Infrastructure Quarterly Infrastructure Financing where the project’s excess cash flow (in local and/or in hard cur- rency, if applicable) would be deposited in case of a local currency devaluation to cover part a certain percentage of the contingency. Should the local currency go through an appreciation the threshold for minimum amount deposited could be lowered. Foreign exchange holding. The IDF can commit to maintaining a financially viable foreign ex- change holding-to-total capital ratio or foreign exchange holding-to- total liabilities ratio. These ratios can have maximum and minimum thresholds and/or time durations. But the idea is that the foreign ex- change holding would be enough to cover for the liabilities that can arise out of probable (key word) exchange rate fluctuations. Credit line with a Multilateral Financial Institution (MFI). The idea is to request disbursements to the MFI should there be a need to cover liabilities resulting from currency fluctuations. This can be done through a short-term renewable credit line if the fund managers are ex- pecting a certain level of profitability. Also, and to be safe, the IDF’s managers should consider incorporating rollover provisions. Also, this credit line would have no cut-off date for a last dis- bursement, that is, the IDF would be able to request disbursements any time during the life of the credit line. Guarantee from the State. The fund managers can lobby with the State hosting the project for the execution and implementation of guarantee contracts that pro- vide exchange rate insurance. We have seen this in Chile and Eu- ropean countries such as Spain and Italy but with concessionaires. The way it would work is rather simple: for example, should the cost of servicing a dollar-denominated debt increase (due to a cur- rency fluctuation, say) more than 10%, the State would cover the difference, and should the cost decrease more than 10%, then the IDF would pay the difference to the State. Said difference could be deposited in a reserve trust. Patricio Abal is an infrastructure law and finance profes- sional, the Infrastructure Editor of Alternative Latin Investor and the Editor of Latin Infrastructure Quarterly. He holds a J.D. from the Universidad Católica Argentina, is a Master in Project Evaluation Candidate at UCEMA & ITBA and a Master in Finance Candidate at UCEMA. He is an Attor- ney at DFG Abogados. He can be reached at patricio@
  • 31. Infranstructure Financing Latin Infrastructure Quarterly 31
  • 32. 32 Latin Infrastructure Quarterly Infrastructure FinancingChinese Investmentin Latin America Infrastructure:Synergies, Opportunities and ChallengesDespite the distance between them, China has become LatAm’s third most im-portant commercial partner behind the United States and the European Un-ion. Following a long period of modest activity, Chinese investment in LatAmskyrocketed to approximately US$15 billion in 2010 and annual bilateral tradeincreased 12-fold from the year 2000 to approximately US$118 billion.
  • 33. Infrastructure Financinng Latin Infrastructure Quarterly 33W hile a significant has long been apparent to investors, Latin the Panama Canal, one of Latin Ameri- amount of Chi- American governments and, most impor- ca’s defining infrastructure works, faces nese investment in tantly, people who drive its roads, fly its capacity issues due to increasing numbers Latin America has planes and visit its ports. While there are of post-Panamax ships. involved buying certainly differences between countries, Some country-specific examples fur-natural resources to support its industrial this problem generally has its roots in his- ther highlight the problem. The Los Lib-growth and help feed its approximately torical low levels of infrastructure spend- ertadores Pass through the Andes Moun-1.3 billion people, China has also agreed ing due to economic and political issues, tains between Chile and Argentina is usedto provide billions of dollars in connection difficulties attracting investors given po- daily by thousands of vehicles. Despitewith important Latin America infrastruc- litical risks and earlier sovereign bond de- the fact that it is a key commercial ar-ture projects, including rail upgrades in faults and Latin America’s sheer physical tery, this pass can close due to snowfallArgentina, electricity acquisitions in Brazil size and topographical challenges. or threatened rockslides and trucks haul-and dam construction in Costa Rica. Compounding long-standing infra- ing goods can remain stuck for days. The In many ways, this investment could structure deficits, Latin America’s infra- Argentine and Chilean governments havenot have come at a better time, as Latin structure has come under whole new de- discussed adding new tunnels to ease theAmerica needs new capital sources to bottleneck but a solution in the short termfinance massive infrastructure improve- is not likely.ments to sustain economic momentum China has agreed to In Brazil, as only a small percentage ofgathered over the last decade, take full cargo is transported by rail, exporters areadvantage of recently signed Free Trade provide billion of dollars forced to ship massive amounts of com-Agreements and ramp up commercial re- modities over poorly maintained roads,lations with new trade partners. China, on in connection with increasing export times and costs. Bra-the other hand, needs to secure massive zil also needs to attract investors to helpamounts of resources to maintain domes-tic economic growth, create new export important Latin America create additional energy infrastructure to meet power demands created by the coun-markets for its products and diversify try’s tremendous recent economic credit exposures. infrastructure projects, The country is reportedly planning US Although there are many positive $120 billion in infrastructure investmentssynergies between the two regions and including rail upgrades in the Amazon to significantly increasetremendous potential for joint and mu- the area’s power generation output.tually beneficial growth, China’s Latin in Argentina, electricity Colombia sorely needs to make trans-America infrastructure investment future port infrastructure improvements, as mov-is far from clear. Apart from existing risksto both sides’ GDP growth, a key driver acquisitions in Brazil ing goods from inland to a port can be as expensive as shipping them half wayof China’s ability to continue to providecapital and Latin America’s ability to pay and dam construction in around the world. Colombia also needs to further develop its logistics infrastructureit back, China faces competition from to take full advantage of tariff reductionsother countries for Latin America infra- Costa Rica. it has secured for products under recentlystructure market share and concerns about executed Free Trade Agreements.anti-competitive Chinese export practices mands as new sources of commodities are Power shortages are a significantcould undermine Latin America’s po- found, commodity exports have increased problem in Venezuela and the countrylitical appetite for Chinese goods. Most and new export markets are developed. As has been forced to implement electric-importantly, a key predictor of future in- millions of tons of products are shipped ity rationing and power cuts. Venezuelavestment volumes is often the success of from often remote areas across the world, depends heavily on trucks to transportcurrent investments, and it remains to be it has increasingly become apparent that cargo and it has been reported that roadsseen whether promised Chinese capital low rail penetration and inadequate roads are so bad they can contain “mega-holes”will result in actual operating projects. are causing delays and adding significant up to the dimensions of an Olympic-sized costs to the export process. The Interna- swimming pool.Infrastructure, Latin America’s tional Development Bank, for example,Economic Achilles Heel has stated that for Latin America to reach Enter the Dragon its potential it will need to invest tens ofThe fact that Latin American infrastruc- billions of dollars in bus and subway sys- Following the announcement of China’sture has significant room for improvement tems, roads, railways and airports. Even “going global” strategy at the begin-
  • 34. 34 Latin Infrastructure Quarterly Infrastructure Financingning of the decade, Chinese investmentsabroad have greatly increased. In 2008, Yet another important economic incentivethe Chinese government issued its firstLatin America White Paper, which identi-fied 14 targeted areas of economic coop- for Chinese infrastructure investment iseration, including trade, investment andfinancial cooperation. Against this policy backdrop, China has to help strengthen LatAm’s economy sobecome the largest or second largest trad-ing partner for numerous Latin Americacountries, including Chile, Brazil, Colom-bia, Argentina, Uruguay and Venezuela. the region’s approximately 600 millionSome project that within a few years Chinawill replace the European Union as LatinAmerica’s second most important trading inhabitants can purchase Chinese products.partner. Further cementing economic rela-tionships, China also executed FTAs withChile, Peru and Costa Rica. Apart from general risk management, announced plans to invest over US $1.5 With respect to infrastructure, the Latin America infrastructure investment billion in Rio Negro farmland. As partWhite Paper says that “the China side also provides attractive business oppor- of the deal Beidahuang agreed to build awill strengthen practical cooperation with tunities for Chinese parties. Many infra- hydraulic power plant and expand a portLatin American and Caribbean countries structure projects, in addition to being fi- where goods will be shipped to transport, information and communica- nanced with loans from Chinese banks, are Not surprisingly given China’s agricul-tions, water conservancy and hydropower to be built by Chinese construction firms. tural commodity interest, various Chineseand other areas of infrastructure develop- If Chinese companies take equity stakes in rail investments have been announced, in-ment, scale up project contracting in the project operating companies, China also cluding a US $10 billion refurbishment ofregion, and conduct mutually beneficial can reap economic benefits from trade the Belgrano Cargas and a $1.85 billioncooperation in various ways so as to con- flows that are not directed at China, thus ef- deal to upgrade the Ferrocarril Belgranotribute its share to further infrastructure fectively subsidizing its own import costs. Norte y Sur. The Belgrano, which linksdevelopment in the region.” Latin America investments also help Chi- Argentina to Bolivia, is an important link This policy view has been reinforced na diversify its global investment portfo- for the nation’s agricultural producers. Asover time by practical realities. China is lio and, in the event of Yuan-denominated part of the partially China bank-financedincreasingly a beneficiary of, if not de- financing structures, broaden the use and deal, China Northern Locomotive & Roll-pendent on, a growing amount of Latin strengthen the value of its currency. ing Stock Industry (Group) Corp. report-America exports and has also agreed that Yet another important economic in- edly agreed to supply 220 carriages andcertain of its infrastructure-related loans centive for Chinese infrastructure invest- 20 trains for US $330 million.will be repaid with Latin American oil. ment is to help strengthen Latin America’s In other transport deals, a unit of Chi-This resource and financial exposure cre- economy so the region’s approximately 600 na Railway Group Ltd. provided initialates a compelling argument for China to million inhabitants can purchase Chinese agreement for a potential US $1.8 billionhelp ensure that infrastructure necessary products. This is undoubtedly an important deal to build a subway in Cordoba and afor needed goods to arrive when expected part of Chinese trade strategy given demand US $1.5 billion deal to extend a train lineat reasonable costs is in place. volatility in the United States and European to Buenos Aires’ Ezeiza Airport. Given this interest, China would cer- Union, China’s largest trading partners. Brazil. While the vast majority of Chi-tainly be concerned about funding solutions nese investment in Brazil has concentrated onto potential logistics chain vulnerabilities. Chinese Infrastructure Invest- the mining, steel, oil and natural gas sectors,In 2010, a large fire halted Venezuelan ments and Projects in Latin in 2010 the Chinese company State Grid inoperations at a fuel terminal on Bonaire America 2010 purchased seven electricity distributionIsland, a 12 million barrel terminal that is businesses for US $989 important for shipments to Asia. While Argentina. Following a severe drought In the telecommunications area, thethe impact of this fire on China petroleum that affected most of its wheat-producing China Development Bank (“CDB”) ex-imports at the time is not clear, it certainly regions, in June China’s largest farm- tended a credit line to Huawei Technol-would have raised concerns about future ing company, Heilongjian Beidahuang ogy Co. that can be used for customer fi-potential oil delivery disruptions. Nongken Group Co. (“Beidahuang”), nancing. This allowed superior financing
  • 35. Infrastructure Financing Latin Infrastructure Quarterly 35terms to be provided to Tele Norte Leste Mexico and CDB signed an agreement The Road AheadParticipaçaoes SA.8 Huawei, which has under which Nextel would receive USbeen present in Brazil for over 10 years, $375 million to fund a 3G network build- There are a number of reasons to be opti-has also announced the construction of out by Huawei. mistic regarding the future of Chinese in-US $300 million research center in São Uruguay. Chinese companies have frastructure investment in Latin America.Paulo State. reportedly made an investment in the From Latin America’s perspective, In the transport sector, Chinese com- Uruguay telecommunication sector and demands on Latin America’s infrastruc-panies China Railway Construction Corp. are reportedly analyzing potential infra- ture will continue to grow and it is hard toand China Northern Locomotive & Rolling structure investments in port facilities, imagine that Latin America governments,Stock Industry Group, backed by financing railways, shipping and communications. even under the best economic scenario,from the CDB and the Export-Import Bank Venezuela. In October 2011 it was will be able to financially backstop allof China, planned to bid on Brazil’s Rio de reported that the China Harbour Engi- needed projects alone. Recognizing this,Janeiro-Campinas bullet train project. The neering Company and the Venezuelan a number of countries in Latin Americafuture of this project is currently uncertain state company Bolivarian Ports signed support the PPP model and Uruguay, forfollowing the poor results of the construc- an agreement to build a US $520 million example, recently launched a road showtion rights auction over the summer. container at the port of Puerto Cabello. to seek greater infrastructure project Colombia. China and Colombia re- In September 2011, it was announced investment.portedly have held conversations regard- that Venezuela and the CDB signed an Apart from a general need for capital,ing a potential US $7.6 billion rail project agreement extending the China-Venezue- Latin America must diversify investmentto link Colombia’s Atlantic and Pacific la Fund, which now totals US $32 billion. capital sources. Due to political and eco-coasts. The railway would be used both The fund is reportedly aimed at financing nomic risks, Latin America has historical-to import and export products to and from 137 development projects between 2013 ly suffered highly volatile foreign invest-Asia. It was reported that the CDB would and 2030. In 2010, the CDB reportedly ment cash flows. These risks have oftenpotentially provide financing for the provided a US $4 billion loan to Venezue- translated into very high capital costsproject and the railway would be run by la, which was to be used to fund expan- which have materially affected project vi-the China Railway Group. sions to the Venezuelan power grid. ability. The fact that Latin America has Ecuador. In September 2011, it was re- In 2009, China Railway Engineer- undergone a significant period of eco-ported that Sinohydro Corp Ltd. bid on the ing reportedly signed a US $7.5 billion nomic growth combined with generallydevelopment of a US $200 million hydro- agreement with the Venezuelan Railway decreasing risk provides an historic op-power station in Ecuador. In October 2011, Authority to design and build a rail net- portunity for Latin America project spon-it was reported that Ecuador signed a credit work throughout the country. Steel for the sors to build a more diversified investoragreement under which the China Import- project was reportedly to be provided by capital base and obtain better deal terms.Export Bank would provide US $571 mil- China’s Panzhihua Steel. China, given its current cash position andlion to finance the construction by the ChinaGezhouba Group-Fopeca of the 487.8 MWSopladora hydroelectric plant. Ecuador also signed a US $215 mil-lion agreement with Hydrochina for the China and Colombia reportedlyconstruction of the 115 MW Delsitan-isagua hydroelectric project in Ecuador’sZamora Chinchipe Province. Further, have held conversations regardingthe CDB also agreed to provide US $680million for three Ecuador hydroelectricprojects, including Mazar-Dudas, Minas- a potential US$7.6 billion railSan Francisco and Quijos. In 2010, Sinohydro signed an EPCcontract to build the Coca Codo Sinclairhydroelectric plant with a reported con- project to link Colombia’s Atlantictract value of US $2.3 billion. Mexico. The CDB has reportedlyprovided loans to Mexican companies to and Pacific telecommunications and railroaddevelopment. In one transaction, Nextel
  • 36. 36 Latin Infrastructure Quarterly Infrastructure Financinglonger investment horizon, makes an ex- America economic and political funda- ly has political interests in Latin America,cellent addition to Latin America’s inter- mentals make Latin America an increas- ultimately it is hard to imagine that itsnational capital providers, many of which ingly attractive infrastructure project enthusiasm for infrastructure investmentshave lower risk thresholds, higher return sponsor. Brazilian companies, for exam- will continue if projects are not complet-requirements and shorter investment ho- ple, are planning infrastructure invest- ed and Chinese funds are not repaid. Onrizons. This is particularly important for ments in neighboring countries, including the other side, political support in Latincountries, such as Ecuador, Venezuela Bolivia, Peru, Ecuador, Colombia and America in the future will likely quicklyand Argentina that face political or eco- Suriname. While these countries lack wane if Chinese funds for projects do notnomic challenges in accessing interna- China’s financial strength and perhaps materialize, local workers are not treatedtional credit markets. relative return flexibility they often have fairly or projects built by Chinese compa- The arguments for increased participa- greater local connections and knowledge nies have safety problems. While largertion by China in the Latin America infra- of local business practices and risks. economic agendas are often the focusstructure sector are also strong. China’s In addition to increasing competition, variables in projecting the future of Sino-demand for Latin America exports will China faces the potential of trade back- Latin American investment relations, thelikely continue to grow, both due to its lashes. These backlashes could take the likelihood is that if individual investmentsown industrial growth as well as a hedge form of governmental actions that are di- turn out poorly it will be hard to get futureagainst risks in other parts of the world rected at all foreign investors, such as re- deals done.that supply China with raw materials. As strictions on land ownership, which couldthis demand continues to increase, China affect commodity strategies and thus the Conclusionwill have an increasingly greater interest attractiveness of related rail playing an active financial and over- More specifically, there is the possi- The increasing broadening of China’ssight role in Latin America infrastructure bility of trade pushbacks due to perceived Latin America investment into infra-developments. anti-competitive Chinese practices. Argen- structure is a trend that will likely con- The region also presents China with tina, for example, placed tariffs on Chinese- tinue, particularly as two region’s tradenumerous economic opportunities, as made shoes which lead to China advising relationship” should be “two regions’Latin America’s growing middle classes importers not to purchase Argentine soya trade relationship. While the success ofwill have increasing purchasing power. oil. While some band of disagreement re- a Sino-Latin America infrastructure part-Growing consumer credit markets in garding export practices is not uncommon nership depends on many factors, thereLatin America will further amplify Lat- and arguably even healthy in bilateral trad- certainly is the potential for a long-term,in America’s ability to acquire Chinese ing relationships, if either Chinese pricing mutually beneficial relationship. Wheth-goods. Further, China’s huge trade sur- practices or Latin American restrictions er this occurs will significantly dependplus and foreign exchange reserves put against Chinese goods become a major po- on the ability of both sides to move fromit in a position to lend at attractive terms litical or economic issue it could affect Chi- a largely investment origination andcompared with other international lenders nese investment volumes. capital sourcing focus to the actual hardwary of adding potentially risky loans to Finally, while many Chinese invest- work of making tough investments worktheir balance sheets. ment commitments have been announced, in the face of physical distance and cul- There are, however, many potential many key projects are in planning or very tural, legal and language differences.roadblocks to China investment in Latin preliminary stages. While China certain-America infrastructure. At the macroeconomic level, manyof the economic synergies underlying a Darin Bifani is the Founder ofstrong Sino-Latin America infrastructure Puente Pacífico Investment Advi-partnership hypothesis presuppose con- sory Ltda., an advisory firm basedtinuing Chinese as well as Latin America in Santiago, Chile.  Previously heeconomic growth. Both regions, howev- was Managing Director, Regionaler, are economically volatile, and the fact Counsel of Cushman & Wake-that each region is an “emerging market” field Capital Asia, Ltd.  He can becompounds rather than offsets a number reached at dbifani@puentepa-of downside economic risks. Technical & Another issue is competition for infra-structure EconomicalThe combination market share. Reliabilityof demand for Latin America infrastruc-ture with generally strengthening Latin
  • 37. Institutions Latin Infrastructure Quarterly 37
  • 38. 38 Latin Infrastructure Quarterly InstitutionsOntario’s Infrastructure T he average age of Ontario’s infrastructure – and the continuing growth of its population – means that the province’s public infrastructure needs are some of the greatest in Canada.  To address this infrastructure deficit, the Ontario government implemented a strategic investment plan to address the significant public infrastructure deficit and prepare for future growth. This investment has been a tremendous success. Today, Ontario is now the most active infrastructure market in Canada. According to the Conference Board of Canada, our government’s commitment to infrastructure development supported more than 220,000 jobs in 2010-11. A key part of the ReNew Ontario plan was the Building a Better Tomorrow framework and the creation of Infrastructure Ontario, a crown corporation wholly owned by the Province of Ontario. At the core of the framework are a set of principles that guide all infrastruc- ture projects in the province, including those delivered by Infrastruc- ture Ontario: • The public interest is paramount. • Value for money must be demonstrable. • Appropriate public control and ownership must be preserved. • Accountability must be maintained. • All processes must be fair, open and transparent. Infrastructure Ontario prides itself on operating as a private com- pany doing public service, with four lines of business that deliver results directly to clients: • Project Delivery of provincial and other Ontario public sector initiatives. • Lending to broader public sector entities in Ontario. • Real Estate Management to satisfy our responsibilities as a land- lord to public servants in Ontario. • Ontario Lands to meet multi-year portfolio objectives. In almost six years, Infrastructure Ontario has brought more than US$23 billion in capital to market through its Alternative Financing and Procurement (AFP) program. Our AFP model is a made-in-On- tario approach that ensures appropriate public control and ownership using private financing to strategically rebuild vital infrastructure, on time and on budget.  One of the key benefits of AFP is that it addresses the problem of delivering projects on time and on budget through risk transfer. In short, project risks are transferred to the party best able to manage them. A good example of this would be with design coordination. A common problem in traditional projects is incomplete or unclear drawings. By bringing together architects and contractors at the very beginning of the process and having them work together – and, of course, by making them responsible for any problems that arise – we are able to mitigate the risk of cost and schedule overruns. AFP also ensures the long-term availability and performance of our infrastructure. On our large-scale projects, the developer is part
  • 39. Institutions Latin Infrastructure Quarterly 39 A key part of the ReNew Ontario plan was the Building a Better Tomorrow framework and the creation of Infrastructure Ontario, a crown corporation wholly owned by the Province of Ontario.
  • 40. 40 Latin Infrastructure Quarterly Institutionsof a consortium that not only builds the And not only are projects being com-facility, but also maintains it for the life pleted on time and on budget, but theyof the contract, usually 25 or 30 years. are also providing value for money to theWe build performance and availability taxpayers of Ontario. The governmentstandards into our project agreements and conducts a thorough value-for-moneystructure payments in such a way that de- analysis on projects before they are evenductions can be made for inadequate per- assigned to Infrastructure Ontario. Thisformance. It’s a powerful motivator that analysis consists of a comparison be-will ensure assets that are handed back at tween the total costs of delivering an in-the end of the concession period are in ex- frastructure project using the traditionalcellent shape. public sector project procurement model More than two dozen AFP projects and AFP.are currently under construction across To ensure that we maintain our mo-the province and more than 10 are in pro- mentum and replenish the pipeline, thecurement right now, including a number Ontario government recently announcedof sports venues for the 2015 Pan/Para- its long-term commitment to making Antonio oversees the strategy,pan American Games. And today, we infrastructure projects happen in com- planning and delivery of all as-have more Design-Build-Finance-Main- munities across Ontario. The govern- signed AFP projects, includingtain projects in the market than any other ment recognizes that our economy and social, civil and technologyjurisdiction in the world. New roads, quality of life depend on good public infrastructure.hospitals, courthouses and other public infrastructure, which is why they de- Prior to joining Infrastructureassets are being built in Ontario as part veloped Building Together, a long-term Ontario, Antonio was the Presi- dent & CEO of 407 ETR. Heof the biggest infrastructure investment infrastructure plan for Ontario. This brings extensive leadership ex-in a generation. By 2015, a total of 38 plan will ensure that investment levels perience in civil and construc-hospitals and 27 new justice facilities in infrastructure projects will be kept at tion projects involving public-will have been built or renovated using highs that we haven’t seen in Canada private partnerships and mul-AFP. since the 1960s. This investment will tiple joint ownership models, We’re also leading the way with our result in the creation of thousands of having worked for numerousgreen building program. We are currently new jobs for communities across On- high-profile international com-managing more than 15 million square tario and send a very clear message panies such as CINTRA, Con-feet in green building construction across across North America and the rest of strucciones Hogarsur andOntario; 32 projects (new construction the world that Ontario intends to hold Agroman in Europe.and renovations) are seeking certification its leadership position in the develop- Antonio was a catalyst at 407under the Canada Green Building Coun- ment of new projects. ETR in aligning the senior man- agement team to achievecil’s Leadership in Energy and Environ- A key part of Building Together challenging operational andmental Design New Construction (LEED is Infrastructure Ontario and our AFP financial goals; building Ire-NC) rating system. In fact, two projects program. Our pipeline is being replen- land’s Eurolink Motorway Oper-have already been certified: Durham Re- ished and we have a significant deal ation Limited from ground levelgion Courthouse in Oshawa (LEED Gold flow coming in the next few years, to a fully-operational businessNC) and the Roy McMurtry Youth Centre more than 20 projects that will be de- in just three years; and, closestin Brampton (LEED Silver NC). livered through varied approaches in- to his heart, leading the com- Since 2005, the number of AFP partic- cluding BF, DBF and DBFM models. plicated major renovation ofipants has expanded considerably. We’ve The projects are in a range of sectors Barcelona’s signature soccerdrawn investment and interest from firms including health care, transit, transpor- stadium in just four months.around the world, many of which have es- tation and colleges. Antonio is a Civil Engineer withtablished operations in Ontario to respond These new projects ensure that On- an Executive MBA from IESE Business School of the Univer-to our AFP program. These new players tario will maintain its momentum and sity of Navarra, Spain.create more competition, providing the standing as a leader in infrastructure de-public sector with more options when it velopment. We look forward to workingcomes to allocating risks to the private with our partners to ensure that we con-sector and also applies pressure on fin- tinue to support a strong and competitiveanciers to offer the best financing rates construction sector in Ontario and acrosspossible. Canada.
  • 41. Companies Latin Infrastructure Quarterly 41
  • 42. 42 Latin Infrastructure Quarterly DealsThe Moin Container TerminalIn March 2011, APM Terminals, a major global portand terminal operator based out of the Hague, won a33-year concession from the Costa Rican governmentto design, finance, build, operate and maintain a newcontainer terminal in the city of Moin, on the country’sCaribbean coast. The US$992 million terminal (knownas TCM for its name in Spanish, Terminal de Con-tenedores de Moin) will be the largest infrastructureproject in Costa Rican history and is meant to bolsterCosta Rica’s growing agricultural export industry.Paul Gallie of APM Terminals Discusses the Largest Infrastructure Project in Costa Rica’s HistoryT CM is expected to handle over 1 million twenty- ship-to-shore cranes and 40 hectares of yard. The channel will foot equivalent units (TEU, the standard capacity be dredged to a depth of 16 meters, with the dredging residue unit for container ships and terminals) in 2016, its used to create a new 1.5 km breakwater. By the end of the last first full year of operation, with that figure expect- phase of construction, there will be 1500 meters of quay wall and ed to rise to 2.5 million TEU over the course of 80 hectares of yard. The entire area granted by the concessionthe concession period. By comparison, JAPDEVA (Junta de Ad- is currently over water, without a single square meter of land,ministración Portuaria y Desarrollo Económico de la Vertiente which adds to the complexity of construction. Typical of APMAtlántica), Costa Rica’s port authority, handled 858,161 TEU in projects, TCM will be executed according to high standards of2010 in its two existing terminals of Puerto Limon and Moin safety, social development and environmental sustainability andcombined, which currently account for 80% of the country’s protection, in line with Costa Rica’s identity as one of the mostcommerce. These swelling volumes are driven by the huge quan- ecologically responsible countries in the world.tities of refrigerated (“reefer”) exports, chiefly bananas and pine- These features of the project, Mr. Gallie says, address theapples, coming out of Costa Rica, the fourth-largest banana ex- main problems facing the current port, particularly the increas-porter and largest pineapple exporter in the world. The country ing bottleneck in exports. The deeper channel will accommodatecurrently has 70% of the global market share for pineapples, with larger ships, facilitating economies of scale. The breakwater82% of the market share in the U.S. and E.U.; as pineapples are a protection will reduce the days lost each year due to bad weath-relatively new commodity on the global market, with little mar- er, while the additional berthing space will alleviate congestion,ket penetration, there should be substantial growth in this area in reducing the massive quantities of bunker fuel that ships cur-the coming years. The main destinations for ships coming out of rently use due to inefficiencies in the existing terminal, whileMoin are the U.S., northern Europe and the Mediterranean. also reducing ships’ CO2 emissions. The installation of modern cargo handling equipment will also improve efficiency.Meeting the Challenge “TCM we will be able to lower the cost of the total logistics chain for the importer and exporter, that’s the fundamental thing,” LIQ spoke recently with Paul Gallie, the Managing Director of says Mr. Gallie. “By having a safe, modern port that can acceptAPM Terminals Moin, APM’s local concessionaire company in larger vessels and turn them around quicker, you reduce the over-charge of TCM, who explained various aspects of the project. head the shipping line incurs in those less efficient ports. The totalDuring the first phase of the project, he says, APM will develop cost of exporting a container is reduced because the shipping line600 meters of dedicated container berth with 6 post-panamax doesn’t have the pressure on freight rates to recover their costs.”
  • 43. Deals Latin Infrastructure Quarterly 43A Painstaking Process cost of the project up to the end of the first phase will be US$563 million. Mr. Gallie expects the first 300 meters of the project toAfter being awarded the contract in March, Mr. Gallie explains, be in operation by 2015.there was a five-month period during which APM had to fulfill APM has no partners for the project: TCM is owned entirelyvarious preconditions – including setting up the local conces- by A.P. Moller–Maersk, a listed company on the Copenhagensionaire company, producing a graph of the insurance policy, stock exchange, which owns 100% of the shares of APM Termi-putting in place a US$3.8 million guarantee, etc. – before the nals Moin. In terms of risk, Mr. Gallie says, “there are certaincontract was signed with the government on August 30. From provisions built into the concession agreement. We take the en-the very beginning, APM teamed with local Costa Rican law- tire risk of the projected target volume. There is no recourse ifyers to help them with the finer points of concession and pub- the amount of cargo is not what we projected, that is entirely ourlic contracting law, while, on the engineering side, it contracted own risk. On things related to the cost of construction, we as-CH2M HILL as its consultants, who worked with APM’s in- sume the risk for the first five years after the bid was made, andhouse team to produce the conceptual technical offer used for they [the grantor] assume the risk from the fifth year onward forits bid submission. the rest of the construction. In the case that the cost of materials After the contract was signed, it was then sent to the govern- goes up (concrete, steel, etc), there are various mechanisms thatment’s comptroller general, who is currently reviewing it as part can be used to readjust the equilibrium of the concession, such asof the standard process for all public contracts. The comptroller adjusting the tariff or extending the length of the concession.”is expected to endorse the contract before the end of the year, Mr. He explains that the new port will be unique, and competitionGallie says, in time for the project’s first phase to begin in 2012. limited. “This port is for Costa Rica’s gateway cargo: it’s designed The concession agreement stipulates a multi-phase timeline 100% for the country’s exports and imports, not to be a transship-for the project, with the first phase being an 18-month period, ment terminal. So in that respect, we’re not looking at a compet-ending in mid-2013, during which APM has to conduct all stud- ing port, because there are no other ports on the coast of Costaies, complete all designs, and obtain all permits for the project. Rica that have the same capabilities.” The existing port authorityThe studies include environmental, geotechnical, and soil stud- will continue to operate terminals in Moin and Limon, but theies, among others; the design work includes producing all models Limon terminal is expected to be converted into a dedicated cruiseand performing model testing for TCM’s various structures; and terminal and yacht marina, while the existing Moin terminal willthe permits include, among others, an environmental impact as- handle only conventional, non-fully-cellular ships.sessment. APM is responsible for completing all the studies and Berthadministrative tasks on its own. Mr. Gallie says that the length Phase Year Cap Length No STS Reeferof the preparation phase has to do primarily with environmental (TEU) plugsconcerns. “I think 18 months is a reasonable amount of time inCosta Rica. We’re very sensitive to the environmental require- 2A 2016 1.3m 600m 2 6 2800ments; APM Terminals worldwide is extremely conscientious en- 2B1 2021 1.8m 900m 3 8 4000vironmentally, and we’re going to put in some very state of the art 2B2 2029 2.3m 900m 3 9 5000equipment in order to improve the environmental impact of the 3 2042 2.7m 1500m 5 9 6500port. For example, if you compare what we’re building to what’sthere today, CO2 emissions will be reduced, and our engineers are A Promising Futurelooking at wind and solar power solutions, as well.” APM is the industry leader in sustainability and environmen- Mr. Gallie sees immense room for growth in Costa Rica’s exports,tal projection. Mr. Gallie notes that at APM’s Port Rotterdam bolstered by the lower-cost, higher-efficiency terminal; and he sees80% of electricity comes from wind-turbines, and the company the project in the larger context of LatAm’s surge of infrastructurerecently signed a contract with the United Nations to reduce development, one of the region’s fastest-growing and most direlyCO2 emissions. It is also the industry leader in safety, outstrip- in-demand economic sectors. “Overall, it is a very exciting timeping its competitors in safety statistics by far. Mr. Gallie also to be in LatAm,” he says. “The region didn’t appear to sufferemphasizes what the project will bring to the local community in from the crisis in 2009 as much as the more developed markets,terms of development and jobs. APM estimates that 1000 jobs and combined with that, the standard of port infrastructure region-will be created by the first construction phase, 450 by the first ally, north to south, is way behind the curve. Our focus at APMoperational phase, and another 500 or 600 by the later opera- Terminals is to invest in emerging markets, such as LatAm, Af-tional phases. Citing a World Bank report, APM notes that each rica, the Middle East and even Asia, so this is just a great job in a container terminal can indirectly create 10 employ- “So we do see exciting opportunities in various countries inment opportunities in the local community. LatAm. In the future we will certainly take a look at opportuni- The first building phase (called phase 2A by the port author- ties to invest in public concessions, and of course if any suitableity) is scheduled to take 36 months to complete, and the total private deals came along, that would interest us as well.”
  • 44. 44 Latin Infrastructure Quarterly Infrastructure FinancingThe Brazilian Development Bankand Infrastructure Development A Focus on the Bank’s Project Structuring DivisionI nfrastructure development is and Founded in 1952, BNDES is the largest the country, infrastructure has become the will remain paramount as Brazil development bank in LatAm and the main BNDES’s main focus, with most invest- aims to sustain its economy’s ro- financing agent for development in Bra- ment going toward the electric energy, bust growth and prepares for the zil. At the end of 2010, BNDES had over telecommunications, urban transport, wa- upcoming 2014 World Cup and US$309 billion in total assets, more than ter supply and sanitation subsectors. In2016 Olympics, and there is a general the Inter-American Development Bank the first nine months of this year, aboutconsensus that bottlenecking caused by (IADB) and the World Bank’s Interna- R$ 38 billion, or 41% of the total releasedinsufficient infrastructure presents a great tional Bank for Reconstruction and Devel- by the Bank, was earmarked for infra-danger and challenge to the country. In opment (IBRD). It is 100% state-owned structure. Highway transport (R$ 19.7spite of its spectacular rise to being the by private law and is the key instrument billion), electricity (R$ 9.7 billion) and7th largest economy in the world and the for the federal government’s industrial and railway transport (R$ 1.1 billion) receivedlargest in LatAm, Brazil was ranked 64th infrastructural policies, while also working the most investment, as part of the PACin the world in an infrastructure index by actively with state and municipal govern- II program. Industry, the sector whichthe World Economic Forum as part of its ments. Importantly, it is the main source usually receives the most investment, re-World Competitiveness Index. of long-term financing in the country. ceived R$ 28.4 billion (31%). The federal government has respond- BNDES finances projects in every sectored to the infrastructure demand in recent of the economy, focusing on several main The Project Structuring Divisionyears primarily through its Growth Accel- areas across all sectors: technological in-eration Program, known as PAC. PAC’s novation, sustainable socio-environmental BNDES develops infrastructure projectsfirst phase, between 2007 and 2010, called development, the modernization of public through its Project Structuring Division.for US$349 billion in investments; the administration, productive structure, export- All of these projects are PPPs betweensecond phase, PAC II, calls for US$526 ing, social inclusion and infrastructure. Part private companies and federal, state orbillion through 2014 and an additional of its focus on productive structure entails municipal governments. The ProjectUS$346 billion after 2014. supporting micro, small, and medium-sized Structuring Division comprises three And yet there are still signs of strain (MSME) companies. According to a recent main mechanisms with distinct areas ofeverywhere. As Business Monitor Inter- report published on the BNDES website, in focus: The Project Structuring Fund (FEPnational says in a summary to a recent re- the first nine months of this year the Bank for its name in Portuguese Fundo de Es-port, “Real GDP growth will hinge on the disbursed a record volume of R$36.2 billion, truturação de Projetos), the Brazil PSPimprovement of Brazil’s infrastructure, or 39.5% of total funding, to such MSME Development Program, and the Brazilianimproving access to transport and ward- companies, an 8% increase from the same Project Structuring Company (EBP for itsing off potential electricity shortages. The period last year. BNDES also supports large name in Portuguese Estruturadora Bra-need for infrastructure is substantial.” companies, and indeed the largest: born two sileira de Projetos). years before the oil giant Petrobras, it has The FEP performs research meantEnter BNDES been an integral component of the latter’s to guide public policy toward develop- expansion into one of the dominant energy ing projects. It has concluded studies onThe main financer of the PAC initiatives companies in the world. oil and gas exploration, the aviation sec-and the most important player in Brazil’s tor, restructuring INFRAERO (the state-infrastructure investment and develop- A Shift to Infrastructure owned company that runs commercialment is the Brazilian Development Bank airports), and the Bioceanic Railway Cor-(BNDES, for its name in Portuguese, Because of the massive and urgent de- ridor; it is currently carrying out a studyBanco Nacional do Desenvolvimento). mand for infrastructure development in on the ports sector.
  • 45. Infrastructure Financing Latin Infrastructure Quarterly 45 BNDES vs Multilateral Banks The Brazil PSP (Private Sector Partici-pation) Development Program is an inno-vative joint venture between BNDES, theInternational Finance Corporation (IFC)and the Inter-American DevelopmentBank (IADB), fostering long-term invest-ment in sectors that have not yet been ex-posed to private-sector investment. Thevehicle was developed by BNDES and iscurrently managed by IFC in partnershipwith IADB and a dedicated team withinBNDES. Its current project portfolio in-cludes projects in health care and schoolsand day care, while a public forest con-cession is currently under consideration.Brazilian Project StructuringCompany Disbursements by Sector 2011 (1st Semester)The EBP is another innovative means ofincreasing private sector participation,in this case on the financing side. It is ajoint venture between BNDES and ninemajor private banks in Brazil: Banco doBrasil, Espírito Santo Bank, Santander,Votorantim Bank, Bradesco, BNDESPAR(an offshoot investment arm of BNDES),Citibank, Itaú/Unibanco and HSBC. BNDES develops the projects togeth-er with a given government – whetherfederal, state or municipal – and puts theproject on the market. The bid winnerthen reimburses EBP for all expenses. The9 partners have contributed about US$30million and there are sixteen projects inthe pipeline. Disbursements by Business Sector From the beginning of the project un-til the signing of the contract, BNDEStakes the place of the government in car-rying out all appropriate studies, bringinga private-sector-style efficiency to a pub-lic project. Nevertheless, even thoughBNDES is intimately involved with theproject from the beginning until it ispassed over to a private company, the ba-sic and major decisions are made by thegovernment involved. There is a general consensus that it isimportant – both for BNDES’s, the pri-vate banks’ and the country’s sake – thatprivate banks be able to make long-termloans. As the same report on the Bank’s
  • 46. 46 Latin Infrastructure Quarterly Infrastructure Financingwebsite notes, it is “acting in conjunc- Airports (US$12.9 billion of total (TCU for its name in Portuguese Tribunaltion with the private financial sector to investment) de Contas da União) appreciation. Ex-expand the latter’s participation in long- pected auction date: December, 2012.term financing,” adding that “these ef- S. Gonçalo do Amarante Airport (Rio Campinas Airport (São Paulo): 30-yearforts should contribute to stabilizing the Grande do Norte): Construction and op- concession for the renovation and expan-BNDES’ role in the supply of credit, and eration of an international airport 18 km sion of the existing airport. INFRAERO willthere are already signs of the growing im- from Natal, with the current airport, Au- hold up to 49% of the voting shares of theportance of the capitals market in invest- gusto Severo, being coverted into an air future SPE (special purpose entity). Trafficment financing.” EBP expects its model force base. The runways and apron are in 2010: 5.4 million passengers; estimatedto improve as the partner private banks being completed by INFRAERO, through traffic in 2041: 90 million. Estimated invest-are better able to make long-term loans, the Army Construction Battalion. Invest- ment of US$6.8 billion. Current status: undera development which falling interest rates ment of US$353 million, including the Federal Court of Audit (TCU) appreciation.would aid. passenger terminal, cargo, equipment, ba- Expected auction date: January, 2012 These sixteen projects are spread sic infrastructure, etc. Auction held Au-across six subsectors: health, education, gust 22th, 2011. The highest bid was US$ Highways (US$5.6 billion)sanitation and solid waste treatment, 100 million, 228% over the initial bid ofairports, highways and urban develop- US$30.5 million. BR-101 BA/ES Highway from the junc-ment and mobility. The sixteen devel- Brasília International Airport (Federal tion with the BA698 Highway (access tooped products are all set to go to auc- District): 25-year concession for the reno- Mucuri, BA or Bahia) to the border be-tion between the end of 2011 and the vation and expansion of existing airport. tween Espirito Santo and Rio de Janeiro,end of 2012. Here are brief descriptions Traffic in 2010: 14.3 million passengers; extending 476 km. 25-year concessionfor most of the projects, by subsector, estimated traffic in 2036: 51 million. Esti- for operation, maintenance, and expan-according to information provided by mated investment of US$2.1 billion. Cur- sion of capacity. Granted by the ANTTBNDES: rent status: under Federal Court of Audit (for its name in Portuguese Agencia Na-
  • 47. Infrastructure Financing Latin Infrastructure Quarterly 47cional de Transportes Terrestres) with data. Public hearing: End of December the investment: to be defined. Currentconcessionaire investment of US$ 1.4 bil- 2011. Tender Documents: January 2012. status: studies in development. Publiclion. Current status: Final adjustments in Expected Auction Date: March 2012. Consultation: November 2011. Tenderstudies. Expected auction date: January Solid Waste in São José dos Campos: Documents: December 2011. Expected18, 2012. 30-year (extendable to 35) administrative Auction date: February, 2012. BR-040 DF/MG Highway from the concession for the construction and man- São Paulo Shopping Circuit: Conces-Federal District to Juiz de Fora (MG or agement of an energy recovery system sion for the construction, maintenance,Minas Gerais), extending 937 km. 25- from solid urban waste treatment, includ- and operation of the popular shoppingyear concession for operation, mainte- ing an environmentally friendly final desti- center in the city’s downtown, includ-nance, and expansion of capacity. Grant- nation, in São José dos Campos (SP or Sao ing shopper support center, drivers anded by the ANTT with concessionaire Paulo) (pop. 630,000, with 672 metric tons guides, circular transportation of passen-investment of US$ 1.6 billion. Current of waste per day). Investment of US$111 gers and cargo, bus terminal, and parkingstatus: TCU analysis. Expected auction million. Current status: under public hear- for busses and automobiles. Daily flowdate: first half of 2012. ing until Nov 2011. Tender documents: Jan of 523,000 shopping tourists, 21,000 of BR-116 MG Highway from the BA/ 2012. Expected auction date: Feb 2012. which come from other cities and states.MG border to the MG/RJ border, extend- Investment of US$130 million. Currenting 817 km. 25-year concession for op- Health (US$315 million) status: ending studies, awaiting definitioneration, maintenance, and expansion of of the definitive transfer of the Federalcapacity. Granted by the ANTT with con- BH Basic Health Units: Construction, Lot to the City. Expected auction date:cessionaire investment of US$2.1 billion. renovation, and management/operation of May 2012.Current Status: TCU analysis. Expected non-clinical services in the basic BH (Belo Parking Areas in São Paulo: Phase 1:auction date: first half of 2012. Horizonte) health network (168 units). common concession for the construction, Range of non-clinical services includes maintenance, and operation of 3 parkingSanitation and Solid Waste Man- cleaning and waste management, laundry, lots in downtown São Paulo; Phase 2:agement (US$1.8 billion) logistics management of medication and recommendations to re-qualify the park- materials, and information technology. Es- ing policy in the city of São Paulo andCOPASA: Concession for the construc- timated Amount of Investment: US$ 206 the concession of 7 additional parkingtion, maintenance, and shared operation million. Current Status: Final adjustments lots. Creation of new spaces in Phase 1 toof the Rio Manso Water Production Sys- to documents after public consultation. meet demand and prioritize the creationtem (SRM). SRM supplies 33% of the Tender documents: December 2011. Ex- of spaces under the park & ride model inRMBH. Investment of: US$ 359 million. pected auction date: February 2012 Phase 2. Investment of approximatelyCurrent status: studies in development. US$71 million for Phase 1; Phase 2 is un-Public Consultation: November 2011. Urban development and mobility defined. Current status: Phase 1: studiesTender Documents: January 2012. Ex- (US$238 million) finished; Phase 2: maturing discussionspected Auction date: February 2012. on the parking policy guidelines and ad- Rio –West Zone Sanitation: Conces- Belo Horizonte Bus Terminal: 30-year vancing in studies on supply and demandsion for the construction and operation of concession to construct and operate the in the city. Phase 2 studies: Until Janu-the sanitary waste management system of city’s new bus terminal for inter-city and ary 2012. Expected auction dates: Marchthe AP-5 region of the City of Rio de Ja- inter-state arrivals and departures, located 2012 (Phase 1) and May 2012 (Phase 2)neiro (21 districts in the West Zone), serv- in the city’s northern region, a new devel-ing 1.8 million inhabitants (56% of col- opment area, serving 426,000 passengers Education (US$98 million)lected waste and 4% treated). Investment a month (in 2012). Possibility of explor-of US$ 940 million. Public consultation ing the adjacent land (for use as a shopping Belo Horizonte Elementary and Infant-until May 27, 2011. Tender documents mall, supermarket, hotel, etc.). Investment school Education: Construction and op-published on August 25, 2011. of US$36.5 million (US$61 million with eration of Non-Pedagogical services of Espirito Santo Sanitation: 30-year ad- accessory construction). Tender docu- 32 UMEIs (ages 0-5) and 5 Elementaryministrative concession for the expansion, ments: published on September 6, 2011. Schools (ages 6 to 14). Concessionairemaintenance and operation of a sewage Parking Areas in Belo Horizonte: investement of US$98 million. Currentsystem in Serra, ES (pop. 409,000), with Concession to construct parking lots in Status: Final adjustments to documentspossibility of a 5-year extension. Invest- downtown Belo Horizonte. A portion of after public consultation. Notice sched-ment of US$410 million to US$530 mil- the 18,000 parking spaces currently on uled for December 2011. Expected auc-lion. Current Status: request for proposal the street (Blue Lane) will be transferred tion date: March 2012.being reviewed for update of network to underground parking lots. Amount of
  • 48. 48 Latin Infrastructure Quarterly CompaniesVESTAS About Vestas Vestas is the only global energy company dedicated exclusively to wind energy – striv- ing for business case certainty and the reduction of the cost of energy for our custom- ers. Vestas works in close partnership with customers to offer the most effective solu- tions towards energy independence. Its core business is the development, manufacture, sale and maintenance of wind power plants – with competences that cover every aspect of the value chain from site studies to service and maintenance. To date, it has installed over 43,000 wind turbines in around 66 countries on six continents. Along with this vast experience, it has data to support the prediction that by 2020 as much as 10 per cent of the world’s consumable electricity will be generated by wind energy. Vestas manufactures most of its own key components. This increases the flexibility of its product development, reduces its dependece on suppliers, and enables it to main- tain a high level of manufacturing know-how. At the same time, it carries out produc- tion and sourcign as close to the market as possible. Vestas also operates the world’s largest research and development center for wind energy in Aarhus, Denmark, and it is currently establishing a new research and development center in the United States. Its vision is to level wind power with existing sources such as oil and gas.In short, Vestas has a 14.8 per cent cumulative market share; installs a new turbine every three hours, worldwide; generates more than 95 million MWh a year; has a 2010-revenue of EUR 6,920 million; employs around 23,000 people. About Vestas Mediterranean Vestas Mediterranean is one of the seven Sales Business Units (SBU) of the Vestas Group. Covering 110 countries, it is also one of the largest SBUs both in terms of sales activity level and geographical reach. Headquartered in Madrid, Spain, this SBU manages all sales, installation, service and maintenance operations in all countries in the south of Europe, the Middle East, Latin America and the Caribbean as well as ap- proximately 70 per cent of the African continent. Vestas has a strong presence and a solid set-up in the Vestas Mediterranean region, allowing us to be closer to the markets where we operate and provide an even better and faster response to our customers. Vestas Mediterranean has established sales offices and local service organizations allowing the company to be closer to the markets where it operates and provide a better and faster response to its customers. Having installed approx. 9,950 MW in the region, representing 22.5 per cent of Vestas’s total global capacity, this impressive track record proves its extensive knowledge and experience in different markets and site conditions. Its core competencies Its expertise involves more than just delivering wind turbines. Vestas cover the entire life cycle of a wind power plant, minimizing our customers’ risks and increasing their
  • 49. Companies Latin Infrastructure Quarterly 49
  • 50. 50 Latin Infrastructure Quarterly Companiesreturns. Vestas work as a strategic busi- sisting of a Performance and Diagnostic components in the following six productionness partner helping its customers from Service for preventive maintenance and a facilities:the moment they decide to invest in wind 24/7 Surveillance Service for quick reac-until long after the wind power plant has tive maintenance. Through the Perform- • Blades production in Taranto, Italy;been commissioned. ance and Diagnostic function the compa- • Nacelles assembly in Taranto, Italy; Specializing in planning, installation ny prevents failures in the wind turbines • Blades production in Daimiel, Ciu-and operations from site studies to long- by detecting anomalies before they are dad Real, Spain;term maintenance, Vestas Mediterranean translated into a production loss. Through • Control Systems factory in Ólvega,supports customers in finding and design- the Surveillance Service the company Soria, Spain;ing the right site; performing the electri- monitors and operate 24/7 about 4,500 • Generators production in Viveiro,cal work, installation and commissioning; wind turbines installed in the Vestas Med- Lugo, Spain;servicing and maintaining the wind pow- iterranean countries. For failures that are • Nacelles assembly in Villadangos-er plants and optimizing their wind power impossible to be detected in advance, the delPáramo, León, Spain.production. company remotely solve alarms coming Besides, Vestas Mediterranean can from the wind power plants. These com- In addition, Vestas has recently es-provide guidance to its customers in con- plementary services ensure the highest tablished a new Vestas Spare Parts fa-nection with the development, financing availability and highest production possi- cility in Vilafranca del Penedès, close toand ownership of wind power projects. ble, by minimizing the turbine downtime. Barcelona,Following the principle of “being easy to In Zaragoza, Spain, we have estab- Spain, for service and repair of windwork with,” it works closely with clients lished the Vestas Mediterranean Training turbine main components, which will serve the entire European market.Vestas Latin America Vestas wide product range V52-850 kW: A very versatile turbine suited for medium and high wind speeds.& Caribbean has Thanks to its modest dimensions, the V52 is simple and cost effective to transport and install. It is characterized by a robustoffices in Mexico, construction, thoroughly tested compo- nents and an enviable track record: over 3,500 wind turbines installed worldwide.Argentina, Chile and V82-1.65 MW: With its large rotor and powerful generator, the V82-1.65 MW model is a high-performance and ex- tremely competitive turbine for sites withBrazil. low and medium wind conditions. This type is well suited for large wind power plants where grid compliance issues are solved at the substation level. More than 2,700 turbines delivered worldwide. V80-2.0 MW: Designed to optimize performance and output at any high windto build up a successful project, continu- Center, where the company’s technicians class site, this turbine is ideal for placesously reduce the cost of energy and en- working on turbines throughout the en- with challenging conditions. Since 2003,sure business case certainty. tire Mediterranean region receive train- it has demonstrated its ability to deliver ing on the latest technologies and work- high Return on Investment at both on-Vestas’ facilities in the Mediter- ing procedures on a regular basis with shore and offshore sites around the world.ranean region the aim of securing the best service and Every week, eight of these turbines are maintenance of Vestas’ customers’ wind installed worldwide.From Vestas Mediterranean headquarters power plants. V90-1.8/2.0 MW: The V90-1.8 MW andin Madrid, the company operates the Ves- In the Mediterranean region, Vestas V90-2.0 MW turbines have been designedtas Mediterranean Control Center, con- manufactures and assemble main turbine to make the most of medium and low wind
  • 51. Companies Latin Infrastructure Quarterly 51sites providing superior energy-basedavailability. Through innovative design,they can generate 25 per cent more energythat the corresponding V80s. More than3,000 turbines delivered worldwide. V90-3.0 MW: The V90-3.0 MW,which offers an exceptional performanceat high wind speed sites, is designed tobe low Vestas corporate structure Currently, Vestas Mediterranean has 6 sales units, which are responsible for the sales, installation, service and maintenance of Vestas wind power plants within their respective regions: • Vestas France with offices in Paris and Montpellier, France. • Vestas Hellas headquartered in Athens, Greece. • Vestas Iberia in Spain and Por- tugal with headquarters in Ma- drid, Spain, and Lisbon, Portu- weight, making it easier to transport years. It is based on the V90-3.0 MW plat- gal, as well as a regional office and install and reducing foundation costs form, one of the most proven platforms in in Maia, Portugal. thanks to its lower load. It can be installed the industry, with more than 2,170 instal- • Vestas Italia with headquarters virtually anywhere in the world in off- lations since 2002. The V100-2.6 MW in Rome & offices in Taranto shore and offshore sites. Also, this mod- uses technology which has already shown and San Giorgio, Italy. el is designed around a large number of its efficiency and durability in the field, • Vestas Türkiyewith headquar- standard components that several suppli- backed by our extensive monitoring and ters in Istanbul, Turkey. ers can provide. More than 1,500 turbines data collection. installed since the launch in 2003. V112 – 3.0 MW: Designed for low Vestas Latin America & Caribbean V100-1.8 MW: The V100-1.8 MW tur- and medium wind speed sites onshore and consists of three hubs: bine is designed for high energy production offshore, the V112-3.0 MW turbine is a from low wind sites, with a greater rotor highly-productive and cost-effective tur- • Vestas Mexico, Central Ameri- diameter that enables maximum output at bine. It delivers high productivity due to ca & Caribbean, headquartered low wind speeds. Due to this, the turbine its large swept area, higher rotor efficien- in Mexico. delivers excellent return investment, even cy and better serviceability and reliability, • Vestas South America (excl. at sites where wind power plants have not which in turn improve availability. Brazil) with offices in Argen- previously been profitable. Designed, test- This model can generate more power tina and Chile. ed and manufactured for quality, the V100- than other turbines in the 3 MW class. Its • Vestas Brazil, headquartered in 1.8 MW makes even the lowest wind speed reliability is assured through the state-of-the- Sao Paulo. sites commercially viable. art Vestas testing centre. The turbine compo- V100-2.6 MW: NEW! The V100-2.6 nents are designed with modularity in mind, MW complements our portfolio for the me- having a large number of standard compo- dium-to-low wind sites which are expected nents that several suppliers can provide. to dominate the market in the coming The testing of the pilot turbine began
  • 52. 52 Latin Infrastructure Quarterly Companiesin January 2010 in Lem, Denmark, anda second prototype has been up and run-ning in the Spanish province of Cantabriasince November 2010. In April 2011, thefirst V112-3.0 MW wind farm in the worldhas been erected in the north German state ofSchleswig-Holstein. V164-7.0 MW - NEW!The V164-7.0 MW offshore wind turbine isdesigned for life in the North Sea and des-tined to take offshore to the next level withits unrivalled energy capture. The 164m2 rotor diameters offers a sweptarea of more than 21,000m2 - the equivalentof almost three football pitches. When it comes to profitability the biggerthe swept area the bigger the revenue. Thisoffshore turbine has been designed with twoguiding principles in mind: firstly, to requireas little maintenance as possible, and second-ly, when servicing is required, it should be assafe, quick and cost-efficient as possible.
  • 53. Projects Latin Infrastructure Quarterly 53In January 2011, Guatemala’sNational Electric Energy Com-mission (in Spanish, Comisión Generation ExpansionNacional de Energía Eléctrica) –a technical organ of the Ministryof Energy and Mines – approvedthe terms of reference for the open Plan (PEG)bidding process (“Bid”) called byDistribuidora de Electricidad deOccidente, Sociedad Anónima; TDistribuidora de Electricidad deOriente, Sociedad Anónima and he Bid is for Distributors to contract the supply of up to 800MW of Guar-Empresa Eléctrica de Guatema- anteed Power for its end users of the final distribution service (“Users”),la, Sociedad Anónima (“Distribu- for a period of 15 years starting May 1, 2015.(2) Likewise, the Bid seeks supply (from the Distributors) of electric energy for their Users accordingtors”), (1) in their capacity of au- to the terms set forth in the Supply Agreements entered into with each ofthorized entities for the [electric the Distributors, in accordance with the Bid’s] distribution service. The Bid allows for the participation of several individuals or entities grouped as a “Consortium” (In Spanish, Consorcio) which, although nominated in the Guatemalan Civil law, are scarcely regulated. This innovative provision favors those entities which may find this type of organization suitable for their interests and particular circum- stances. Certainly, there are minimum conditions to be met, but it is still an important innovation in this type of processes.
  • 54. 54 Latin Infrastructure Quarterly Projects Another important feature of the Bid Likewise, the Bid’s terms provide that, due on December 9, 2011, and the dead-is that the bidders are obliged to disclose when adjudicating, the Distributors must line for the presentation of technical andtheir generation technology: whether observe certain minimum thresholds de- economical offers is set for January 26,generation be with renewable or non- pending on the generation technology, 2012. (3)renewable resources. If the latter, bidders with the renewable resources type havingmay only consider the fuels specified in a higher adjudication minimum.the Bid’s terms. The renewable resources As of today, certain events in the Bid’sgeneration technologies are described as road map have occurred. However, cer-those which use solar, wind, hydraulic, tain strategic dates are still to come: forgeothermal or biomass-generated power. instance, the third informative session is1 Pursuant to the General Electricity Law (in Spanish, Ley General de Electricidad), the electric energy distribution service is aregulated one, and thus only the entities which are duly authorized can render it. In Guatemala, these entities are authorized todistribute energy to end users. The authorization is granted on a geographical scope basis.2 In accordance with the General Electricity Law, the entities authorized for the distribution service must have in place agreementswith generating entities that guarantee their full power and energy needs for each current year and the following calendar year.3 Prior to presenting an offer, a bidder must purchase the Bid’s terms. The acquisition of the Bid’s terms implies the right of theacquirer to present questions, clarifying requests and, eventually, an offer.Luis Pedro del Valle H.”.EXPERIENCEHis experience is ample regarding corporative advice in general, includ-ing drafting of typical and non typical agreements, as well as complexcorporate transactions. Mr. del Valle has experience concerning financeand stock market transactions. He also possesses experience and knowl-edge in the fields of Telecommunications Law as well as Information Tech-nology Law.CARRERLuis Pedro obtained his Law Degree at Law School of the UniversidadFrancisco Marroquin, Guatemala, where he also obtained his degree asAttorney and Notary Public. He is a candidate for an LLM in InformationTechnology Law at Stockholm University in Sweden. He is currently workingin his second thesis aimed at analyzing the automation of law. He is au-thorized as Notary Public and Attorney by the Supreme Court of Justiceof Guatemala.MEMBRESIASHe is a member of the Guatemalan Bar Association since 2005.LANGUAGESHe is fluent in Spanish and English.
  • 55. Projects Latin Infrastructure Quarterly 55ReventazónHydroelectric ProjectContinuing a tradition of clean energy, Costa Rica is set to build the largest hydro-electric project in CentralAmerica by 2018. Costa Rica currently produces 93% of its energy from renewable sources, 82% of whichcomes from hydro-electric plants. Costa Rican electricity consumers also pay the lowest tariffs in the region.
  • 56. 56 Latin Infrastructure Quarterly ProjectsT he government-owned Cos- duction facilities will be constructed; and the project, it has decided to retain re- ta Rican Electricity Insti- finally, the powerhouse, turbine, gen- sponsibility for constructing the Plant. tute (ICE) has an ambitious erator and control facilities will be com- The Reventazón River project is al- pipeline of projects to sat- pleted. Construction materials, including ready one and a half years behind schedule isfy the country´s demand, steel, cement, and concrete, are estimated and ICE´s critics argued that the last damgrowth and development. For the past 50 to cost from US$150 million to US$300 built by ICE in the Pirris River took tenyears, ICE has held a de-facto monopoly million. The total cost of the project is es- years for completion and is only one thirdover the Costa Rican electricity sector, timated in about US$1 billion. of the size of Reventazón. There are alsoidentifying profitable projects throughout To date, ICE has built roads leading several environmental risks involved.the country and planning for long-term to the project site and several tunnels to A vast majority of Costa Rican citi-growth. The Reventazón Hydro-Electric transport construction materials for dam- zens support the construction and use ofProject presents important investment op- ming and turbines and most of the civil hydroelectric plants in the country, andportunities for foreign investors. The hy- works. ICE will create a project finance ICE recognizes the need to create infra-droelectric plant is to be built on a US$850 structure for the Reventazón Project. They structure that provides consumers withmillion budget and will function from the are considering working with either the reliable and affordable sources of flow of the Reventazón River, Interamerican Development Bank (IADB) Reventazón will be the first of ICE´s hy-near the Caribbean basin. The 305MW or international banks to secure the funds dro plant crown jewels.hydro facility will be constructed in three necessary to complete the project. Whilemajor phases: first, the reservoir, dike, ICE had previously considered teamingdam, and intake facilities will be built; up with international construction com-second, the penstock and hydraulic con- panies from Brazil and China to complete Eduardo Zúñiga EXPERIENCE Mr. Zuñiga’s practice consists of representing financial institutions, funds and cor- porations in their financing activities, focusing mainly on lenders, sponsors and structured financings and restructurings in the infrastructure and energy indus- tries. Also, he has participated in complex work-outs, setting up special purpose vehicles and securing project guarantees. Mr. Zuñiga also practices in the project development and finance and has coun- seled foreign banks and multinationals providing credit facilities to both private- and government- owned companies. He constantly advices an elite list of global and regional financial institutions in securing local guarantees in both their lend- ing and project development activities. In 2009, Eduardo formed part of the legal team in charge of structuring a lease re- financing for Chinese Corporation regarding the implementation of the Costa Ri- can 3G Network for Instituto Costarricense de Electricidad. This deal was awarded the Deal of the Year award by International Finance Magazine in 2009 In the past, Eduardo led the Arias & Munoz branch offices of Guanacaste (2006-2008) wherehe positioned himself as one of the most important attorneys in the area and he became a landmark in the real estatepractice in the area. During this time he has led important real estate acquisitions of strategic properties to develop futuredevelopments and he has continued providing legal advice to such clients.CARREREduardo holds an LL.M from the University of Pennsylvania (2009). Additionally, he obtained a Business Certificate of theWharton School of the University of Pennsylvania (2009). Eduardo obtained his law degree (J.D. equivalent) from the Uni-versity of Costa Rica (2004) and was authorized by the Costa Rican Bar to practice. Also, he obtained a master degree inContracts and Registry law from the Interamerican University of Costa Rica – Laureate International (2005) and was author-ized by the National Notary Authority to practice as a Notary Public (2006).MEMBRESIASEduardo is member of the Costa Rican Bar (2004) and the Notary Authority (2006). Also, he is a member of the Costa RicanAssociation of International Law, Philip C. Jessup.LANGUAGESHe is fluent in Spanish, English and Italian.
  • 57. Projects Latin Infrastructure Quarterly 57TheBRITOHydroe-lectric Projectcontemplates theconstruction of two Odams located on theSan Juan River, the naturalborder between Nicaragua andCosta Rica. The San Isidro Damwill be built near the Spanish fortress IT tLa Inmaculada Concepcion and consists ecof a concrete dam 10 meters high. Its primaryfunction will be to regulate the level of LakeNicaragua. The Miramar Dam, on the other hand, oj ua Prconsists of a rock-filled dam 735 meters long at 37 me- BR ag icters above sea level. This dam will create a regulating res-ervoir of 16 km2 with a volume of 160 Hm3. ar tr ic ec According to the Nicaraguan government, the BRITO Projectwill be one of the largest electricity generation sources in the country, N elwith an installed capacity of 250 MW, consisting of 4 units of 62.5 MW in droeach. The estimated cost of construction of the BRITO Project is US$600million and it is expected to be concluded by 2015. Hy Despite the concerns about the environmental impact of the project, the Nica-raguan government granted a concession to a Brazilian company which is currentlyconducting feasibility studies. In addition to the benefits of hydroelectric generation, theBRITO project will improve navigation on the San Juan River and Lake Nicaragua, and willalso ensure water supply in the villages near Lake Nicaragua and the Miramar Reservoir.
  • 58. 58 Latin Infrastructure Quarterly ProjectsOfilio MayorgaEXPERIENCEOfilio’s practice focuses on a wide range of international legal issues, in-cluding the protection of foreign investments under investment treaties(BITs), privileges and immunities litigation, international litigation and arbi-tration, domestic enforcement of foreign judgments and arbitral awards,and international human rights litigation. He led the corporate and litiga-tion team of a multinational dairy and food production company and ad-vised a British company in respect of a potential Investment Treaty claimagainst a South American country. Ofilio is currently representing a Czechinvestor in a denial of justice claim before the Inter-American Commissionof Human Rights. Additionally, Ofilio advises foreign financial institutions inproject financing, guaranty structuring and dispute resolution.CARREROfilio has a LL.M degree from The University of Michigan Law School (2010)and a Master of Arts in Law and Diplomacy from The Fletcher School, TuftsUniversity (2009). Ofilio obtained his LL.B (magna cum laude) from Univer-sidad Americana School of Law in Managua (2006). During the summerof 2008, Mr. Mayorga worked at the United Nations Office of Legal Affairsin New York. Ofilio also represented Universidad Americana as an oralist in the Jessup International Moot CourtCompetition in 2006. Mr. Mayorga has taught a course in International Law at Tufts University and a post-gradu-ate course in International Arbitration at Universidad Americana School of Law. He is authorized to practice lawin Nicaragua.MEMBRESIASAmerican Society of International LawYoung International Arbitration Group (YIAG), London Court of International Arbitration.LANGUAGESSpanish and English
  • 59. Regulation Latin Infrastructure Quarterly 59Dispute Resolution:Brazilian Infrastructure ContractsT he existing Brazilian arbitra- regulations, which affect the substance contract, the admissibility of arbitration in tion law was enacted in 1996 of the contracts. In others, the activity certain government contracts has become but came into full practical to be carried out is either a government commonplace. Law scholars and courts application only after 2001, monopoly (such as oil and gas) or a pub- generally reject the previous objections when the STF (Brazilian lic service (e.g., water supply, energy or and consider it admissible for contractualSupreme Court) rejected a constitutional ports). The main contract in an infrastruc- financial claims to be settled by arbitration.challenge against it. In 2002, Brazil rati- ture arrangement is often a government Such court rulings concede that the Brazil-fied the New York Convention of 1958. concession (franchise), granted after a ian arbitration law of 1996 gave sufficientSince these two milestones, ADR is thriv- public tender. Other government con- basis for arbitration in government con-ing. In 2009, CBAr (Brazilian Arbitration tracts may also be there. BNDES, Brazil’s tracts and no specific statutory provisionCommittee), an arbitration think-tank, is- government-owned development bank, is was required. Even so, several federal andsued a report in which it examined almost commonly in charge of funding a large state statutes, either general or applicable800 state and federal court rulings from part of infrastructure projects. Pursuant to to specific sectors, have expressly provid-1996-2008 involving arbitration. Most Brazilian law, such government contracts ed for arbitration. The most comprehen-large-scale contracts now provide for attract the application of a particular set sive examples are those of Laws 11.079arbitration. However, when government of rules distinctly different from those ap- (public-private partnerships – PPPs) andentities are involved, contractual arbitra- plicable to private contracts. 11.196 (government concessions) of 2004tion provisions are still the exception, the If in private contracts Brazilian arbitra- and 2005, respectively. They establishrule being the submission of disputes to tion law and practice are consistent with specific requirements: the arbitration mustthe state courts of the seat of the relevant those existing in most other arbitration- be conducted in Portuguese and in Brazil.government entity. In addition, since the friendly jurisdictions, the matter can take There is no obstacle against the use of ancountry is not a member of ICSID, do- a twist when government contracts are in- international arbitration center, providedmestic and international arbitration plays volved. Certain law specialists will argue that the proceedings take place in Brazilan essential part in the protection of in- that matters of public interest cannot be – which, under Brazilian arbitration law,vestments in Brazil. subject to arbitration, and this premise has makes the outcome a domestic award, not Infrastructure contracts, often devel- led some courts and the Brazilian Court of subject to recognition prior to enforcement.oped under project finance arrangements, Audit (TCU), to initially reject altogether The applicable material law in governmenttypically involve a multitude of agree- the possibility of arbitration in govern- contracts will generally be Brazilian law,ments. Most of them are purely private, ment contracts. Fortunately for foreign but public procurement regulations allowsuch as construction contracts and insur- and domestic investors and contractors, some latitude in the choice of law and fo-ance policies. However, some of the key the opposite view has since prevailed. In rum in some international contracts (articlecontracts are directly or indirectly linked the wake of the STJ rulings of 2005 and 32, § 6, of Law 8.666).to the government. In many cases, the sec- 2006 in a series of cases involving pow- However, even in this favorable envi-tor at hand is subject to strict government er purchase agreements and a port sector ronment, the courts are often called upon
  • 60. 60 Latin Infrastructure Quarterly Projectsto deal with arbitration involving state hired, in February 1999, a consortium date scheduled by the tribunal for theparties. A new step toward the consolida- formed by two Brazilian contractors, award to be rendered, Compagás filed antion of arbitration as a reliable and safe Carioca and Passarellli, which had been action seeking an injunction to stall themethod for dispute resolution when gov- selected in a public bidding process. The arbitration. It also sought a final judg-ernment entities are involved was taken contract did not contain any arbitration ment acknowledging the invalidity ofin October 2011. An important new piece provision and chose the forum of the cap- the submission agreement and nullifyingwas added to an already strong and arbi- ital of the state of Paraná for any disputes the corresponding arbitration procedure.tration-friendly case law. arising from the contract. During the per- Compagás contended that in such a set- A ruling by Brazil’s Superior Tribunal formance of the contract, the consortium aside action the arbitration was void duede Justiça (STJ) promises to increase the submitted a claim for additional payment to Compagás’s standing as a state entityopportunities for arbitration in Brazilian based on contract changes, unforeseeable and the lack of a contractual arbitrationgovernment-related contracts. It was ren- interferences in the performance of the provision. Alternatively, it alleged thatdered in recurso especial no. 904.813-PR, contract and other causes for increased the submission agreement was defectivefiled by Companhia Paranaense de Gás costs. The parties then decided to resort because it did not state clearly the sub-Natural – Compagás against Consórcio to ad hoc arbitration to solve the dispute. ject matter of the arbitration and that theCarioca Passarelli. It is a new develop- A submission agreement (compromisso arbitration procedure could not continuement of the case known to Brazilian arbi- arbitral) was originally drafted by Com- without a replacement arbitrator.tration experts as Compagás. pagás’ attorney and was finally agreed All these matters had been previously In a way, the new ruling in Compagás upon and signed by both parties in May submitted and dismissed by the tribunal.simply restates and reinforces Brazil’s 2001. The arbitration commenced as Eduardo Talamini delivered at the timepro-arbitration case law. But it does move agreed, with two-party appointed arbitra- a legal opinion on this case addressingseveral steps beyond, addressing some tors and a chairman. However, as the case these issues, which was later published inof the issues that are still raised in Brazil progressed, Compagás decided to with- Revista Brasileira de Arbitragem, CBAr,against arbitration involving state parties. draw from the arbitration. Using its al- issue no. 4, p. 44. The arguments present-Confirming previous case law on the ad- leged prerogatives as a state entity – later ed in the legal opinion prevailed at statemissibility of arbitration in these matters in the case denied by the state courts – it appellate level and more recently in theis only one of several aspects for which unilaterally denounced the submission STJ opinion.Compagás deserves praise. agreement and declared it void. The arbi- The state court of first instance denied The facts of the case involve a con- trator originally appointed by Compagás the injunction sought by Compagás, andstruction contract signed by a mixed-cap- resigned. After being given by the tribu- the ruling was later confirmed on appeal.ital company (Compagás) owned prima- nal the opportunity to appoint another ar- Meanwhile, the tribunal proceeded withrily by a state government. This company bitrator, Compagás refused to do so. The the arbitration and rendered, in July 2001,(Compagás) is charged with distributing tribunal then decided to rule on the case an award in favor of Consórcio Cariocanatural gas within the Brazilian state of by a majority vote. Passarelli for monetary damages in theParaná. In its ordinary business, Compag At this point, three days before the original amount of R$5.8 million (around US$20 million in today’s figures). The Tribunal de Alçada do Paraná (aIt is a new development state court of appeals later merged into the current Tribunal de Justiça do Paraná) rendered a final ruling at state level on Compagás’s set-aside action in the appealof the case known to 247.646-7. The appellate court rejected all Compagás’s contentions and fully confirmed the validity of the arbitration and the subsequent award.Brazilian arbitration Under the Brazilian procedural sys- tem, an appellate ruling may be appealed on the grounds of infringement to consti-experts as Compagás. tutional rules (to the STF) or to federal law rules (to the STJ). The recent ruling by the STJ addressed a recurso especial filed by Compagás based on the alleged infringement of federal law rules by the
  • 61. Regulation Latin Infrastructure Quarterly 61state court of appeals (Compagás also with the nature of Compagás (as a state which is a requirement under the Brazil-filed a recurso extraordinário to the STF, entity) and in addition was not provided ian federal arbitration law;which was not admitted and is pending for in the bidding solicitation (RFP) nor (iii) the award was entered by major-revision by the STF on its admissibility). in the original contract, and therefore the ity vote, without a replacement arbitrator,The allegations submitted by Compagás submission agreement violated the legal thus violating the submission agreementfocused on three issues, all of them al- provisions concerning the binding effects and the Brazilian federal arbitration lawready addressed and rejected by the ap- of the RFP in a bidding procedure; rules concerning the formation of thepellate court: (ii) the submission agreement did not tribunal. (i) the arbitration was incompatible contain a clearly defined subject matter, In a unanimous ruling by its 3rd
  • 62. 62 Latin Infrastructure Quarterly Regulation“The recent ruling by the STJ is a clear submission agreement does not affect the conditions of the preceding bidding procedure even if arbitration had notindication that Brazilian courts are aware of their been originally provided for. In addition, the opinion of the STJ dis-role in ensuring that private companies may missed an objection that has been made in other similar cases before lower courts and in scholarly writings. Brazilian pub-rely on arbitration as an effective, practical and lic procurement law (article 55, XIII, § 2, of Law no. 8.666 of 1993) providesenforceable form of reaching a final resolution that government contracts must contain a choice of forum provision appointing the seat of the government entity as thefor disputes concerning infrastructure contracts competent forum for any disputes. The opinion mentioned that such choice ofregardless of the parties involved.” forum provision was not incompatible with arbitration, since it will be appli- cable for support (such as interim meas-Chamber rendered on October 20, 2011, of the court, “In this case, there was no ures) and set-aside suits. The opinionthe STJ rejected all allegations. Justice draw, but a majority award. This means also indicated that the choice of forumNancy Andrighi wrote the opinion of the that the purpose of the law was reached could be relevant for certain matters, incourt. even though the arbitrator appointed by the scope of a submission agreement, Complying with the applicable proce- the appellant has ceased to participate that could not be submitted to arbitra-dural rules, the STJ refused to admit the in the proceedings.” The court acknowl- tion. But it clearly pointed out that thisrecurso especial with regard to matters edged that this reason was sufficient to was not the case at hand (a “discussionrelating to the contents of the contrac- ensure the validity of the arbitration con- concerning the financial equilibrium oftual agreements of the parties. There- cerning this topic. the contract”). According to the opinion,fore, with regard to item (ii) above, the At last, with regard to item (i) – ar- “The dispute between the parties is of anSTJ acknowledged that the state court bitration involving a state party in a con- eminently financial and disposable na-had decided the case based on facts that tract with no arbitration provision – the ture, so much so that the parties couldwere not subject to review by the STJ. court not only admitted the arbitration, have solved it directly, without the inter-The opinion of the court quotes a passage but considered that it was preferable to a vention of either the state courts or of theof the appellate court ruling stating that court judgment “given its greater speed arbitral tribunal.”“the subject matter of the arbitration was and specialization in comparison with the One extremely important passagealso well defined in the submission agree- Judicial Branch.” of the opinion involves the relevance ofment made by the parties, since it deals According to the opinion, “The dis- good faith in the behavior of the parties –with an enclosed clause, which refers to tinction of this case lies in the fact that, particularly state parties – in the submis-all the disputes then existing between the in the contract entered into by the par- sion of a dispute to arbitration. The opin-parties, what can be assessed by simply ties, arbitration was not provided for as ion highlighted that the parties “optedexamining the minutes of the meetings a means of dispute resolution (arbitra- for arbitration, by means of a submissionand the correspondence exchanged be- tion clause). The submission agreement agreement, challenged afterwards by thetween the parties. This is not a case of an was entered into later by the appellant appellant. It should be noted that it was aindefinite or undetermined subject mat- state entity.” The opinion pointed out voluntary action by the government – itster, as the appellant alleges. The appellant that “the fact that there was no arbitra- entity – to submit the dispute to arbitra-knew very well what this was about and tion provision in the RFP or in the con- tion and renounce a judgment by a statewhat the subject matter of the submission tract entered into by the parties does court. (…) In this context, one may sayagreement was.” not nullify the submission agreement that the appellant’s later behavior, to chal- Regarding the matter of the formation signed later.” lenge its own action, goes to the brink ofof the tribunal (item [iii] above), the STJ It clearly distinguished the purpose of bad faith, in addition to being evidentlyacknowledged that the case involved a the principle of the binding force of the detrimental to the very public interest ofmajority award under article 24, § 1, of RFP, within a bidding procedure, from having the dispute solved in the speediestthe Brazilian Arbitration Act (Law no. the purpose of the submission agree- manner.”9.307 of 1996). According to the opinion ment. The supervening conclusion of a In summary, the STJ ruled that the
  • 63. Institutions Latin Infrastructure Quarterly 63submission agreement was valid and ability and instilling confidence, it will suring that private companies may relycompatible with the provision for choice attract investment and investors. En- on arbitration as an effective, practicalof forum, which was considered applica- couraging and advancing arbitration as and enforceable form of reaching a finalble to determine the competent court for a form of dispute resolution are steps in resolution for disputes concerning in-“all other disputes possibly existing be- the right direction. The recent ruling by frastructure contracts regardless of thetween the parties, as well as for interim the STJ is a clear indication that Brazil- parties involved.or enforcement measures involving the ian courts are aware of their role in en-arbitration.” This recent ruling by the STJ is a rele-vant addition to Brazilian case law on this Cesar A. Guimarães Pereira ismatter for at least three reasons. a Brazilian attorney, partner of First, it confirms a long-standing tra- Justen, Pereira, Oliveira & Tala-dition in Brazilian courts of upholding mini and holds an LL.M (1998)arbitration agreements entered into by and a PhD (2005) in Public Lawthe government. The opinion expressly from Pontifícia Universidadereferred and adhered to the most known Católica (PUC-SP), in Brazil.precedents, conveying a clear message He has published numerousthat it is part of a strong and well-estab- articles on subjects relatedlished case law. to public law and arbitration Second, it acknowledged that a sub- and the books Elisão tributáriamission agreement is a legitimate means e função administrativa (Taxfor the government to submit a dispute to Avoidance and Governmentarbitration in the absence of a contractual Action) (2001) and Usuáriosprovision for arbitration. Since most gov- de serviços públicos (Usersernment contracts under dispute in Brazil of Public Services) (2nd ed.,do not contain arbitration provisions, this 2008). He has recently co-ed-acknowledgement opens an important ited and written for the booksopportunity for the parties to resort to Arbitragem e poder públicoarbitration as a speedier means to solve (Arbitration and State Parties)their disputes. Based on this ruling, state (2010) and Infrastructure Law of Brazil (2nd ed., 2011). He is the presi-parties may feel confident that by entering dent of the arbitration center of the Federation of Industries of theinto submission agreements they will not State of Paraná (CAIEP). E-mail: <>.be breaching their legal obligations aris-ing from the bidding procedure prior tothe contract under dispute. Lastly, this ruling sends a straightfor-ward and clear message to state parties –and to parties to arbitration agreements ingeneral – with regard to good faith. TheSTJ considered that the state entity actedin near-malice (basically in venire contrafactum proprium) and against the publicinterest by challenging its own prior de-liberate submission to arbitration. Thisopinion by the STJ should put parties onnotice that Brazilian courts will not acceptand may further punish such frivolous al-legations in the future. Arbitration, like ADR methods ingeneral, is about freedom, trust andaccountability, and this translates intogood faith. At all levels of government,Brazil has learned that, by showing reli-
  • 64. 64 Latin Infrastructure Quarterly Companies