XXXXXX XXXXX Latin Latin Infrastructure Quarterly 1 Infrastructure QuarterlyIntelligent Transport Systemsfor the Chilean Railways TheColombia Short StoryPPP Law on InfrastructurePrivate Equity ProjectFund of Funds Bonds
Contributors Latin Infrastructure Quarterly 3Dear Infrastructure Practitioners, Contributors Abello, AlessiaWelcome to the third issue of Latin Infra- Posse, Herrera & Ruiz Abogadosstructure Quarterly! Abrantes, MarianaA PPP Lusofonia llow me to briefly take you through every article featured inside. This issue starts by covering the initiative of the Chilean government to im- Bogan, Andrew prove the national rail network with the participation of the private sec- Bogan Associates tor through the adoption of Intelligent Transport System applications. Inthis issue we also feature a really insightful article on a topic not much discussed but Brieba, Danielof great importance: shorting infrastructure stocks. A complete analysis of the recent ARA WorleyParsonsPPP legislation enacted in Colombia is also focus on this third issue. From Spain wereceived a thorough examination of the legal and financial aspects of the structur- Casanova, Mauricioing of a PPP through a case study. We put together an interview with a Managing Ministerio de Transporte yDirector of a private equity fund of fund firm based in the U.S. and Brazil focused Telecomunicaciones (Chile)on underserved markets such as infrastructure because we believe that the creationof such a firm is an exciting development for our region. Project bonds has been a Corvalan, Anatopic much discussed lately which is why we are featuring a complete analysis on Espirito Santothe state of that market and its reality in Latin America. We also feature an articleon one of the biggest infrastructure projects currently being analyzed in Paraguay Duke, Russellwhich is the modernization of the public transport system in the metropolitan area National Standard Financeof Asunción. This issue also presents some guidelines for infrastructure projects andcompanies trying to raise funds internationally. We present a piece on the state of Figueroa, María Fernandainfrastructure development in Costa Rica which argues for further encouragement ARA WorleyParsonsof private sector investment. Another topic widely discussed nowadays, particularlyin countries going through economic contraction, is the management of PPPs con- Hidalgo, José Miguelsidering budgetary restrictions; we feature an integral piece of this issue in Portugal. International PPP ConsultantWe also interviewed a PPP consultant with vast experience in Chile to discuss thefactors behind the successful Chilean experience and the lessons learned that can be Latini, Estevaoapplied in other countries. The last article is a comprehensive view of the state of the Latin America Alternativesinfrastructure industry in our region considering worldwide economic conditions.As we have done in the past covering a specific infrastructure conference, in this Ortiz, Raulissue we cover the II Brazil Infrastructure Investments Forum as we prepare for the Deloittethird Forum that will take place in New York during the fall. Sherman, DeclanI would like to thank all of the contributors for this issue for their great work. Everlight CapitalI hope you find this third issue interesting and enjoyable. Please do not hesitate to Villalobos, Federicocontact me at firstname.lastname@example.org should you have any questions and/or com- E3 Capital Costa Ricaments. As always, I encourage you to send us feedback on, and new ideas for, ourproduct. Vouga, Rodolfo Vouga & Olmedo Abogados Sastre, Julián International Transport ConsultantPatricio Abal.Editor
Contents 5 ContentsIntelligent Transport Systems for the Chilean Railways:A Proposal based on Public Private Sector Partnerships ......................................6The Short Story on Infrastructure .......................................................................14Colombia:The Infrastructure Plan Relies on the New PPP Law..........................................17Legal and financial structuring process of ZaragozaLRT Line 1 under a Public Private Partnership scheme......................................19Private Equity Fund of Funds – Latin America Alternatives...............................26Project Bonds......................................................................................................28Paraguay – BRT Public Transport System...........................................................32Raising Capital offshore for infrastructure companies and projects .................34Costa Rica’s Infrastructure Challenge ................................................................36Managing PPPs for Budget SustainabilityThe case of PPPs in Portugal, from problems to solutions ................................3811 Brazil Infrastructure Investments Forum -NYC............................................46The Chilean Experience......................................................................................49The State of Investment in Turbulent Times .......................................................51
6 Latin Infrastructure Quarterly ProjectsIntelligent TransportSystems for theChilean Railways:A Proposal based on Public Private Sector Partnerships Mauricio Casanova Daniel Brieba Head of Projects and Development Industrial Engineer, MBA Logistics Development Program – Ministry of ARA WorleyParsons (http://www.ara-worleypar- Transport and Telecommunications - Chile sons.com) email@example.com firstname.lastname@example.org Julián Sastre María Fernanda Figueroa International Transport Consultant Civil Engineer Technological Advisor at the Caminos de Hierro ARA WorleyParsons Foundation (http://www.fcaminoshierro.com) (http://www.ara-worleyparsons.com) email@example.com firstname.lastname@example.orgITS – Intelligent Transport Systems – is a term which is used to describe the wide range ofcomputer and telecommunications based technologies and applications geared towardsthe resolut ion of transport problems through the use of specially designed systems.T ransport management is in- • The exhaustion of conventional solu- Transport and Telecommunications, has creasingly more aware of the tions, unable of solving on their own developed a plan aimed at the adoption need to adapt to policies re- efficiency and capacity problems. ITS applications for use on the railways garding the environment, city- • The reduction in relative costs of on a national level, in order to proposeplanning, passenger safety and security, these systems in recent times. guidelines for the application of theseas well as economic and social factors • The universal adoption of informa- programmes, designed to improve thesuch as time lost, comfort etc. Likewise, tion and communication applications. national rail network. This has been con-ITS have become more relevant as den- • The increase of disposable income, ceived from the viewpoint that, althoughsity of traffic and railway operational and therefore, living standards of rail private initiative is vital for the develop-speed has increased, at the same time, users, who demand increasingly great- ment of these systems, the State must un-safety levels demanded by users has er levels of comfort and place higher dertake policies which foster them, andrisen. It is difficult to imagine transpor- value on information and time. The in- at the same time, provide leadership ontation in the future without use of ITS, formation provided to the users must research and development of these proj-especially as these systems will take on be reliable and swiftly delivered. ects. Likewise, and given that there area continually more important role in the multiple needs and limited resources arecoming years. The success of ITS appli- With this reasoning in mind, the Chil- on hand to fulfil them, it is thus neces-cations is based on: ean Government, through its Ministry of sary to manage and plan these projects,
Projects Latin Infrastructure Quarterly 7detecting main needs, prioritising and ing standout points: lessons learnt from mation of numerous policies has allowedchoosing between different alterna- other areas and countries, opportunities the systematic and progressive imple-tives, meaning it is necessary to make a for Chile, role of the State and the ex- mentation of these systems, which as adeep-rooted analysis of the strategies to perts’ vision. All this with the aim of se- result of their magnitude and complexity;be undertaken in order to ensure effec- lecting the most appropriate ITS projects require long timeframes, high investmenttive investment. In short, these incentive for the Chilean railway network. levels, the collaboration and coordinationpolicies will take on the form of Public of numerous agents of different natures,and Private Sector Partnerships (PPP) International background and the difficulties caused by the exten-in order to conform with these systems sion of these systems across nationalcharacteristics, as well as with those of The compilation of information, ranging boundaries.the railways. from bibliographical texts, the study of Depending on the aim of the railways, competent bodies and authorities, analy- the European case is both a challenge andMethodological structure of sis of ITS in place, the study of policies an aim, yet in other completely differentthe plan development and regulations etc., allowed to formulate cases, the standardisation of systems, from a relatively all-encompassing vision of their definition through to operation doesFigure 1 shows the synthesis of the struc- the current state-of-play with regards to not present a target. This is clearly notedtural methodology and working scheme ITS, especially in the railway field. in countries such as the United States,followed to develop the Railway ITS Plan. It has been clearly noted that Europe where the railways are almost entirely Firstly, the review of international ITS is at the forefront of these Intelligent Sys- privately owned and the only governmentapplications already in place, as well as tems in terms of dedication and coordinat- requirements on them are with regard topolicies, plans and strategies operating at ed developments, encouraging organised safety in their operations, as well as in thea national level, has allowed to charac- progress and mutual cooperation through interaction with other modes of transportterise the “state-of-the-art” with regards the active participation of its different and the population in general.to Intelligent Transport System applied member states. The European Union has It must be kept in mind that the aimsto the railways. In parallel, a diagnosis concentrated its efforts into projects such of the railways in Europe and the Unitedwas performed on the ITS already in op- as: ERTMS (European Rail Traffic Man- States are totally different: Whilst in Eu-eration in Chile as a whole. agement System), the ETCS (European rope, railways are geared mainly towards The application of state-of-the-art Train Control System) and the GMS – R passenger transport; in the United StatesITS applications to the particulars of the (Global System for Mobile Communica- their main purpose is to transport freight.Chilean case was focused on the follow- tions - Railway). In addition, the procla- This explains to a large extent the differ- Figure 1 : Methodological Structure INTERNATIONAL ITS ITS STATE OF LEARNED THE ROLE OF THE THE ART LESSONS GOVERNMENT POLICIES, PLANS AND STRATEGIES ITS STATE OF OPPORTUNITIES EXPERT’S POINT DIAGNOSIS THE ART FOR CHILE OF VIEW ITS PROPOSED SOLUTIONS
8 Latin Infrastructure Quarterly Projectsent policies and developments in terms of ITS applications have always been narios based on video imagery, for smokeITS. These two different types of trans- present in the rail sector. The particulars and structural failure detection throughport result in services with hugely differ- of this transport mode as to its fixed tra- the use of wireless sensors.ent requirements in terms of safety and jectory and its intrinsic relationship be-quality. tween track and vehicles means that these Energy and the Environment Additionally, the criteria through elements are adapted for this specific The management of energy substationswhich these problems have been tackled purpose and these elements may provide already has automated processes for con-are also different. Whilst in Europe the interesting results along different levels necting and disconnecting to the network,development of these systems is visual- on the system, both with regard to traffic as well as self-checking devices. For ex-ised as a direct action on the part of the circulation and passenger information. ample, in Japan phase change is no longerState to establish specific technical norms ITS have been applied to many aspects done using rolling stock, but rather usingand standards, in the United States the of the railway sector, though the follow- the catenary (neutral area management).system is oriented towards obtaining re- ing are worthy of special mention. This means that there are currently sys-sults through the establishment of func- tems which make occasional decisions.tional specifications. Infrastructures Between vehicle and substations/electri- In general, from the international Signalling systems are intimately linked cal system techniques are being developedpicture we can identify two main areas, to the infrastructure. In reality, it can be which allow for the return of energy re-which to a certain extent condition the stated that the first smart systems (intrin- covered to the High-Speed Rail Network,management of proposals presented in sic safety systems) were applied to rail- which is, at the moment, only utilisedthis ITS plan: way infrastructure at the beginning of the internally. It is important to highlight the last century, to detect trains’ locations. fact that this technique is not new and is • Systems interoperability. Other systems exist, for example those applied frequently in metropolitan rail • High safety standards applied in tunnels, for emergency sce- systems, which have a sufficient traffic
Projects Latin Infrastructure Quarterly 9density to make the currents produced by Germany, the system named RailCom • Passengers information providedregeneration have a significant volume. Manager operates in the same fashion. through cell phones There is a major concern regarding the There are also in operation on board • Trains equipped with internet connec-environment, the need to save energy and smart train driving systems, sending mes- tions.emissions reduction. In Spain, the Elec- sages from the control post to the train • Emergency scenarios managementRail initiative aims to find solutions to itself, especially in the case of metropoli- and intelligence to execute protocols.reduce energy consumption through stud- tan rail networks, through the use of theies undertaken by a group of universities CBTC system. High-Speed Rail vehicles Analysis of policies, plans andand which involves modifications to roll- also offer possibilities for the implemen- the authority of the chileaning stock, to infrastructure and to railway tation of this system.operations management. On board, the train itself already has transport ministry. automated smart systems, running inde- At the present time, the Ministry of Trans-Signalling, Safety, Accident rates and pendently from the Control Centre. This port and Telecommunications, through itsCommunications transformation is extremely relevant as Transport Under-Secretariat, has suffi-It can be stated that Control Centres are it changes the architecture in place. The cient empowerment to be able to estab-where the greatest levels of communica- trains themselves carry on-board intelli- lish inter-operability requirements andtion density is found and where the hub of gent systems geared towards safety and safety standards through the use of ITS.the intelligent systems is located, as is the security (that is, of operational type and The Transport Under-Secretariat also hascase with systems such as ERTMS and against deliberate actions) towards envi- the authority to oversee and coordinateEUROPTIRAILS in Europe, ADTCS and ronmental quality standards, traction and the operation and development of funda-ATMS in Australia, STAC Rail in Spain engine issues, and braking in compliance mental and complementary services thatamongst others. with quality standards, and finally travel- are part of the public transport network. There are applications for the traf- ling speed, especially in Japan and Eu- This entity also has regulatory powersfic management along the lines of the Da rope (Germany, France and Spain). over those privately provided services,Vinci system, developed in Spain which is which use the public infrastructure. Thesea systems integrator, meaning that it takes User Information services must abide by basic regulations,data from many subsystems and facilitates The following areas are worthy of special without compromising their freedom ofoperator management using this data. In mention: operation but they do have to coordinate
10 Latin Infrastructure Quarterly Projectstheir participation with state companies. The railways in Chile are divided firstly into two major geo- Within the Transport Under-Secretari-at, the work undertaken by the Railway graphical areas, the Northern regions (Arica – La Calera)Department can be highlighted. This De-partment is empowered to embark upon and the Central – Southern regions (Valparaíso – Puertostudies and propose the construction ofcomplementary projects, which it consid- Montt) and then into two sectors relating to passenger trans-ers necessary for the improvement of rail- port and freight transport. Depending on these areas and sec-way services. From the analysis of the experiences tor of analysis, the railway system realities and possible pro-regarding plans and policies we can ex-tract two especially important initial con- posals to be offered might be diametrically different.clusions. The first is that the role of theState is fundamental for technological role played by the European Commission ETCS which was announced in an ECadvances in the railway sector. The sec- as an organising body is to be highlighted. communiqué to the European Parliament.ond refers to the areas of activity of those This entity takes on the challenge of pre- Another important topic is the perma-political plans, which have been centred senting the aims of the European Union nent impulse of railway research in gener-on three following items: in order that each member state may be al, in which the following projects related able to develop its own plans, in accor- to the rail sector may be highlighted:• Inter-operability, compatibility and dance with EU directives. An example of LOGCHAIN for the optimisation of standardisation of systems and tech- this is the Strategic Plan for Infrastruc- the logistical chain for freight transport nology used on the railways. ture and Transport in Spain, which aims throughout Europe.• Implantation and improvement of sat- to improve the efficiency of the systems, 7th Framework Programme for Re- ellite localisation systems. strengthen territorial and social cohesion, search Policy in the European Union,• Improvement of railway safety (against and contribute to the general sustainabil- from 2007 and before, a model for pro- potential accidents and delinquency). ity of the system, as well as encouraging grammes which foster innovation and fi- economic development and competitive- nancing. Two main, yet different trends have ness, all within EU guidelines. The Galileo programme shows thebeen noted with respect to, the role of We have also seen the relevance which need for the EU to have its own naviga-the State: In the case of the European is given to the public-private sector part- tion system and has also required the de-Union, there is a diversity of initiatives, nerships in order to respond to the invest- velopment of systems for its utilisation.regulations and standards focused the ment needs and the social repercussions Within the confines of the work un-homogenisation of national railway sys- derived from these technologies. dertaken in the framework of EU policy,tems, to be able to operate on a single, The most ambitious plan undertaken in the drafting of documents intended to addborder-less network. In this sense, the recent years is the drafting of the ERTMS/ to the debate and initiate a consultancy procedure (Green Papers) and reference reports or background studies on specific issues and how to perform these studies, often the result of previous documents (White Papers) can also highlighted. Nu- merous resources involving the participa- tion of experts and agents in the sector add their voice to these documents and to the debate. Finally, it should be kept on mind the importance given in EU plans and poli- cies to passenger information and inter- modality issues. In the USA, the government deals mainly with issues relating to safety standards on rail transport, for example through the application of the Positive Train Control (PTC) programme. Unlike its European counterparts, it only dictates regulations which must be followed. The government also participates in plans re- lating to train capacity increase, both in
Projects Latin Infrastructure Quarterly 11terms of passengers and freight, which to reduce congestion on the motorways Northern regions (Arica – La Calera) andprovide incentives for those who invest through the transfer of transport of freight the Central – Southern regions (Valparaísoboth from the public and private sector traffic towards less contaminating modes – Puerto Montt) and then into two sectorsthrough subsidies and/or tax rebates. of transport, such as the railway. relating to passenger transport and freight The role of the Railway Administra- Another case worthy of special men- transport. Depending on these areas andtion Authority, RAD, traditionally, has tion is Australia, where something simi- sector of analysis, the railway system re-been very different to that of its Euro- lar to the scenario in the United States alities and possible proposals to be offeredpean counterpart. The Ministry (Depart- has been noted, by which we mean that might be diametrically different.ment) of Transport is dedicated mainly from the government standpoint, safety In the Northern region, the privatelyto the regulation of the safety conditions on the railways is the maximum priority. owned railways (Ferrocarril Antofagasta-throughout the railway system, operating Nonetheless, as in the United States with Bolivia (FCAB) and Ferronor) only pro-through the Federal Railways Adminis- the advancement of high-speed rail, the vide freight transport services. FCAB,tration (FRA). government also promotes new invest- transports raw materials and copper to With regards to financing, highly in- ments for top-of-the range rail services and from the mines, and to a lesser ex-teresting legal regulation apply. These and facilities, using public moneys. This tent, other mining products and Bolivianinclude fiscal breaks whilst at the same makes it perfectly clear that currently, the freight (also mostly minerals). FCAB hastime create specific funds, in addition to promotion of the railways as a sustainable managed to independently develop theirthe funds created by the FRA y RAD, means of transport cannot be achieved own smart systems, and has achievedwith the latter being the body entrusted without the leadership of the Public Sec- interesting results. Meanwhile, Ferronorwith the definition of programmes for tor Administration. provides similar services serving mainlyacquisition of subsidies, administration the iron ore mining region. Main opera-and negotiation of tenders, amongst other The national rail system in tions are the Potrerillos Railway (FCP)activities. The government participates chile and the railway from Los Colorados Minein the incentives for research into new to Huasco (FAH). Ferronor has followedtechnology, subsidising studies and also The railways in Chile are divided firstly a similar path to the FCAB with regards togetting involved in initiatives which aim into two major geographical areas, the the field of technological developments,
12 Latin Infrastructure Quarterly Projectsyet it has involved the public sector in de- owned infrastructure. EFE manages all rails ing and problems in this area are substantialveloping its smart systems, through tools traffic and also operates passenger traffic, and the difficulties lay on scarce resources,and productivity instruments provided having to respond to the needs and condi- priorities defined by EFE itself, other agentspartly by the state owned Corporación de tions which arise from each type of service. intervention, and, therefore the need to rec-Fomento de la Producción (CORFO) There are line sectors in which, due to the oncile varied and sometimes opposed needs The Central Southern Region is, howev- level of passenger rail traffic, freight may and points of view. Thus on the rare occa-er, rather more complex. Unlike the North- only be transported at night-time, though sions when collaboration and participationern Region, here we find concurrence of in others, as a result of the clients’ needs, between the State and the Private Sectorpassenger and freight rail services on a ma- both services run during day and night. In occurs, there is a notable lack of fluid com-jor proportion of the lines. The former ser- other sectors infrastructure related issues munication.vices are managed by affiliates of the State directly affect the normal rail traffic flow, Below we have a chart which displaysRailways Company (EFE), and the latter causing problems and delays to all services the SWOT MATRIX of ITS projects inby private rail carriers, both using the state running on the same tracks. Issues outstand- Chile. Table Nº 1: SWOT Matrix of National ITS projects INTERNAL FACTORS Strengths Exists in Chile, and is in operation technology of a highly developed level. EFE is implanting technological elements for its different services. Some state-of-the-art technology are already in operation on the Santiago and Valparaiso Metropolitan Rail Net- works, FCAB and Ferronor, which provides an incentive for the remaining companies in the sector to reach these standards and prove that this level of service is achievable. The relative cost of ITS investments needed is lesser in comparison to the cost of infrastructure. ITS applications allow for a more efficient management of the existing infrastructure. Weaknesses There is no specific planning schedule in place regarding ITS at a governmental level. Investment in technology to develop ITS applications is not considered a priority. There is a clear lack of institutional definition with regards to the promotion of ITS. There is a different level of technological development between freight and passenger carriers which translates as a lack of communication between systems. Poorly coordinated development plans between carriers and the EFE. Absence of definition of requirements for interaction between systems. EXTERNAL FACTORS Opportunities The technology is in place. The companies operating in the north of the country, which have shown so far to be successful and profitable, do so without interference from EFE. Increase in worldwide awareness regarding the railways as a sustainable transport system. Growing demand levels in both passenger and freight services. Presence of world renowned reference points for these systems to improve inter-operability, management, opera- tion, mobilisation, etc. contributing to the national goals. Increasing awareness of the importance on safety in all its aspects. Threats Independence of the northern network which leads to a lack of information and communication. Limited investment capacity for the development of new infrastructures. Scarce interaction between the State and industries. Major competition from motorways as a result of a lack of regulation and proportional fare structures. Lack of confidence in the railways ability to transport freight and passengers. Deficits carried from the past and reduced investment budget. Delinquency directed at installations which puts in danger the use of this technology.
Projects Latin Infrastructure Quarterly 13 The above leads to the conclusion that,before could the Chilean railway system As can be appreciated, the combined par-could aim to reach the operational levelsseen in modern systems such as those inuse in Europe and the United States, first- ticipation of public and private sectorly it is necessary to resolve several issueson a strategic level. Thus the proposal for agents in different forms of association isthis is as follows:• The definition of technological plans pivotal, highlighting the role of the Minis- which include specific projects for the short, medium and long term, centring try of Transport, the Public Railways com- on two major priorities: 1. Reduction of congestion levels. 2. Improvement in safety levels. pany EFE, the private railway operators• The Creation of an ITS Institution, and corporations such as ITS Chile, to comprised of: 1. Management Level: Inter-minis- agglutinate the national and international try committee comprised of the Ministry of Transport and Tele- technological companies. communications, the Ministry of Finance, Public Works and Tour- ism. lish a data base detailing the ITS systems agents in different forms of association is 2. Technical Staff: made up of an ex- used in Chile became clear, as well as the pivotal, highlighting the role of the Min- ecutive secretariat, given the role need to carry out ex-post studies to evalu- istry of Transport, the Public Railways of creating plans for the promo- ate the success or failure of the projects, company EFE, the private railway opera- tion of the use of and the develop- as well as bringing to the surface the ac- tors and corporations such as ITS Chile ment of ITS applications and ex- tion of different actors, in order to allow (http://www.itschile.cl/), to agglutinate ercising authority relating to ITS for the delivery of an improved service the national and international technologi- projects and an Advisory Board for the users. cal companies. and technical experts, whose role As can be appreciated, the combined would be the definition of regula- participation of public and private sector tions and standards. 3. Collaborators: In- cluded in this group will be representa- tives of the differ- ent railway compa- nies, both from the public and private sector, university institutions, differ- ent governmental bodies regarding investment and technology, etc.• Definition of regula- tions and standards which allow for the communication be- tween different systems within the companies which must interact in the process.From the analysis work un-dertaken, the need to estab-
14 Latin Infrastructure Quarterly XXXXXX XXXXXon InfrastructureThe Short Story W hile infrastructure investing has long been considered to be pri- marily a private equity investor’s domain, the past decade has seen a significant increase in infrastructure investment in publicly listed infrastructure companies whose stocks trade on equity markets around the globe. Since the global scale of public equity investors is far larger than private equity funds, it seems likely that over time this trend will continue with more infrastructure operators choosing to do initial public offerings of their common stock to raise additional capital. However, with listed securities Andrew A. Bogan, PhD trading on an exchange, infrastructure companies and Thomas R. Bogan, will not only have to contend with the scrutiny CFA, Managing of investment analysts and their stock recom- mendations, but also with short selling, where a Members of hedge fund or other investor borrows shares from Bogan Associates, LLC a broker and sells them into the secondary market, betting that the price of the stock will fall in the future.
Infrastructure Financing Latin Infrastructure Quarterly 15Short selling is primarily the domain ofhedge funds, which “hedge” their long It is interesting to note that the share price ofequity and market exposures by shortingequities that they believe are likely to fall Triunfo (TPIS3:BZ) fell sharply after it wonin price. This hedging of equity exposureby short selling can be done with individ-ual equities or by shorting whole indexes the concession for Brasilia’s Airport, while theusing exchange-traded funds (ETFs), al-though shorting ETFs pose another layer shares of Grupo CCR (CCRO3:BZ) rallied inof risk and complexity that is outside thescope of this article. Generally speaking, response to its losing all its Brazilian airportinfrastructure equities have not been verypopular among short sellers historically concession bids to other consortia willing tofor two reasons. First, listed infrastruc-ture businesses tend to be established op-erators of profitable infrastructure assets pay much higher prices.so they generate fairly stable and robustcash flows. overly optimistic or overly pessimistic, Overwhelming Debt Betting against the stock of a company both of which seem to occur more fre-that has stable (or growing) cash flows and quently in recent years on an increasingly Another condition that can lead to an at-the high margins commonly seen in natural global basis. When a frenzy of buying tractive short selling opportunity in infra-monopoly businesses like infrastructure is erupts in infrastructure stocks that drives structure is overwhelming debt. Manya dangerous game that rarely rewards its prices above a sensible price to earnings lenders like infrastructure businessesparticipants. Secondly, infrastructure equi- ratio for a particular infrastructure stock, because the cash flows are usually moreties typically pay some of the largest divi- or an entire sector, a carefully timed short predictable than for other, more cyclicaldends in the equity markets. Since a short sale can often capture the downside. For businesses. Infrastructure companies alsoseller borrows stock from a broker and then example, in late 2007 the market enthu- have physical assets to help collateralizesells it on the market hoping to buy it back siasm around listed Chinese infrastruc- their debts. While this allows for very effi-at a lower price in the future, they incur ture and the upcoming Beijing Olympics cient and highly leveraged financial struc-two costs—the interest owed to the lend- drove prices of Beijing Capital Inter- tures, it can also lead to reckless borrowinging broker and the dividend paid through national Airport (694:HK) above HKD and over-leveraged operations that run thethat broker to the original shareholder from $15 per share! The stock has traded for risk of wiping out equity value if a signifi-whose margin account the stock was bor- many years since closer to HKD $3-$5. cant disruption (like a deep recession) oc-rowed. Interest rates for stock loan are of- At current prices, the P/E ratio is around curs. Many of the Australian infrastructureten more than 5%, sometimes much higher 14 times. investment firms ran into serious problemsif the stock is difficult to locate for borrow- In Latin America, there has been a lot of with debt in 2008 and 2009, which helpeding and short selling. In addition to that talk in recent weeks about the prices paid to facilitate the bankruptcy and liquidationcost of shorting, the short seller also must at auction for Brazilian airport conces- of one of the industry’s most venerable in-pay any dividend on the stock, which in the sions in the run up to both the 2014 World vestment firms, Babcock & Brown in Au-case of infrastructure equities can be of a Cup and 2016 Rio de Janeiro Olympics. gust 2009. Even more problematic thancomparable scale, often 3-5% and some- Many investors find the high prices paid overwhelming debt at the level of the oper-times much higher. difficult to justify, though the growth rates ating infrastructure company, some listed The combined costs of interest and for air travel in LatAm are impressive (as infrastructure funds had two layers of debt,high dividends coupled with underlying they were in China in 2007). However, having borrowed heavily at the asset levelnatural monopoly businesses that rarely in this case only one of the three winning and again at the fund level, making it evenhave downside surprises in their earn- bidders has a public listing on Bovespa. more difficult to survive a liquidity panicings makes shorting infrastructure stocks It is interesting to note that the share and credit crisis. Astute short sellers werea very challenging and rarely rewarding price of Triunfo (TPIS3:BZ) fell sharply able to capture some of the downside asstrategy. However, there are some spe- after it won the concession for Brasilia’s many of these heavily indebted firms andcific conditions that lend themselves to Airport, while the shares of Grupo CCR listed private equity infrastructure fundsshorting infrastructure profitably, several (CCRO3:BZ) rallied in response to its saw their share prices tumble.of which are discussed below. losing all its Brazilian airport conces- sion bids to other consortia willing to Loss of Monopoly PowerValuation Shorts pay much higher prices. However, while valuation shorts always look obvious in The driving economic force behind mostThe price of any asset can overshoot in retrospect, they are extremely difficult to infrastructure businesses is the concepteither direction if market participants are time correctly in advance. of natural monopoly and betting against
16 Latin Infrastructure Quarterly Infrastructure Financinga natural monopoly business is usually a has not yet detected. This opportunity oc- an exchange, so these opportunities arefool’s errand. However, in some infra- curred in both steel producers and gravel infrequent.structure industries changes in technolo- miners in 2008 and early 2009 since thegy and/or the regulatory environment can credit crisis had halted funding for new Conclusioncreate conditions in which a company or infrastructure development projects thatgroup of companies loses its natural mo- are large consumers of these kinds of In summary, when considering short sell-nopoly characteristics. This happened in construction materials. Prices for these ing of listed infrastructure equities, itthe telecommunications infrastructure in- commodities fell sharply with disappear- is paramount to remember that bettingdustry with the adoption of wireless phone ing demand, and profitability suffered for against natural monopoly businesses istechnologies. Since massive tangles of several quarters. seldom a good idea. However, there arewires to each home and business would certain conditions that create opportuni-no longer be necessary, government regu- Under-Utilized Infrastructure ties for profit for a well-disciplined shortlators around the world broke up telecom seller willing to exercise patience and ap-monopoly operators and forced competi- Another condition that can be exploited ply industry-specific knowledge to findtion into the markets. by short sellers is when a newly con- infrastructure stocks that are over-priced. When landline technology was domi- structed infrastructure asset that is just Among the myriad possible causes ofnant, most governments preferred a sin- beginning to attract users fails to meet over-priced stocks destined to fall ingle natural monopoly telecom operator, the original projections. Historically, value, good places to look are companiessince the redundant costs and negative predicting the user uptake of an entirely that have unrealistic valuations due to ex-externalities of many different company’s new asset like a new toll road, airport, uberant buying, dangerous levels of debtseparate telephone wires going to every tunnel, pipeline, or a metro rail system is at the operating and/or fund level, loss ofbuilding were unappealing and a regulat- very difficult. When a listed infrastruc- monopoly pricing power due to technol-ed monopoly operator was preferred. But ture firm is constructing a new piece of ogy changes or regulation (or both), largewith new technology making a few cell infrastructure, there are significant risks exposure to cyclical commodity prices, ortowers able to cover large regions with- associated with misestimating user up- the failure of a new infrastructure asset toout all the extra bundles of wires, the ap- take that one does not see in more mature attract users quickly enough to overcomepeal of market competition for consumers infrastructure businesses. Sometimes the costs of its construction. Short sell-trumped the historic telephone monopoly new assets are not adopted as widely as ing is usually considered a way to hedgelogic. In recent decades, short selling of expected (or as hoped for by an unreal- market risk, but always remember thatlegacy monopoly phone operators forced istic government authority involved in there is no limit to the loss potential forinto the world of competition has often making the predictions) and short sellers every single short sale one makes—short-provided return opportunities, and not can capture downside returns. However, ing is one of the most dangerous games inonly in LatAm, but all over the globe. In most new infrastructure projects raise pri- finance and even most hedge fund manag-general, when looking to short infrastruc- vate equity capital and are not listed on ers are not very good at it.ture stocks, businesses that have lost theirmonopoly characteristics are a good placeto look since cash flows often becomeless predictable and downside earningssurprises more common in the face of ag-gressive competition from new entrantsto the business.Infrastructure MaterialsSuppliersAnother group of infrastructure-relatedbusinesses that sometimes lend them-selves to short selling are the infrastruc-ture materials suppliers, such as steel, ce-ment, and gravel companies. Since thesecommodity businesses are much morecompetitive and cyclical in nature thanoperators of infrastructure assets, theycan usually be sold short with successmore frequently, so long as the short saleis timed to coincide with a cyclical down-turn in the business that the broad market
Regulation Latin Infrastructure Quarterly 17COLOMBIA: Many of these initial projects were awarded directly after the public bidding process were declared vacant. Then came the second generation of concessions, with a different approach as to the risk allocation, however of the two contracts labeled as second generation, only oneThe Infrastructure “survived” while the other project com- monly known as the COMMSA Project ended-up being one of the most publi- cized fiascos. The third generation came with morePlan Relies complex contractual structures and high- ly regulated risk allocation schemes and budgeting; it also came along when the country became calmer, more stable in the security aspect, thus with more com-on the petitors (although local). And with this generation started all the contentious bidding processes; and by contentious I mean complex processes where biddersNew PPP Law. faced each other in public hearings try- ing to convince the government entity that the offers of its competitors were not valid or lacked certain information or wasAlessia Abello misleading or incorrect. We’ve seen of-Partner Posse Herrera & Ruiz fers rejected due to technicalities, affect- ing the ability of the government to haveIn an unprecedented flash approval process by the Na- competitive bidding processes. Although the third generation is substantially bettertional Congress, president Santos’ administration suc- structured the main criticism is the lack ofceeded the enactment of law 1508, 2012, the PPP law. This technical studies supporting the financiallaw was a “most expected” piece of legislation in a coun- model of the government and supporting the due diligence of potential investors.try in need of infrastructure development and projects Notwithstanding the foregoing, thereand sunk in unnecessary technicalities and bureaucracy was a kind of inertia in the government and despite all the complications somein its bidding processes. To address all aspects contained projects were structured and awarded inin this law would require extensive space and time. How- the last 10 years. However, Colombia isever, in view of the interest Colombia has awakened in well behind its peers in infrastructure de- velopment and one of the reasons gener-the international infrastructure market, the purpose of ally raised is the existence of complicatedthis article is to highlight the most important contribu- rules applicable to the structuring and awarding of these projects.tions of this law to PPP projects. One of the challenges this govern-C ment had was the approval of the TLC olombia’s PPP history started tion structure. At the time these bidding Treaty with the US, once this challenge in the nineties with the first processes were initiated, Colombia was was surpassed then came the need to in- generation of concession under one of the darkest chapters of its vest in infrastructure but, with the same agreements executed by the recent history, affecting the interest of in- existing, burdensome rules? The answerColombian Government (the Instituto vestors and leaving these projects in the was obvious, to meet the infrastructureNacional de Vías –INVIAS-) with pri- hands of local constructors that assumed requirements, a more simple regulationvate parties. The initial structure of these the risks under quite complicated circum- was necessary.contracts was somewhat different from stances (not only from the security stand- The next question is evident, is lawthe current one (third generation of con- point but also assuming the risk to finance 1508 the answer to our needs? We stillcessions) particularly in the risk alloca- projects affected by security issues). have the possibility to amend any flaws in
18 Latin Infrastructure Quarterly Regulationthe up-coming regulation of the law that can also be a source of well-structured sary constraint that might, at some point,is currently under study and preparation projects. limit the ability of the government to useby the Government. However, let’s start Now, this new piece of legislation has these tools to keep the economic balancewith the good news: many critics, including myself. In my of a PPP contract. From now on, the bidding process can opinion, it does not address the princi- To conclude, it is normal to have nega-include the prequalification of bidders. pal issues that all the agents involved in tive reaction vis-a-vis this law since itThis is excellent news, although subject structuring infrastructure projects have will not solve the short term problemsin its entirety to further regulation, the identified as subject to improvement (i.e. currently faced by the Infrastructurelaw allows to prequalify investors, and encumber some selection process and Agency, but with an adequate regulationwhat is more important it expressly per- “seals and stamps” supremacy). The use addressing the main issues highlighted inmits to finalize the structuring phase of of private initiatives for larger projects this article, it might become an importantthe project with the prequalified inves- would have been interesting and block- piece of regulation for the infrastructuretors by delegating additional studies to ing or limiting the additions in term and sector in Colombia.the prequalified. If this provision is ad- price to the contracts can be an unneces-equately regulated, it can be a lifesaver tothe enormous and expensive task the gov-ernment has in structuring all the projects Alessia Abello is a partner of Pos-it needs, it will also help accelerate the se, Herrera & Ruiz. Her practice ispipeline of projects and untie the maze focused on bidding and conces-the agencies are currently in with such a sions of public contracts subject tolarge number of projects of all kinds. administrative law. She also works To address the fact that PPPs are large- in Mergers and Acquisitions, Proj-ly considered as financial deals rather ect Finance, Venture Capital andthan mere construction projects, the law Private Equity Funds.determined that the government has to Alessia has worked in privatiza-verify that potential bidders have the fi- tions in the financial and electricnancing capacity and past experience in sectors. She structures infrastruc-financing projects of this sort rather than ture concession contracts andexperience in construction. Although this their bidding processes, linkingfactor is highly unpopular within the Co- them to private financing. She ledlombian construction sector, I believe, the legal team that structured con-however, that our local industry can com- cessions for construction of Phaseply with this new approach. Due to their II of the Transmilenio Systemparticipation in the three generations of in Bogotá and advised IFC andconcessions above described the local INCO on the landmark structureindustry is more sophisticated and has a of the Ruta del Sol bidding pro-great deal of experience in dealing with cess. She has advised bidders inthese complex structures and projects. several public bidding processes, Finally, private initiatives for PPP proj- mainly for road concessions andects are additional tools that can be used procurement, and has counseledin medium-sized and small projects. Al- private and public companies inthough the general contracting law (Law syndicated loans involving public budget and debt.890, 1993) included private initiatives for Alessia led the legal team that structured the first public venture capitalconstruction concessions, this PPP law fund in Colombia, and has advised several fund managers on the struc-went further on to allow private initiatives turing and incorporation of private equity funds.in any infrastructure project that can be She has an LL.M. from Cornell Law School and a JD from Universidaddefined as PPP. Although the review and de los Andes. Her native language is Spanish and she is fluent in Englishapproval process by the government of and French.any private initiative may take up to 17months and some fundamentals need tobe further detailed in the regulation, suchas the allocation of the extra points to theprivate party that originated the projectand the economic value of the studies anddesigns of the originator, in case the proj-ect is awarded to a third party, we believethat duly implemented and used, this tool
Deals Latin Infrastructure Quarterly 19Legal and financialstructuring processof Zaragoza LRT Line 1 under a Public PrivatePartnership scheme. The first phase of the Zaragoza LRT has been operating since April 2011, although proj- ect structuring process began in 2004. Within a legal and financial scheme which incorporates the advantages of private man- agement, the City Council has an active presence in the control and the management of the Concessionaire’s activity. In the first eight months of operations, 7 million passengers have already used this infrastructure.I n the beginning of 2004, the Gov- the Infrastructure and PPP team together (non-refundable) grants. The rest of the ernment of Aragon and the Zara- with Deloitte Abogados, and were leaded investment amount has been financed via goza City Council signed a General by both partners, Andres Rebollo and a combination of long term debt and eq- Cooperation Agreement in order to Juan Martinez Calvo. uity from promoters.promote actions in the urban transport The financial close took place in No-sector in Zaragoza’s metropolitan area. The Project vember 2010 with a Club Deal integratedAs a result of this agreement, a Technical by BBVA, La Caixa, Ahorro Corporación,Task Force was set in order to analyse the Zaragoza’s 1st LRT line links the north Caixa Galicia, Grupo Santander and In-implementation of a LRT line in the city with the south side of the city. The route stituto de Credito Oficial (ICO), with theof Zaragoza. Since that date and until the includes city areas like Valdespartera, Vía collaboration of the European Investmentend of 2008, a series of studies and tech- Ibérica, Rotonda de Toulouse, Isabel la Bank (EIB).nical assistances were developed, among Católica, Fernando el Católico, Gran Vía, The construction of the line waswhich we highlight the following ones: Plaza de Paraíso, Paseo Independencia, scheduled in two phases, the first onethe drafting of an intermodal transport Coso, Cesar Augusto, Puente de Santia- (Valdespartera – Plaza Basilio Paraíso,plan and the sustainable mobility plan, go, Ranillas, María Zambrano/Gómez de 7.2 km) has been in operation since Aprilthe feasibility analysis, the technical proj- Avellaneda (depending on the direction), 2011 (the construction started in Septem-ect (including its preliminary draft ver- Luciano Gracia, Rotonda Juslibol, Parque ber 2009), while the construction of thesion), and the PPP scheme under which Goya up to Avenida de la Academia Gen- second phase started in July 2011, expect-the project would be tendered out. eral Militar. This route, which has a total ing to start its operations in 2013. In November 2007, the Zaragoza City length of almost 13 kilometres, connects The management of the project (fi-Council contracted services of Deloitte the main areas of expansion of the city. nance, construction, operation andSpain in order to define the legal and fi- The initial forecasted investment maintenance) is carried out by a Mixed-nancial scheme to be implemented in the reached 350 million euros, 130 million of Economy Company (MEC), a companyproject, elaborate the financial feasibility which have been contributions made both participated both by the private and theanalysis and draft the tender documents. by the Zaragoza City Council and the Re- public sectors where the private partnerThe advisory services were carried out by gional Government of Aragon through (SIP) underwrites a majority of shares
20 Latin Infrastructure Quarterly Deals(thus, having control over it). In April ing a Mixed-Economy Company with a procedure, and2009, Zaragoza City Council tendered out private major investor (80%), chosen via • Public control and presence in thethe selection of the SIP, which, together a public open tender, being the rest (20%) management of the public service.with the City Council, would create the owned by Zaragoza’s City Council. TheMEC. selected scheme was chosen after ana- As an example, between the op- Once the SIP was selected, and the new lysing different possibilities and options tions that were analyzed and discard-company (MEC) was created, the City (multi-criteria analysis), assessing each ed, we mention the following ones:Council signed with it a Public Service alternative’s pros and cons, and how eachcontract for the construction, finance, op- of them would fit the criteria established • Public Works Concession contract.eration and maintenance of the new LRT by the City Council, the private sector • Mixed-Economy Company with aline for a 35 year tenor. and any other stakeholder presumably in- public entity as major shareholder. Regarding construction, the infrastruc- volved during contract’s valid term. • Two different concession contracts,ture and rail systems would be object Among the main objectives set one for the construction and mainte-of a turnkey contract. This contract was out by the City Council, the follow- nance of the infrastructure, and anoth-signed by the MEC with the construc- ing ones deserve to be highlighted: er one for the operation of the publiction subsidiary of the private partner (but service.could have been signed with any other • Public accounts’ off-balance sheet • Public Works concession and creationone chosen by the private partner), with financing of all costs incurred in the of a Mixed-Economy Company solelyfull risk transfer (except for those risks construction and operation of the in- to operate the system, andestablished by law). frastructure, • Integrated management carried out The operation of the service is carried • Minor administrative complexity and by a public company.out through a sub-contract with a consor- low level of difficulty in project’s im-tium formed by the shareholders of the plementation, After an initial analysis and the rule-outSIP. • Need of minimum budgetary sup- of some of the proposed alternatives, the port (particularly of non-refundable decision would be finally taken betweenThe management model grants), the first two alternatives, as these were • Certainty about Contracts’ pricing, the ones that better fit pre-set preferences,Regarding the legal and financial structur- • Generation of sufficient interest guaranteeing a reasonable and relativelying of the project, the decision was made among private promoters in order to high balance between fundamental goalsto implement a management contract us- guarantee a competitive awarding pursued by the City Council. Selection of private partner through public tender. Zaragoza City Council It contributes with 20% of equity in exchange for dividends Signing of Public Service It contributes with Capital grant Management contract with Private Partner the MEC It contributes with Deferred Budgetery Payments (Availability Payments) It contributes with 80% of equity in exchange for dividends It contributes with know-how in ex- Mixed Economy Company change for annual (management) fee Banks Financial contract (MEC) Users Payment of fares Turnkey Contract Construction Operation & Maintenance Contrast Contract
Deals Latin Infrastructure Quarterly 21 The option of a Concession contract al- presence in the management of the public maintenance) Line 1 of Zaragoza Lightlowed to minimize the risk of non-obtaining service for which the infrastructure is built. Rail “. In April 2009, two bids were re-an off-balance sheet financing categoriza- As a disadvantage of this scheme, in ceived from:tion for all requested forecasted investment, comparison with the Public Works Con- “TRAZA” Joint-venture integrated byit was less complex from an administrative cession contract scheme, there is a greater companies CAF, TUZSA, FCC Construc-standpoint, it was the easiest to manage, and administrative and legal complexity in ción, Acciona, Ibercaja and Concessia.it was more “tested” in Spain; however, it terms of project and contract structuring, Joint-venture integrated by companies:did not allow the achievement of the goal as well as in the management of the pro- Iridium, and Arascón Vías y Obras, withregarding institutional presence within the cess as a whole. ALSTOM as the rolling stock supplier.project company. Finally, in July 2009, the Zaragoza A Mixed-Economy Company, with a pri- The private investor (SIP) City Council issued the final award of thevate partner as major shareholder, had many contract to the consortium TRAZA, pro-of the advantages of the concession scheme Since the very beginning, it was clear that ceeding immediately to the incorporation(to a lesser extent, though), and despite it the required profile for the private partner and formal registration the cited Mixedcomplicated slightly the procurement pro- should be the one of an “investment and Economy Company.cess and its management, it allowed to in- management company of transport infra- In this Mixed Economy companytroduce the factor of “institutionalization” structure”, which would have financial scheme, the private partner (SIP) in ad-(i.e. public control and presence). strength, knowledge in the private financ- dition to receiving the corresponding ing of this type of projects, could guarantee dividends as a shareholder, also perceivesMixed Economy Company the construction of the infrastructure in due a “Know-how transfer Fee” from thescheme time and at a fixed price, operate the sys- Mixed Economy company. This fee re- tem and also its long-term management. munerates the contribution and transferAmong the main advantages of the finally In addition to the control of the Mixed of knowledge by the SIP to the company,selected scheme, the following ones de- Economy Company and the leadership in and allows to generate a “break” in the In-serve to be highlighted: the management of the service, the City ternal Rate of Return (IRRs) of the differ- It allows the involvement of the private Council would be contracting the con- ent partners, increasing the one from theinvestor in the long-term management of struction works at the very moment of the private investor in comparison to the onethe project’s life cycle cost. award. of the public stakeholder. It implies a significant risk transfer to In February 2009 the City Council of Regarding the procurement process forthe private investor, which reduces the Zaragoza launched the tender process for the selection of the SIP, it deserves to berisk of on-balance sheet financing. the “selection of the private partner which noted that the tender documents access It reduces the financial effort of equity will participate with the city of Zaragoza requirements (both regarding financialcontributions from the Public Authorities. in the constitution of the Mixed Economy strength and technical capabilities), par- It “institutionalizes” the project, al- Company that will manage the public ser- ticularly demanding if compared to thelowing the City Council to have an active vice (building, financing, operation and usual practice in the Spanish market. Composition of the Mixed Economy Company 20% 5% 11.8% 25% Tuzsa CAF FCC 16.6% Acciona Ibercaja 80% Concessia 25% 16.6% TRAZA Ayto. Zaragoza
22 Latin Infrastructure Quarterly Deals Requirements of financial standing Also, another of the particularities Thus, once chosen the alternative of awere mainly related to the fill-out of a of this project is that the Shareholders Mixed Economy company with a publicstatement of good financial standing pro- Agreement (incorporation deeds) of the entity as minor shareholder, a basic fi-viding evidence (in accordance with com- future Mixed Economy Company were nancial structure was defined, taking intomon practice in financial markets) that the drafted as a part of the public tender account Administration’s restrictions re-private partner would be capable of carry- documentation provided to bidders. This garding potential contributions of publicing out investments and payments for at fact had great significance because, if the resources for the operation period andleast 400 million euros in a similar time- legal relationship between the MEC and also, after having analyzed forecastedframe to the one of the project and the the City Council will be governed by the demand and associated costs, the publicsubmittal of audited financial statements tender documents, the legal relationship contribution requested during construc-of the past three years. The submittal of between the Private Investor and the Pub- tion (grant) to make the project feasiblean income statement with an average to- lic stakeholder will be governed by the from a financial standpoint, consideringtal turnover in the past three years over a said shareholders agreement. different volumes of public payments dur-million euros, was also compulsory. ing operation period. In what relates to technical and profes- Financial and budgetary struc- As it will be explained below, the pay-sional standing, the following require- turing ment mechanism was partially structuredments can be highlighted: linked to demand (payment per user) and Experience in at least two construction Financial feasibility analysis was con- complemented with deferred budgetarycontracts for public works on rail infra- ducted by the City Council under the support configured as availability paymentsstructure (urban or metropolitan) with an assumption that no LRT system is self- and dimensioned on different payment lev-investment of at least 100 million of euros sustainable from a financial perspective. els per user, combining different levels ofeach, performed over the past five years, That is, the revenue (fees charged to us- average rate. This mechanism also allowed Experience in the financing and man- ers) after operational and maintenance the revenue risk of the project to be trans-agement of transport infrastructure (any cost would not be enough to compensate ferred into two parts; one part would betype), in at least two projects already in the investment (including construction transferred on a demand basis and the otheroperation and under any type of collabo- costs, financial expenses, profitability, part, in connection with the infrastructureration (including Public-Private Partner- etc.). Consequently, public support would and service availability and quality.ship). The amount of the investment of be necessary. After defining these initial conditions,each of these projects should be at least Public support in LRT systems under and based on all existing data, along with100 million euros, concession or PPP structures usually are all technical, financial, macroeconomic, Experience in the financing and man- as follows: tax and accounting assumptions, main cri-agement of a railway infrastructure (urban teria of financial feasibility of the projector metropolitan): at least one experience • Contributions as non-refundable were set out:in operation at the time of the submittal, grants during construction period, • Requirement of a minimum equity Experience in the operation of an in- • Contributions during operation IRR for the private partner (aroundfrastructure servicing up to 8,000,000 period (public deferred pay- 10%)passengers per year o involving more ments), or • Requirement of a maximum leveragethan 1,000,000 kilometres per year. • A combination of the previous. (70%) • Requirement of a minimum Debt Ser- vice Coverage Ratio (1,35x – 1,40x). • Requirement of a maximum debt re-The initial forecasted investment reached 350 payment period (below 27 years).million euros, 130 million of which have been Financing structurecontributions made both by the Zaragoza In broad terms, the financing scheme for the structuring of the project considered that:City Council and the Regional Government Zaragoza City Council committed the contribution of a non-refundable grantof Aragon through (non-refundable) grants. during construction of up to 140 mill €, (definitive amount would be offered byThe rest of the investment amount has been the private partner, entitled to offer a re- duction, subject to score in the bid evalu-financed via a combination of long term debt ation process). Other variables subject to scoring in the bid evaluation process wereand equity from promoters. the amount of availability payments and a reduction in the construction term.
Deals Latin Infrastructure Quarterly 23 Non refundable grant (max Eur 140M) Long-term debt Base funding structure in Total Funding Needs (max 70%) the financial feasibility study Private Financing 20% Public Equity (min 30%) 80% PrivateSource: Self Research This partial public funding of the works nent linked to the infrastructure qual- amount will depend on the annual maxi-was aimed at minimizing the amount of ity and availability. mum amount that TRAZA offered in itspublic payments during operation period Under these premises, and considering bid and on the applicable deductions for(availability payments) while maintaining the high level of revenue expected from all breaches in the fulfillment of the setsignificant risk transfer and preserving a users (based on existing demand stud- criteria regarding availability and qualitypreponderant weight of private financing, ies and the average fare estimated), the specifications.thus not distorting the philosophy of the selected payment mechanism was struc- This amount is payable on a quarterlyPPP scheme. tured as a combination of (i) revenues basis and is updated annually according The Mixed Economy Company is fi- related to demand, and (ii) “availability to CPI-index. The system of deductionsnancing the remaining cost through a mix payments” by the City Council. and penalties that applies to the availabil-of equity and long term debt under Proj- In this sense, the revenue received by ity payment is not limited by any condi-ect Finance scheme. the MEC in consideration of the service tion, that is, no minimum payment is consisted of: guaranteed by the Administration for thisPayment Mechanism. Payment per user. That is the amount purpose. of revenues that the management com- The “coefficient of availability andThe Payment Mechanism of this project pany is entitled to charge to whoever uses quality” is calculated on the basis of ninewas aimed at regulating the public pay- the LRT, considering just those users that criteria, among which we highlight thements complementary to the revenues effectively validate single or multiple following: Services Offered (degree ofcollected directly from LRT’s users. In journey tickets. fulfillment of its offered services), Ac-the structuring process of this payment The availability payment, which is cessibility (global accessibility, operationmechanism, besides allowing the finan- the amount that the Zaragoza Council is of vending machines and ticket validat-cial feasibility of the project, the follow- obliged to satisfy to the MEC (in addi- ing machines), Information to travellers,ing goals were also considered: tion to the payment collected from users), Timing (punctuality), Customer Services,• Mitigation of the demand risk while as payments connected to quality and Travel Comfort, Security and Environ- keeping investors/manager signifi- availability of the infrastructure/service mental issues. cantly committed to the success of the (arising from a strict monitoring system, According to the feasibility study, the project, and including also an auto-monitoring car- mix of income of the Mixed Company• Introduction of a significant compo- ried out by the own company). The total forecasted (Base Case) over the 35 year Payments from Availability Deductions / Other commercial Income MEC Users Payment Penalties incomeSource:Self Research
24 Latin Infrastructure Quarterly Deals If Real Demand > Z, the City Council receives the 90% of the extrarevenues. If Y < Real Demand < Z , the City Council Z(x +20%) will receive from the MEC, 50% of the extra Y(x +10%) revenues. X(Reference demand) W(x -10%) If Real Demand < W, the City Council compensates to MEC, 50% of the lost revenues. 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39term of the contract was integrated by City Council shares the risk if the real de- This system is intended to mitigate the85% of direct revenues from users, 13% mand differs from the forecasted demand. demand risk, while maintaining the riskof availability payments, and the remain- transfer to the MEC. System functionsing 2% of revenues from other commer- The “demand level bands” two-ways; that is, if the Public Admin-cial activities. system. istration is sharing the consequences of A system of “demand level bands” was lower than forecasted direct revenues, itstructured taking into account the sig- In this system, payment related demand is also sharing the benefits of greater thannificant relative weight of revenue from bands are defined as a deviation of the real forecasted revenuesusers, and the high impact on the profit- demand from the one forecasted (Refer- In general, the system configures threeability of the MEC that may be caused by ence demand). The risk and venture is this bands of demand defined as -10%, +10%adverse demand situations,. This system way shared between the City Council and y +20% below/over reference demand.articulates a mechanism by which the the Mixed Economy Company (MEC). In the event that the real demand is down 10% regarding reference demand, the City Council will pay to the MixedRequirements of financial standing were mainly relat- Economy Company the 50% of lost rev- enues.ed to the fill-out of a statement of good financial stand- In the event that the real demand is be-ing providing evidence (in accordance with common tween 10% and 20% above the reference demand, the Mixed Economy Companypractice in financial markets) that the private partner will pay to the City Council the 50% ofwould be capable of carrying out investments and pay- the extra revenues obtained In the event the real demand is abovements for at least 400 million euros in a similar time- 20% the reference demand, the Mixed Economy Company will pay to the Cityframe to the one of the project and the submittal of au- Council the 90% of the extra revenuesdited financial statements of the past three years. obtained.
Deals Latin Infrastructure Quarterly 25Chronology and Technical specificationsimportant milestones. Zaragoza LRT• October 2004 – October 2008: Contracting Line 1. of technical assistances, pre-investment Line 1 (First Phase) In operation since April 2011. studies and construction design. Line 1 (Second Phase) In construction• July 2008: Initial approval by the Zaragoza Kilometres of Line 5, 8 (in operation). Total layout: 12,8 City Council of the management scheme. Via width 1.435 mm• August – September 2008: Public informa- tion period of the proposed management Kilometres in double track. 12.8 km scheme. Kilometres electrified track 10. 8 km. Two km without catenary, with• October 2008: Resolution of claims re- ACR. ceived against the management scheme Kilometres single track 0 during the public information period and Kilometres single electrified track 0 final approval. Kilometres single electrified track 19.0 – 19.5 km/h.• February 2009: Announcement of the pub- lic open tender procedure for the selection Stations of the SIP. Number 14 (first stage) out of a total of 25• April 2009: Bids submittal. Underground Stations 0• July 2009: Final selection of the SIP and in- Surface Stations All corporation of the Mixed Economy Com- pany. Rolling Stock• July 2009: Contract closure for the construc- Manufacturer CAF (Construcciones y Auxiliar de Fer- tion and operation of the tram, between the rocarriles, S.A.) City Council and the MEC Number of units. 12 out of 21 Urbos 3, with 5 modules.• September 2009: Commencement of the Type of vehicle Bidirectional modular with 32m. first phase construction works. Power 560 kW. Units without catenary system• November 2010: Financial close. ACR.• April 2011: Commencement of operations Capacity. 206 passengers, 52 seats. of first phase• July 2011: Commencement of the second Accesses Four doubles doors and two single doors. phase construction works. Passengers• June 2013: End of second phase construc- Passengers carried 7 million users in the first 8 months tion works (forecasted). Raul Ortiz is Manager at Deloitte, within the Infrastructures Financing and PPP advisory group and specializes in financial modeling. He has participated in more than 30 infra- structure financing and PPP projects . Since his incorporation in Deloitte ´s Infrastructure & PPP team, Raúl has participated in several PPP projects providing financial advice and supporting the structuring process. His experiences cover both public sector and private sector clients, in Spain and abroad (mostly Europe and Latin America), and ranges from transport projects (roads, railways, LRTs and urban transport systems ), to social infrastructure and urban facilities. Among the projects for the public sector the following ones deserve special mention: Spanish PPP program for High Speed Railway, Tenerife Island LRT and Tren del Sur, Zaragoza LRT and Urban System Transport, Vitoria LRT, Leioa and Barakaldo LRT, Granada Metro, Palma de Mallorca LRT, Education and health facilities plan in Aragon, Metro Kyiv (Ukraine), strategic advisory for Sociedad Estatal de Infraestructura del Transporte Terrestre of Spain, Dirección General de Planeación (Colombia). For the private sector: Spanish Public Works Ministry first generation highway renova- tion plan (10 highway projects), Highway master plan of Xunta de Galicia, Public buildings furnishing plan in Greece and several roas projects promoted by Spanish local governments. Raul is Industrial Engineer, specialized in Project Evaluation, from the Universidad Técnica Federico Santa María in Chile. He also has a Master in Business Administration (MBA) from the Universidad Autónoma de Madrid.
26 Latin Infrastructure Quarterly XXXXXX XXXXXPrivate Equity Fund ofFunds – Latin AmericaAlternatives LIQ speaks to Estevao LatiniI find Latin America Alternatives (“LAA”) Management to What characteristics and type of investment process do yoube quite a novelty for our region. Can you tell us a little bit look for in the General Partners (GPs) in which you invest?about how the Partners of LAA came up with the idea? Latin America Alternatives is after local General Partners, withA founder of the firm, Rod Walkey, was a CIO of a well known proven track record on the capacity to source proprietary non-family office in the USA. In 2006 Rod made an investment for competitive transactions, add value to the investments thru athe family office in a PE Fund-of Funds group in Asia called Asia skilled team dedicated and the ability to successfully exit theseAlternatives. Based on the great experience with this Asian prod- investments in the Fund timeframe.uct, he decided to make the same allocation to Latin America,but did not find any firm exclusively in the region, seeing the op- Can you describe the due diligence LAA conducts on eachportunity to develop the same business model in Latin America. GP?What is a Fund of Funds (“FoF”)? LAA conducts a deep due diligence in the targets GPs, le- veraging its deep experience in the Brazilian PE market,A fund of funds is a pooled investment vehicle that will invest including a wide array of qualitative criteria thru its pro-into private equity funds and sometime direct co-investments. prietary evaluation tools specifically designed to the LatinThe fund of fund offers their clients diversification and access to American PE environment, highlighting the previous de-top tier funds that they could not otherwise invest into. The fund scribed operational track record along with alignment ofof funds has dedicated resources to analyze a specific region, interests with investors, team cohesion and long term incen-sectors and asset class that their clients would not have, leading tives, governance/reporting standards and corporate socialto better risk adjusted returns. responsibility. 26
Infrastructure Financing Latin Infrastructure Quarterly 27What type of investment style are you looking for in the GPsin which you invest? Estevao Latini is a co-Founder and Managing Direc- tor of Latin America Alternatives, private equity fundLAA Fund I is looking for local GPs in Brazil, Chile, Peru and of funds firm located in Boston and Rio de Janeiro,Colombia, positioned in underserved markets, such as middle focused in provide local opportunities in underservedmarket and middle size infrastructure, including mezzanine in- markets such as infrastructure and middle market to in-vestments is this two styles, and Funds with preferred return tied ternational investors. Prior to launching Latin Americato local inflation. Additionally LAA Fund I targets to invest 25% Alternatives Mr. Latini was the private equity Portfolioof LAA Fund I to co-invest with this GPs and provide additional Manager at Petrobras Retirement System, responsibleco-investments opportunities to its Limited Partners (LAA in- for R$ 2.5 billion in Brazilian private equity funds fo-vestors). cused in infrastructure and growth capital. Previously Mr. Latini served as an investment analyst for Pruden-What is the fee structure of LAA? tial Real Estate Investors – LATAM, a subsidiary of Prudential focused on PERE Funds. Mr. Latini holdsLAA Fund I has a 1% management fee with a 10% performance Bachelor degree in Economics Science from UFRJ andfee over a hurdle rate of 8% in US dollar. a Master degree in Business from FGV-EBAPE. Mr. Latini is fluent in English, Spanish and Portuguese.As an investor, what are the advantages of investing with a FoF?Local knowledge and relationship, expertise in selecting GPsand analyzing co-investment opportunities, gaining exposure tovarious sectors of the economy and investment styles, access tofunds already closed to the regular investor or without offshoreentities. Additionally LAA offers free open sharing of research,due diligences and analysis for its investors seeking for moreknowledge on the region or even additional exposure in certainsectors and co-investments, providing a lower aggregate man-agement fee for its investors portfolio.What have you found to be the attitude of GPs towards FoFs?Usually very receptive, as it combines multiples sources ofcapital in a single investment vehicle, simplifying reporting andrelationship efforts for GPs. Additionally, FOF may provide ad-ditional sources of capital for co-investment and seeding fundsunder capital raising process. In this sense, LAA’s approach isto seed Funds of experienced managers helping to shorten Fundraising process and funding early pipeline opportunities, intro-duce seeded GPs to LPs that may desire additional exposure incertain sectors; provide a flexible mandate for GPs thru a bufferof co-investment capital to be deployed; and to introduce poten-tial investors for additional co-investment sources.In which regions of the world are you looking for investors?Primarily US, Latin American, European and Middle East insti-tutional investors and high net worth individuals.What can you tell us of the volatility and returns of FoFs?Private equity fund of funds are much less volatile then the stockmarket, hedge funds or single private equity GP’s because theinvestments are made over a period of 5 to 7 years which flattensout the volatility. We think it is a very effective way to guardagainst market timing, currency fluctuations and other macroeconomic factors. 27
28 Latin Infrastructure Quarterly Infrastructure Financing Since early 2011, a number of high level discussions have Project Bonds been taking place in the market with a view to identifying new ways to continue financing project developments, es- pecially in view of the financial crisis which has limited the lending capacity of the banking sector. The European Com- mission took the lead on these discussions and along with the European Investment Bank, launched the Project Bond Initiative which was followed by at least one other initiative. T he UK government has fol- USA was active in the bond market in 3 lowed this initiative through the sectors: Power, Renewable and Transport UK Treasury Dept and is push- with average tenor at 22 years in 2008 and ing for the development of the 2010 more related to Transport, Power National Infrastructure Plan mainly with and Renewable, whilst average tenor of bonds bought by institutional investors, 12 years in 2009 reflecting the shorter i.e. Project Bonds. tenor of gas pipeline deals. Pricing in the There are also a number of other consid- US rose continuously in this period, from erations which have put the concept of Proj- 3.25% (2008) to 5.79% (2010). ect Bonds on top of the international agenda: Canada was mostly active in So- • The economic crisis which has af- cial Infrastructure with 13 deals worth fected the cost of funding for all US$2.95Bn. Tenors have settled in the banks across the region, especially in mid 20 years and pricing has also risen Portugal, Spain, Ireland, Greece and from 1.9% (2008) to 3.86% (2010). Italy. Latin America was active in using • EU Commission’s interest in pur- Project Bonds in the Transport, Oil & Gas suing infrastructure developments and Power sectors, totalling US$5.4Bn across the region, partly to minimize led by Brazil, with tenors fluctuating be- the economic stagnation in those ar- tween a peak of 21 years (2009) to 11 eas where projects can be developed. years (2010) and rates reducing from a The EU has made an estimate of high of 12.95% (2008) to 9.2% (2010). €1.5Tr which need to be invested in Asia was mainly driven by Australia the next 10 years in the Natural Resources and Social In- • High expectations of a negative im- frastructure sectors and followed by Viet- pact by Basel III requirements on nam. There were 11 deals in this period Project Financing by banks. totalling US$2.3Bn, led by the Oil & Gas • The presence of high liquidity in the sector (US$1.4Bn), Social Infrastructure hands of Institutional Investors. (US$506m) and Mining (US$270m). What is worth noting is that 58% of the total was 2008-2010 global data and related to Greenfield projects, 35% to refi- leading markets: nancing and 7% to Brownfield projects. In this period, the international market saw 75 Current markets analysis – issuances worth in excess of US$24.4.6Bn USA, Canada, Brazil in 2008-2010. The leading countries in this period were USA (19 deals worth US$9Bn); The main Bond Houses (banks with Brazil (12 deals worth US$5.2Bn), Canada structuring and distribution capability) have (16 deals worth US$3.4Bn) and Australia (4 a Sector/Client Specific approach across all deals worth US$1.6Bn). products. As Project Bond is an ancillary Europe has so far used the bond mar- business, clients only provide Lead Man- ket to a marginal degree in that only ager roles to those Bond Houses which also US$610m of Project Bonds have been is- offer advisory and/or financing with a good sued against total projects of US$6.4Bn Distribution capability. Relationships are in this period. targeted, with selective lending (tenors up
Infrastructure Financing Latin Infrastructure Quarterly 29to 5-7 years conditional to other products, In Brazil the main opportunities will relate to fi-such as bonds). Most of the focus is on:Advisory, Equity, M&A, Project Finance nancing of oil & gas drillships/ platforms/FPSOs(biased towards bond structure), LeveragedFinance and Debt Capital Markets. In addi- (US$20bn approx) with Petrobras as ultimate coun-tion, the Trading activity becomes essentialto maximise the income from the Project terpart; refinancing of fully operating toll roadsBond business line. (with long traffic history), and the financing of some Given the nature of Project Bonds andthe scarcity of monolines to provide bond- brownfield projects in the transportation sector (ex-holders with full wraps (ie guarantees)as in previous years, Greenfield projects pansion of roads, airports and ports).will most likely be financed with a mixof tranches involving bridge facilities,ECAs (whenever possible) and multilat- rich deals pipeline, mainly spread in four There are 6 greenfield transactions foreral facilities to cover the Pre completion countries, Brazil, Chile, Peru and Colom- the next 2 years, involving drilling rigs,phase, tied to a Project Bond refinancing bia. road transports, rail, water and wastepost completion. On the other hand, the In Brazil the main opportunities will plants totalling Project Costs of €20.7Bn.use of Project Bonds as the only financ- relate to financing of oil & gas drillships/ These transactions should lead to debting instrument will be better suited for platforms/FPSOs (US$20bn approx) with levels of €16.6Bn of which €9.9Bn couldrefinancing of operating assets and some Petrobras as ultimate counterpart; refi- be suitable for Project Bonds.brownfield projects. nancing of fully operating toll roads (with In Chile, there is a US$8.5Bn pipeline In the next couple of years Europe long traffic history), and the financing of of infrastructure projects in the next 3might see some Project Bonds related some brownfield projects in the transpor- years. Although the local currency incometo transportation projects (3 brown- tation sector (expansion of roads, airports streams of the projects would make thesefield) worth €23.6Bn, which could raise and ports). The success of some Project projects ideal for Project Bonds, these€11.1Bn in PBs. Bonds related to the refinancing of an will most likely not be used. In the case In the US the main deals pipeline will operating toll road and the financing of of Chile, the Pension Funds invested inrelate to privatisations expected to take two drillships (during construction phase) monoline wrapped bonds during the firstplace in ports and toll roads; and refinanc- opened the doors to the Project Bond wave of infrastructure projects. Given theing of operational power plants, backed market both in the domestic and external current rating of majority of monolinesup with long term PPAs with govern- markets. (Assured Guaranty being the exception),ment agencies – hence with a top rating-.The market is expecting thepower sector refinancing inthe region of US$20/40Bnbetween 2012-2014 in-volving some mini permstructures, with an averageof US$400mln and maxUS$1.2Bn per deal. In Canada, the main op-portunities will continue toarise from accommodationand transportation infrastruc-ture, energy and utilities sec-tors. The energy and utilitiesare very dominated by thegovernment through the PPAswith the regional governments,which leads the borrower com-panies to enjoy ratings in theA level making thus makingProject Bonds the right choicefor financing. Latin America offers a
30 Latin Infrastructure Quarterly Infrastructure Financingthe Pension Funds do not seem to beready to invest in Project Bonds again. Atthe same time, the local banking systemis pretty liquid and banks have expressedinterest in lending long term on a ProjectFinance basis. In Peru, there are three power proj-ects and new airport in Cusco identi-fied for this year, worth €1.6Bn whichwould need to raise debt worth €1.27Bn,of which €763m could be in the form ofProject Bonds. Colombia has recently come up with avery aggressive pipeline of infrastructureprojects, mainly roads (US$20Bn) andrailways (US$3.5Bn), followed by portsand airports. Roads are expected to havea mixed risk based, with 70% based onavailability payment and 30% on trafficdemand. It would make sense for the Co-lombian Pension Funds to invest in Proj-ect Bonds related to the 70% component,but perhaps a bit early to forecast the out-come. All in all, there is an interesting pipe-line of projects that could attract institu-tional investors to invest in Project Bonds.However, there are a number of consid-erations that need to be made region byregion in order to better assess whetherProject Bonds may become a significantfunding source. Some of these are:• Impact of Basel III on total funding cost for Projects. Basel III will be- gin a gradual rollout in 2013 and will have reached full roll out by 2019. Al- though Basel III has a global remit, it is expected to first affect Europe.• Impact of Solvency 2 on Insurance companies capital requirements. Sol- vency 2 will be rolled out by January 1, 2014 and will only affect European based Insurance companies as this is a European Directive.• Refinancing risk allocation, and last but not least• Institutional Investors minimum re- quirements to match their liabilities (i.e. long dated inflation indexed linked instruments) and benchmark on returns. Although this is not meant to be an indepth analysis of the Project Bond Initia-tive, we hope the current paper allows thereaders to grasp the importance and po-tential magnitude of the Project Bonds inthe current market.
Infrastructure Financing Latin Infrastructure Quarterly 31 Ana Corvalan Director Project Finance, EMEA & Australia, Espiritu Santo Investment Bank, London Branch. Ana is an Economist by background with Bachelors and MSC (equivalent) Degrees from Catholic University in Santiago, Chile. She worked 11 years in Latam and then moved to Europe where she has been for the last 15 years. Her banking career has been focused on Project and Structured Financing of Oil & Gas, Power and Infrastructure projects as well as Risk Management. Ana is also a Board member of International Project Finance Association since 2011. She has been a Director at Espirito Santo Investment Bank since 2009 in the Project Finance team, with focus on the Oil & Gas, Power and Infrastructure Sectors in EMEA and Australia. She has led the bank’s IMLA participation in transactions like: the US$2.6Bn Project Financing of a crude oilrefinery by Egyptian Refining Company, Egypt; €3.8Bn Project Financing of Nordstream Phase 1 gas pipeline between Russia andGermany; the US$998mln Project Financing of Salalah IWPP in Oman; and the £2Bn Acquisition financing of Gatwick Airport byGlobal Infrastructure Partners.In 2011, she also developed a business proposal for the Project Bond Initiative within the bank and was responsible for the bank’sresponse to the Conseil de Cooperation Economique and the European Commission with regards to the consultation process relatedto the future financing of projects under the Project Bond Initiative.
32 Latin Infrastructure Quarterly ProjectsPublic TransportParaguay – BRT of the signing of the Contract, the MOPC will lose the right toSystem use it. The BRT Public Transport System (locally known as “Me- trobus”) is part of a larger scale project which includes (a) urban revitalisation, (b) the first Public Transport Metropolitan Cor- ridor, (c) administration, and (d) financial audit and evaluation. This is one of the biggest infrastructure investments in the metropolitan area of Asunción. It will enhance the quality of life of the Paraguayan population, but most of all it will create plenty of jobs at different levels. The project aims to implement a central line that will cover 18 km between Asuncion and San Lorenzo, a route which usu- ally takes 1 hour and 40 minutes in regular traffic conditions using the current public transport system. This commute is expected to be reduced significantly with the implementation of the “Metrobus”. Not only would it enhance the conditions for commuters who regularly make use of the public transport system in Asunción, but it would provide a safe and reliable alternative to the so-called “motor-culture” deeply enrooted in Asunción.I The total investment amounts to USD 160 million, of which n October 2011, a bill was put forward by the President of the IADB will finance about 80% (125 million), and the re- Paraguay and the Ministry of Public Works and Communi- maining USD 35 million will be funded by the OPEC Fund for cations (MOPC) to implement a Bus Rapid Transit (BRT) International Development (OFID). Public Transport System on a central line along the Eusebio The project is the kick-off for the implementation of an in-Ayala Avenue between Asunción and San Lorenzo city centres. tegrated transport system in Greater Asunción. Once this firstThe Senate approved the Project in December 2011, and the bill step is completed, important investment opportunities in infra-is expected to be studied by the Lower Chamber in March, when structure projects are sure to come about.the legislative period resumes. As stated, the current city traffic situation hands down re- The bill aims to approve a USD 125 million credit granted by quires that urgent measures be taken in order to prevent thethe Inter-American Development Bank (IADB) for the project. chaoticsituation to become a chronic state. Experts from the Great expectations are placed on the first weeks of March, when National University of Asunción predict that in no less than 5the legislative year starts. If the credit is not approved within a year years, Asunción’s downtown will be completely overloaded,
XXXXXX XXXXX Latin Infrastructure Quarterly 33leaving no room for the transit of most private motor ve-hicles. RODOLFO G. VOUGA ZUCCOLILLO is a Senior Asso- Although this project has wide public support for the ciate at Vouga & Olmedo Abogados. He graduated withgreat benefits that it would signify, several technical and po- Honors from the National University of Asuncion (J.D.,litical hurdles remain. summa cum laude, 2007) and was awarded a Masters in Some lawmakers have echoed their concerns on the proj- Law (LL.M.) degree from Columbia Law School (LL.M.,ect implementing gas-oil fueled buses instead or electric 2010). He passed the New York Bar exam. His fields ofones, claiming that spending such a big-scale credit in a expertise are: Litigation, Arbitration and Mediation; M&A;non-sustainable project would prove pointless not only eco- Foreign Investments; Corporate and Commercial; Capi-nomically, but also environmentally speaking. tal Markets; Tax and Cus- In addition, many argue that the delay in enacting the bill toms Law. He has beenobeys to a political maneuver considering the coming end of actively involved in vari-the current President Fernando Lugo’s tenure. ous projects related with On the other hand, experts from the MOPC and specially foreign investments. Hepoliticians who were heavily involved in the granting of the is a former assistant pro-credit consider losing the chance to use the facility to be a fessor in Legal Techniquewaste of efforts, and claim that if changes must be intro- at the National Universityduced (such as the electric system proposed by some sec- of Asunción. Languages:tors), it should be done once the central line is operative; Spanish, English, Portu-taking it not as a definitive result but only as a means to guese, German.initiate the new change in transport policy. Paraguay will soon know whether the BRT is a reality orwhether other alternatives will have to be sought to solve itsrapidly-increasing traffic.
34 Latin Infrastructure Quarterly Infrastructure FinancingRaisingCapitaloffshorefor infrastructure companies and projectsIt has been an active several years for Brazilian private equity funds in terms of raisingcapital. BTG Pactual recently announced plans to create an investment fund of at leastUS$1.75bn for funds dedicated primarily to Brazilian infrastructure projects. In 2010and 2011 we saw Advent International close their fifth Latin America private equity fundraising US$1.65bn, Gavea Investimentos raise US$1.9bn for their private equity fundand Patria Investimentos complete the raising of a $1.55bn infrastructure fund.
Infrastructure Financing Latin Infrastructure Quarterly 35M ost of this capital has • Large development pipeline of flowed into Brazilian in- greenfield investment opportuni- vestments and in each of ties these funds either some or • Availability of project financ-all of this capital has flowed into infra- ing at attractive interest ratesstructure projects. A key characteristic of through BNDESthese funds is that significant amounts of • Long established framework forcapital either came from or is expected to private investment in infrastruc-come from international investors. ture in Brazil Furthermore as limited partners around • Government support for privatethe world have become increasingly com- investmentfortable with the prospect of investing in As a result large Brazilian banksLatin American infrastructure and private have established offices in major in-equity funds, many large institutional in- ternational capital markets to act asvestors are also becoming increasingly an agent for local Latin Americancomfortable with investing directly in companies seeking capital offshore.Latin American infrastructure projects Everlight Capital, with its head of-or companies themselves. These interna- fice in New York, recently openedtional institutional investors include large an office in Australia and is focusedprivate equity funds, sovereign wealth on advising international investorsfunds, pension funds, wealth manage- seeking to invest into either Latinment platforms and of course multilateral American infrastructure projectsorganizations. Over the last 15 years in- or Latin American infrastructurefrastructure has become a well developed companies. Everlight Capital hasseparate asset class in developed markets seen a significant increase from in-and a number of limited partners have ternational investors seeking to gain a to demonstrate the successful devel-fortified their in-house expertise to assess better understanding of infrastructure opment and construction of assets orattractive direct infrastructure opportu- investment opportunities in Latin Amer- the successful operation of assetsnities– similar to how they’ve built spe- ica. Most pension funds, superannuation 3. Provide an exit mechanism for inter-cialized teams for alternative funds and funds, sovereign wealth funds and other national investors that is consistentreal estate. In the last few years, the larg- large direct infrastructure investors have with their investment horizonest transactions involving international gone past recognizing the need to have 4. Be prepared to provide financial mod-capital flowing into Latin American in- exposure to emerging markets and are ei- els, due diligence questionnaires andfrastructure opportunities have included ther working on their emerging markets presentations to support the under-Texas Pacific Group teaming up with investment strategy or already seeking lying investment thesis. MaterialsGavea to acquire a 25% stake in Cosan’s investment opportunities. should be standardized so they areRumo Logistica unit, State Grid Corpo- When it comes to raising capital inter- consistent with investor expectationsration of China investing US$989m in nationally, there are a number of aspects 5. Engage advisers with a strong under-seven Brazilian transmission groups and that infrastructure companies and invest- standing of structuring equity invest-Omega Energia receiving an investment ment managers should take into consider- ments from international investorsof US$201m by Warburg Pincus and Tar- ation. The main considerations are: into Latin Americapon Investimentos. 1. Ensure returns and terms of invest- Everlight Capital is one of a growing The inflow of capital has been mean- ment are attractive on a relative basis group of organizations that advises Latiningful and not only originating from US to global infrastructure investors who American companies on how to accessand UK investors but also Canada, Aus- see investment opportunities in mul- offshore capital. As foreign direct invest-tralia, Asia and the Middle East. Whilst tiple markets ment into Latin America continues toChile has long attracted capital from in- 2. Be able to demonstrate a track record grow at a rapid pace there promises to beternational infrastructure investors, Brazil of strong local performance through a lot more activity in this space.is increasingly becoming the main desti- economic cycles. For example be ablenation in Latin America for internationalcapital seeking direct investments ininfrastructure assets. The key character- Declan Sherman is the managing director and founder of Everlight Capital. De-istics of Brazil that make it attractive to clan has an extensive track record as an investor and advisor in the infrastructureinvestors include: space in Australia, US and Latin America. Everlight Capital is a Latin American• The underlying strength of the Brazil- focused asset manager and adviser focused on investing international capital into ian economy Brazilian infrastructure and other liquid and illiquid investment opportunities.
36 Latin Infrastructure Quarterly InstitutionsCosta Rica’sInfrastructureChallengeCosta Rica, a 51,000km2 Central American country, has always been recognized as asolid democracy whose set of institutions and long-term oriented policies have providedremarkable results in terms of education access, healthcare coverage and environmentalprotection. However, when looking to the other component of the development equa-tion, results are far from being impressive. Decades of limited government investment,restrained fiscal environment, continued project delays, and political blockage to initia-tives seeking to unlock private sector’s potential are seriously challenging the long-rungrowth sustainability of this $35 billion economy.I nvestment Needs. The Economic relative to the region. According to the stands in Quadrant II with somewhat Commission for Latin America and Global Competitiveness Report 2011- a cushion in social infrastructure but a the Caribbean -ECLAC- (2011) es- 2012 and the Human Development Re- relative broader gap on the economic timates the region requires to invest port 2011, Chile leads the way in overall side. More specifically, the Costa Rican5.2% of its GDP per annum just to meet infrastructure quality (32nd out of 142) Ministry of Public Works –MOPT-, onnew infrastructure demand through 2020 and ranks highest in human development its recently published National Trans-–current system renewal excluded-. Set- (44th out of 187). As depicted in Figure port Plan 2011-2035, estimates invest-ting up the goal to catch up per capita in- 1, Chile would be located in Quadrant I ment needs on land transport, airportsfrastructure stock levels of countries like as an economy with a relatively narrower and seaports to be around $2.5 billion perSouth Korea, Singapore and Malaysia economic and social infrastructure gap. annum (~7.1% of GDP). That’s nearlywould demand additional 2.7%. On the flip side, Quadrant III groups those 10x MOPT’s annual budget. In addi- While economic heterogeneity makes economies whose poor infrastructure tion, state-owned Costa Rican Instituteit is difficult to pinpoint the scale of in- quality and lower human development of Electricity –ICE- forecasts investmentvestment needs for each Latin American entail greater investment needs than its requirements for new power generationeconomy, additional reference points con- regional peers. projects at $9 billion (~2.5% of GDP pertribute to map where Costa Rica stands Based on the these criteria, Costa Rica annum), as total capacity must doubled
Institutions Latin Infrastructure Quarterly 37by 2021 to meet rising demand. Look- to ensure efficiency and transparencying to social infrastructure, the National while providing stakeholders a reliableWater and Sanitation Company –AYA- long-term policy horizon. Among its($1.8 billion) and the Ministry of Public functions, the Agency would analyze,Education –MEP- ($1.0 billion) are also structure, tender and monitor investmenturging critical refurbishment and expan- projects proving Value for Money –VfM-sion projects. Meanwhile, the Costa Ri- to be procured under PPP schemes. Thecan Social Security Fund –CCSS- faces PPP policy scope would also cover ener-up to an $800 million infrastructure de- gy projects coupled with a much broadervelopment program (2012-2016) amid a spectrum of possible contract arrange-severe budgetary crisis. Given this back- ments such as service and management,drop, promoting private sector involve- leasing, franchise, concessions, joint ven-ment seems to be crucial for solving the tures, etc.puzzle. Nonetheless, major decisions are Along these lines, the PPP Agency inyet to be taken. cooperation with other public authori- Boosting Private Investment. Aside ties would also hold the responsibility offrom recent telecom market liberalization building up the required PPP technicaland terminal expansion at Juan Santama- capabilities among market participantsria International Airport (special scheme), to deal with vast contract modalities,Costa Rica has a timid framework for pri- risks mitigation instruments, govern- Federico Villalobos Carballovate participation, primarily governed by ment contingent liabilities, rate settingthe Public Work Concession Law of 1998 approaches, etc. Lastly, the PPP policy Federico Villalobos is a Senior Finan-(Act 7762 and 2008 Act 8643 reform) and success would also depend on imple- cial Analyst at E3 Capital Costa Rica,the Autonomous and Parallel Private En- menting new rules that facilitate access with deep knowledge in advancedergy Generation Law of 1990 (Act 7200 to capital markets. As such, Costa Ri- modeling, industry analysis, busi-and 1995 Act 7508 reform). Looking to can Securities Market Regulator –SU- ness valuation, infrastructure projectthe energy sector, legislation establishes GEVAL- would have to review and re- financing and public private partner-Costa Rican Institute of Electricity –ICE- direct current guidelines’ focus (Public ships. Prior to joining E3 Capital,as single off-taker and caps private gen- Offering of Securities, articles 73-98) to Mr. Villalobos worked as High Yielderation at 30% of total national supply; protecting investors’ right to complete, Research Associate (offshore and on-comprised of 15% for BOO -build oper- accurate and timely information rather shore) for a top tier European invest-ate own- projects with maximum capac- than establishing numerous barriers that ment bank. Further, Mr. Villalobosity of 20 MW and 15% for BOT -build diminish market development and push has served as Economic and Financialoperate transfer- projects up to 50 MW. funding costs up. Analyst at several institutions includ-Meanwhile, the only two operating proj- It is clear that implementing a PPP ing the Inter-American Institute forects since Public Work Concession Law policy would just be part of a compre- Cooperation on Agriculture, Costainception, San José-Caldera toll road hensive infrastructure reform but would Rican Social Security Pension Fund($350 million) and Liberia International definitely be the right starting point to- and Grupo Mutual Mortgage Bank.Airport terminal ($35 million), have evi- wards unlocking Costa Rica’s infrastruc- He has also published numerous in-denced weaknesses on National Conces- ture bottleneck. As proven by ample frastructure-related articles in Costasions Council’s –CNC- role as regulator, international success stories and recent Rica’s main newspapers (La Nacion,on the back of politicization and weak local experience with telecom market La Republica, El Financiero). Federi-staff-knowledge management that threat- liberalization (100% mobile penetration co holds a Licentiate Degree in Eco-en ongoing project monitoring as well reached) and terminal expansion at Juan nomics and a Capital Markets Special-as future developments such as the $992 Santamaria International Airport (3rd ization from the University of Costamillion container terminal concession to best airport in Latin America according Rica. Currently, he is a PPP SpecialistAPM Terminals. to Airports Council Int.), enticing private candidate at the Institute for Public At this juncture, enacting a compre- sector participation is key to drive fresh Private Partnerships.hensive national policy on public private capital. And even more importantly, to Contact: email@example.com /partnerships stands as the main driving establish a new infrastructure paradigm firstname.lastname@example.org to promote higher private sector founded on core PPP principles (VfM,participation along with best regulatory optimal risk allocation, output-orientedpractices. This effort would be founded on projects, transparency, and public sectora new PPP Agency (replacing the CNC), accountability) coupled with a whole-endowed with the necessary author- life project costing culture for publicity, independence and technical expertise procured projects.
38 Latin Infrastructure Quarterly Institutions The case ofBudget Sustainability PPPs in Portugal,Managing PPPs for from problems to solutions Mariana Abrantes de Sousa, PPP Lusofonia, Portugal September 2011 Considering that Portugal is currently suffering one of the most severe financial crisis in its history, and that it is one of the countries that has relied the most on PPP con- tracts to meet its public service and infrastructure needs, this paper examines to what extent PPPs have contributed to Portugal’s debt problems and evaluates how Portugal’s PPP contracts can be managed in order to contribute to the necessary solutions. I n the early 1990’s, the conversion of recovery from the current financial crisis, traditionally procured public invest- making it is a key component of the Ad- ment to PPPs promised to overcome justment Programme negotiated with the Portugal’s historic infrastructure International Monetary Fund - IMF and deficit, despite its tight budget constraint. the European Union - EU in May 2011. This was in line with both national and Although the interests of the various European policies, and was enthusiasti- PPP Stakeholders are acknowledged, the cally supported by local and international focus of this paper is on the Government promoters and banks, at least until the as the public partner, from a taxpayer per- first round of the international financial spective. crisis in 2008. Section 2 describes how PPP projects As we enter the 2010’s, Portugal is were contracted in Portugal over the last struggling to cope with an extensive and two decades. complex portfolio of PPP contracts which Section 3 highlights the links, and in presents critical challenges both for pub- some cases, the causality, between budget lic finances and for the local banking sys- problems and the issues of PPP contract tem. It is evident now, that the prudent management in Portugal. management of these PPP contracts will Section 4 explores the specific fis- be one of the determinants of Portugal’s cal risks resulting from such practices as
Institutions Latin Infrastructure Quarterly 39availability payments and renegotiations. a private company, Brisa borrowed un- and conversion from variable to fixed Section 5 concludes with lessons der Government guarantees and received term which added between from 7 to 11learned and contributions towards even- Government investment subsidies equiv- years to the concession.tual solutions. alent to 20% of its investments. Brisa was According to Carmona, Macário & van nationalized in 1975, in the post-1974 der Hoofd (2006), several pitfalls trig-PPPs in Portugal revolution period, and reprivatized in suc- gered rounds of complex renegotiations cessive tranches after 1997. of this emblematic contract, as identifiedPublic-private partnerships in Portugal After decades of tight financial con- by the Court of Auditors reports (2005),are long term administrative-law con- straints, Portugal was able to step up its including misjudging the willingnesstracts in which the public partner (the public investment effort after joining the to pay and protester risk. But the Luso-“Concedent” or Grantor) transfers to the EC in 1986, thanks mostly to EIB-Euro- ponte financing was also waylaid by theprivate partner or concessionaire the obli- pean Investment Bank loans to the Gov- financial crisis of 1994, modest by cur-gation to design, finance and build pub- ernment. rent standards, which caused the Escudolic infrastructure and/or to operate a pub- long term fixed interest rates to jumplic service. The contract may consist of 2.1 The precedents set by Lusoponte from about 8,5% to 11,5% in the monthsa “public works and public services con- The first major concession contract of prior to financial close. Wanting to keepcession” if the infrastructure is to be built, modern times was the DBFOT contract to a tight schedule in order to completeor simply a “public services concession” with Lusoponte for the Vasco da Gama the bridge in time for Expo 98, the Gov-if the infrastructure already exists. The Bridge, signed in 1994, which set a num- ernment chose to cover the financing costconcession contract also encompasses the ber of critical precedents. The project difference even though the strict tenderright to receive remuneration for provid- received a Cohesion Fund investment procedures assigned interest rate risk toing the public service, either by charging grant of €319 million, but otherwise it the concessionaire.users, as in cash tolls, or directly from the was meant to rely exclusively on user Other pitfalls included the absence ofpublic partner or Concedent itself through tolls, with a variable term defined by the a PSC, public sector comparator, whichvolume-based shadow payments or pay- number of cars. The near doubling of the was not surprising at the time for such aments for the simple availability of the tolls on the existing 25th of April Bridge large pilot project. Another critical andinfrastructure. 1 Some infrastructure-only during the construction of the new cross- seldom-mentioned pitfall was the poorPPPs, such as schools, are based on long ing, resulted in intense protests (buzinão overlap between the tender managementterm rental contracts. Under Portuguese in June 1994), which lead the Govern- team, GATTEL, Cabinet of the Taguslaw, as in most other civil code coun- ment to unilaterally freeze tolls on the ex- River Crossing, and the highway author-tries, most public infrastructure is part of isting bridge, and to “rebalance the con- ity JAE, Autonomous Road Board, whichthe public domain, even if it is financed cession” with a corresponding operating later took over the monitoring the con-and operated by the private sector, so the subsidy. Altogether, from 1995 to 2001, tract. Without a PSC as guidepost, andprincipal asset of the concessionaire is the Lusoponte had seven renegotiations and with an inexperienced contract manage-concession contract itself. rebalancings, known by the Portuguese ment team, it was exceedingly difficult As elsewhere, PPPs are seen as asym- acronym REF (Reequilíbrio Económico for the Concedent to defend the originalmetric contracts, since the Concedent e Financeiro), totalling €408 million in Value for Money optimized at tendering.reserves the right to impose unilateral corresponding compensation (Carmona,changes in the public interest, subject to Macário & van der Hoofd 2006). Risk 2.2 The SCUT shadow toll programmecompensation. In practice, however, once allocation was also changed, namely the In 1999, Portugal launched an ambitiousthe public partner completes procurement reduction of the obligation of the conces- road investment programme in the formand adjudicates the PPP contract to the sionaire to maintain the existing bridge of shadow toll roads SCUT (Sem Co-private partner, it is placed at an infor-mation and bargaining disadvantage forthe 25+ year duration of the concessioncontract. This paper examines to what extent PPPs Portugal has a decades-long historyof public service concessions, mostly inwater and rail transport. In 1972, Brisa have contributed to Portugal’s debt prob-received the first concession to build390 km of tolled motorways until 1981, lems and evaluates how Portugal’s PPPmostly the north-south A1 and A2 and theradials A3 and A5. In effect, the A1 con- contracts can be managed in order to con-necting the two major cities of Lisbon andOporto was concluded only in September tribute to the necessary solutions.1991 (Brisa history). Although originally
40 Latin Infrastructure Quarterly InstitutionsAlthough Portugal is now estimated to have 116 relation to the contracts already signed in order to be comparable to direct public debt – are “currently estimated at over 14PPP contracts by last count, more than half signed percent of GDP”2, or about €25 billion .3 About 80% of the PPP liabilities are in thesince 2005, that is not to say that Portugal has “a transport sector.PPP Programme” as an explicit component of a 3. One hundred PPP contracts in search of a PPP Programmecentrally managed public investment effort. Although Portugal is estimated to have 116 PPP contracts by last count, about half signed since 2005, that is not to saybrança ao Utilizador). Many of the SCUT 2008 and the contract entered in arbitra- that Portugal has “a PPP Programme” asmotorways reached into the sparsely pop- tion before it opened in 2010. The fourth an explicit component of a centrally man-ulated interior and thus were expected to hospital PPP contract was signed in early aged public investment effort. The con-have modest traffic. Nevertheless, traffic 2011. Tenders for two infrastructure only sensual diagnosis is that there has been “awas counted and most of the traffic risk hospitals were launched in 2008 (Mon- lack of adequate central control for cre-was supported by the concessionaire, teiro 2010). ating public-private partnerships” basedwith the Concedent effectively providing The Regional Governments of Madei- on wrong incentives arising from the factrevenues (sufficient to cover debt service) ra and Azores and many municipalities that they were used to “loosen the budgetand enjoying the corresponding upside, also contracted a large number of munici- constraint in the short term as they are re-in a traffic band risk sharing mechanism. pal water distribution and waste manage- corded, according to existing (European)The seven SCUT contracts were signed ment concessions, car parks, and schools. statistical rules, in the private partners’during 1999-2002. In addition, the Gov- Many of the water concessions have been balance sheets” (EU-DGEFA 2011).ernment launched four new cash toll con- renegotiated and water tariffs increased According to Oliveira Cruz& Cunhacessions, including ring roads and roads (Oliveira Cruz& Cunha Marques 2011). Marques (2011), the Portuguese Govern-on the more densely populated litoral. ment went “too far in launching too many Some of the new road PPPs were 2.3 PPPs go into high gear projects too quickly” without consolidat-troubled by environmental problems Already by 2005, Portugal had more ing know-how in the public sector and ap-post-adjudication and by shifting political than 20 PPP projects contracted or in plying lessons learned, without the properdecisions regarding the corridors, which procurement, with average PPP activity legislative framework to guide new con-complicated expropriations and construc- of about 1,3% of GDP , in 2000-2005 tracts and without a structured projecttion and which resulted in almost imme- period, twice as high as the UK (PWC management organisationdiate claims for rebalancing. 2005). The newly elected Government After the problems with the tendering Other PPPs included two urban rail undertook a €25 billion investment pro- of the first wave of shadow toll SCUTconcessions (with mixed user and tax- gramme including new road concessions projects, new PPP legislation (Decreepayer funding) and several port terminal and the High Speed Rail (TGV) network, Law 86/2003) introduced the requirementconcessions based on user charges ad- leading to a new wave of PPP contracts, for Ministry of Finance involvement injudicated by individual port authorities. mostly in roads and hospitals, but also at the project tender panels. The tender doc-Plans to grant a concession to build the the municipal level. uments, the bid proposals and the finalNew Airport for Lisbon, and to operate In a unique move, at the end of 2007, contracts had to be approved by joint ten-the existing airports, were studied exten- Estradas de Portugal, S.A., the State- der boards (CAP –Comissão de Avaliaçãosively since 2000, but the tender did not owned highway company, was granted de Propostas) named by both the Financeproceed. the global road concession, together with and the sectoral ministries, but these were The ambitious and aggressively inno- the consignment of a portion of the fuel often political appointees, rather than ex-vative hospital PPP programme, launched tax and the right to grant sub conces- perienced staff, and often changed overunder Decree Law 185/2002, proved too sions to private partners (Decree Law the various project phases. The creationcomplex and had to be revised. The Gov- 380/2007). of a small but dedicated team in Parpúbli-ernment’s intention to transfer clinical According to the EU-DGEFA (June ca, a wholly State-owned company, func-risk to the private partners had few prec- 2011) report, cumulative PPP invest- tioned as an internal procurement advisoredents internationally, and it significantly ments since 1995 amount to almost 10 rather than as a full-fledged PPP unit.restricted the number of interested bid- percent of GDP, which corresponds to an Decree Law 86/2003 also generalizedders, since banks were unwilling to take annual average of almost 0,75 percent of the requirement for a Public Sector Com-clinical risk and thus required sponsor GDP. The implicit government liabilities parator for each project and set guidelinescounter-guarantees. Cascais, the first of in relation to PPPs – calculated as the net regarding risk sharing and renegotiations.four clinical hospital PPPs, was signed in present value of the flow of payments in Despite reinforcements of the role of Par-
XXXXXX XXXXX Latin Infrastructure Quarterly 41pública with revisions to the legislation Some contracts appear to have been The learning curve in the public sector(Decree Law 141/2006), the institutional structured so as to overcome existing pub- has not been optimized. There is no effec-arrangements have remained inadequate. lic finance controls such as the prior ap- tive knowledge centre, with the possible proval of the Court of Auditors (visto do exception of the Court of Auditors which3.1 From individual PPP projects to a Tribunal de Contas). Estradas de Portu- issued PPP guidelines in 2008 and otherPPP Programme gal argued, albeit unsuccessfully, that the in depth audit reports.Many of the critical elements needed to new road sub concessions did not requiretransform a set of individual PPP con- prior approval of the Court of Auditors. 3.2 PPPs and the Government Budgettracts into a PPP Programme have been, Municipalities used the same argument (OE-Orçamento do Estado)in practice, missing. As a result, PPP to sign long term rental contracts for new The issue, however, is not necessarily onecontract management has been weak schools and convention centres outside of of missing budget and PPP legislation,and fragmented, characterized by policy the mandated municipal debt limits. but rather one of inadequate implemen-discontinuities, legal loopholes and even The definition and staffing up of the Con- tation, in the rush to sign large numbersevasion of existing public finance man- cedent role, remains unclear. The creation of of contracts over short periods. Althoughagement guidelines. a Central PPP Agency, announced at various the original 1991 Budget Framework The overall ceiling on annual PPP con- times, has been held up by disputes between Law (Lei 6/1991) required the budgetingtracting, which has been long required by the Finance and the sector ministries over of all public investment projects, underthe Budget Framework Law (LEO Lei de who will have the ultimate authority in trans- the PIDDAC programme (Programa deEnquadramento Orçamental 91/2001), action and contract management, including Investimentos e Despesas de Desenvolvi-has never been implemented4. the review of service compliance by the mento da Administração Central),which Clear criteria for selecting projects concessionaire. Parpública has been serving is included as an annex to the annual bud-to procure as PPP rather than as public as the Ministry of Finance advisor on PPPs get law approved by Parliament, this hasworks contracts have been lacking. The since 2003, and PPP teams were created not been applied to PPP projects.requirement of a PSC -Public Sector in the Ministry of Finance itself (GASEPC Although the annual ceiling on new PPPComparator (already implicit in art. 19º 2007), in the Ministry of Transport, the Min- liabilities has been required by the Bud-of the LEO-Budget Framework law of istry of Health, and the Ministry of Environ- get Framework Law at least since 2001,2001) has been applied regularly only in ment, but some have had limited administra- but it was never implemented in practice.the hospital sector and in some of the re- tive and reporting functions and others been Analysts even continue to argue that thecent rail and road projects. disbanded recently. underestimation of future budget burdens
42 Latin Infrastructure Quarterly Institutionsmay have been due to the absence of “a The World Bank (2008) estimated that should be carefully monitored and anylegal instrument to incorporate the annual PPP liabilities had reached 10 percent of contingent commitments “be recordedrents for the duration of the contract into GDP in 2003 and used Portugal’s experi- with the utmost clarity in the documenta-the public balance sheet”, Oliveira Cruz & ence to draw lessons regarding the need tion accompanying annual budgets” sinceCunha Marques (2011). for stronger “institutional arrangements future payments to private partners “are The Budget Directorate (DGO) merely that ensure coordination, technical sup- akin to debt”.includes a table with the known multi- port “ and the appropriate application of In the 2009 Consultation, concludedyear PPP liabilities, for information only, checks and balances”. It considered the in January 2010, the IMF suggested thatin the Budget Report (ROE) which ac- “Government PPP Unit suffered from “greater involvement of the Ministry ofcompanies the annual Budget proposal lack of experience with PPP projects and Finance in public-private partnerships,(Proposta de Orçamento de Estado) to inexperienced staff, and as a result, Portu- especially early in the design stage, willParliament. gal’s early PPPs were subject to constant also help improve results and contain fis- When commenting on PPP practices in delays and cost overruns”. Thus “weak cal risk,” continuing to focus on individu-Portugal, local and international authori- public sector capacity was evident in in- al tender management.ties, tended to focus more on issues of sufficient risk transfer to the private sec- By 2011, the IMF concluded that “thereindividual transaction management and tor and in delays in giving essential gov- are significant fiscal risks associated withreporting rather than on the overall cumu- ernment approvals” SOEs and PPPs, not all of which have yetlative impact of the large number of PPP The OECD (2008) budget review of been identified. Materialization of thesecontracts or the total amount of hidden Portugal cautioned that PPP contracts contingent liabilities can pose a seriousPPP liabilities. may “shift too much fiscal risks to fu- challenge for debt management and re- The Court of Auditors included a sec- ture generations”, but its recommenda- quire close monitoring.” PPPs merited ation on PPPs in its Opinion on the 2004 tions focused on improving rather than special chapter in the ensuing Economic As a result, PPP contract management has been weak and fragmented, characterized by policy discontinuities, legal loopholes and even evasion of existing public finance management guidelines.General Government Accounts, again limiting PPP contracting. With regards Adjustment Programme IMF (2011).focusing on reporting issues with PPPs: to PPPs, “summary information should At the European level, the Maastricht“the Court therefore considered that, for include risk analysis”, contracts should criteria focused attention on the internalthe purposes of budget monitoring , the be carefully reviewed to ensure that they imbalances, budget deficit/GDP<3% andtotal public PPP liabilities should be pre- meet efficiency tests and that they do not Sovereign debt/GDP<60%. The tightsented, both in the Budget Law and in accept inappropriate risks, “the public expenditure and debt criteria combinedthe Government expenditures accounts in sector comparator should be discussed with soft Eurostat national accountinga chart designed to identify and to deter- by Parliament”, and the recording of the rules to create accounting and budgetarymine the respective total costs, including associated liabilities improved, including incentives to transform traditional publicthose relating to expropriation, changes those undertaken by State-owned enter- investment projects into PPPs. ESA 95in contracts, land acquisitions, etc. (Por- prises. But it appears to have taken the norms and Eurostat Decision 18/2004 al-tuguese Court of Auditors, Parecer sobre formal arrangements at face value.5 lowed PPP projects to be excluded froma CGE de 2004). The Portuguese Court Realistically, the non-implementation public expenditure and public debt if theof Auditors also raised more specific con- of annual PPP ceilings, which would have private partner bore the construction riskcerns as a result of its audits (Tribunal de been inconsequential if most projects had and either the traffic or the availabilityContas, Fertagus 2005 and Tribunal de been well structured and user-based, has risk. In retrospect, this has strongly en-Contas; road and rail PPPs, 2005). become a critical loophole with the pre- couraged the trend towards availability Carmona, Macário & van der Hoofd dominance of availability payments. payments, which involve considerably(2006) stressed that even though the use more fiscal risks than the traditional user-the comparator “between the PPP and 3.4 PPPs and the IMF in Portugal paid toll road concessions.conventional procurement alternatives In the Article IV consultation (2005), the A recent UK Parliament report onwas required under the Portuguese legal IMF considered that “private sector in- the PFI considers that the divergenceframework) it is actually not” being ef- volvement in infrastructure investment between the European Standards of Ac-fectively applied (in 2006). is welcome”, but recommended that risks counts (ESA) and the International Finan-
Institutions Latin Infrastructure Quarterly 43cial Reporting Standards (IFRS), which“require that most PFI projects be scored The issue, however, is not necessarily one ofin an organisation’s financial accounts, isconfusing, and… creates incentives to use missing budget and PPP legislation, but ratherPFIs, rather than direct capital investmentby departments”. one of inadequate implementation, in the rush4. The fiscal risks in PPP to sign large numbers of contracts over shortFar from the promise to resolve Portu-gal’s various deficits, in infrastructure, in periods.financing and in management resources,the large number of poorly structured and fic demand as Portugal enters the 9th con- alternate sources of reliable informationmanaged PPP contracts became another secutive quarter of negative GDP growth. to minimize impact of opportunistic be-source of financial distress. haviour on the part of concessionaires”. Although borrowings by concession- 4.2 Fiscal risks in renegotiations and However, Engel, Fischer & Galetovicaires are not included in public debt, rebalancings (May 2009) argue, from the Chilean ex-they are certainly included in external As shown above, Lusoponte set a number perience, that when the renegotiationsdebt, to the extent that projects are fi- of unfortunate contract management prec- occur during construction 6, these cannotnanced by international banks, or by edents that have continued to hobble the be said to result from the “incomplete”local banks dependent on cross-border Portuguese PPP projects since, namely nature of PPP contracts. Instead, theyfunding. While public debt reached the absence of a PSC, the weak contract note that the renegotiations and rebalanc-€160 billion (93% of GDP) at the end of management team on the public sector ings of PPP deals in Chile were bunched2010, gross external debt reached €405 side, and the high frequency of bilateral in certain years and mostly (65%) paidbillion (235 % of GDP at end 2011), renegotiations and rebalancings. future Government administrations. In“extremely high” by IMF standards The critical issue in PPP programme contrast, the awards of arbitration panels(IMF June 2011). After enjoying an AA sustainability is getting and maintaining were mostly (61%) paid by the adminis-rating for more than a decade from 1998 good Value for Money for the taxpayers tration who faced the disputes. They alsoto March 2010, Portugal’s long term over the 20-30 year duration of a PPP con- conclude that pre-determined renegotia-sovereign rating has been cut sharply to cession contract. FIDIC and EU public tion caps are substantially exceeded andBBB- in2011 (Fitch). procurement rules all focus on procure- are thus ineffective. ment, but in PPP the focus has to be on The actual frequency of renegotiations,4.1 The fiscal risks in availability pay- contract management post-adjudication. arbitration payments, and rebalancings ofments By signalling its readiness to renegoti- PPP contracts in Portugal is difficult toMuch of the Portuguese PPP problem ate contracts, even accepting the ex-post quantify since there is no single publishedhas to do with increasing prevalence of reallocation of key risks such as traffic, list 7, but it is estimated to be greateravailability contracts where the traffic interest rate and major maintenance, the than in other PPP markets8. The currentrisk remains with the Concedent. Unlike Portuguese State may have encouraged IMF mandated reviews are likely to sheduser-based PPPs, the concessionaires and sponsors in subsequent projects to under- new light on the impact of bilateral ne-the banks have little need to scrutinize take strategic behaviour, bidding aggres- gotiations and of independent arbitration.traffic studies, because project revenues sively in the conviction that the tables Arbitration may involve less fiscal risk,are independent of actual traffic. This could be turned in their favour in post- because it is done under formal rules,may place Governments at greater risk of signing renegotiations. and the outcomes are binding on all par-undertaking marginal projects, leading to According to Oliveira Cruz & Cunha ties, the Concedent, the concessionaire,overinvestment in marginal infrastructure Marques (2011), renegotiation of con- and most importantly, the creditor banks.and painful macro corrections. tracts has been the Achilles heel of PPP s Arbitration awards are generallyless than With the recession and the introduction in Portugal. With international tendering, 20% of the compensation requested byof tolls in three of the former SCUT shad- bidders “compete for the market” but then concessionaires (Portuguese Court of Au-ow toll roads in October 2010, there are “settle into the good life”, no longer hav- ditors 2008).reports that traffic has declined by 20% ing to “compete in the market”.to 50% in various corridors in the first S. Ping Ho (2006), who studied PPP 4.3 Regulatory capture in PPPssemester of 2011, versus the year earlier renegotiations in the context of game One way to understand the “Conce-figures. Several projects report traffic theory, warned that PPPs are incomplete dent performance risk” in the post ten-volumes of less than 50% of base case. contracts and that ”Governments should der monitoring and renegotiation phaseThis may be evidence of, both, the traf- expect and prepare well for renegotia- would be to apply the concept of “regula-fic diversion caused by the introduction of tions, establish early warning systems, tory capture”. Normally, regulatory cap-tolls, and of the income-elasticity of traf- keep enforcement costs low, and secure ture is said to occur when a government
44 Latin Infrastructure Quarterly Institutions As Portugal and its banking system due to over investment in costly infra-regulator bends to the interests of those faced ever rising funding costs and eventu- structure now plagued with excess capac-it regulates. But a “private partner may ally lost access to the international finan- ity. But sometimes traffic takes years toalso capture the procurement process by cial markets in 2010, the large portfolio of ramp up and one or two weak projectsside-contracting (colluding) with the gov- thinly-priced project finance loans caused need not be a cause for alarm.ernment” (Maskin & Tirole 2007). Con- serious asset-liability and earnings prob- The critical problem has more to docedent capture can also occur if there is lems, leading banks to sell some PPP loan with the sheer quantity of PPP transac-a small group of possible bidders, as in a assets at deep discounts in order to delever- tions and with the negative synergies andsmallish market like Portugal. age. Net interest margins on the project fi- duplication which have now, for example, To Fourie & Burger (2000), the “prob- nance loans have become negative and a lead the Government to cancel plans forlem of regulatory capture also stems from few PPP project have become distressed, a third north-south motorway nearly par-the information asymmetry, and this risk although others have benefitted from the allel to the A1. In addition, the increas-is higher if the regulator (or Concedent) is generous renegotiations mentioned above. ing reliance on PPPs promoted the illu-constrained in terms of management and In the future, the IMF will require that the sion of budget discipline that was in factanalytical capacity.” annual review of PPPs and concessions achieved by removing a sizable portion of According to Irwin (2007), politics can be “accompanied by an analysis of credit public investment from the visible directencourage governments to bear more risk flows channelled to PPPs through banks public expenditure and direct public debt.than is in the public interest, since suc- by industry and an impact assessment oncessful claimants “tend to have opaque credit allocation and crowding out effects” 5 PPPs as part of the solutioncosts and to come with a rationale ex- (IMF Update 1-September 2011).plaining how they are good for the coun- Portugal’s current Economic Adjustmenttry” especially if the “government’s ac- Programme focuses special attention oncounting and budgeting fail to recognize PPPs, with a freeze on new tenders un-their costs”. Far from the promise to til a full review of the portfolio is carried resolve Portugal’s various out by March 2012, in order to quantify4.4 PPPs and the Portuguese banking the fiscal risks in each PPP contract andsystem deficits, in infrastructure, in the PPP portfolio overall, and to as-Portugal’s excessive external debt re- sess the scope for renegotiating someflects, in part, the external funding of in financing and in man- PPP contracts so as to reduce governmentthe local banking system which became agement resources, the liabilities and also to define annual ceil-highly leveraged. Liabilities to non-resi- ings on new PPP liabilities (IMF Updatedents rose from €155 billion at the end of large number of poorly 1-September-2011). An assessment of2008 to €171 billion at the end of 2010 the 30 most significant PPP contracts is(including €41 billion of emergency fund- structured and misman- underway (August 2011).ing from the ECB), 42.2% of the Gross aged PPP contracts be- In its response to the IMF and the EU,External Debt. the Portuguese Government agreed to Portuguese banks were enthusiastic came another source of forego contracting any new PPPs at theabout project financing, which promised national, regional or local level until itstable long term income for manageable financial distress. takes measures to:risks, provided that long term funding • Enhance monitoring and control ofcould be secured. Before the Euro was capital expenditure decisions with theintroduced in 2000, the EIB provided 4.5 Fiscal risks, PPPs and Portugal se- implementation of a public invest-the long term Escudo funding needed vere external debt crisis ment information systemand local and international banks took According to IMF-FAD (2009) “A survey • Set indicative expenditure ceilingsproject and construction risk by issuing of selected countries confirms the transmis- and a medium-term budget frame-payment guarantees in favour of the EIB. sion mechanisms from the financial crisis work for the 2012 BudgetLater, Portuguese banks continued heav- to PPP programmes”. However, there is no • Revise the Budget Framework Lawily involved in project finance, even when mention of the reverse causality between (LEO)credit spreads dipped below one percent. excessively large PPP programmes and a • Publish a comprehensive report onThe crowding out effects were also se- country’s sovereign rating. fiscal risks as part of the annual bud-vere. The causal relationship between PPPs get, consistent with international best When foreign banks retracted sharply and Portugal’s external debt problem can practices, including all PPPsafter 2008, local banks stepped up their be described as one of quantity and alsounderwriting. But when bank ratings were of quality. In quality terms, the trends to- The Adjustment agreement also calls forcut below the levels required by the EIB wards availability payments and frequent strengthening of the management of PPPsfor its guarantors, bank guarantors were renegotiations damaged the Value for including the project selection, assess-required to pay additional fees to the EIB. Money and productivity of the projects, ment, approval and tendering, the con-
Institutions Latin Infrastructure Quarterly 45tract monitoring framework and reporting force penalties and remedies in cases that countries which exclude and exemptstandards, all under supervision of the of non-compliance. PPPs from the normal budgetary disci-Ministry of Finance and in consultation 5. Implementing and enforcing the an- pline, procedures and constraints do so atwith EC and IMF staff by end-2012. nual budget limit for new and exist- their peril, since these complex, opaque The solution to the debt crisis includes ing PPP liabilities, as required by the and very long term contracts carry greaterdeleveraging the Government, the pub- Budget Framework Law since 2001, fiscal risks than traditional procurement,lic sector, the banks and the country as a so that PPP projects and the resulting and require more, not less, scrutiny, mon-whole, so PPPs must become part of that PPP liabilities are subject to the same itoring and limits. It is critical to collectdeleveraging. Some of the measures in- budget discipline and procedures as PPP contract monitoring data and publishclude: any other public investment and direct further studies in order to promote trans-1. Increasing user fees in order to reduce public debt. parency and protect the long term interest reliance on the over-burdened Por- 6. Creating and maintaining a Central of the taxpayers. tuguese taxpayer, such as the intro- PPP Agency in the Finance Ministry duction of tolls in the former SCUT with executive rather than merely ad- shadow toll roads. Since Portugal has visory powers, to monitor and manage Mariana Abrantes de Sousa no through transit traffic, affordability the financial aspects the PPP portfolio and willingness to pay are real con- as a whole and the resulting PPP li- straints, resulting in traffic diversion. abilities, in much the same way as the2. Extending the concession periods Ministry manages the public debt. could help to reduce the annual pay- 7. Creating and maintaining PPP units in ments, but this would require finding a each of the sector ministries to assume new, non-commercial, source of very the permanent role of Concedent in long term funding since it is simply all phases of PPP projects. Ensur- not available in the market. One solu- ing that the Net Present Value of all tion would be for the EIB to release PPP liabilities, revised annually, are bank guarantees on all projects which including in each department’s an- have reached completion. Another nual budget, alongside the traditional initiative would be to create an EU- capital investments. Monitoring and wide official infrastructure invest- setting caps on the total PPP liabilities ment fund along the model of the In- per ministry. frastructure Crisis Facility created in 2009 to help projects nearing financial In conclusion, the major lesson learned close in developing countries. from the Portuguese PPP experience is3. Cancelling marginal projects and problematic contracts that have been subject to too many renegotiations, and which may present the greatest fiscal risks over the next 20-30 years. Contract resolution or buy-back pos- sibilities are complex and will vary project by project, but should be care- fully investigated and executed.4. Restricting bilateral renegotiations of PPPs as much as possible9, ensuring that all rebalancings are subject to the intervention or review by an indepen- dent third party as in the case of arbi- tration. Publication of all contractual changes and their budget impact is es- sential in order to demonstrate that the Concedent is not caving in to unjusti- fiable concessionaire and bank claims. Rigour and transparency are key in order to recover credibility. Although some PPP contracts are considered armoured (blindados) in favour of the concessionaire, it is possible to en-
46 Latin Infrastructure Quarterly Institutions II Brazil Infrastructure Investments Forum – NYCOctober 20, 2011A round 200 professionals at- Advogados (Brazil). It featured panel the Financial Times, and Conference Mod- tended the II Brazil Infrastruc- discussions by Brazilian and American erator, welcomed the first panel of distin- ture Investments Forum held public authorities, legal specialists and guished speakers to the podium: Minister October 20, 2011, at the Hud- economists, targeting U.S. companies Márcio Fortes de Almeida, President of theson Hotel in New York City. The seminar and practitioners interested in Brazil. The Olympic Games Public Authority – APO,was organized by the Brazilian-American event addressed the many exciting oppor- and Minister Benjamin Zymler, PresidentChamber of Commerce, Inc. and Editora tunities and challenges now found in the of the Brazilian Federal Court of Audit –Fórum, in association with the Americas Brazilian infrastructure segment. TCU, who discussed the investments andSociety/Council of the Americas and was Cesar A. Guimarães Pereira, moderator legacy of the 2014 World Cup and thesponsored by Multiterminais (a Brazil- of the first panel and strongly involved in 2016 Olympic Games. Minister Márcioian logistics conglomerate), ABRATEC the organization stages, says he was pleased Fortes centered on the fact that many of(an association of Brazilian companies with the outcome: “This is the second event the required structures are already in place,in the container terminal sector) and PEI of this kind, and we could see a tremendous due to the investments made for the RioMedia (a British publisher responsible for growth in interest and participation of the Pan American Games in 2007. However, athe monthly publication Infrastructure In- audience as compared with the Miami edi- great deal of investments will be needed forvestor). The media sponsors were the Fi- tion in 2010. The skillful organization con- a variety of urban improvements, directlynancial Times, and Agência Estado, and ducted by the Brazilian Chamber and Edi- and indirectly related to the Games. Minis-the media partners were Latin America tora Fórum created an extraordinary forum ter Benjamin Zymler stressed the role andMonitor and Latin Finance. The event for discussion and networking, with a re- purposes of the Federal Court of Audit inwas supported by a vast array of Brazilian markable group of Brazilian and American controlling public expenditure involvedand U.S. organizations: ICDR – Inter- authorities, specialists and business people. in the Games. Minister Zymler expressednational Center for Dispute Resolution, I am very optimistic and looking forward to his remarks on the event: “Knowledge ofBACCF – Brazilian American Chamber the 2012 edition”. regulations and of the interpretation givenof Commerce of Florida, Justen, Pereira After a brief introduction by the Bra- by the controlling government bodies isOliveira & Talamini, Advogados (Brazil), zilian-American Chamber of Commerce critical to any investor. In this scenario,Gávea Investimentos (Brazil), Vinson & Executive Director Roberto Azevedo, the event proved to be of utmost impor-Elkins LLP (U.S.), Smith International Ambassador Luiz Felipe de Seixas Corrêa tance once it disclosed the understandingLegal Consultants, PA (U.S.), Motta, Bi- (General Consul of Brazil in New York) of these bodies and reinforced the idea thatcalho & Carvalho, Advogados (Brazil) formally opened the conference. John one can invest in Brazil with legal certain-and Guilherme Gonçalves & Sacha Reck, Moncure, Director for Latin America at ty”. Cesar A. Guimarães Pereira, partner at
Institutions Latin Infrastructure Quarterly 47Justen, Pereira, Oliveira & Talamini mod- Richard Klien (Multiterminais), Cesar Pereira (Justen, Pereira Oliveira & Talamini), Marçal Justen Filhoerated the Q&A session. (Justen, Pereira Oliveira & Talamini), Ministro Márcio Fortes (Olympic Games Public Authority), Ministro Benjamin Zymler (Brazilian Federal Court of Audit), Roberto Azevedo (Brazilian-American Chamber of Alécia Paolucci Noguiera Bicalho, part- Commerce) and John Moncure (Financial Times).ner at Motta, Bicalho & Carvalho, moder-ated the second panel. The speaker MarçalJusten Filho, founder and senior partner atJusten, Pereira, Oliveira & Talamini, dis-cussed the legal framework for investmentsin the transport sector in Brazil, with a par-ticular focus on the regulatory role of thegovernment agencies. As one of the mostrenowned Brazilian practitioners in thisfield, Justen Filho was able to give the par-ticipants a clear view on some of the pecu-liarities of the Brazilian legal system withregard to transport services under govern-ment regulation. In his words, “Brazil hasa long-standing tradition in the applicationof legal models designed to regulate pri-vate investment and the private provisionof services in the area of transport and lo-gistics. This ensures the necessary predict-ability and makes the transport sector oneof the most dynamic in terms of private in-vestment and involvement”. Marcos Pinto,partner at Gávea Investmentos, offered theaudience a business perspective, addressingthe economic and financial characteristicsof investments in Brazilian transport and lo- Theodore Helms (Petrobras), Randy Melzi (Americas Society-Council of the Americas), Daniela Azevedo (Day Pitney) and Monica Vieira (Americas Society-Council of the Americas)gistics infrastructure. His detailed analysis
48 Latin Infrastructure Quarterly Institutionsprompted questions dealing with a variety Brazilian business and legal environment. In of this event: Our goal was to promote de-of business issues. addition, online participation was also made bate and provide legal professionals with Paulo Bernardo Silva, Brazil Commu- available to participants who could not be an overview and intellectual legal and eco-nications Minister, addressed the forum present in New York City. Many internation- nomic aspects of investments in Brazil,attendees via long-distance video, offering al participants were able to ask questions and together with the necessary informationa compelling presentation on the opportu- make comments in real time. about the adequate contract arrangementsnities and challenges of infrastructure in The launch of the 2nd edition of the in order to provide legal certainty for theseBrazil. His presentation was introduced by book “Infrastructure Law of Brazil”, edited investments. The Brazil Infrastructure In-a communication made on his behalf by the by Marçal Justen Filho and Cesar A. Gui- vestment Forum was a success in terms ofBrazilian attorney Guilherme Gonçalves. marães Pereira, took place during the event participation, with a full house and webcast A final panel on arbitration in regulated and it was used as reference material for the for a targeted audience of qualified lawyers,sectors in Brazil took place immediately subjects that were dealt with in the panels. American and foreign investors and poten-prior to a networking luncheon. It was mod- The 2011 edition of the book includes es- tial partners of the Brazilian Public Govern-erated by Luiz Martinez, Vice President of says to introduce the reader to the Brazil- ment. The next edition, scheduled for Oc-the International Center for Dispute Reso- ian regulation in the areas of energy, oil tober of 2012, in New York, will keep itslution –ICDR, who also informed the audi- and gas, telecommunications, transport and positive impact and is already considered aence about the relevant role of the ICDR in logistics, basic sanitation and waste man- traditional event in Forum’s portfolio”.the solution of conflicts involving Brazil- agement. There is also an additional essay One of the highlights of the II Brazil In-ian parties. The expert panel of speakers completing the coverage of competition vestment Infrastructure Forum was a spe-included João Otávio de Noronha, Justice law, already dealt with in the first edition. cial networking luncheon on the terrace ofat the Superior Court of Justice – STJ, the Corporate taxation and environmental law the Hudson Hotel, overlooking the islandBrazilian court charged with the recognition are two other new areas examined in the of Manhattan. It allowed the participants toof foreign arbitral awards, Alden L. Atkins, new edition. The book is sold online by Edi- develop business relationships and to ex-partner at Vinson & Elkins, and Maurício tora Fórum, one of the hosts of the seminar. change knowledge and information on theGomm Santos, counsel and arbitrator at In the section of translated legal texts, fast-growing Brazilian infrastructure sector.Smith International Legal Consultants. The the book includes a complete translation The third edition of this annual con-arbitration panel generated intense debate. of Law n. 12.462, which created the RDC ference will be held October 14, 2012, atThe variety of views from the panel and – Differential Procurement Regime for the the Harvard Club, in New York City. Thethe audience alike offered the participants a 2016 Rio Olympics and the 2014 FIFA program will comprise discussions on thethorough analysis of the Brazilian approach World Cup. Another book dealing specifi- recent developments in Brazilian airports,to arbitration in this sector. All attendees cally with the RDC, written by partners and railways and ports, as well as in the areaslearned from one of the highest ranking ju- associates of Justen, Pereira, Oliveira & of oil and gas – a permanent source of inter-dicial authorities in Brazil that the country is Talamini and edited also by Marçal Justen est in Brazil – and civil construction, a basicarbitration-friendly and its courts are ready Filho and Cesar A. Pereira Guimarães, will instrument for private involvement in infra-to recognize and enforce awards dealing be launched in March 2012, in several loca- structure. As in the 2011 edition, the eventwith infrastructure investments. tions in Brazil. will end in a luncheon, this time featuring The program was carried out by experts Editora Fórum’s CEO, Luís Cláudio a keynote speaker. As the program unfolds,and tailored to promote investment opportu- Ferreira, comments on its purpose in work- new information will be made available innities in the infrastructure sector in Brazil, as ing together with the Brazilian American the next issues of this magazine.well as to present in-depth information on the Chamber of Commerce in the organization
Institutions Latin Infrastructure Quarterly 49The Chilean ExperienceL IQ speaks to Jose Miguel Hi- What is the role of the Ministry of Pub- structure to satisfy the needs of citizens. dalgo, international PPP con- lic Works (Ministerio de Obras Públi- The PPP system also helps to free fiscal sultant, about the factors that cas or MOP) and what are the main resources for projects that are less attrac- have led Chile to a successful ways it interacts with private sector tive to the private sector but offer a highexperience with PPPs, the role of the dif- parties? social return, such as small aerodromesferent players involved, some of the most or bays for fishermen, drinking water inimportant achievements of the model, and The role of Ministry of Public Works is to rural areas, and similar ones.the model’s applicability elsewhere in the provide services of infrastructure to sat- region and the world. isfy the needs of citizens, the productive What role have the capital markets sector, and the integration process. played in financing infrastructure de-What are in your opinion the main It interacts with private sector parties velopment in Chile?institutional factors that have led to by the public private partnership (PPP) so many years of uninterrupted infra- system. In that system, the concession The most relevant actors in financingstructure development? holder´s obligation is the execution, re- have been: banks, life insurance com- pair, maintenance or exploitation of state- panies and pension fund administrators.I think that the most important factor is owned public works. Some achievements are:the credibility of the concessions model. One of the main goals in concessions • Syndicated loans for US$ 1.4 billion.In Chile, the Public Private Partnership system is to stimulate the participation • Issue of Bonds in the local market to(PPP) system is focus of public policy of private sector in the generation of new the tune of US$ 4 billion.extensively validated. There´s political initiatives. • More than 20 local and internationalconsensus behind the system. Since the financial entities.beginning of the model (in 1992 was the Is infrastructure development central- • Continued improvement in the systemfirst call for tender), we have had five dif- ized with the MOP or do regional agen- over time (placement of infrastructureferent governments, and the model has cies play a role in it as well? If the lat- bonds spread from 150 bps to 46 bps).consolidated. Another essential factor is ter, what is the role? • An already mature market, with highthe Chile´s economical stability, trans- demand and low bond spreads, andparency, credibility, legal system stabil- In the case of PPP System, infrastruc- many credit and insurance offers.ity, and the subsequent confidence in the ture development is centralized with the model shown by local and international MOP, in the Concessions Coordination Chile has pioneered the development ofconsortia. Department, but they work together with tools to support the financing of conces- Other factors that have led to so many the regional agencies of the MOP. They sion contracts that include:years of development are: also work with other directions of MOP, • Guaranteed Minimum Income.• Team work between all the parties: Ministry of Finance, and other ministries. • Coverage against exchange-rate risk. Concessions Coordination Depart- In the investment promotion, they work • Income Distribution Mechanism that ment, Directions of the Ministry of together with Embassies, Commercial provides concession companies with Public Works, Ministry of Finance, Offices, Ministry of Foreign Relations, a stable income horizon in exchange Ministry of Planning, etc. Foreign Investment Committee, Chilean for carrying out additional work on• An open system to private initiatives. Development Agency, General Director- behalf of the state.• Efficient dispute resolution mecha- ate of International Economic Affairs, • Present Value of income mechanism nisms. amongst others. that uses a flexible concession period• A robust financial system. to guarantee a certain level of income.• An experienced team. Has the successful model also been ap- • Special Public Works Collateral to al-• Business models: attractive profitabil- plied to social infrastructure develop- low use of the rights granted by the ity, appropriate risk allocation, bor- ment? state in raising finance. rowing facilities. • Generation of competition in the ten- Yes. As I said, the role of Ministry of Pub- What are the latest developments in dering process. lic Works is to provide services of infra- Chilean infrastructure development?
50 Latin Infrastructure Quarterly Institutions As the model has consolidated, opportu- Public Private Partnership systems. I knownities for the diversification of projects that countries such as Costa Rica, Uruguay,have emerged. After initially being used Paraguay, Colombia, El Salvador, and Hon-for intercity and urban highways and air- duras are interested in learning more aboutports, it has gradually expanded into new the Chilean Model. Last year I travelled toareas with the inclusion of public build- Costa Rica and Uruguay to speak aboutings, prisons, hospitals and cultural infra- Chilean experience, and people from Costastructure. Rica, Uruguay and Colombia have come to Also, in the portfolio of projects for the Chile in the last years.period between 2012 and 2014, there are some innovative projects as the Urban re- How about countries in other regionsnewal of the Marga Marga Estuary in Viña of the world?del Mar - one of the most touristic citiesof Chile-, which is a private initiative that Regarding Europe, I think that many coun-will upgrade the estuary´s defenses, and tries, especially Spain, have more experi- José Miguel Hidalgo Gorosteguiwill install some spaces for shops and ence than us. The main investors in public Consultantgreen areas all along the estuary. In addi- concessions infrastructure are from Spain. email@example.com, a public marina is planned for Viña Also, there are investors from Italy, Swe- Business administrator degree fromdel Mar’s waterfront. This project will den, France and Germany. In addition, Universidad de Santiago de Chile, andimprove the quality of life for the city´s there are interested investors from Finland, certificate in “Economics for the in-inhabitants and will be an important tour- and Austria, amongst others. frastructure”, at Universidad de Chile.istic attraction. Turning to Asia, I know that Indone- He worked during 12 years in the divi- sia is interested in know about our model. sion of Concessions at Ministry of PublicCan the Chilean experience be ap- Some authorities from that country have Works of Chile, in the areas of projectplied in other LatAm countries? Which been in Chile. Also, some investors form management and investment promotion. ones? Korea, China and Japan are interested in Now, taking advantage of his exten- know about our projects. sive experience working with Chil-I think Chile’s successful experience can And with reference to Africa, I know ean Public Private Partnership (PPP)be applied in other LatAm countries that that authorities from South Africa are in- infrastructure projects, he is assistingwould like to implement or to improve their terested to know more about our model. other countries in implementing and improving their infrastructure utilizing What would be the PPP model and investors interested in first steps to imple- investing in Chile. ment it? His work required in-depth exper- tise across a wide range of skills: I think that the first step is to have politi- • Contract regulations cal consensus behind • Specification of standards and the system. Then, levels of services I think that a good • Business modeling idea is to internalize • Use of government guarantees successful cases in and subsidies countries that have a • Contract solicitation, tender and strong PPP system, to awards learn about success- • Risk distribution ful and failed aspects. • Tariff schemes It is also necessary to • Project Evaluation & Analysis have a strategy to pro- • Dispute Resolution mote investment in • Procurement the country. Finally, I think that is a good idea to start with a not so big and complex project, as a first ex- perience.
Institutions Latin Infrastructure Quarterly 51 The world has an infrastructure problem. Tightened glob- Investment in Turbulent Times al financial markets and the uncertainty engendered by the sovereign credit crisis spreading throughout Europe from Greece and Spain to Italy. makes this fundamentally a financial problem Global governments find themselves fiscally strained by retracting economies, reduced tax The State of Infrastructure revenues and greater demands for public assistance [en- titlements, health care, welfare, pensions, unemployment benefits] and support of their populations amidst record unemployment rates and a global financial crisis. Con- sequently, infrastructure spending and development has been delayed. T he United States alone estimate Latin America, these studies and market over the next five years the fed- reports indicate that the infrastructure fi- eral government will need to nance and lending industry is reducing in- spend at least U.S. $2.2 trillion vestment abroad and in emerging markets. (yes, U.S. $2.2 trillion) just to maintain, Instead, these institutions are focusing on repair and build merely its most critical local infrastructure opportunities within infrastructure. The United Kingdom has their own geographical region. These lo- declared similar infrastructure needs, and cal infrastructure capital requirements are has admitted that the UK government and at an unrivaled high, and at the same time HM Treasury do not have the resources face a shortage of institutional capital. to complete their infrastructure plans. There are plentiful local investment op- Governments worldwide are in desperate portunities. What does this mean? Latin search of infrastructure solutions to tackle America will see less foreign investment their massive and growing needs. in infrastructure until such time that glob- al financial markets repair themselves and Let’s look closely at Latin restore investor confidence. Foreign in- America. vestors will invest closer to home and will carefully select emerging market invest- Latin America and its member countries ments that offer exceptional upside with are still viewed as “emerging markets” by limited downside risk. the international community. In general, global emerging markets have historical- Global Forces Affect Local ly depended deeply on foreign investors, Capabilities multinational corporations and global fi- nancial institutions to finance and develop For many government ministers or urban infrastructure assets. Latin America has financial planners, competing for funding followed suit by attracting and striving in a worldwide market is an unfamiliar to capture ever larger amounts of foreign activity. Where construction and main- investment capital. Latin America’s fu- tenance of infrastructure was required in ture infrastructure demands have now run the past, many officials and their advisors into severe obstructions. Recent industry first looked to local banks, or sought to studies of global infrastructure fund-rais- raise money in domestic bond markets, ing have revealed that the world largest with levies of taxes used to pay the inter- financial centers, institutions and corpo- est payments on those bonds. In some rations are retracting and taking a more cases, financial advice was, and still is, conservative investment strategy, placing sought from the very people who stand capital preservation and security as the to profit from the issuance of traditional paramount priority. More importantly for local bonds or local borrowing and who
52 Latin Infrastructure Quarterly Institutionstherefore are in conflict with capital mar- Urbanization entertainment, creates safer neighbor-ket alternatives. In a global financial mar- hoods, and encourages growth.ket, credit ratings and risk assessments One key global driver for infrastructure Latin America has the highest percent-for infrastructure projects must compete development is urbanization. For the age of urban population in the world,favorably with analogous opportunities first time in human history, more people according to the World Bank. Yet its in-across the world. Local political ob- live in cities than in rural areas. This frastructure has not kept pace with the re-stacles and risk elements are being com- trend is forecast to increase. Urbaniza- quirements of existing and growing urbanpared across nations and cities. Financial tion requires infrastructure: housing, populations. Investments are needed toplanners and government officials need roads, power, ports, light and heavy rail, keep pace with exploding BRIC and Af-to educate themselves about the method- schools, lighting, communications, water, rican economies.ologies of new financial techniques that waste management and police. Govern-are rapidly evolving in light of the eco- ments and businesses need to provide European Sovereign Crisisnomic crisis globally and become aware this framework to allow for stable societ- Impact on Latin Americaof where they stand on the world stage ies that can compete in the marketplace.so that they can present the best possible Whether the ideology leans towards free- Latin America is and will continue to beenvironment to attract and maintain in- market, or is based on more controlled a victim of the European sovereign debtvestments. If cabinet-level ministers are economies, large-scale development is crisis. The bond markets have panickedignorant of infrastructure-based financial now a fundamental task of governments as a result of the instability of Europe andbasics and fail to understand the financial and industry. Urban investments can the potential losses and write downs inmarkets requirements, they will not be create positive feedback. For example, European sovereign bond debt. Emerg-able to compete effectively and will con- better lighting in urban areas increases ing markets and sovereign entities withtinue to fall short in the development of safety, which encourages people to invest credit ratings below Standard & Poor’snew critical infrastructure assets. in housing and businesses, to enjoy urban “A-” or Moody’s “A3” are considered by
Institutions Latin Infrastructure Quarterly 53many institutional investors as too risky can be catastrophic for infrastructure with Brazil’s rapid growth, energy inde-and unstable in light of the European owners and operators. pendence and financial policy over thedowngrades. Keep in mind that only a past five years. Most recently, Brazilfew years ago Spain and Italy had very Investors top Latin America surpassed Great Britain as the world’shigh credit ratings of AAA and are now Destinations in 2012 sixth largest economy, which was a com-in fear of default and massive losses. In- pletely positive indicator of growth andstitutional investors are looking for short I have carefully researched Latin America future opportunity (congratulations toterm liquid safe havens to weather the taking into consideration each countries the leaders and people of Brazil). How-storm. history over the past 15 years, financial ever, although Brazil has many positive When one considers the slackening health, short term outlook, political sta- developments, with growing opportunityof private and foreign capital into Latin bility and legal system to rate my favorite for Latin America’s largest infrastructureAmerica combined with a troubled and investment destinations for 2012. spending plan over the next three years inrisk-averse sovereign bond market, one anticipation of the Olympics and Worldmust turn to the local Latin American fi- 1. Chile Cup, remain cautious on the long termnancial markets. In general local Latin 2. Brazil view for Brazil financially. My concernAmerican financial institutions are smaller 3. Mexico is that Brazil potentially may be grow-in size than many of their counterparts in 4. Peru ing too quickly without having felt theNorth America, Europe and Asia. There- 5. Panama full effect of the global recession. Whilefore their ability to lend is constrained by the upcoming Olympic Games and Worldinherent limits on loan size and capacity. I selected Chile as my favorite over Brazil Cup bring excitement and energy to Bra-Consequently, the larger the project and because Chile has a long standing history zil, they also bring enormous amountsinfrastructure finance need, the more dif- of sovereign financial prudence, stability, of new debt and spending in prepara-ficult it will be to raise the debt from local and a sound and predictable political and tion for both world stage events. I amLatin American financial markets. An- legal system that provides great comfort concerned that these events will bring aother issue that arises is that most Latin with limited uncertainty. Chile is still in temporary economic stimulus, but willAmerican banks and financial institutions need of massive infrastructure spending fizzle and leave decades of debt associ-provide primarily short- to medium-term in part due to the devastating earthquakes ated with these events. However, onedebt and do not have the ability to pro- that destroyed large parts of Chile’s infra- wild card is the large offshore oil reservesvide long-term, fixed-rate debt. Access structure network. Chile, I believe, is a recently discovered which could have anto long-term fixed-rate financing is one of solid investment destination with few ob- enormous impact on Brazil over the longthe most critical requirements for financ- stacles in the short term. term. Greece knows this first hand as it ising an infrastructure transaction. Infra- Brazil is the most exciting and interest- thought that much of the sovereign bor-structure assets generally are perceived as ing Latin American country for investors rowing for the Greece Olympics provedlow yielding and long term investments and poses the largest infrastructure oppor- to be the tipping point into their deep fi-with predictable revenues over time. Any tunity. Brazil is a close second with an nancial troubles.increase in future refinance and borrow- outlook that many observers believe to be Additionally, Brazil maintains a flating cost as a result of higher interest rates very promising. I have been impressed government bond yield curve – what Urban Population (% of total) Arab World 56% East Asia & Pacific 46% Euro area 74% European Union 74% Europe & Central Asia 64% Latin America & Caribbean 79% Least developed countries: UN classification 30% Middle East & North Africa 58% OECD members 77% South Asia 30% Sub-Saharan Africa 37% World 51%
54 Latin Infrastructure Quarterly Institutionsdoes that mean? It means that short term nancial markets. The Inter-American De- sell bonds or obtain bank loans and equitygovernment bond rates are effectively the velopment Bank will be relied upon more partners. The United States Federal gov-same as long term government bond rates. heavily for not only direct loans, but also ernment has used build to suit lease struc-On February 13th, Bloomberg LLP pub- for financial guarantees to ease credit risk tures for more than 20 years and currentlylished Brazil’s government bond rate for concerns associated with Latin America. leases more than 7,000 properties and as-3 month bond at a 10.11% yield, 5 year Concessions will continue to be a source sets under rental/lease agreements with abonds at 10.82% and 9 year bond yields of completing infrastructure projects, how- private owner. Latin American projectsat 11.29%. Economics theory would nor- ever Concessionaires will face more diffi- will also turn to these new methodologiesmally indicate that when the yield curve culty in raising attractive debt financing, as strategic alternatives to more traditionalis flat over an extended period, this can be which will limit the number of projects. routes. In 2012 the deep pocketed inves-an indication of a future recession. This Similar to Europe and North America, tors seek capital preservation over thedata means that the financial markets Latin America will likely also expand its potential of high returns associated withlack short term confidence in government infrastructure financing options to alterna- higher risk. Money is and will be avail-bond debt. I don’t predict that Brazil tive capital structures such as real estate able for the right projects and risk matrix.will suffer the same economic disaster as and asset leasing rather than attempting toGreece; but Brazil will have to carefullynavigate the next 2-5 years during thesetimes of growth, and watch governmentspending policies using a conservative Russell A. Dukefiscal strategy. Managing Principal National Standard Finance, LLCThe Different Classifications firstname.lastname@example.org Infrastructure: Social vs. Russell A. Duke is Managing Prin-Economic cipal of National Standard Finance,Bankers and investors categorize infra- LLC. Mr. Duke is responsible forstructure into two distinct asset classes. leading the company´s strategicInfrastructure can broadly be defined as growth, managing its daily businesslong-term physical assets that operate in operations globally, setting corpo-markets with high barriers to entry and rate strategy and maintaining andenable the provision of goods and ser- building relationships with institu-vices. tional investors, business partners Social Infrastructure is a subset of and clients. He also is actively en-the infrastructure sector and typically gaged in day to day operations andincludes assets that accommodate social oversight of the firm´s most com-services. Examples of Social Infrastruc- plex and highest priority investmentture assets include schools, universities, transactions leading a global team ofhospitals, prisons, government buildings officers, deal makers, underwritersand community housing. and legal professionals. Mr. Duke In contrast, Economic Infrastructure also serves on the Managementsupports economic activity and is often Committee and investment commit-characterized by user-pays or demand- tee of National Standard Finance, LLC. Mr. Duke brings a diverse backgroundbased revenue streams such as toll roads, of experience and knowledge to National Standard Finance, LLC and its clients.water systems, energy, communications, Mr. Duke has in-depth experience in debt and equity project financings, complexfinancial systems, airports, sea ports and investment banking and structured finance transactions due to his experience asconvention centers or hospitality. a merchant banker, investment banker and private equity investor. Since joining Institutional investors led by the National Standard, Mr. Duke has navigated the firm’s rapid growth by expandingworld’s largest pension funds and sover- its investor and client base which has resulted in a rapidly growing portfolio andeign wealth funds will lead emerging mar- an annual pipeline of more than 500 transactions annually originated. Mr. Dukeket infrastructure investing in 2012 and has been the lead investment banker and/or a Principal on numerous large scale fi-2013. Large scale infrastructure financing nancial transactions and has created international exposure due to his accomplish-will be more challenging to obtain. Long ments and efforts in infrastructure and project finance. Mr. Duke is highly experi-term debt and construction financing will enced in international transactions including Europe and Asia. Mr. Duke directlybe especially difficult in the foreseeable oversees all new investments in infrastructure and government assets globally asfuture until the global economy stabilizes Head of the firm’s Global Infrastructure and Government Group.and the European Sovereign/Debt crisis isproperly dealt with and rectified in the fi-
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