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 email@example.com 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) firstname.lastname@example.org email@example.com 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) firstname.lastname@example.org email@example.comITS – 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