LIQissue 1 September 2011

Companies
Latin Infrastructure Quarterly
Brazilian Airport
Privatization
PORT OF CALLAO
Multipurpose North Terminal
A New Investment Frontier?
PPP Law Cleantech Infrastructure
Guatemala
Contributors
Contributors
Ana Fernndez Gonzlez Roger Miralles Anadi Jauhari Emerging Energy & Environment Adrian Barrios PricewaterhouseCoopers Andrew Bogan Bogan Associates David Bloomgarden Multilateral Investment Fund Dennis Blumenfeld Multilateral Investment Fund Diego Harman Rubio Leguia Normand Fabiana Peixoto de Mello Jorge Figueredo Vouga & Olmedo Abogados Luis Pedro Del Valle Arias & Muoz Manuel Ugarte Estudio Delmar Ugarte Abogados Miguel Ronceros Estudio Delmar Ugarte Abogados Milagros Marav Rubio Leguia Normand Paulo de Meira Lins International Finance Corporation Roberto Tapia Rodolfo Vouga Vouga & Olmedo Abogados
Welcome to first issue of Latin Infrastructure Quarterly (LIQ)!
atin America is going through an impressive economic expansion. We, here at LIQ, agree that economic growth can only be sustained over time with a strong development of social and economic infrastructure with the private sector actively involved in the process. Every government in the region agrees as well. Many countries have chosen to take action to foster said development. In those countries, the public and the private sectors have struck partnerships that have resulted or will result in stronger economies. This is perhaps why David Roseman, of the Macquarie Group, said that South America is the next logical step. A few other countries, for different reasons, present less appropriate scenarios for infrastructure development. We intend to provide you with valuable insight from both set of countries. The infrastructure professionals responsible for this process are not looking for news coverage because they already know in advance the developments of the industry. We know these professionals are looking to read how their colleagues solved a clients contractual, regulatory, financial or bureaucratic problem or how they structured a specific deal and what lessons were learned. Practitioners also appreciate reading about how a certain development will impact the future of the industry, and what ideas are out there that may help address some of the current obstacles to the further development of infrastructure. Our proposal with LIQ is for you, the infrastructure professional, to use it as a mean through which you can access hard-to-find analysis and actionable information from your colleagues in the form of articles and interviews, case studies, project profiles, and, "logistical" issues to have in mind. With the above purposes in mind we intend LIQ to be an accessible space for you to share your ideas and experiences with a relevant audience: fund managers, government officials, lawyers, bankers, and consultants. Should you be interested in doing so please do not hesitate to contact us at info@liquarterly. Also, we look forward to your feedback on things to improve and topics to cover. We hope you enjoy the magazine.
Contents
CONTENTS
Grup TCB..........................................................................................................4 A terminal operator with a worldwide presence Cleantech Infrastructure:................................................................................8 New Investment Frontier?...............................................................................12 Multipurpose North Terminal: (Muelle Norte) of Callaos Port Public Private Partnership in Chilean Hospitals..............................................20 A new market in development Airport Infrastructure in Brazil.......................................................................24 Mezzanine Finance forLatAms Infrastructure..............................................28 Spains Infrastructure P3 Program...............................................................32 Infrastructure Projects in Peru:....................................................................36 Are Regional Governments Still under the. Paternalism of the Central Government? Privitization Models for Latin American Airports &..................................40 Implications for Brazilian Airport Privatization Infrascope:......................................................................................................44 An interactive learning tool and benchmarking index EU Debt Crisis and Spanish PPPs..................................................................46 The Impact of the Regional & Local Elections in Spain................................48 Itaip-Villa Hayes Electric Transmission Line..............................................53 Hidrovia on the Paraguay River.....................................................................54 Airports Concession in Paraguay...................................................................55 Peruvian Infrastructure Projects....................................................................57 Public Private Partnerships Act in Guatemala...............................................59 LIQ Speaks with Paul de Meira Lins of the IFC...........................................61
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Companies
Grup TCB:
A terminal operator with a worldwide presence
Since its foundation in 1972, Grup TCB has established itself as the foremost Spanish operator of port terminals, engineering services and consultancy for container and general cargo terminals. This leadership is demonstrated by its specialization in multiple spheres of operations and cargo management, as well as its strategic presence in different ports around the world.
In recent years Grup TCB has undergone rapid growth and major expansion in Europe, the Americas and Asia. With activities stretching from the Pacific Ocean to the Aegean, Grup TCB has immersed itself in an ambitious plan for international development that is constantly evolving. It bases its growth strategy on being a leading operator and shareholder in every one of the terminals in which it operates, from the initial stages of the project to the day-to-day management of intermodal traffic. The key to the company strategy lies in its running of the terminals. One of its guiding principles is to maximize internal logistics with the objective of satisfying and enhancing the needs of its customers and the communities where the terminals are located. The company offers an ample spectrum of services, including port infrastructure design, acquisition and management of equipment, planning of intermodal connections, and even the implementation of customized online solutions. And all of this is subject to the strictest criteria in terms of security, quality and respect for the environment, and approved by independent certifying agencies. This global vision of the shipping cargo business has helped to consolidate the companys preeminent position.
Companies
Grup TCB has a global vision of the cargo shipping business, one that meets all of its clients needs
Latin Infrastructure Quarterly Buenaventura as the port with the greatest potential on Colombias Pacific Coast. The Buenaventura terminal, with an investment of US$240 million in its first phase, provides a real alternative for cargo transport by allowing clients in the region to optimize their import/export procedures and to harness the considerable synergies available in terms of operating. Buenaventura is a strategic enclave for international shipping lines: close to the Panama Canal, at the midpoint between North and South America, and the closest port to the Far East. From here, Colombia ships 60% of its total exports, including 80% of its coffee. TCBuen expects to handle 250,000 TEU over the course of 2011, its first year in operation. Moreover, two vessels can simultaneously dock at its quay, which measures 480 metres in length, and it has a 26 hectare container yard for storage. Facilities at TCBuen principally consist of two Post Panamax gantry cranes with a capacity of 65 tons and equipped with the latest technology; there are also seven RTG cranes for operating within the container yard. (TCBuen has placed itself at the forefront of the most modern shipping terminals in Latin America by using simulators with the most innovative technology for
Companies training gantry crane operators. Together with the Brazilian company Incatep, it has trained 18 operators to handle port facilities in this way. As a result, the terminal can offer its clients productivity on par with the highest figures posted along the western coast of South America. This recent inauguration consolidates Grup TCBs position on the American continent, where it has three other terminals: TCP, in Paranagu (Brazil); TCY, in Progreso (Mexico); and TCH, in Havana, Cuba. Located on the eastern coast of Brazil, the port of Paranagu is a first-class logistics port. Its area of influence covers 800,000 km2 and accounts for 60% of Brazils GDP. It also boasts important international connections, being a port of call for major shipping lines from the U.S., Canada, Europe, Africa and the Far East. TCPs short-term plans are focused on the physical expansion of the terminal. The investment required for extending the 315-meter quay and acquiring new equipment will be around US$90 million. Objectives include surpassing 0.85 million TEU by 2012, with an expected capacity forecast of 1.5 million TEU for 2013. Since 2005, Grup TCB has run the port of Progreso in the Gulf of Mexico. This enclave, located on the Yucatn peninsu-
At present Grup TCBs worldwide operations include terminals in Barcelona, the Canary Islands, Valencia, Gijn, Paranagu (Brazil), Havana (Cuba), Progreso (Mexico), Buenaventura (Colombia), and Nemrut Bay (Turkey). It also owns two intermodal service subsidiaries (TCB Railway Transport and TCV Railway Transport) and four rail terminals (Barcelona, Valencia, Gijn, and Zaragoza). It is developing its business activity in the area of engineering and technical consultancy by undertaking terminal-development projects. In tandem with its terminal operations, the group is also developing other activities, including traffic analysis; legal, technical and economic viability studies; development of the port master plan; defining the ideal operating system; and defining investment. It is also undertaking projects in civil engineering, installations and machinery, which include studies in maritime climate, navigation and manoeuvres, among other relevant subjects. In the area of re-engineering, it designs environmental management and sewage treatment systems, prepares studies on lighting and maintenance, analyzes dangerous goods, and prepares safety plans, while also modifying and modernizing facilities for improved operations and making changes in distribution to optimize production.
Port terminals in South America

Last May, Grup TCB inaugurated TCBuen, a new container terminal in Buenaventura, Colombia. More than 900 guests were invited to the opening ceremony of the terminal, presided over by the President of the Republic of Colombia, Juan Manuel Santos Caldern; the Minister for Transport, Germn Cardona; the Minister for the Environment, Beatriz Uribe; and the Governor of the Valle del Cauca department, Francisco Jos Lourido. The Colombian President underlined the importance of introducing this new infrastructure, which would establish
Colombias Buenaventura Terminal is establishing itself as one of the most modern ports in Latin America -
Companies
Grup TCB expects to see a 13% growth in 2011 la, serves an area of influence of intense economic development, particularly in terms of its in-bond, logistics and tourism industries. Its area of development covers the states of Quintana Roo, Campeche, Chiapas, Tabasco and Yucatn; in total, this represents an area of influence with over 10 million inhabitants, including its floating population, which makes up 10% of the total population of Mexico. In Cuba, Grup TCB participates in the mixed-concession holder company of the Container Terminal of Havana, having assumed the management of its entire business. The privileged situation of Cuba in the Gulf of Mexico makes the port of Havana a center with enormous potential for the development of international trans-shipment traffic, while it also services its own internal needs for the general supply of the island. continues to participate actively in international conferences across the Americas, Europe and Asia. The company is also continuing to optimize its existing terminals, through various expansion and improvement projects, as at the terminal of Gijn, which recently unveiled a new crane, and the terminals of Barcelona and Valencia, where train-transport has helped produce very high growth rates. So despite the economic situation that has shaken the world, Grup TCB maintains an optimistic outlook for the future. The company expects to achieve a growth rate of 13% by the end of the year and forecasts continued progress at all terminals.
Global growth
In keeping with its strategy, Grup TCB intends to sustain its worldwide growth and maintain a geographically balanced business portfolio. In tandem with the steadily progressing development of a terminal in India (Ennore), with a planned investment of US$340 million, and the growth of its newly inaugurated terminals, the company
Infrastructure Financing
Cleantech Infrastructure: A New Investment Frontier?
Anadi Jauhari is a Senior Managing Director at Emerging Energy and Environment LLC (EEE), a Connecticut-based alternative investment firm with current presence in Rio, Mexico City, and Panama. EEE specializes in renewable energy, cleantech, energy and emerging infrastructure. Prior to his current role, Anadi was the Head of Americas Project Finance Group in New York at Natixis, a French bank. He co-founded EEE in 2009 with John Paul Moscarella, a co-founder of the AIM-listed Latam-focused renewable energy and carbon developer, Econergy International plc, which was acquired by GdF Suez in 2008.
EEEs mandate is to invest institutional capital in emerging trends and the fast- growing markets globally through its dedicated investment funds. Over the next 10 to 15 years, EEE believes that technological innovations and climate change will create unparalleled investment opportunities for a range of investment strategies venture, private equity, infrastructure and fixed income. As an alternative asset manager, EEE believes its strength lies in its industry and asset expertise, local presence in the target markets, and close relationships with local and overseas strategic and financial players. The firm currently manages an early stage cleantech venture equity fund in Latin America, which is fully committed. Its second Latam-focused private equity fund, backed by US- based, European and regional multilaterals, will focus on late stage renewable and cleantech infrastructure. What is cleantech and why is it important for Latin America from macro and sector perspectives? We define cleantech very broadly to include companies with sustainable business models that produce goods and services, which increase energy efficiency, substitute or reduce fossil fuel consumption, and reduce or eliminate environmental waste in sustainable ways. These companies have varying risk profiles depending upon the business model and market positioning. On a risk-return continuum, on one end, within the broader cleantech universe, we have early stage investing in start-ups, with a high level of technology and commercialization risks, and infrastructure oriented companies, on the other end of the spectrum. Because of the diverse nature of risk-return profiles of investment opportunities, a wide range of investment strategies are feasible venture, private equity, infrastructure and fixed income. At a macro level, the region is in a very good economic shape today major countries have good balance sheets in large part due to the structural and economic reforms. Over 80% of the regions $5.3 tn GDP today, is accounted for by investment grade countries Brazil, Chile, Colombia, Mexico and Peru as compared to mid- to late 1990s when the first wave of privatization and investments began,. Although the region was not immune
- A conversation with Anadi Jauhari, CAIA
from the financial crisis, it emerged quickly based on its exports and internal sources of demand with current expectation of future real GDP growth in the 4% to 5% range. With economic growth comes rising incomes and improved standards of living. This translates into more demand for energy. Per capita electricity consumption in the region is still low by developed country standards, which means that it will grow quickly. This creates a need to build new infrastructure that provides access to secure and cost-effective sources of energy to keep pace with growing demand. A reliable energy infrastructure is also fundamental to the regions energy security. In our view, cleantech investments can help diversify energy sources and build new energy infrastructure that is both sustainable and cost-effective. The region is endowed with a vast, untapped renewable resource base which is more attractive (in terms of energy potential) than in the developed world. For example, small hydro (<30 mw), wind, solar, and biomass are in abundance in the region and only a very small fraction of the resource base has been utilized. The region has the benefit of deploying the newest technologies developed elsewhere and hence, leapfrog other
countries with more established energy infrastructure. As US, Canada, Europe, and Asia (especially China) begin to direct investment dollars in the development of clean technologies, which, once commercialized, can be transferred and deployed in the region. As the cost of producing energy from renewable sources has come down quickly and if our long-term outlook is one of scarce natural resources (oil, gas etc), then cleantech, as an energy solution, becomes economically attractive. Also, as evident from recent renewable energy auctions in Peru, Brazil and Uruguay, renewables are competitive with traditional forms of energy without explicit subsidies, and in fact in the Brazil auction for wind energy, these bids were lower than natural gas combined cycle plants. Clean technology solutions especially distributed generation can be implemented quickly in smaller communities as often there are no scale disadvantages with smaller renewable generation sources. Such projects can have direct economic benefits through the localization of supply chains. Such green stimulus is an important contributor in creation of jobs which makes clean energy politically acceptable.
What are the opportunities in cleantech infrastructure investing in Latin America? We see tremendous opportunities in renewable energy generation (small hydro, wind, solar, biomass, geothermal), cogeneration, waste management, transport efficiency, energy storage, microgrid, efficient lighting systems, and biofuel/biogas infrastructure. We are focused on the infrastructure end of the cleantech our definition of infrastructure includes assets stable cash flow, with low technical or operating risks. What we find interesting is that within the cleantech segment, especially on the technology end of the spectrum, as technologies mature, a company with the right combination of proven technology and business model, can take on infrastructure attributes i.e., stable cash flow via contracts combined with strong market positioning. The traditional forms of clean energy infrastructure include contracted energy generation assets which have stable long-term cash flows and limited operating risk. Longer term, we see a regionally integrated market develop with transmission links that connect different renewable resource-rich markets.
What we find interesting is that within the cleantech segment, especially on the technology end of the spectrum, as technologies mature, a company with the right combination of proven technology and business model, can take on infrastructure attributes i.e., stable cash flow via contracts combined with strong market positioning.
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Latin Infrastructure Quarterly some form of currency risk mitigation via contracted linkages with inflation (local, US) and or US$ tariffs. Long-term energy prices will still reflect fossil fuel prices which are global commodities again depending upon the market in the region. An important development is the emergence of local pension capital for private equity as an asset class. Pension reform in Brazil, Colombia, Peru, Mexico and Chile is likely to open up new sources of capital for private equity style investing as local pension funds diversify their investment options from their traditional reliance on government bonds. While it is unclear whether the new source of capital will find its way into renewable infrastructure, we believe the stable and essential nature of some of the clean in-
Companies The fund will take mitigated completion or greenfield risk, but generally no early stage development risks. Our infrastructure focus removes any technology or commercialization risks. The focus will also be on small- to -medium sized renewables and cleantech cos or projects (up to 50 MW to 100 MW individually) which at times can be aggregated into larger portfolios for improved portfolio efficiencies. A large part of economic activity in the region is still organized via small and medium enterprises (SME) in the region, which often lack access to capital and knowhow. The funds likely target will be a subset of the broader SME universe, entrepreneurs with vision and experience to develop and implement the regions cleantech infrastructure in the region.
What trends we are seeing in clean energy sector more broadly that the region could benefit from? Declining all-in costs of renewable energy generation, in large part to technological improvements, greater diffusion of promising clean technologies from the developed markets, and a strong realization on part of the regulators to develop a regulatory and policy-framework are positive trends we see in the region which will continue to drive renewable and cleantech investments. Clean energy deployment can be done on a distributed generation basis, especially in solar, cogen, small hydro, which means smaller scale projects can be implemented quickly. What are the challenges and risks in the implementation of cleantech investment solutions in Latam? The development of clean infrastructure faces capital and execution or implementation related bottlenecks, as is the case in any market developed or developing. From a capital perspective, access to early stage capital is still very challenging for project developers, and so is the availability of long-dated project finance capital - ideally to match the underlying contracts or the economic life of assets - on cost-effective terms. Local debt markets lack depth and unable to provide longterm asset funding that is often required for renewable and cleantech infra. This is an area multilaterals have provided innovative financing solutions in the past and they will continue to be important players in cleantech capital formation. Foreign institutional investors interested in gaining equity exposure via unlisted fund structures are often concerned about currency risks in the region not surprising given the regions history with high levels of inflation and currency crises. The macroeconomic situation is vastly improved now and going forward, our view is that the region will enjoy increased macroeconomic stability and regulatory certainty. We believe, depending upon the market, energy assets do provide
Pension reform in Brazil, Colombia, Peru, Mexico and Chile is likely to open up new sources of capital for private equity style investing as local pension funds diversify their investment options from their traditional reliance on government bonds.
frastructure assets, in general, would be a good match for such capital. From an execution or implementation point of view, the development of local engineering, procurement and construction (EPC) base, as well as appropriate risk-transfer structures which mitigate counterparty risks (offtaker, EPC contractor, operator, etc.). The role of multilaterals and local government is critical in addressing some of these bottlenecks. What opportunities will EEEs second fund invest in? EEEs second fund will invest in renewables and cleantech infrastructure. How does EEE create value in its portfolio companies? EEEs senior professionals have extensive experience in the targeted sectors we have a strong local presence in our key target markets. Our teams work closely with the portfolio companies and have a hands-on approach in managing the assets and in introducing best-practices in project execution, operation and financial controls. Anadi Jauhari can be reached at Anadi.jauhari@emergingenergy.com.
Companies
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Deals
(Muelle Norte) of Callaos Port

The bidding for the 30-year contract to upgrade and expand the Terminal Muelle Norte must have been quite competitive, why was APM finally awarded with said contract? Indeed it was a very competitive bid, probably the most important project granted in concession in the last five (5) years, involving Perus most valuable port and an initial investment commitment for 5 stages of US$ 750 million. Technical operation requirements criteria was well above the standard, as desired by the Peruvian government in the quest for only well recognized port operators worldwide to participate in the bidding process. As such, important experience in port operation was to be met, either as a direct bidder or through a Consortium, crediting annual movement equal to or larger than 10,000,000 TEU, with port managing effective control of at least one terminal with an annual movement equal to or larger than 1,000,000 TEU. APM Terminals, being the second largest port operator in the world with 61 ports and terminals in 33 countries, covering all continents, had the sufficient strength and experience to be declared a successful prequalified bidder. The Peruvian government felt that the competition in Callaos Port had to be strengthened (since South Terminal was being already operated by DP World and the North Terminal was being operated by state-owned company Enapu). With the intention to reduce the fees that the fee operator would charge to the minimum level possible and to further enhance competition in Callaos Port, the two (2) remaining prequalified bidders (APM Terminals and Hutchinson Port Holdings, MSC did not present economic proposal) had to determine the following competition factors: Cost per 20-foot full container using a dock gantry crane (being US$ 102 the minimum), including a Cost Rate per TEU / day per additional storage time after the 48 hours established in Standard Services for containerized cargo (US$ 3 being the minimum, US$ 7 as maximum). Discount rate offered regarding Standard Service Rates based on break bulk cargo, rolling cargo, solid bulk cargo and liquid bulk cargo (up to 25%). Discount rate offered regarding certain Special Service rates included in the Concession Agreement (up to 100%). Additional Complementary Investment. In the end, APM Terminals and Hutchinson tied on the first and second competition factors, while APM Terminals offered a full 100% discount on Special Services, which finally broke parity with Hutchinson, which offered on that same concept a 85.88% discount. What is your opinion regarding the risk allocation scheme set forth in the contract (please discuss permitting, economic equation i.e. can the concessionaire ask the grantor for a tariff review and on what grounds, construction and operation risks). We find that the Concession Agreement has an acceptable risk allocation scheme, although it could have been better structured for the benefit of the Concessionaire. For example, the restitution of the economic-financial equilibrium of the Concession Agreement can only be invoked by any of the parties in case of changes in the applicable laws and regulations, which means other risks not related with the enactment of a new law cannot be invoked as cause for said restitution (for example, variations of exchange currency, strikes that may paralyze the port operation for a considerable period, economic obligations not clearly defined to
Multipurpose North Terminal
Deals date in the agreement, among others that may arise). Risk assumption is detailed throughout the Concession Agreement according to the matter (labor, environmental, operative), and it is common for the Grantor to assume responsibility, to hold the Concessionaire harmless and take all the necessary actions with regards to, any claim, action or act filed by third parties regarding the Grantors obligations or damages caused, due to events or situations that occurred before Takeover. How is the upgrade and expansion being financed? Briefly described the security structure permitted in the concession agreement (share pledge, assignment of contract, assignment of rights, pledges, etc.). This is a DFBOT Agreement (Design, Finance, Build, Operate and Transfer). Hence, the financing of the project corresponds exclusively to the Concessionaire, being its responsibility to obtain the funding for the works and port equipment necessary for each stage of the project, prior to its construction. This must be credited prior to the construction of Stages 1 and 2. With the purpose of financing the design, construction, conservation and exploitation of the North Terminal, the Concessionaire may, following previous approval granted by the National Port Authority, with the Grantors favorable opinion and the Regulators technical opinion, grant guarantees in favor of Permitted Creditors, to guarantee the permitted guaranteed Indebtedness on the following matters: 1. The concession right, pursuant to article 3 of Law N 26885, which establishes the possibility in encumber a mortgage and execution of the concession right in case of default of the Concession Agreement, including the extrajudicial execution. 2. The concessions income, net of the compensation granted to the Peruvian government for the Exploitation of the concession. 3. The shares of the Concessionaire. In order to procure the financing of the project. It is worth noting that the project is divided in stages, the first five (5) of mandatory compliance and the possibility for the development of a sixth stage that includes a new Container Terminal which could increase investments from US$ 750 million to 1,2 billion. What were the three main issues you had to solve when (i) providing advice for this transaction; and (ii) providing advice for the takeover of the operation? Advice on the transaction 1. Structuring of the Project: Given the interest of many foreign investors in taking operation of the North Terminal due to its strategic position in the Pacific Ocean (DP World and APM Terminals had previously presented separately Private Initiatives), the Peruvian government wanted to promote the project as a public bid maintaining a presence in the Callao Port
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Terminal through Peruvian stateowned company ENAPU, within the administration of port operations. The Peruvian government wanted to avoid with this labor conflicts with ENAPU workers, and also to prevent public reactions against the project related to the topic of the privatization of the countrys main port. As a result of the above, by Supreme Decree N 019-2010-MTC, the Ministry of Transport and Communications established for the administration of port infrastructure to the private sector to be given through the form of a Joint Venture with ENAPU. The aforementioned decree received much criticism, mainly because opting for a joint venture operation was not in accordance in recent history in private investment promotion related to infrastructure projects in the past 20 years, developed through concession schemes. Moreover, other attributes of the Ministry of Transports and Communications given by the decree were also criticized: (i) leaving at its criteria whether the Agency for Promotion of Private Investment PROINVERSION should direct the project
APM Terminals, being the second largest port operator in the world with 61 ports and terminals in 33 countries, covering all continents, had the sufficient strength and experience to be declared a successful prequalified bidder.
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Latin Infrastructure Quarterly operator) to participate in the competition for the award of the North Terminal, in order to avoid the existence of monopoly within the Callao Port Terminal which would prevent competition and the benefits related to it, mainly the reduction of tariffs. Once the public bid for the North Terminal was announced on August 2010, the process was carried out with certain discrepancies of the bidders who did not consider ENAPU as a partner who could bring something to the business (considering that the state-owned company would take a 17.01% percentage of gross revenues before taxes). Even though the concession mechanism was finally enforced, this did not prevent bidders from signing with ENAPU a Joint Venture Agreement as an annex of the Concession Agreement in exchange for ENAPU goods and assets that bidders felt were not an adequate return for the benefits ENAPU would give. 2. Injunction to the bidding process: The government enacted a Supreme Decree during the process, based on the political decision to promote competition in the port by not allowing existing port concession holders to participate in this or in other future bids. Being the port operator of the South Terminal in the same Callaos Port in which the North Terminal is located, DP World felt it was being discriminated against by being prevented from participating in the bid. One of the arguments DP World felt strong about was the fact that they had been granted with a green-field project and the North Terminal Project in Callaos Port was a brown-field project with cash flows already being generated and a port already managed by state-owned ENAPU, to be transferred already in operation to the successful bidder. All in all, APM Terminals and the rest of the Bidders wanted the same economic and technical conditions as those on the South Terminal, since
Deals minimum rates were low and other obligations were demanding in comparison of those for DP World; while DP World felt the Peruvian government was breaching anti-competition law by giving the North Terminal bidders an operating port, including stateowned ENAPUs port equipment, while it had to construct its own terminal and but its own port equipment. Since DP World felt it was being discriminated against by being prevented from participating in the bid, it filed a constitutional claim for the supposed breach of its non-discrimination right. The claim was presented alongside with an injunction which would have allowed them to participate in the public bid for the North Terminal. This was a key subject for APM Terminals, since DP World could have had comparative advantages in case it was allowed to present proposals (lower rates, privileged information). This required several negotiations and meetings with Proinversion in which common terms were reached as to prevent the bidding process from being cancelled. Finally, the injunction was left without effect as to promote terminal competition in benefit of Users, and the bidding process continued without DP World being prequalified as bidder. To date, there is still the constitutional claim filed by DP World pending of resolution in Peruvian constitutional courts, and a claim filed by such company before the Arbitration body of the International Center for Settlement of Investment Disputes (ICSID), according to the dispute resolution mechanism. APM Terminals will not participate in such arbitration procedure. 3. Closing Date: The Peruvian government decided to go along with the bidding process despite some social conflicts generated mainly from ENAPU workers that did not agree with the concession, rallied behind a presidential candidate that originally claimed that ports as stra-
bid, which could ensure a process of transparent selection, (ii) to develop a private public bid, with competition of only private bidders of its choice, (iii) including ENAPU in the business, a state company that could provide little in front of his partner. Three days after the issuance of Supreme Decree N 019-2010-MTC, the government published Supreme Decree N 020-2010-MTC, in which it clarified that prior to the Joint Venture to be entered, a public bid directed by the Ministry of Transports and Communications had to be performed to determine the capacity and expertise of the private investor which would enter the Joint Venture. Despite the above clarification, the controversy over the partnership with ENAPU was still a criticism, thus generating voices of disagreement on private investors interested in the North Terminal, on the viability and profitability of the project. Thus, in July 2010, the State enacted Supreme Decree N 146-2010-EF, mentioning that the Joint Venture had to be bid under a concession scheme. This meant that the main legal relationship would be given by a Concession Agreement, signing in parallel a Joint Venture Agreement as a contract appendix. It also established that the public bid would be in charge of Proinversion. Following the purpose described in both Supreme Decrees N 019-2010MTC and N 020-2010-MTC, which sought to promote competition in the management of port infrastructure service, Supreme Decree N 0332010-MTC was published, with a specific prohibition for private port administrators that had an existing contractual relationship with the Peruvian government, to participate in other public bids designed to deliver the administration of another port infrastructure within the same port terminal. In other words, what the government wanted was to prevent DP World (the existing South Terminal
Companies
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Latin Infrastructure Quarterly in Appendix 23, from which the Concessionaire had to make job offers to at least sixty percent (60%) pursuant to the Concession Agreement. In this sense, the agreement mentioned for the Concessionaire to send job offer letters within fifteen (15) days counted since the Port award, having the port employees ten (10) days to answer this communication. In this part of the process, we had to confront with two problems. First of all, the employees data sent by ENAPU was not updated. This problem affected the notification of the job offer letters sent by the Concessionaire, in reason that the addresses detailed in the Annex 23 list were not correct. On the other hand, the port employees had many doubts about the conditions that we established in the job offer letters, which had been expressed through several letters that the Unions sent us, although APM Terminals was just expressing such letters according to terms and conditions of the Concession Agreement. Our law firm wanted to prevent turmoil from port workers, so we sent to Callaos Port two (2) of our labor lawyers, specialists in human resources management, during the 10 days term for workers to answer job offer letters, in order to explain them and answer all queries and questions regarding takeover and new labor conditions, and in turn such lawyer were receiving in return and in representation of APM Terminals the employees acceptance letters. These 10 days were very important in the takeover process, because we had our first contact with the port employees. In this sense, APM Terminals acquired their trust, reassuring them the commitment of the Concessionaire in not affecting any right they might have had previously by working with ENAPU. A joint conference summoned by ENAPU and APM Terminals was very helpful and important for convincing the remaining employees
Deals which had doubts in accepting job offers from ENAPU. The result of all efforts displayed was successful, since more than ninety percent (90%) of the employees (around 420 workers)that received job offer letters, finally accepted joining APM Terminals team. 2. Labor Contracts: The Concession Agreement established for APM Terminals to sign labor contracts with all employees who had accepted their job offers, within 60 days before takeover of the port operation. For this, we needed the employees remuneration information from ENAPU. In this sense, according to the offer job letters experience, it was necessary to prepare a very cautious labor contract, where two clauses were of particular interest: If the worker detected a disparity between the remuneration established in the contract and the real remuneration, the worker would have to prove with his payment slips the real remuneration. The employer could observe the bargaining agreement benefits executed between ENAPU and his unions. The result was once again successful: only 4 employees of all the operative workers who had accepted the offer job letters did not sign their labor contracts.
tegic sectors of the country should remain under the administration of Peruvian-owned companies (such candidate, Ollanta Humala, later won the presidential elections but since then he has moderated his original speech, now keen in respecting and fomenting private investment). Once the award of the bid was concluded on April 1st 2011, APM Terminals felt time was a key factor in protecting future investments, and wanted to sign the Concession Agreement as soon as possible, even though takeover of the operation would be done later. Closing Date was programmed on March 11th, 2011, and important matters where pending to be performed as to comply with obligation prior to Closing Date. Among other obligations, we advised APM Terminals in the following: (i) constitution and incorporation, along with the other members of the Consortium, of the Concessionaire company, a special purpose vehicle with a capital stock of US$ 61,433,839.80; (ii) celebration of shareholders agreement and deliver copy of the act in which shareholders approve the Concession Agreement; (iii) registry of powers of attorney of legal representatives and directors; (iv) delivery of performance bond of US$ 30,716,920.00; (v) reimbursement procedure expenses to Proinversion for an amount of US$ 1,255,013.70 (vi) negotiating on the insurance for port operation, civil responsibility and workers. Coordination with Proinversion was crucial in order to perform all necessary obligations for Closing Date. That included permanent work meetings as to avoid observations in the documentation to be delivered at Closing Date, as well as a pre Closing-Date Advice on the takeover of the operation 1. Hiring of Operative Workers: Proinversion provided APM Terminals a list of ENAPU operative employees
3. Timing for Takeover: Once again, time was of the essence and takeover was finally programmed for July 1st, even though the Concession Agreement had set forth sixty (60) days from Closing Date. ENAPU and APM Terminals had to make all necessary coordinations for the transfer of the operation without affecting port activities during the transfer process, and also had to comply with some legal obligations that would allow APM Terminals to operate normally. Some of the most important ac-
Deals tions taken by the Concessionaire and needed for takeover included: Communication and approval of Tariffs for Standard and Special Services. Communication and approval of Users Claim Regulations. Hiring of operative and whitecollar personnel necessary to commence port operations, and registering of labor contracts in the Ministry of Labor. Lease agreements with foreign personnel and migratory status before the Ministry of Labor. Negotiation and entering of agreements with all providers and suppliers of goods and services in the port. Negotiations with existing port providers and suppliers that wished to continue relations with APM Terminals. Coordination and negotiations with ENAPU and the Grantor regarding takeover. Signing Date, the anchoring ground for traditional fishing vessels near Berths C and D should have been reorganized, so that the use of the area by such vessels does not affect the operational capacity of the North Terminal nor the Works execution. As of Takeover date, ENAPU is executing a plan to remove from the areas such fishing vessels. What is the dispute resolution mechanism set forth in the Concession Agreement? The Concession Agreement has set forth an arbitration procedure for any dispute settlement or controversy that arises between parties. However, there is a specific procedure that must be followed before an arbitration even occurs: Direct dealing, by petition of one of the parties to the other, stating the conflict or any uncertainty that has juridical relevance and may arise regarding the interpretation, execution, compliance and any aspect related to the existence, validity or effectiveness of the Concession Agreement or its termination. The term for direct dealing for national arbitration shall be fifteen (15) Days counted since the day in which one of the parties informs the other in writing about the existence of a dispute. Regarding international arbitration,
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What are the main contractual obligations regarding the port operation of the grantor (e.g. dredging, coastal defenses, navigational buoys)? There are no key obligations of the Grantor regarding port operation, since responsibility for the entire operation has been transferred in concession to APM Terminals, including all goods of ENAPU related to the North Terminal and areas in which it operated. In that sense, the Concessionaire has the right to the exclusive execution and/or provision of any and all services that may be rendered within the North Terminal as from the Takeover. This must be done observing principles established in our National Port Law, including free competition, neutrality and non-discrimination principles, so that it shall not be able to behave in a way that aims at affecting the competition of port services in Callaos Port Terminal. There was one specific obligation by the Grantor in which it guaranteed that on
the term for negotiation or direct dealing shall not be less than six (6) months. Such term shall be counted from the date in which the party invoking the clause notifies the request to initiate direct dealings to the Ministry of Economy and Finance in its capacity as the Coordinator of the State Coordination and Response System in International Investment Disputes, In case the parties, within the direct dealing term, did not settle the dispute or uncertainty arose, they shall define it as a technical or non-technical dispute or uncertainty, as the case may be. Technical Disputes: Equity arbitration, in which the arbitrators shall settle the dispute to the best of their knowledge and belief. The dispute shall be settled through national arbitration, and regulations of the Arbitration Center of the Lima Chamber of Commerce, regarding anything not provided for in this Concession Agreement, shall apply Non-Technical Disputes: Arbitration at law, procedure by which the arbitrator shall settle in accordance with the applicable Peruvian laws. The arbitration at law may be national or international, depending on the amount of the controversy. In that sense, when non-technical disputes involve an amount that exceeds US$ 10 000,000.00 or its equivalent in domestic currency, disputes will be settled by international arbitration at law, through a
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Deals
procedure followed in compliance with the Conciliation and Arbitration Rules of the International Center for Settlement of Investment Disputes. On the other hand, for non-technical disputes in which the involved amount is equal or less than US$ 10 000,000,00 or its equivalent in domestic currency, disputes shall be set-
tled through arbitration at law by means of a procedure conforming with the conciliation and arbitration Regulations of the Center of the Chamber of Commerce of Lima. Finally, it is worth mentioning that the Concessionaire and its partners or shareholders have expressly, uncondi-
tionally and irrevocably waived any diplomatic claim for controversies or conflicts that may arise from the Concession Agreement.
Miguel Ronceros mronceros@delmar-ugarte.com www.delmar-ugarte.com Partner with Delmar Ugarte Abogados in Peru, holds an LL.M. degree from The London School of Economics, a JD from Pontificia Universidad Catolica del Peru and specialized studies in infrastructure at The John F. Kennedy, School of Government (Harvard University). He focuses mainly on representing parties in the development and financing of infrastructure projects in different sectors, including airports, ports, toll roads, oil and gas, telecommunications, electricity, among others. He is a Director of the Finance Law Program at Universidad del Pacifico and a Project Finance professor at Universidad del Pacifico, Universidad ESAN and UPC. His relevant experience include representing the IADB, IFC, US-Exim Bank, KExim and SACE in a US$2.2 billion financing for an LNG project in Peru(Deal of the Year awards by Latin Finance, Project Finance International and Latin Lawyer); representing Odebrecht in a US$600 million financing for a toll-road (Deal of the Year Award by CG/LA Infrastructure - Most Innovative Infrastructure Financing Structure in Latin America); leading the external advisory of the Peruvian Government in the structuring of a US$650 million containers terminals concession in the Callao Port (Entrepreneurial Creativity award) and advising the Peruvian Government in the drafting of the Public-Private Partnerships laws. Mr. Ronceros has been name one of the leading attorneys in Peru in Financing and Projects by Chambers and Partners and by Which Lawyer and in Public Procurement by Whos Who. He was also recognized by Latin Lawyer as one of the top twenty lawyers in Peru under the age of forty.
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P
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ublic rivate artnership in Chilean Hospitals
A new market in development
n Chile, the application of the Public Private Partnership (PPP) model was initiated in 1996, with the approval of the General Law on Public Works Concessions. Since then, there have been numerous public works developed under the PPP model in such distinct areas as airports, roads, ports, stadiums and prisons. These works exceed US$12 billion in investments and have changed the connectivity and productive capacity of the country. Chile is a recognized leader in LatAm in being conducive to business, investment, and PPPs. Even more importantly, its consumers have developed a high standard of services in areas handled traditionally, and often inadequately, by the State. Beginning in 2000, several PPP initiatives were developed for Chilean hospitals, but most of them failed to reach completion for technical or political reasons; only Maip and La Florida Hospitals, both of them located in Santiago de Chile, are now under construction. These projects are intended as general hospitals, each with nearly 400 beds, and with a total budget of over US$300 million. The PPP aspect of these projects extends to most of the nonclinical support services and leaves out the medical equipment and clinical operations. The projects were initiated in 2006, tendered, and awarded in 2009 to the Spanish company San JosTecnocontrol. The process has been a real test for applying the PPP model to Chiles public health sector, and so far it has been successful in terms of the design process, bidding and construction.
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Deals
The devastating earthquake of February 27, 2010, highlighted the vulnerability of the countrys hospital infrastructure, which suffered major losses in its operational healthcare capacity in more than 70 hospitals, with 25 of them rendered out of service or seriously damaged. As a whole, the healthcare network lost more than 4,700 beds. This situation demonstrated the high obsolescence and vulnerability of Chiles hospitals. To date, the official portfolio of PPP hospital projects exceeds US$1.5 billion. Only one of these projects, the Antofagasta Hospital, is in the prequalification stage, with over 700 beds and more than US$300 million of investment; it should call for bids in September 2011. The rest of the projects include large, highcomplexity hospitals located in Santiago, such as the Salvador-Geriatrico and Sotero del Rio Hospitals, each with more than 700 beds, and the Felix Bulnes Hospital, with 400 beds. Other, smaller hospitals are located in the areas stricken by the earthquake, such as the Parral, Curico and Cauquenes Hospitals. All of these projects require architectural design as a prerequisite for being tendered. Additionally, in recent months the government has announced that new hospitals will be built via PPP. These projects include more than 4 new hospitals in the early stages of study, and together they should exceed US$700 million of investment. In all cases, given the local regulatory requirements and bidding methods established by law for the countrys publicsector tenders, these projects will require highly competent local professional teams to analyze the information provided by the Chilean State and make the bidding process competitive. The Chilean PPP tender process establishes an iteration of consultation and construction for the technical and economic contents of the tender, and the efficiency of each company in this process is a key for the development of a real understanding of each project. The current Chilean Government faces a huge challenge in realizing the construc-
tion of the hospitals in its PPP portfolio, yet no major advances in the field have been observed since the change in government a year and a half ago. The market`s expectations and the Chilean populations complex healthcare needs are increasing,
and probably the best option for the Government is to respond to these demands by the way of PPPs, as they will incorporate quality standards of services and help focus the work of managers and clinicians directly on the healthcare of users.
Dr. Roberto Tapia Hidalgo rtapia2005@gmail.com http://concesionesensaludparachile.blogspot.com/
The author has worked during the last 20 years in the area of project management and public health in Chile and with various international agencies, developing his professional work in such areas as primary health care, international cooperation, and hospitals PPPs. He has worked in both the public and private sector and has done extensive consulting for the development of PPPs. In the public sector he was in charge of the successful PPP development and tender process of the Maip and La Florida Hospitals in Chile His approach to the PPP application to health care sector is based on the ethical imperative for incorporating new ways of investing in LatAm development, aiming simultaneously for high technical and economic standards.
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Airport Infrastructure in Brazil

Fabiana Peixoto de Mello
Deals
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Brazils deficient airport infrastructure was not a major issue until the country was awarded the 2014 World Cup and the 2016 Olympic Games, yet for years it had impaired the blossoming of high-value-added industries. Historically Brazil has been able to manufacture high-added-value products at low costs, but the costs of shipping those products to Europe, Asia or North America which purchase 70% of Brazils exports and are only reachable by sea or air -- inhibit its competiveness. Many factors account for these costs, but the countrys airport infrastructure should take much of the blame.
nfraero, a company wholly owned by the Government of Brazil, manages 67 Brazilian airports, only 11 of which are currently profitable. It uses cross-subsidy mechanisms to support the network. The aviation agency (ANAC) issued new regulation that will change cross subsidy calculation (Res 180/11). Instead of setting different tiers of tariffs by passenger movement, as Infraero used to do, negative operational results will be set off with disproportionate distribution of the networks commercial revenues. Airports with higher operational results will have higher tariff increases. The challenge is that most airports have negative operational results because they do not move enough passengers to break even. Experts estimate that an airport needs to move about 1.5 million per year to break even, but 66% of Brazilian airports move fewer than 1 million passengers per year, and 24% move fewer than 450,000 passengers. The new regulation will increase the rigidity of the network and make it even more complicated to receive private investment into individual airports. The airports will only be viable as parts of a whole. Hence, the privatization of airport infrastructure currently under discussion will maintain 49% Infraeros network ownership. There are alternatives for making the network more flexible, including direct subsidies to unprofitable routes, as the Essential Air Services (EAS) program in the U.S. and Public Service Obligations (PSOs) in Europe do. These programs bring transparency and make it very clear what portion of the deficit is being borne by the taxpayer and
why. In Brazil, however, direct subsidization programs are likely to cause a very tough political discussion and to reinforce the existing antagonism between regions, mainly the Northwest and Southwest. The countrys historically uneven wealth distribution and huge dimensions have ignited these feelings in the past, and it is not politically wise to stoke them. Brazilian investment capacity is exhausted and infrastructure investments can only be borne by tax increases. Taxation is already very high and increasing it will reduce the countrys competitiveness. Moreover, Brazilian regulations are unfriendly to private investment in airport infrastructure. The Governors of the States of Rio de Janeiro and Minas Gerais are facing a lot of pressure to meet the deadlines for the Olympics and World Cup and are pushing for the total transfer of management of Rio de Janeiro/Tom Jobim and Confins airports to the private sector. President Dilma Roussef has raised the possibility of transferring the management of some airports to special purpose vehicles in which Infraero would have minority participation, and then selling the Governments majority equity in Infraero. Official documents confirming these statements will not be unavailable until December 2011. But the recently created Civil Aviation Secretary has just created two additional agencies named CONAERO and CAA and has taken measures to improve Infraeros governance. CONAERO is a committee made up of representatives of the Agriculture Ministry, Defense Ministry, Revenue Ministry, Development Ministry, Health Ministry, and the aviation agency.
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Deals
CAA is an airport operating authority that will oversee the direction and operations of most important Brazilian airports which are expected to be privatized soon: Guarulhos (SP), Congonhas (SP), Galeo (RJ), Santos Dumont (RJ), Braslia (DF), and Confins (MG). The specific functions and responsibilities of each agency are very unclear, particularly because Infraero itself will be the CAA and hence oversee direction of the companies in which it has minority interest. The Civil Aviation Secretary measures to improve Infraeros governance suggest that the Government may open the companys capital in the future. The current privatization model developed by the Brazilian Aviation Agency and used for the construction, operation, and exploitation of a new airport in the city of So Gonalo do Amarante, in the State of Rio Grande do Norte, called ASGA. The existing airport in the city of Natal is also located in Rio Grande do Norte and is only 11 kilometers away from ASGA. According to a study conducted by the IPEA (Instituto de Pesquisa Econmica Aplicada, or Institute of Research in Applied Economics), the capacity of the existing airport in Natal is about to be exhausted considering the projections of passenger demand. But according to ANACs information, dated February 2011, the existing airport is not profitable, as the chart below demonstrates. A joint venture of Corporacin America and Engevix won the bid for ASGA offering a 228.82% markup. The 8% return estimated by the joint venture is deemed impossibly high by other competitors and some analysts. Corporacion America is known for having defaulted its concession fees of Ezeiza Airport due
There are rumors that the Federal Government does not want to bid for a brand new airport in So Paulo because the State Government belongs to the opposition
to the Government of Argentina. The joint venture has already stated that will proceed with aggressive bids in other Brazilian airports privatizations and that it will seek Brazils Exim Bank (BNDES) financing. Nonetheless, the result of the bid bought some time to the regulatory agencies in a sector that is facing a severe leadership and organizational crisis. Investors interested in the So Paulo airports bids are demanding non-compete guarantees, such as the prohibition of construction of another airport to serve the congested metropolitan area of So Paulo. There are rumors that the Federal Government does not want to bid for a brand new airport in So Paulo because the State Government belongs to the opposition. Numerous studies prove that So Paulo needs another airport, regardless of any improvements made to the existing ones. Investors requests may well suit Federal Governments intentions, but they would be very detrimental to the city and the State. President Roussefs special-purpose-vehicle model obliges the private investor to complete the necessary construction for increasing a given airports capacity. The problem is that Infraero itself has not been able to complete the necessary construction for years, even though it had been given the resources to do so, mainly because of environmental and regulatory restrictions. The risk of not obtaining environmental and regulatory authorizations has jeopardized many energy projects in Brazil. Bidders have won the rights to develop projects only to face immense difficulties in getting the necessary licenses and hence to honor their delivery obligations. According to the abovementioned study by the IPEA in 2010, the average processing time for an environmental license to start
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Activity
Revenue (R$)
With depreciation and interest (R$) Cost Result -1.160.010 5.697.650 -7.160.715 199.962 -12.463.696 -702.270 -15.589.079
Without depreciation and interest (R$) Cost 1.347.463 2.064.163 11.442.416 815.731 8.841.410 1.081.407 25.592.590 Result -641.501 6.685.143 -1.219.389 627.954 -7.853.905 -127.466 -2.529.166
Cargo handling fees Non regulated fees (mainly commercial fees) Domestic boarding fees International boarding fees Domestic Landing fees International Landing Fees Total
705.962 8.749.305 10.223.027 1.443.684 987.505 953.941 23.063.424
1.865.972 3.051.655 17.383.742 1.243.722 13.451.201 1.656.211 38.652.503
building a project was 50 months. Recently the energy sector has developed a Pre-Tender License (Licena Prvia para Leilo) for projects, granted before the tender. The winning bidder still has to pursue other environmental licenses after being granted the authorization for the project. There have been no discussions over implementing a similar license for airports. Even though obtaining an environmental license involves a lengthy process, analysis of the difficulties Infraero faces to carry out its investments has been focused on its challenges with project management. In July, the Civil Aviation Secretary has announced measures of improvement in this regard that include the creation of a new business directorship to be filled by August. As the clock ticks and the debate over the best methods continues, some players have decided to take action. In an effort to avoid a total fiasco and build the very minimum capacity for the events, keeping away from major regulatory and environmental issues, Infraero has decided to build operational modules (Mdulos Operacionais Provisrios) for the existing terminals, sarcastically nicknamed puxadinhos (annexes) by the population. According to Infraero, these modules are cheaper, less comfortable, but temporary. These modules augment the check-in, boarding, and deboarding areas, but do not increase the number of aprons and lanes. They will merely increase the area where passengers will have to wait too long for the same number of flights. President Roussef has passed a law that loosens up procurement rules for all airports within a 350km radius of the World Cup host cities. Numerous entities and legal authorities have criticized this law for facilitating corruption and abusive practices in the Governments procurement and for reducing the transparency of public actions and expenses. Investors, on the other hand, are exploring less regulated opportunities, such as private airports. The challenge is that private airports cannot be explored for commercial purposes, as their
authorization only lasts for five years and can be revoked at any time. Nevertheless, their number has grown substantially and the network is getting denser quickly in and around the cities of So Paulo and Rio de Janeiro. Brazil does not lack the demand or resources for, nor the overall interest in, improving its airport infrastructure. It lacks coordinated action oriented toward the long-term development of the country. No measure taken now will adequately prepare Brazil for the World Cup or Olympics Games. Brazil needs strong leadership that understands the development challenges facing us and communicates them clearly to the population.
Brazil does not lack the demand or resources for, nor the overall interest in, improving its airport infrastructure.
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Mezzanine Finance
for LatAms Infrastructure
Mezzanine finance is an innovative and complex way to finance corporate expansion projects, acquisitions, recapitalizations, and leveraged buyouts, as well as to structure refinancings. A mezzanine financing can be structured in a number of ways, a versatility that facilitates its capacity to evolve with market conditions and adapt to meet particular financial needs of companies and projects. As Eduardo Farhat, a Principal at Darby Overseas Investments (Darby), the private equity arm of Franklin Templeton Investments specializing in emerging markets and an experienced player in mezzanine finance worldwide, says, A well structured mezzanine transaction aligns all interests around the success of the project and provides all sides with a better deal, as it mitigates risks from the investor side while avoiding unnecessary dilution from the sponsors.
Patricio Abal
Infranstructure Financing
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hough many private sector companies worldwide have utilized mezzanine finance to develop public infrastructure projects, the LatAm region has had limited experience with a few important exceptions. Darby launched the Darby Latin America Mezzanine Fund back in 1999 and the Brasil Mezanino Infra-estrutura FIP (BMI) in 2007, and is apparently in the process of closing its Darby Latin America Mezzanine Fund II after a number of years of fundraising. EMP Latin America has begun investing its Central American Mezzanine Infrastructure Fund (CAMIF), as well, a development which infrastructure professionals are watching closely. This article will provide an overview of mezzanine finance and the most common issues surrounding it. It will then address the characteristics and activity of the funds named above. Characteristics of mezzanine finance Mezzanine financing can be structured in a number of ways to provide a tailor-made solution based on the transaction and the capital structure of the company receiving the financing. In fact, mezzanine finance is a collective term for hybrid forms of finance, as it has features of both debt and equity. It is important that companies considering mezzanine finance understand that the return of the mezzanine providers, targeted at 20% in most cases, will be the aggregate of any or all of the following: the interest cash payment; the so-called payable in kind interest, which basically means that the interest amount is added to
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the principal outstanding; the return from the equity stake; and whatever participation the provider gets over the results of the companys performance. Issues to be considered by companies applying for mezzanine finance With the previous section in mind, it should not be a surprise that negotiations over mezzanine finance can involve many issues, extend over time, and demand plenty of documentation. That is why companies considering this type of finance are advised to seek proper legal and financial advice, both before applying for the finance (to anticipate the expectations and requests of mezzanine providers) and, subsequently, during the negotiations of term sheets and legal documentation (to be able to more efficiently tackle the issues that are listed below). Due to the equity and debt elements that characterize this type of long-term risk capital, investors and companies have to understand and negotiate a number of complex issues: Security: Mezzanine is subordinated to senior loans, therefore security can consist of second liens on assets. Secu-
rity packages will need the consent of senior lenders (see Intercreditor issues, below); Exit structure/s: The most common ways for mezzanine finance providers to exit an investment are through a recapitalization of the company (using generated cash or senior debt contracted on more convenient pricing) or through an acquisition of the company by a strategic investor; Covenant protection: While the debt component of a mezzanine transaction shares a similar set of covenants to bank loans, ratios are not as stringent; Intercreditor issues: Senior creditors and providers of mezzanine finance will have to negotiate an intercreditor agreement to address, among others issues: the collateral to guarantee the mezzanine loan, the remedies to be exercised upon a default on their respective loans, and the conditions under which the mezzanine provider can accept a payment (different from the interest payment) from the company; Interest rates: Can be fixed or variable;
investing in Brazilian infrastructure is a complex activity that requires a number of pieces to be put in the right place simultaneously: senior financing, all required licenses, and a certain amount of equity from a sponsor with a remarkable track record and indisputable reputation, among other elements.
Equity kicker: Can be in the form of warrants and/or profit sharing arrangements tied to the companys performance (measured using net profits, EBITDA, or operational metrics); Holding or operating company: Providing the mezzanine finance to the former means additional risk for the provider (because the holding company has no operational cash flows, so that a legal structure to secure the dividends from the operating company has to be put in place); hence costs increase for the recipient. The plus side is that the debt will not affect the operating companys ratios involving interest coverage or leverage; Transparency requirements: Companies are expected to report certain financial and operational information in a timely and complete fashion to allow appropriate monitoring. Lastly but certainly not least in importance, there are the beneficial effects for a company of a partnership with a mezzanine provider. As when partnering with a private equity firm, the companys image improves, increasing the chances of partnering with sponsors and accessing relevant deal flow. Our regions experience with infrafocused mezzanine funds In 1999, Darby launched its pioneer Latin America Mezzanine Fund. By 2005, it had made 12 investments for a total of US$200 million. Today it is fully divested. The fund had a strong focus on infrastructure and showed great diversification across countries and infrastructure sub-sectors (toll roads, ports, pipelines, energy, telecom, etc). The last few years have seen an increase in the launching of infra-focused mezzanine funds. In 2007, Darby led the way, yet again, with the launching of the BMI. As the name suggests, this is a mezzanine fund focused on just one country, Brazil, and a specific sector, infrastructure. Furthermore, the currency of investment is the real (R$387.5 million), and the external capital was raised from Brazilian institutional investors (we use the word exter-
Infrastructure Financinng nal to indicate that the funds sponsors, Franklin Templeton Investments and Brazilian Grupo Stratus, have also invested in the fund). The BMI has a 4-year investment period and part of its capital has been invested in electricity generation and in a cargo terminals. Mr. Farhat says that investing in Brazilian infrastructure is a complex activity that requires a number of pieces to be put in the right place simultaneously: senior financing, all required licenses, and a certain amount of equity from a sponsor with a remarkable track record and indisputable reputation, among other elements. The main challenge for a professional infrastructure investor is to find robust and economically attractive investment opportunities that match all these requirements and can go through an indepth due diligence process without any major issues identified. The fund can invest in energy and biofuels; water, sewage, and waste management; logistics and transportation; oil and gas; and suppliers to the Brazilian infrastructure sector. In late 2009, EMP Latin America closed its CAMIF. Major multilateral and bilateral development banks appear as investors in the US$150 million fund, which focuses on traditional infrastructure subsectors but can also invest in related sectors such as alternative fuels and health and education. Part of CAMIFs capital has already been invested in a palm oil producer in Mexico and in a hydroelectric
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power company in Guatemala. Darby seems to be closing the followup fund to the Latin America Mezzanine Fund. The firm intends to raise US$200 million and will focus on investment opportunities in the range of US$10 to $30 million in the manufacturing, services, and infrastructure sectors of, primarily, Mexico, Brazil, and Colombia. Special thanks to SoRon Hung and Eduardo Farhat from the So Paulo office of Darby Overseas Investments. Patricio Abal is one of the Directors of Latin Infrastructure Quarterly.
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Institutions
Highlights of the Spanish P3 Programme

A supplementary PPP Infrastructures Program was passed by the Spanish Government in 2010, in order to bring forward investments that would otherwise have been delayed due to the countrys current, well-known budgetary situation. Besides promoting job creation, this program is meant to be a new productivity model for sustainable mobility, cutting transport costs and improving competitiveness and efficiency, mainly by stimulating various kinds of railway transportation. This financial model aims to postpone its impact on the National Balance until the payment deadline in 2014, with the remaining expenditure to be paid during the life-cycle of the infrastructure 25 years
and highways. Meanwhile 35% of the expenditure will go toward maintenance and preservation of existing infrastructures.
ADIF and the P3 Programme

ADIF plays a leading role in the P3 programme, not only regarding high-speed infra- and superstructure but also railway stations and logistics centers, despite the bids being slightly out of schedule. A competitive dialogue procedure will be carried out by special purpose vehicles (SPV, supporting 5-10% share capital) in all P3 tenders, according to the 3 phases depicted in the accompanying graphic. The investments will be drafted in the SPV as explained below: 1. First payment: 40% PEC (Presupuesto
de Ejecucin por Contrata- Construction BoQ, or Execution Estimate for Contracting and Construction BoQ) to be disbursed during the execution of the works; 2. Deferred Payment: 60% PEC. To be debited against long term debt, plus interests capitalized during the execution of the works; 3. Availability Payment: Depending on the quality of the preservation and maintenance works during the operational stage. The following chart shows the P3 projects due to be tendered by ADIF through 2011 MADRID-GALICIA HIGH SPEED RAILWAY The works have been split into 2 separate contracts:
P3 PROGRAM
Ana Fernndez Gonzlez
for railways, 30 for roads through a unique annual fee comprising investment, maintenance, preservation and financial expenses. Regarding the projects commissioned to ADIF (Spanish Railways Infrastructure Manager), whose investments are NOT considered part of the budget deficit, 50%2 of the payment was originally to be disbursed during the execution of the works The total amount to be invested is Euro17 billion -- 1.7% GDP around 70% of which will be assigned to railways, while the remaining 30% will be devoted to roads
SPAINS INFRASTRUCTURE
The Programs main requirements are the following:

In order to fulfil the EUROSTAT financial and allocation requirements regarding public debt, the concessioner is to own both construction and availability risks; In order to provide the projects with reasonable profitability, demand risk will NOT be transferred to the concessioner; In order to ease the access to external funding, this program has been agreed with significant local and international financial institutions such as EIB, ICO (Spanish Official Credit Institute), AEB, and CECA (the latter two of which are Spanish banking societies); A minimum of 20% of the initial investment must be supported with the concessionaires shareholders equity.
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OLMEDO-SANTIAGO: Railway track construction, maintenance and preservation, again divided in 2 subsections, with concession terms of 25 years; OLMEDO-ORENSE: Electrification, safety, security and installation of railway facilities, divided into 3 lots with concession terms of 25 years, while for traffic-control and telecommunications the contract is for 20 years.
Strengths and Weaknesses of the Program

WEAKNESSES There is a lack of institutional experience in private partnerships for public works, with respect to both financial and operational assessment. Furthermore, the outcomes of some previous attempts at a similar management structure have been rather discouraging, e.g. Madrids new toll highways. To lessen the impact of such outcomes, the Minister of Public Works and Transportation Jos Blanco has just approved a credit-injection rescue package of Euro200 million to risky corporations with a convenient interest rate of 1.75% and payment terms until the end of the concession.3 Bank funding reliance: The key role of private credit companies with which no cooperation agreement has been reached is the biggest barrier hindering concessioners from affording the opening investment. According to the foreseen scenario for funds acquisition, ICO is to finance up to 30% of the programme. Therefore contractor and private financial institution equity will be limited to 20%, since the remaining 50% will be backed by the EIB.4 Nevertheless, this optimistic forecast clashes with the EUROSTAT requirements for which public credit agency investments shall be considered as public debt. Country Risk Rating and speculative movements against Spain obviously entail further complications in obtaining funding, though Jos DazCaneja, Managing Director of the PPP Forum, did not find this to be a significant obstacle in 2010. Constraints: Only projects in advanced stages of progress will be included in the program, so as to minimize risks. Therefore, any studies for a new transportation network that might be more appropriate in the current situation are excluded. There are increased risks and costs due to the higher complexity of the projects, as they involve strategic, legal, economic, financial, technical and management factors.
The preliminary stage ended in June 2011, with the following joint ventures going for the bid: Azvi, Sacyr, Coalvi and Assignia Infraestructuras cciona Infraestructuras, Comsa, Copasa, FCC Construccin and Guinovart. Ferrovial Agromn, Tecsa, Vas& Construcciones, Iberovas and Cosfesa
Furthermore, ADIF will soon tender 2 new infrastructure stretches in this corridor: Requejo- Padornelo Tunnel and O Caizo Tunnel (left track), with a total investment of Euro175 million, comprising a total length of 9.7 km; it was just passed by the Cabinet last July 18. The fact that no PPP is planned in both cases must be stressed since they will be developed under conventional public procedures. The execution of this railway line will also be supported with ERDF funding with Euro128.5 million, which that shall not be invested in PPP contracts. MADRID-VALENCIA HIGH SPEED RAILWAY This contract includes the electrification, signal & signaling, safety, security and installation of railway and communications facilities. The deadline for the preliminary stage ended in June 2011; it is currently in the selection phase, for which the following five joint ventures qualified: Ansaldo, Inabensa and Telvent Bombardier, EYM Installations,
STRENGTHS Financial Viability: It is the only means to implement public infrastructure projects otherwise unachievable at this point in time by gaining access to additional financial sources regularly addressed to the private sector. Direct job creation in both execution and preservation of the works: According to the estimates made by SEOPAN- the Spanish Contractors lobby, It will allow the creation of around 340,000 jobs in a period of two years and will boost economic growth.5 There will be improvements in productivity, competitiveness and sustainability by developing a more efficient transportation system, with heavy betting on railways (high-speed, suburban trains and freight transportation) and multicriteria requirements that include not only economic but also social and environmental profitability. It seizes the opportunity of mixing technical capabilities and skilled management to optimize the partition between principal (administration) and agent (contractor) and increase the efficiency of the works Diversity: In order to permit both small and medium enterprises to join in, projects of various sizes and typologies will be tendered. Promoting intercompany cooperation by including in the bids variables that encourage the creations multidisciplinary teams.
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Rover Alcisa and Guinovart. Siemens GMBH, Indra and FCC Construccin Thales, Dimetronic and Cobra Isolux, EMTE, CAF and Alstom Transports.
Private Sector interest in railway joint partnership is proved by the large number of companies tendering for this contract. ARANJUEZ INTERMODAL LOGISTIC CENTRE With the tender process for the 25 years of concession terms in an advanced stage negotiations have recently begun with
the contractor (Cointer, Lamaignere and Acotral) the new Intermodal Logistics Center in Aranjuez will become a key hub for specialized freight corridors, mainly those from Andalusia, Valencia and Portugal. Private shares, in this case, will range between 53% and 76% of the initial scheduled investment. The emplacement being owned by ADIF, it will be leased to the concessionaire, linking the rental to the operational outcome. VIALIA VIGO STATION VIALIA is the new brand ADIF launched to distinguish large commercial stations from leisure-focused stations. With the
bid process running since December 2010 and a minimum of 30% equity required, the entire work plan for the station not only includes the building construction and operation but also encloses a Euro69.6 million investment of railway infrastructure, already tendered by conventional public contract. Designed by the well known architect Thom Mayne, it is meant to become the access door and city reference as well as inhabitants meeting point. HSR NORTH-NORTHWEST CONNECCTION The aim of this stretch is to ensure the
SHORT LIST
Technical & Economical Reliability
NEGOTIATION
Preliminary offer: Tech & Economical Criteria
Final bid & ADJUDICATION. Tender Specs.
BAFO
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STRETCH HSR MADRID - GALICIA
SUBSECTION OLMEDO-SANTIAGO (Railway Track Construction & Preservation) OLMEDO-ORENSE (Electrification, Safety, Security & Installation of Railway Facilities
LENGTH (Km) 432 344 166 ----174 398
SCHEDULED INVESTMENT (M) 647,3 1685,2 446,8 14,1 181,1 400(*) 1776,3 2053,5
HSR MADRID - COM. VALENCIANA INTERMODAL LOGISTIC CENTRE VIALIA STATION HSR NORTH - NORTWEST CONNECTION HSR MADRID - EXTREMADURAT
ALBACETE - ALICANTE ARANJUEZ VIGO VALLADOLID - VENTA DE BAOS - PALENCIA LEN Platform and Railway Track Electrification, Safety, Security & Installation of Railway Facilities
connection of the HSR Madrid-Valladolid to the Northwest lines via Palencia (towards Len, Asturias y Cantabria) and to the North via Venta de Baos (towards Basque Y railway network). The design considers both freight and passenger traffic. To the estimated P3 investment of Euro400 million in electrification, safety, security & installation of railway facilities, Euro706 million must be added for platform construction (jointly financed
by ERDF with Euro102.7 million), to be developed under conventional public procedures. This tender is due to take place in the second half of 2011. MADRID-EXTREMADURA HIGH SPEED RAILWAY This contract involves the electrification, safety, security and installation of railway and communications facili-
ties, as well as the construction, maintenance and preservation of platforms and tracks, with a total investment of Euro3.083 billion. In April of this year, ADIF submitted to the Official Journal of the European Union (OJEU) all the information required to initiate the tender. This is the mandatory first step for any European company to bid in the process, which is meant to take place before the end of the year.
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Peru
Projects in
Are Regional Governments Still under the Paternalism of the Central Government?
Infrastructure
ut this overall picture belies certain problems in the relationships between the central and regional governments that have inhibited infrastructural growth. A decade ago, Peru adopted a new political and administrative structure, dividing into 26 regions. The regions have inherited the geographical layout of the former political division, the department, and the regional presidents have emerged as their respective regions keepers, with more powers and funds than those previously in charge, the prefects, who were appointed by the President of the Republic. However, this regionalization policy has no correspondence with decentralization in the implementation of infrastructure projects, simply because the regional governments do not yet have the ability to carry out a successful infrastructure transaction by themselves. They are still highly dependent on Proinversin. Proinversin is the agency that promotes private investment under the Central
Institutions Government. It has a track record of over 10 relatively successful years, with the granting of various projects like the IIRSA (Integracin de la Infraestructura Regional Suramericana, or South American Regional Infrastructure Integration) roads, and the north and south docks of the port of Callao, among others, which have attracted major investors such as DP World, APM Terminals, and Odebrecht. However, we say relatively successful because there have been some problems during the construction and operation of these assets that were not foreseen in the contracts. Certain risks were not properly distributed among the public party (the Peruvian Government) and the private party (the licensee), leaving the door open to later renegotiations of some aspects of these contracts. Thus, even though it is highly respected internationally as a competent, methodologically sophisticated agency, with an excellent staff, that has helped establish clear rules to attract foreign investors, Proinversin has not able to cope fully with the infrastructural challenges facing Peru. Much of the difficulty lies in the diverse burdens of its responsibility: it must represent not only the Central Government but other entities, as well, including the regional governments, municipalities, and the National Port Authority, among others, at their request, in order to help them complete transactions. This has meant that regional governments have had no incentive to promote their own infrastructure projects. The problem comes to be structural, because these new regional governments, both politically and functionally (they are newer than the Proinversin itself), do not have the technical staff to carry out these fairly sophisticated transactions. Thus an alarming situation has arisen: the regions are not serving the purposes for which they were created. The state paternalism responsible for the inequality in living standards between the capital, Lima, and the rest of the country, especially the mountainous and jungle areas, continues. The same logic that brought delayed decisions from Lima, imported products, the
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outlines of a few tracks that were being built, etc., seems to be echoed in the insufficient advisory services Proinversin provides currently to the regions. The regions, therefore, are calling for the decentralization not only of functions but of abilities. The Government of Peru has made efforts to meet infrastructure investment requirements in the regions, even mentioning the possibility of investing through public-private partnerships (PPPs). But it is not enough to put paragraphs of good intentions in promotional brochures. It is necessary that the conditions for developing a PPP in the regions meet the minimum international standards. Proinversin is going down this road, through ongoing training of its cadres. On the side of the regional governments, however, such training amounts to zero. And the great danger that hangs over Peru is in failing to understand that, to sustain the growth levels projected by institutions like the IMF and the World Bank, there is a need for an infrastructure that supports anticipated levels of trade. We speak of danger because, for a country that urgently needs to resolve social conflicts and distribute the wealth being generated, any decline in infrastructure investment, caused by a poorly designed transaction process, by concession rules that are not clear, or by dubious financial studies of self-sustainability, will only de-
lay the implementation of infrastructure works, thereby delaying the countrys capacity to meet expected demand, and consequently resulting in less income and less wealth distribution. The Distribution of Potential Infrastructure Projects Peru has about 29 million inhabitants, distributed as follows: 52% along the Pacific Coast, 37% in the mountains of the Andes, from North to South across the country (Sierra), and 11% in the jungle to the East. This unequal distribution may be the primary explanation for Perus traditional centralism, based in the capital, Lima. The big change in the management of infrastructure services began with the socalled first wave of privatizations in the early 90s, under the government of Alberto Fujimori. The aim was to transfer state-owned enterprises in charge of strategic sectors to the private sector due to the economic collapse of the socialist model that ran the country during the 70s and 80s. Then, in the new century, a second wave began, in this case of concessions, the most important projects being the IIRSA roads that connect the country from the coast to the jungle through the Andes. Currently, many analysts say that a third wave, of PPPs, is beginning. Currently, the Central Government has identified more than 800 projects with a total investment exceeding US$60
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Latin Infrastructure Quarterly gions of Tumbes, Piura, Lambayeque, La Libertad, Ancash, Lima, Metropolitan Lima, Callao, Ica, Arequipa, Moquegua and Tacna, with over half the population, and almost one third in just Metropolitan Lima, there are 7 projects that exceed US$500 million. In Piuras energy sector, there is the Hydropower Project in the Alto Piura (US$ 700 million); in Ancashs, the special project of the Maran River Diversion (US$ 4.8 billion). In the Lima Region (as distinct from Metropolitan Lima, the capital) the construction of thermoelectric plants (US$ 3.6 billion) is planned. In Arequipas energy sector there are the Lluta-Lluclla Hydroelectric Project (US$580 million) and the Pampas Verdes Dam (US$ 1.8 billion). In Moqueguas energy sector, there is the South Andean Pipeline (US$1.2 billion). In Tacnas transport sector, there is the Mega Commercial and Industrial Port (US$ 1.8 billion). A Moment of Truth In order for a private initiative to come to fruition, a company must identify an investment opportunity on State resources, develop a project, and present it to Proinversin or to a regional government, seeking to get a concession granted. If there are interested parties (from the Declaration of Interest, there is a 90-day period for such third parties to file), it proceeds to a tender or competitive bidding; otherwise the award is given directly to the proponent. Many of the projects mentioned above, however, are not yet declared of interest by Proinversin, and are sleeping in a closed folio of a prospectus, in the hope that some investor will take a private initiative. They have simply been identified, and possibly have had some pre-feasibility studies, but their self-sustainability has not yet been evaluated. Fortunately first steps are being taken, with regional governments seeking transaction advisors with the experience and international credentials to connect them directly with builders, operators and financiers, and also to help them in developing the requested projects, countervailing the growing infrastructure deficit. But regional governments are not fully respon-
Institutions sive, and Proinversin has its own pace and schedule of activities. If the Central Governments paternalism continues, many potential investments will be lost. As the saying goes: time is money.
billion. Twenty of these projects (2.5%) have an estimated individual investment of over US$500 million, totalling US$41 billion, or 70% of total investment. Fourteen of these projects are in the energy sector, mainly hydropower, totalling an estimated US$33 billion. Six belong to the transport sector, totalling an estimated US$8 billion. In the jungle of Peru, which roughly includes the regions of Loreto, Amazonas, San Martn, Ucayali and Madre de Dios (and, as mentioned above, includes 11% of the population), there are 6 projects over US$500 million. In Loretos transport sector, there is the Northern Inter-Oceanic Railway YurimaguasIquitos, with an estimated investment of US$850 million. In Amazonas, there are five hydroelectric projects: Rentema, Manseriche, Balsas, Cumba and Chadin, with Manseriche being the largest (US$9 billion). In the other regions of the jungle there are no individual projects that exceed US$500 million. In the Sierra, which roughly includes the regions of Cajamarca, Hunuco, Pasco, Junn, Huancavelica, Ayacucho, Apurimac, Cusco and Puno (and includes 37% of the population), there are 7 projects that exceed US$500 million. Cajamarcas transport sector has seen the rehabilitation and improvement of the ChongoyapeCochabamba-Cajamarca road, with an estimated investment of US$700 million. Hunucos transport sector, meanwhile, contains the Inter-Oceanic Central Highway, with an estimated investment of US$650 million. Junns transport sector boasts the Tunnel Trasandino (US$ 3.2 billion), and its energy sector includes the Paquitzapango Hydroelectric Project (US$5.6 billion). In Huancavelica, in the energy sector, there are two hydroelectric projects, Vizcatn-Cuquipampa and Mollepata. In Apurimac, in the transport sector, there is the construction of the railway Abancay - Port of San Juan de Marcona, with an estimated investment of US$930 million. In the other regions of the Sierra there are no projects that exceed US$500 million. On the coast, which includes the re-
Adrian Barrios
PwC Canada | Vice President, Infrastructure & Project Finance | Montreal Office adrian.barrios@ca.pwc.com Adrian Barrios has 10 years of professional experience in project finance, business valuation, mergers and acquisitions, financial modeling, feasibility analysis, microfinance and financial audit. In the last 5 years he has led more than 50 business valuations and transaction projects in Canada, Peru and Ecuador. His experience comprises the mining, energy, financial services, agribusiness and commercial sectors. He holds an MBA from ESADE Business School and is BA in Economics from the Universidad del Pacfico.
Companies
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Andrew A. Bogan, PhD, Managing Member, Bogan Associates, LLC
Privatization
for Latin American Airports and Implications for Brazilian Airport Privatization
s an infrastructure investor based in the United States, one is often asked, Is it actually possible to invest in infrastructure, or does the government own all of it? Sadly, in the United States, despite being widely regarded as the worlds premier Capitalist economy, most of the transportation infrastructure is owned and operated exclusively by federal, state, county, or municipal governments, including nearly all the toll roads and airports, most major sea ports, and the entire national passenger rail network a structure more akin to a Socialist or Communist state. The single significant exception, due to historical precedent, is freight rail. Several private companies, such as BNSF (recently acquired by Warren Buffet), CSX, Kansas City Southern, and Union Pacific, own and operate most of these railways. Among major airports in the United States, Midway in Chicago is actively looking for private bidders after a deal to privatize it for US$2.5 billion fell through in 2009. New Orleans is also discussing privatization options for its airport, but very little progress is yet evident in either case. Indianapolis Airport in Indiana was privately run by Britains BAA for about a decade but was voluntarily returned to government control in 2008. BAA also briefly held a concession for the small regional
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airports in Harrisburg, Pennsylvania, but it was terminated by the local government authority after just a few years. None of Americas largest hub airports is privatized. Fortunately for investors interested in airports, many other countries have chosen to privatize at least some of theirs. Examples can now be found in the United Kingdom, Europe, the Middle East, Africa, India, China, Southeast Asia, Australia, New Zealand, and throughout Latin America. Privatization can fund the construction, development, expansion, improvement, and efficient operation of airports without the cost burden falling on a government and its citizens. The different models for privatizing airports have varied significantly from country to country over the past few decades, and with Brazil in the midst of deciding precisely how to privatize its national airports, it is an opportune time to consider the different approaches taken by other LatAm countries and to review Brazils options for airport privatization in a uniquely LatAm context. Many countries across LatAm have privatized airports over the past 20 years and a wide variety of privatization models have been used. In South America, Argentina granted a single concession for 33 major airports to a private consortium, Aeropuertos Argentina 2000, in 1998. Bolivia privatized its three largest international airports in 1996, though all others remain in government control. Chile granted a 15-year management contract for Santiago International and other airports beginning in 1997, and the concession renewal process is now underway. Colombia began privatization with the airside of Bogotas main airport in the late 1990s and privatized terminal operations there about a decade later. In the past decade, Ecuador has privatized Guayaquil Airport and granted a concession for the construction of a new airport in Quito. Peru privatized its largest airport, Lima, in 2000 and has more recently continued by privatizing two regional groups of smaller Peruvian airports.
Many countries across LatAm have privatized airports over the past 20 years and a wide variety of privatization models have been used.
In Mexico, Central America, and the Caribbean, many other airports were privatized in the past two decades, as well. Costa Rica, Honduras, and the Dominican Republic are important examples. In 1998, Mexico broke its airports into three regional groups and privatized each group with subsequent stock market listings. For the purposes of this article, both the regional grouping approach chosen in Mexico and the privatization of Perus largest single airport in Lima have been selected as examples to best illustrate the options for Brazils future airport privatizations. While being forced to take on all-ornothing regional concessions, the concessionaire was guaranteed at least one large-scale urban area airport in addition to smaller regional airports. This structure had the advantage of preventing private concessionaires from cherry picking only the most attractive and profitable airport properties, while simultaneously guaranteeing that smaller regional airports would benefit from any economies of scale. However, from an investor perspective, this approach does reduce the sensitivity of ones investment selection to any one airport or single metropolitan area and requires both the private company and its investors to straddle a range of airports, from major metro-area urban hubs to tourist destinations to small regional airports serving more rural areas. Overall, it has been a successful privatization effort, with all three companies operating profitably and delivering a good standard of service for more than a decade. Unfortunately, the healthy state of the regional airport operators did not prevent the largest airline in Mexico, Compaa Mexicana de Aviacin from going bankrupt in 2010. However, one cannot blame privatization for the challenges faced by airlines in their hyper-competitive and oil-price sensitive business, as numerous
The Mexican Regional Grouping Model

One early example of successful privatization of government-owned and -operated airports in a LatAm nation was Mexicos airport privatization in 1998. The pioneering approach involved organizing airports into regional blocks by grouping multiple airports in a geographic vicinity into three separate private businesses: Grupo Aeroportuario del Pacifico, in the West; Grupo Aeroportuario del Centro Norte in the central region and North; and Grupo Aeroportuario del Sureste, in the Southeast.
*Oscar Armando Rico Galeana. The privatization of Mexican airports. Journal of Air Transport Management. Volume 14, Issue 6, November 2008, Pages 320-323.
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Latin Infrastructure Quarterly initial approach taken was to privatize just one airport, no clear benefits of this success directly impacted Perus many other international and regional airports. So in 2006 and 2008, additional concessions were granted to two regional airport groups in Peru (organized similarly to Mexicos geographic groupings), and Cusco International is expected to be privatized as well.
Institutions best for Brazil, its people, and its airport passengers? In recent months, Infraero has taken on a large branding campaign inside its airports with its bold logo emblazoned on jet-ways, windows, and even the tapes demarking the security line (which moves infuriatingly slowly at most Brazilian airports). Is all this branding a waste of tax dollars from an incumbent bureaucracy, or is it the precursor to a huge privatization of Brazils nationwide airport operator, perhaps followed by a stock market flotation on So Paulos BOVESPA exchange? If the government chooses this path to privatization it would be unlikely that much would change, at least in the near term. Forcing a large government bureaucracy into the structure of a private company might appeal to those inside Infraero, but it seems unlikely to provide the sweeping changes that are needed to upgrade Brazils airports. Some of Infraeros top bureaucrats have previously said that airports should not look like palaces or high-end shopping malls, lest the poor in Brazil, who do not have enough money to fly, feel mistreated. While it is important to consider the entire diverse population of Brazil in its governments decisions, that kind of thinking is not very compatible with optimizing the operating performance of an air passenger terminal. High quality shopping experiences, a variety of dining options, and attractive waiting areas all score high with the traveling public across a wide income distribution. No doubt the transparency requirements of an IPO and the ongoing auditing of a public company could help to improve a privatized Infraero, but it would not appear the most attractive option for Brazils airports unless a significant shift in corporate culture and leadership accompanied the transition.
airlines have gone bankrupt (some multiple times) in the United States in recent years, as well, despite almost no major airports being privatized there. A couple of years after the Mexican airport privatization, Peru followed with an entirely different approach. Instead of grouping many airport properties together and creating private concessionaires from the pre-existing government operating authority, the government decided to auction off their most attractive hub airport in the capital city of Lima to private bidders in a more typical public-private partnership (PPP) structure. This allowed domestic and foreign private companies to organize consortia and bid for the crown jewel of Peruvian airports. In the end, the winning bid came from a three-way consortium of Fraport, the German company that operates one of Europes largest hub airports in Frankfurt, and their American and Peruvian engineering and construction partners. Since this airport privatization was motivated in part by a desire to significantly expand, upgrade, and improve Limas airport, the consortia had to include not only a worldclass airport management company like Fraport, but also engineering and construction firms like Bechtel and Cosapi. The success of any infrastructure privatization must be measured not only by the revenues and profits of the private company, but also by the quality and cost-effectiveness for the public. In this regard, it is especially important to see the success of the privatization of the Jorge Chavez International Airport Lima as measured by the major awards it has subsequently received, including being ranked in the Skytrax World Airport Awards as the best airport in all of South America in 2005, 2009, 2010, and 2011the first of those awards coming just 5 years after privatization! In addition to the greatly improved passenger experience and the international accolades, the Lima airport has also succeeded in attracting far more passengers (and thus revenue), with passenger numbers nearly doubling from 4.5 million in 2000 to about 9 million last year, an impressive achievement by any measure. However, since the
What Should Brazil Do Now?

It would be hard to imagine either So Paulos Guarulhos International Airport or Rio de Janeiros Galeo-Antonio Carlos Jobim International Airport winning any major awards in their current form. Both airports, along with all others in Brazil have been operated for years by Infraero, the government airport authority, which technically reports into the Brazilian Defense Department and is often ridiculed by the Brazilian press for its inefficiency and unwillingness to upgrade or expand Brazils airports despite the urgent need. Encouragingly, as Brazil gears up for the FIFA World Cup in 2014 and the Olympic Games in Rio de Janeiro in 2016, the government under President Dilma Rousseff has recently announced plans to privatize Brazils airports nationwide. However, the announcements (at press time) had been very limited in detail, with no clear indication of what model would be used. Will Brazil follow Mexicos lead and break Infraero into its regional constituents and privatize each of those units into for-profit businesses? Will it begin with single concessions for the largest and most important airports, like Guarulhos on the outskirts of So Paulo, which is by far the largest city in South America? Or will it try something new such as privatizing the government airport authority, but leaving it largely intact?
Dont Change It, Just Privatize It?

Clearly any privatization of the government bureaucracy that has run Brazils airports in the past is a welcome change, but what type of privatization would be
Mexican Geography in Brazil?

A regional breakup of Infraero would leave more competition between regional airport groups, as in Mexico, creating some competition between several new
Institutions companies and likely generating more investment and innovation than would be seen with a single national airport operator. But Brazil is a vast and disparate land. It would be hard to imagine any regional airport operator that did not include either of Rio de Janeiros two major airports or So Paulos two major airports being able to compete effectively with the scale of those huge and heavily industrialized Southeastern metropolitan areas. The poorer Northeast and Amazon Basin regions of Brazil constantly complain that the government favors the largest, richest metropolitan areas. Thus a breakup of airports on a regional basis might be fraught with political risks. wrangling. It will require swift action, a well-structured and transparent privatization, and proper incentives for rapid completion of the upgrades and expansion.
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All of the above . . .

Perhaps the best option available to Brazil today as the country proceeds with its airports privatization is an interesting combination of the two established LatAm models. By privatizing Brazils largest international airports in Rio de Janeiro and So Paulo as individual private businesses (as in Lima), the rapid improvement and expansion of those critical infrastructure assets could be ensured, with competing operators driving innovative and creative solutions to the challenges posed by the countrys most congested airports. With the largest (and likely most lucrative) single airport franchises privatized separately, it would be much more feasible to group other Brazilian airports into regional groups of comparable size and scale without the perception of unfair advantages for any one regional operator. These regional groups of airports could themselves be privatized in a similar fashion to the Mexican airports in geographic groupings, possibly with much of the same personnel currently employed by Infraero simply transitioning to the private sector. For investors, this would create an interesting variety of airport operating firms, with attractive revenue and profit opportunities across the board.
Look to the Andes

One attractive possibility would be to take the two or three largest Brazilian international airports that would amount to sizable businesses in their own right and privatize them on on a one-by-one basis, much like the Peruvian success with Lima. There is some indication that this is roughly what the government currently has in mind, at least to begin the privatization process. Certainly, an independently run and privatized Guarulhos Airport with sufficient investment and excellent management could in 5 years time be vying for top international honors alongside Lima. That would be a welcome change for So Paulo and a huge benefit to the regional economy, especially if it were coupled with a large increase in passenger throughput in addition to a much-improved traveler experience. The same model could be used for Rio de Janeiro and, if implemented decisively (and immediately), might mean a truly world class airport, fully operational by 2016 in time to welcome the world for the Olympics. Time is short and it is increasingly unlikely that action will be fast enough to make this a reality, but a quick look at Beijing International Airports expansion prior to the 2008 Beijing Games (along with the success in Lima) shows that it is indeed feasible, but it will not be the product of continued dithering and political
Private Airports, Public Equity

Whatever method is selected by the Brazilian government for its airportprivatization plan, it will be an exciting development in LatAm infrastructure that will unfold over the next decade. As the government tries to balance the needs for private capital and significant investment in Brazilian airports with the expectations of transparency, cost-effectiveness, and good corporate governance, the Brazilian government would be well advised to push all the private airport operators that
result from their privatization efforts to be publicly traded companies, listed either on the Brazilian BOVESPA exchange or elsewhere. The three Mexican regional airport groups are all listed stocks both in Mexico City and as American Depository Receipts (ADRs) in New York. Limas airport operator, Fraport, is publicly traded on the Deutsche Brse in Frankfurt. A public listing allows any citizen wishing to invest in his or her nations newly privatized airports the opportunity to do so in an open, fair, and transparent way. Private equity transactions give voting citizens no such opportunity, raising concerns about infrastructure that is used by the public while being controlled by a few individuals with narrow interests. The political reaction to private equity ownership of airports that were previously publicly traded, like BAA in the United Kingdom, has been especially harsh. Recently, the UK Competition Commission forcibly broke up the London area airport monopoly and required Ferrovial, BAAs private equity owners in Spain, to sell Gatwick Airportan action that had not been considered for the lengthy period that BAA was publicly listed on the London Stock Exchange from 1987 to 2006. Clearly, the benefits of a public equity listing for a privatized airport operator do not only accrue to the countrys citizens (who are able to invest in shares of their infrastructure directly, if they so choose), but also to the privatized company operating the concession. If the company is listed on a national stock exchange and widely held by the public (in personal brokerage accounts, mutual funds, and pension plans), it is much less likely to be the victim of harsh regulatory intervention.
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Good infrastructure contributes to increased productivity and economic growth. Yet constrained public-sector budgets inhibit the ability of many governments to meet the needs of their populations. Under public-private partnerships (PPPs), private entities contract with the public-sector, assume risks, and provide investment, in return for gains from managing, operating, and/or providing services to a given project. Private-sector management techniques can contribute to increased efficiency, lower costs, and an increase in the quantity and quality of services. However, for the abovementioned gains to be realized through PPPs, it is important that governments have adequate technical capabilities and the appropriate legal, regulatory, and institutional frameworks in place.
INFRASCOPE
An interactive learning tool and benchmarking index
by the Economist Intelligence Unit with the support of the Multilateral Investment Fund (MIF), a member of the Inter-American Development Bank (IDB) Group. In Infrascope, the laws, regulations, institutions and practices that affect the environment for PPPs are analyzed and evaluated alongside the rate and quality of PPP project development in the region. Infrascope analyses PPP capacity
herein lays the value of Infrascope. Infrascope is an interactive learning tool and benchmarking index, accompanied by a summary report, in which the capacity of 19 LatAm and Caribbean nations to develop and implement PPPs in transport, water and sanitation, and electricity generation is assessed.1 Infrascope was developed
based on six country-level categories: legal and regulatory framework; institutional framework; operational maturity, or the extent to which PPP-related laws and regulations are upheld as well as the number and level of success of past projects; investment environment; financial facilities for funding infrastructure; and a sub-national indicator which was added to the most recent edition of
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Infrascope to take into consideration intra-state differences in PPP capacity in a particular country. For each category, countries receive an evaluation based on the underlying indicators. In addition to evaluations specific to each of the six categories, overall country evaluations are derived based on the weighted sum of the categories. Main Findings of Infrascrope 2011 Legal and regulatory framework: Out of the 19 countries in this study, four have reformed their regulatory framework for PPPs since 2009, when the first edition of Infrascope was released. Reforms in three countries Chile, Mexico and Panama modified and improved pre-existing laws. The fourth country, Guatemala, approved a new law altogether by passing a comprehensive PPP law in April 2010 for concession projects in the transport and energy sectors. Institutional framework: Brazil, Chile and Peru received the best scores for institutional frameworks. All three countries have reasonable checks and balances in place for the project planning and oversight stages, but each has room to improve. Operational maturity: Six countries had at least 20 concession projects in the ten-year span the study covers (19992008). Countries in the region, however, still lack full capacity to plan and oversee PPPs and to effectively and consistently regulate the sectors included in Infrascope. Investment climate: Most countries in the region experienced some degree of political interference in institutions, policy implementation and business. However, the study found that three countries in the region - Chile, Colombia and Peru - have a high level of political will for PPPs across sectors. These countries not only enjoy political consensus around PPPs, but also have active PPP programs. Another six countries in the region ben-
efit from favorable political attitudes and strategies for PPPs, though project implementation is generally slower. Financial facilities: Although the risk of non-compliance with PPP contracts has not changed for most countries since last year, three countries - Uruguay, Argentina and the Dominican Republic - have seen improvements in their evaluations for this indicator. Sub-national adjustment factor: Of the 19 countries in this study, six facilitate and implement PPP projects at a subnational level. Although it fell short of a perfect score, Brazil tops the list for this indicator. Chile topped the index again in 2010, owing to strong regulatory, institutional and investment conditions and legal reforms that improved the PPP process. The second- and third-ranked countries, Brazil and Peru, displayed similar characteris-
tics, along with strong political will to initiate projects, strong institutional capacity and sound implementation practices. The Case for Infrascope Infrascope can be downloaded for free and allows users to self-score indicators and change weights to reflect dynamic country circumstances. The tool is also very effective for companies engaged in PPPs to compare frameworks and evaluate risks across countries. The MIF works with interested governments in LatAm to strengthen institutions and build capacity to develop, implement and oversee PPPs. Infrascope, as an independent assessment, serves as an important reference for dialogue and a learning tool to help the MIF and countries in LatAM and the Caribbean develop PPP programs.
David Bloomgarden is Lead Private Sector Development Officer and Coordinator of the Program to Promote Public-Private Partnerships in Latin America and the Caribbean at the Multilateral Investment Fund (MIF), a member of the Inter-American Development Bank (IDB) Group. In this capacity, he operates the largest grant program for capacity building for PPPs in Latin America and the Caribbean. He was recently appointed as coordinator of a new MIF program to promote access to basic services for low-income populations in Latin America and the Caribbean. Before coming to the MIF in 2005, Bloomgarden was Deputy Director of the Office of Multilateral Development Banks in the U.S. Treasury Departments International Affairs Office where he acquired extensive experience in the development and oversight of new multilateral development bank policies. Dennis Blumenfeld is Lead Consultant for the Program to Promote Public-Private Partnerships in Latin America and the Caribbean at the Multilateral Investment Fund (MIF), a member of the Inter-American Development Bank (IDB) Group. In this capacity, he designs and manages technical assistance programs to support the successful development of public-private partnerships (PPPs) in Latin America and the Caribbean. Dennis also works as a consultant for a new MIF program to promote increased access to basic services for lowincome populations through non-traditional business models. Dennis has a Masters degree from the School of Foreign Service at Georgetown University where he focused on infrastructure development and business-government relations in developing countries.
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Politics
EU
Debt Crisis and Spanish PPPs

Spain is under stress. The European sovereign debt crisis has lead to a significant rise of capital costs, with EURIBOR interest rate premiums soaring from 150 basis points (b.p) to a maximum of 420 b.p., thanks to the downgrades of PIG countries and the recent S&P downgrade of the U.S.
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The difficult situations in Portugal, Ireland, Greece and, lately, Italy are putting pressure on
he market pressure on Spain has been due to the lack of control of public finance and the expected deficit, the official number for which is 6% of GDP. Public debt is not a problem, as it is quite low by EU standards at around 65-70% of GDP, while Italys is well above 100%. That is why Italy, relatively, is under more pressure than Spain. Rebalancing PPP projects PPP projects must rebalance their economic and financial plans (EFP), which are agreed upon in the tenders. When a company tenders, usually the governments publishes an EFP and the company sets a discount in the fees to be the best offer, following the Law of Public Contracts (7/2010). Currently, companies are re-negotiating with governments to upgrade fees for tolls, for instance, in orer to regain a balance of financial profitability, or to extend the number of years of parking facility or toll roads concessions. Latin America is the natural backyard market for Spain As the private sector is facing higher capital costs which, in order to make PPP deals more profitable, push the IRR requirements above 10-15%, banks are also raising covenants such as debt service coverage ratios
the Spanish economy to cut expenses.

by more than 20%. Spanish developers are thus seeking more projects outside Spain. Latin American countries are holding events to invite Spanish companies to tender there, as in Colombia, where 170 companies were recently invited by President Santos. With a shared language and cultural history with most of the countries in the region, it is the natural foreign market for Spain. Seven regional governments taking seats already The PPP industry is now becoming more selective in its tendering of projects, and there are more joint ventures than before. Competition between groups is not very aggressive. Markets are segmented with different regions or comunidades autnomas (autonomous communities). The aftermath of the elections for regional and local governments will surely change the official numbers, with extraordinary audits from the private sector. In Catalonia, the regional government hired Deloitte-Faura Casas to audit the official numbers of 2010-2011. Seven new regional governments have changed. The need for public finance improvement requires some degree of sales of assets such as hospitals, parking facilities, buildings, offices, airports, railways, ports, etc., to the private sector to recover some resources for payrolls, mainly in education and healthcare. Some sale and lease back deals are expected, as well. Some regional governments, such as Catalonias, did poor business with PPP projects that did not make economic sense, such as Line 9. Also investment in high speed rail AVE is now considered bad business in terms of cost benefit analysis, as there is not going to be a return of the large investment, except in some cases such as the Madrid-Zaragoza-Barcelona or Madrid-Valencia lines. Bad examples are the MadridExtremadura line, which would have connected Spain and Portugal but was canceled by the latter. The difficult situations in Portugal, Ireland, Greece and, lately, Italy are putting pressure on the Spanish economy to cut expenses. The announcements of asset sales in Greece, in airports, ports, toll roads, etc., and in Portugal of assets such as roads and airports, are reducing the interest in the assets sales of Spain. Those facts are creating a down valuation trend for PPPs in Southern Europe. According to new data from SEOPAN, the market pressure and the lack of public finance munitions reduced public tenders by 90% for capital expenditure from the central and main regional governments in the first half of 2011. And there is even more bad news: Spain has general elections scheduled for November 20, so there will be no government until early 2012.
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Politics
A NEW OUTLOOK FOR INFRASTRUCTURE?
nteresting opportunities lie ahead for infrastructure players in Spain in light of the results of recent regional elections in May 2011. There has been a marked swing in favor of parties who are more positive about the involvement of the private sector in infrastructure. Moreover, regional government finances are in a poor state, which bodes well for an future increase in PPP projects. Partido Popular (PP) scored a resounding victory in the regional elections, winning regional in Cantabria, La Rioja, Castilla-Len, Castilla-La Mancha, Extremadura, Madrid, Murcia, Comunidad Valencia, Aragn, Baleares and the Canary Islands. They were victorious in regions traditionally linked with the PSOE, such as Extremadura and Castilla-La Mancha. In Navarra, the UPN a regional spinoff of PP won, while in Asturias, a new party FAC led by Alvarez Cascos, a former Minister of Public Works for Jos Maria Aznar, came out ahead. In light of the elections, the PP will manage about EUR86 billion in public funds. The PPs business-friendly approach favors PPPs, infrastructure, lower taxes and employment initiatives. Despite the lack of fiscal revenues, there is a strong commitment to stimulate projects to create jobs and set up positive externalities for the entire country. At the municipal level, the story was much the same. The PP got 8.45 million votes, up 2% from 2007, while the PSOE got only 6 million votes, down 7%. The main changes at the municipal level were in Barcelona, Zaragoza, Sevilla, Santander, Girona, Tarragona, San Sebastin and La Corua. The Socialists lost the city of Barcelona, after governing it for 32 years.
THE IMPACT OF THE REGIONAL AND LOCAL ELECTIONS IN SPAIN

ROGER MIRALLES
Barcelonas new mayor, Xavier Trias (of the CIU), has a positive attitude toward infrastructure projects and is keen on making new investments to upgrade the city, which has not undergone any major overhauls since the 1992 Olympic Games. The previous mayor, Jordi Hereu, was trying to promote Barcelona as the city for a Winter Olympic Games in the Pyrenees for the long term, which may not have been bad idea after all. In the Basque Country, The PNV, a nationalist party, won most cities; but a new party, Bildu a coalition between independents and the extreme Left won cities such as San Sebastian from the Socialists. The party has been under investigation from the Central governments Justice Department on account of its previous connections with the independence movement in the territory. National Elections will take place in 2012. It seems to be only a matter of time before Mariano Rajoy becomes the next Prime Minister of Spain.
Spain possesses the largest share of Public-PrivatePartnerships (PPP) in Europe

By 2010, Spain had become the largest infrastructure market by size, with over EUR4 billion, according to the EIB researchs arm, EPEC. Most of the PPP initiatives carried out
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in Spain have been tendered by regional governments, including, for instance, the metro stations on the new 9 Line undertaken by Generalitat in Catalunya. It is important to stress the awarding of roads in Aragon, with 8 concessions during 2010. There was also intense activity in Galicia and Andalucia, with new PPP projects undertaken in roads, and now within Vizcaya in the Basque Country. Nonetheless, the central government has also been actively involved in large infrastructure projects, namely in rail and airports. During 2010 and the early months of this year, the central government tendered, through ADIF (the infrastructure rail owner), 6 PPPs in High Speed Rail. The Central government has also appointed advisors (ATKearney and Cuatrecasas) and a bank (RBS) to initiate the privatization of AENA, and it is expected that the Barcelona (El Prat) and Madrid (Barajas) airports will be tendered before the end of 2011, as well as 49% of the smaller, regional AENA airports. The central government presented a new regulation for the accounting system of infrastructure companies, under Orden EHA 3362/2010, to be applied beginning on January 11, 2011. Firstly, it stipulates that fixed income paid regularly to the concessionaire has to be accounted as a financial product. Secondly, the financial costs after the infrastructure is open have to be capitalized as more value for the asset. The general accounting plan implemented in 2007 stated the reverse. The ICAC the body that regulates accounting and principles in Spain did that so as not to hurt infrastructure players, otherwise the majority of the concessions and PPP might have gone underwater. Recognized business leaders are starting to pressure current Prime Minister
City Cambrils Vic Tortosa Reus Manresa Tarragona
Inhabitants 32.422 40.422 34.473 106.622 76.209 140.184
Debt 45.378 55.587 43.586 117.802 78.344 143.185
Debt / citizen 1.430 1.392 1.240 1.099 1.023 1.020
REGION Andalucia Aragn Asturias Baleares Canarias Cantabria Castilla-Leon Castilla-La Mancha Catalunya Valencia Extremadura Galicia Madrid Murcia Navarra Basque Country La Rioja Ceuta, Melilla * TOTAL
SOCIAL 965.19 169.26 134.52 149.81 292.17 75.56 515.57 655.42 1,615.93 711.81 128.41 315.47 1,248.96 175.89 120.19 466.20 59.34 66.40 7,866.10
CONSTRUCTION 1,349.32 343.04 185.15 183.39 411.60 97.91 701.39 758.67 2,182.37 888.36 205.64 501.14 1,760.79 199.54 187.49 802.43 67.60 88.95 10,914.78
CIVIL WORKS 1,877.31 242.35 1,016.65 310.62 509.38 227.14 1,306.36 915.47 1,960.93 942.87 564.33 1,361.93 1,363.39 262.16 141.35 1,784.48 88.98 418.70 15,294.40
TOTAL 4,191.82 754.65 1,336.32 643.82 1,213.15 400.61 2,523.32 2,329.56 5,759.23 2,543.04 898.38 2,178.54 4,373.14 637.59 449.03 3,053.11 215.92 574.05 34,075.28
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Jose Luis Rodriguez Zapatero to cut corporate taxes, reduce social security levies and implement market friendly growth initiatives.
Four regions received 40% of all infrastructure investments in Spain in 2010

Catalunya, Andalusia, Madrid and the Basque Country regions benefited from more than the 40% of all tenders - central, regional and local - in Spain during 2010, according to SEOPAN, a trade group representing the largest construction companies in Spain. There was no change of government in these regions in the May elections. The most recent change took place in November 2010 in Catalunya, with a new CIU government taking over after 8 years of PSC-PSOE rule in the region. Investment in social infrastructure has included projects in housing, schools, healthcare, and sports, among others. Investment in construction has included projects in factories, terminals and administrative facilities. Civil works have been undertaken for roads, railways, ports, urbanization, and water management.
Four regional governments account for half of the tenders
On a regional basis, Catalunyas government tendered EUR1.4 billion, while the Basque Country tendered EUR1.2 billion; Madrid, EUR1 billion; and Andalucia, EUR800 million. By sector, the distribution in roads, in excess of EUR300 million, was concentrated in Castilla-La Mancha and Catalunya. Works in the region of EUR203 million was seen in Galicia, and above EUR100 million in the Canary Islands and Andalucia. Currently there are 3 roads under tender in the Diputacin Foral de Vizcaya, a lower regional tier of government, for an aggregate of approximately EUR900 million. To better understand the current climate, it is fair to say that, in the case of roads, for each euro tendered by the Central government, another euro has been tendered by regional governments. Earlier this year, BIDEGI, the owner of Guipuzkoa in the A-8 toll road, which belongs to the Diputacin Foral de Guipuzkoa, hired Deloitte to structure the financing to undertake a second ring road in San Sebastin and upgrade the network of roads, for approximately EUR400 million. At the same time, Interbiak, in Diputacin Foral de Bizkaia, introduced a PPP scheme with payments for availability. A team led by Andrs Rebollo of Deloitte has provided comprehensive advisory services in Spain. Mr Rebollo, formerly of PWC, set up AdeInfra, which was acquired by Deloitte in 2008.
In the rail sector, the Basque Country accounts for more than 60% of total tenders at the regional level of government with EUR782 million in 2010. The works relate to the Y High Speed Rail link connecting Madrid with Bordeaux, the building-rock of the HSR in the Cantabric, competing with and complementing the Barcelona-Toulouse axis. Rail projects are traditionally linked mostly to the Central government due to the ADIF and RENFE (the network owner and operator). A third is only tendered by regions. Ports are mainly tendered at the central government level and have totalled approximately EUR500 million. However, the regional governments of Andalucia, Galicia and the Basque Country have also undertaken projects valued over EUR20 million each. In the case of investment in water infrastructure, the most active region has been Madrid, with its Canal Isabel II. Interestingly, a number of sources have indicated that the project is likely to be privatized to generate additional funding for investment. Madrid tendered EUR355 million already. In water infrastructure two thirds of the total investment has been carried out by the central government.
The state of regional public finances offers new opportunities

The dire state of regional finances would seem to entail that funds are not readily available for new infrastructure projects. Nevertheless, the bad shape of regional public finance would actually suggest that there is a clear need to set up projects to foment economic activity and employment. PPPs have traditionally been a good starting point for such initiatives as they can be structured so as not to require direct budget support. In fact, large and costly infrastructure investments during the past two decades have been financed this way. The change of government in the Basque Country, now under a PSOE-PP coalition,
In the rail sector, the Basque Country accounts for more than 60% of total tenders at the regional level of government with EUR782 million in 2010.
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may help infrastructure investment, as previously large tenders were not possible while the PNV was in power. The change in government has changed the landscape substantially. The central government of Spain is under pressure from investors to take action, due to the large fiscal deficit and rising debt stock. But regional expenditure represents a low share of the total debt. The modification of the Stability Law on the basis of the business cycle have given room to the regions to be more reluctant than before to set up a zero-deficit rule. At the municipal level, we expect a new stream of small PPP projects on local services that are going to be provided from the private sector. We expect to see a wave of PPP investment along the lines of what the UK is pursuing at this time. A number of new companies are appearing to provide advisory services to this local tier of governments. Former executives from PWC and Deloitte, and of engineering companies, such as Miquel Puig, former CEO of Abertis Airports, now offer a large portfolio of services, from tender advisory to valuation and modeling. The dire shape of municipal public finances is likely to create new opportunities to carry out infrastructure projects and other PPP initiatives. The growing
level of municipal fiscal deficits on account of declining government revenue, particularly in the case of housing, will likely pose challenges. A number of sizable cuts will come from reducing the level of services provided by the cities to its citizens. Some mid-size cities have recorded high levels of debt on a per capita basis: The accumulated debt for carrying out expenditure cannot disappear. Another way to adjust this is to cut employment. Other tiers of government such as the provincias (provinces) accumulated a lot of debt during the 2004-2008 period. The bad condition of these lower tiers of government regions and municipalities is expected to worsen and raise the countrys fiscal deficit as the new governments take office. They will need to undertake comprehensive audits and reviews of accounts. In Catalunya the same situation took place and this is likely to lead to a rise in the fiscal deficit and debt levels. The lack of budgetary control policies is not just a question of politics, but a question of regulatory requirements. Interventores, which control public finance with audits and fiscalizaciones in regions and municipalities are paid by the same institutions they control. Therefore there is a
conflict of interested as interventores are controlling the institution that pays them. It will take 2 to 3 months to set up new government teams and hire new advisors, so there is going to be a new draft of projects that will begin to roll out after the summer. But everybody is expecting a country shift to the PP of Rajoy; as a consequence, Spain needs the creation of a more business-friendly environment, particularly in the infrastructure sector and in PPPs generally.
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Companies
Paraguays 500 KV
Companies
The proposed 500 KV Itaip-Villa Hayes transmission line is considered to be the most important engineering project for Paraguay in the last 20 years.
Itaip-Villa Hayes Electric Transmission Line

Latin Infrastructure Quarterly he Joint Declaration between Paraguay and Brazils heads of government on July 25, 2009, acknowledged the need to reach an agreement on Itaipu Binacionals construction of a 500 KV electric transmission line between the Right Margin Electric Substation (SEMD) and the Villa Hayes Electric Substation (SEVH), serving Paraguays capital, Asuncin, and the main industrial poles and running along five administrative divisions and extending 345 km. The project is critically important as the state-owned transmission system is on the verge of failing to meet the countrys needs by early 2012. The project will be financed through Brazils contributions to the Structural Convergence Fund of MERCOSUR (FOCEM), of which US$100 million correspond to mandatory contributions from Brazil and US$300 million to voluntary contributions. Questions have been raised as to whether the National Electricity Administration Office (ANDE) should have been awarded executive authority over Itaipu Binacional. Once the line is operational, Paraguay will have 2475 MVA available, including 600 MVA from Itaipu, or 39% of the potential generated by the project. As an example of an aspect of the countrys energy needs, the Rio Tinto project to set up an aluminium processing plant will need around 1.100 MVA. The bid was open to international tenders from all companies domiciled within MERCOSUR and with a corporate purpose fit for carrying out the project. The structure of the Project is divided into three stages: i) The building of the SEVH and the enlargement of the SEMD, awarded to the ABB/CIE consortium. This phase started on June 20, 2011, with a budget estimated at US$120 million. ii) The engineering services will be provided by the Brazilian company Leme Engenharia, while the Paraguayan consortium Electromecnico Villa Hayes will be in charge of the engineering and technical support services. The total budget for these services amounts to US$11.6 million; work started on June 20, as well. iii) The building of the 500 KV Electric Transmission line from the SEMD to the SEVH ; only the contract for the construction of the 786 transmission towers plus 347 km of the 500 KV line is left to be awarded. Seven offers were presented on August 8, and the final decision on the awarding is expected to take place in September. To many, the construction of the transmission line and the substations, which have been pending projects ever since the Treaty of Itaipu of 1973, constitute a reaffirmation of the so-called energy-sovereignty of the Itaipu dam. The 500 KV line the biggest infrastructure project in recent decades not only in terms of the investment and technical ingenuity put into it but in terms of its potential contribution toward the countrys industrial development, including the creation of new industries and job opportunities and the development of the areas in the projects immediate vicinity. The line will augment Paraguays position as a competitive and low-cost electricity provider.
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Projects
The
T
he Hidrovia waterway, planned for the ParaguayParana rivers of the Southern Cone, has been qualified as the largest engineering project in the frame of the integration process of MERCOSUR. The Hidrovia project represents the joint efforts on behalf of the countries concerned for adopting a unified maritime legal framework for the region and the implementation of a dredging program. The Hidrovia on the Paraguay river is planned to extend from Caceres (Bolivia) to Nueva Palmira (Uruguay), covering an extension of 3,500 km, of which ca. 550 km are within exclusive Paraguay domain. In Paraguay, the concession will award the dredging and maintainance of the Asuncin-Pilcomayo stretch, which is a vital piece for the project as a whole, since special difficulties arise in the stretch between the Apa river and Asuncion, which shows the harshest conditions for navigability. An advanced draft version of the bid conditions had been prepared by the former administration of the Ministry of Public Works (MOPC). Under this draft version, the concession would last 25 years and be structured in 3 stages: 1. Authorisations and Mobilisation of vessels. (12 months); 2. Dredging and Signaling (24 months); and 3. Maintenance of the Waterway (until the end of the concession period). A bill for the concession has also been drafted, but it has not yet been presented to the Congress for its study. The bid was initially expected to be launched at the end of
Hidrovia on the Paraguay River

2009, but it has been set aside for different motives since the original schedule was drawn. One of the possible motives, as certain people closely involved in the project claim, is the fact that the National Ports and Navigation Office (ANNP) would practically lose its reason for being. One of the ANNPs main purpose is the dredging and signaling of the rivers, which it carries out with highly questioned efficiency and effectiveness. Part of the almost-2000 employess of ANNP would be terminated. There are also concerns regarding environmental impact of the works. In this regard, some NGOs believe that the dredging of the rivers to improve navigability conditions and stabilize the water level throughout the whole year can bring harmful consequences for the Pantanal (the wetlands north of Paraguay in the border with Brazil and Bolivia) and the biodiversity of the area. The Hidrovias positive impact on the country and the region as a whole is also undeniable. Competitiveness of national production, the development of the region above the Asuncin and, on a bigger scale, the strengthening of the regional integration process will be boosted. 80% of Paraguays foreign trade is transported through the water. With the completion of the Hidrovia project, transportation costs will decrease considerably, and hopefully the effects and costs related with the landlocked nature of the country will be mitigated by efficiently using the rivers.
One of the ANNPs main purpose is the dredging and signaling of the rivers, which it carries out with highly questioned efficiency and effectiveness. Part of the almost2000 employess of ANNP would be terminated.
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he Airports Concession Bill was launched by the President of Paraguay and the Ministry of Public Works and Communications (MOPC) on October 14th, 2010. The Bill authorizes the Executive Power to grant the concession of international airports Silvio Pettirossi (Asuncin), Guaran (Ciudad del Este) and the airfield of Mariscal Estigarribia in the Chaco Region. As the Bill was introduced as an urgent matter by the Executive, it was due to be studied by both chambers by March 31st, 2011. Perhaps due to miscommunications, this urgent treatment character was not transmitted to the Representatives Chamber, which led to the normal course of action to be taken with the Bill. After having been discussed and amended, it was sent back to the Senate for its ratification on April 12th. The Senate disregarded the amendments on the grounds
Airports Concession in Paraguay

Paraguayan Deals
JORGE FIGUEREDO is a Partner at Vouga & Olmedo Abogados. He graduated with Honors from the National University of Asuncion (J.D., magna cum laude, 2001) and was awarded a Post-graduate Degree in International Relations from the University of Oxford, U.K. His fields of expertise are Corporate and Commercial; Mining and Oil & Gas; Infrastructure; Competition Law; Energy, Water and Natural Resources; Intellectual Property. He has been actively involved in the process of drafting the enactment or amendments of various laws and regulations such as the Competition Law, Water Law, Independent Generation of Electricity and Mining Laws and many other subjects related with environmental issues as a member of the Environmental National Council. He is a former assistant professor in International Private Law as well as Intellectual Property at the American University of Asuncin and Professor of International Public Law at the Interamericana. Languages: Spanish, English, French, Italian and Portuguese. RODOLFO G. VOUGA ZUCCOLILLO is a Senior Associate at Vouga & Olmedo Abogados. He graduated with Honors from the National University of Asuncion (J.D., summa cum laude, 2007) and was awarded a Masters in Law (LL.M.) degree from Columbia Law School (LL.M., 2010). He passed the New York Bar exam. His fields of expertise are: Litigation, Arbitration and Mediation; M&A; Foreign Investments; Corporate and Commercial; Capital Markets; Tax and Customs Law. He has been actively involved in various projects related with foreign investments. He is a former assistant professor in Legal Technique at the National University of Asuncin. Languages: Spanish, English, Portuguese, German.
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Projects in South America due to the many sporting events to be carried out in the next years besides the fact that Paraguay is a landlocked country with critical deficits in cereal transport, gives this Project an undeniable urgent character, as the need to decongest the overloaded airports of neighbouring countries is imperative and the fact that better airport conditions may attract other airlines that could fulfil the lack of routes and the availability of seats that currently affects passengers trying to fly to the country as well as shipping This initiative of joining forces with the private sector, will prove crucial not only to the improvement of Paraguays condition as a regional hub also, taking advantage of the central location of Asuncin at an equidistant position from several of the main financial and touristic centres of South America such as Sao Paulo, Buenos Aires and Santiago, among others; but also the countrys willingness to open for private and foreign investments in sectors traditionally dominated by public funds, which proved insufficient to the current countrys needs. Moreover, the injection of capital and creation of employment opportunities as a spill over effect will prove more advantageous to the competitiveness of the national industry.
It is estimated, that a total of US$ 250 mn will have to be invested for the modernisation of the relevant airports.
that they were made out of time, and that therefore the approval by the Representatives was deemed automatically granted by the original purported day of study, March 31st, 2011. Back to the Representatives Chamber, Speaker Victor Bogado refused to give approval to the Bill since the changes introduced by them were not included. In a renewed effort to achieve an agreement, a note was sent on July 27th to the Senate, requesting that it reconsider the decision authorising the sanction of the unmodified version of the Bill. The Senate must decide whether it ratifies the initial or the amended version, but under both scenarios, the Bill will have been sanctioned. When the Bill is enacted and published by the Executive, a Special Commission formed by the MOPC will start the relevant studies for the elaboration of the bid conditions. According to a Schedule included as an exhibit to the Bill, once the Act is passed, there is an estimate of 19 months until the concession is awarded. It is estimated, that a total of US$ 250 mn will have to be invested for the modernisation of the relevant airports. Ever since the proposal was introduced, detractors have not remained unheard. The employees of the National Office of Civil Aviation (DINAC), have called on strikes to pressure the Executive to veto the Bill, claiming that the potential concession would be detrimental to the working conditions.. Another position is the one held by those opposing the joint public-private initiative, claiming that this would be a sell-out to the business sector representing a decline of the sovereignty/ giving place to a relinquishment of sovereignty over a genuinely national institution to the private sector: Moreover, it is argued that the improvements required by the airports could be easily afforded with the DINAC funds, which works on a superavit. The recent abrupt change of authorities in the MOPC, including Minister Efrain Alegre, the most active promoter of the Bill, has also had obvious repercussions. Under the direction of former Minister Alegre, a number of public-private initiatives inspired by the regional model of infrastructure development had been launched. Despite the announcement of the current authority in the MOPC that all projects might continue its normal execution, this as many other projects launched in the former administration, has slowed down as a result of said changes, The Airport Workers Union is also reluctant to support the concession, even though the Bill includes a clear provision that guarantees the immutability of the working conditions, even granting the workers the possibility to move on to a different state office, in the event that under the new private administration their services are no longer needed. Similar undertakings carried out in the region (Santiago, Chile. Montevideo, Uruguay. Lima, Peru) have become a source of inspiration for fostering private participation or private takeover of large infrastructure works. The imminent overflow of air traffic
Projects
Latin Infrastructure Quarterly them given that Huascacocha was the first project of its kind. These types of discussions are advisable when approaching the government, as to reach common ground and make the transaction more efficient. The project is funded by SEDAPAL through its new Master Trust, established during the transaction with collections received from its customers, which shall also be used to finance the rest of the mega water projects. Another difficulty of the transaction consisted in eliminating the existing subordination with respect to the customer
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Huascacocha Water Derivation Project

he Huascacocha Water Derivation Project was granted in concession in 2008 to a Peruvian subsidiary of the Brazilian construction conglomerate Construtora OAS. This project consists in the construction, operation and maintenance of a dam at the Huascacocha Lake located in the Peruvian provinces of Pasco and Junn, along with a pumping
contemplates tariff as revenue for the Concessionaire, as well as a Guaranteed Minimum Annual Income which guarantees a minimum of income for the project irrespective of traffic flow. The size of the project and the amount of investment required demanded the largest amount ever financed by syndicated lenders for a self sustainable toll road concession. Moreover, the project was financed by a syndicate comprised of a multilateral entity, a foreign financial institution and a Peruvian bank, relevant feature
PERU INFRASTRUCTURE
PROJECTS
station and a derivation canal in order to convey water to the Rmac river in Lima and thence to water treatment facilities owned by SEDAPAL (government owned water utility company of Lima and Callao) and a hydropower plant. Given that this was the first of the new mega water projects launched by SEDAPAL, thorough diligence of this entity was required, as well as numerous discussions with governmental personnel in order to explain and describe the project financing aspects of the transaction, which were novel to collections to be assigned to the Master Trust, given that SEDAPAL had previously affected 100% of its collections to another trust in order to pay pending governmental obligations.
Red Vial 4 Tollroad

The Red Vial 4 Tollroad is a new highway spanning across the northern region of Peru granted in concession in 2009, to be built by a Peruvian subsidiary of Spains OHL Concesiones.The project
that made the financing be particularly arranged. Also, detailed structuring allowed hedge providers to be recognized by the Peruvian government - for the first time in Perus history - , as Permitted Creditors under the concession agreement, which allowed important risk hedging to be incorporated. As a transaction involving many different parties, it was challenging to hedge all the financial risks involved, for which it was necessary to establish a particular
The size of the project and the amount of investment required demanded the largest amount ever financed by syndicated lenders for a self sustainable toll road concession.
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Latin Infrastructure Quarterly guarantee) vested upon the issuance of Works Progress Certificates. RPICAOs are indexed to the price of certain construction materials and to Peruvian wholesale inflation during construction, thus generating uncertainty of the actual value of purchased RPICAOs at closing of the project financing. Consequently, careful structuring allowed variable funding upon project completion in
Projects order to monetize potential excess RPICAO cash flows. This allows the monetization of additional flows in the future, without re-issuing bonds. Also, RPICAO payments are indexed to the wholesale index while the Bonds are indexed to the retail index, thus generating a possible inflation mismatch. This situation was resolved by including a reserve account to cover inflation basis risk.
regulation of currency conversion in the loan agreement, as well as executing several derivatives. Also, the security package included a trust over all the cash flows of the concessionaire (toll road), for what it was very important to create a flexible scheme to allow for the normal operations of the concessionaire and to give enough comfort to the lenders and the hedge providers.
Taboada Wastewater Treatment Plant Project

The Taboada Wastewater Treatment Plant was granted in concession in 2009 to a Peruvian subsidiary of Spains ACS Group, through which the amount of treated water shall be significantly increased in Lima and Callao, thus reducing ocean pollution. This is one of the new mega water projects launched by SEDAPAL. Under this project SEDAPAL makes RPICAO and RPMO payments, which remunerate construction and O&M costs, respectively. The Project was financed in 2011 through a future flow PEN denominated VAC-indexed securitization of RPICAOs. As the Concessionaire completes construction milestones it receives RPICAOs, which are irrevocable and unconditional payment obligations (with a government
Milagros Marav Milagros is partner of the Firms Administrative Practice Group. Her practice is focused on legal advice for public-private partnerships, concessions, infrastructure projects and privatizations, among others. She is also a consultant on issues of administrative simplification for the Presidency of Council of Ministers, as of Regional and Municipal Governments. She graduated from Pontificia Universidad Catlica del Per in1996 and with a Master of Public Administration from Ortega y Gasset Institute, attached to Universidad Complutense de Madrid, Spain in 2009.
Diego Harman Diego is an associate of the Firms Corporate Practice Group. His practice is concentrated in Project Finance,Capital Markets, Banking and Financial Law, and Civil Law. In addition his experience includes project finance, public and private debt and equity offerings, as well as concessions for infrastructure and public services projects. He is also specialized in mergers and acquisitions, takeover bids and, in general, corporate transactions. He graduated from both Universidad de Lima, 2007 (Magna Cum Laude). Postgraduate degree in Investment Law, and Postgraduate School of Universidad Peruana de Ciencias Aplicadas, 2008.
Regulation
59
The Public
Private Partnerships
Act in Guatemala
by Luis Pedro del Valle H.

In addition to the abovementioned features, the States Contracting Act is limited in scope and does not allow, per se, these more moderns methods of developing public infrastructure. For example, the recently awarded [Electrical Energy] Transmission Expansion Plan (Plan de Expansin de la Transmisin) was executed in a fashion similar to a PPP, even though, at the time the tender was initiated for this project, the PPP Act was not in force. However, the Electric Energy Act (Ley General de Electricidad) allowed the regulator to launch a tender for purposes of expanding the electric energy transmission infrastructure. This was an exception rather than the norm and can be considered the most relevant precedent for the PPA Act. In accordance with the PPP Act, there is a National Council of Partnerships for Economic Development Infrastructure (Consejo Nacional de Alianzas para el Desarrollo de Infraestructura Econmica), which is
n April 2010, the Guatemalan Congress enacted the Public Private Partnerships Act (PPP Act; in Spanish, Ley de Alianzas para el Desarrollo de Infraestructura Econmica). The determinant factors for the enactment of this statute can be extracted from the acts recitals, namely, the States commitment to foster the countrys development, especially in the rural areas, as well as the belief that PPPs will help liberate resources and increase the magnitude and quality of investments. One of the main promoters of the PPP Act was Congressman Mariano Rayo. Before this milestone, public infrastructure was mostly built and operated through the States Contracting Act (Ley de Contrataciones del Estado), which sets the terms and conditions upon which the Guatemalan Government (including autonomous and decentralized entities as well as municipalities) contracts its goods, supplies, works, and services. It is important to note that the States Contracting Act is still valid and in force. However, the PPP Act regulates a specific way of realizing public infrastructure projects that implies an agreement, through the contracting institution, between the Guatemalan Government and a private participant. The States Contracting Act already favors private sector investment to an extent: for instance, any works, goods, or services whose cost exceeds Q0.9 million (about US$112,500) must be contracted by conducting a tender open to any individual or entity who qualified, a circumstance that favors private sector investment in the development of public infrastructure. However, PPPs as regulated in the PPP Act introduce a new form of contract that can be more attractive for both local and international investors, as they are based on a fairly developed statute. It can thus be considered a progressive and innovative approach vis--vis the States Contracting Act.
60
Latin Infrastructure Quarterly nity or communities to be affected by the project to inform them of all relevant factors. This communication occurs during the projects feasibility stage; and (ii) Eminent Domain: the Council and the Executive Directorate are in charge of approving and promoting the expropriation of land if and when necessary. It is important to note that under this structure, the private party aiming to take part in these partnerships most likely will the one obliged to obtain the necessary financial resources. If under the corresponding agreement the Government is obliged to perform payments, then the resources would need to be allocated in the Governments budget. One final noteworthy aspect of the
Regulation PPP Act is that arbitration is the chosen dispute-resolution mechanism. Thus these partnerships and any conflict or dispute arising thereof would not be subject to local courts. As of this date, the PPP Acts regulation (reglamento) has not been issued. Thus the framework for the implementation of this Act is inexistent, which in turn presents an obstacle for seizing all potential benefits. Additionally, no PPP project has been offered or called for by the Council, nor any foreign investor declared interest in participating.
part of the Central Government. It integrates, among representatives of certain ministries, two representatives of the private sector. Among the Councils other duties, it must set the national agenda for PPPs. Pursuant to the PPP Act, after a tender process for the adjudication of a potential public infrastructure development opportunity, an agreement will be signed between the State and the private party. This agreement will provide, among other elements, the terms and conditions upon which the infrastructure will be developed. Two noteworthy aspects of the process are handled by the State: (i) Approaching the affected communities: The State approaches the commu-
Luis Pedro del Valle H. (1978). Senior Associate at Arias & Muoz since 2007, with broad experience in Corporate, Project Finance, Commercial, Stock Market, Banking and Financial law. Also involved in academic activities and performs as incumbent professor in an elective course and assistant professor in other classes.
Institutions
Latin Infrastructure Quarterly Speaks with

he International Finance Corporation (IFC) has been integral to the growth and spread of private finance initiatives (PFIs) and public-private partnerships (PPPs) for infrastructure projects throughout LatAm. As a member of the World Bank Group, focused on building the private sectors of developing countries, it has been active in every country in LatAm and the Caribbean, particularly in those countries increasingly amenable to private-sector involvement in infrastructure, such as Colombia, Peru, Mexico, Honduras, El
61
Paul de Meira Lins of the International Finance Corporation
voted to fostering infrastructure PPPs in the country. LIQ spoke recently with Paulo De Meira Lins, Investment Officer at IFC specializing in Brazilian infrastructure. A graduate of Stanford Law School and formerly a lecturer in infrastructure law at Fundao Getulio Vargas, Paulo worked previously as a Presidency Officer at the BNDES before joining the IFCs Advisory Services Division. His job at the IFC involves advising national and sub-national Brazilian governments in structuring and tendering PPPs in various infrastructure subsectors.
international best practices and strong environmental and social standards and BNDES contributes with its profound and unique knowledge of the Brazilian infrastructure market. In the Funds first two years, two major infrastructure projects, both in the northeastern State of Baha, were successfully contracted and financially closed. One was a large emergency hospital, the Hospital do Suburbio, the countrys first health-sector PPP, the construction of which was executed under a public works program while the private-sector concessionaire, Promedica-Dalkia, was charged
The Brazil PSP Fund provides financial and technical resources for PPP development, and all of the project development in Brazil is done hand in hand with the BNDES advisory services team, including project selection and execution.
Salvador and, recently, Paraguay. Brazil, the regions largest and fastest-growing economy, has been resorting to PPPs to meet its soaring infrastructural needs. In 2008, the IFC joined forces with the Brazilian Development Bank (BNDES) and the International Development Bank (IDB) to create the Brazil Private Sector Participation (PSP) Fund, specifically dePaulo explains that the IFC and the BNDES work together in PPP-related work within Brazil. The Brazil PSP Fund provides financial and technical resources for PPP development, and all of the project development in Brazil is done hand in hand with the BNDES advisory services team, including project selection and execution. IFC contributes with with equipping the hospital and running clinical and non-clinical services, under a ten-year contract. The other project was a major toll road system around the city of Salvador, the BA 093 road system, the countrys first metropolitan road network to be allotted to the private sector to expand, rehabilitate, operate and maintain. The IFC and BNDES teams have also
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Latin Infrastructure Quarterly sounding and appropriate contractual instruments; sometimes you need to make some institutional arrangements, and always be transparent as well as listen to the relevant stakeholders. He notes, however, that a project can develop more quickly, such as an upcoming PFI for schools in Belo Horizonte, which took a little over 6 months to develop. Things went very well: the government new very well what it wanted had already developed some studies. It was simpler to structure and therefore we went faster. But there is something many of our public-sector clients dont realize: infrastructure PPP projects take a long time to develop and mature. PPP is not an easy solution that is developed overnight. A stronger understanding of the entire process, the needs and structuring tools is precisely what Paulo and his colleagues hope to cultivate in the governments with which they work. We dont come in, do the work, and leave. Theres a big component of capacity building in the work we do. The point is to work together with the PPP units of the federal and state governments and to transfer our knowledge, whether sector-specific knowledge or best practices for structuring PPPs. We basically do project execution together with our clients in a single team. We do not do work if we dont have a minimum amount of committed staff within the government, because in the end, these are the people that are not only going to be monitoring the contracts but also developing new projects. So we want the capacity to be there to generate more projects in the future. Most of the states, he explains, especially the larger states, have dedicated and capable PPP units. There is a federal law establishing terms for PPPs, and while several states have adopted their own PPP laws, all of their general provisions are in line with the federal law. It is not the IFCs role to assist states in creating the best legal and regulatory frameworks for PPPs. That type of work is what the World Bank does Paulo says. Upstream legal and institutional structuring is clas-
Institutions sic World Bank work, and the World Bank has very seasoned professionals in this field. As part of the World Bank Group, we try to build synergy between what we do and what the World Bank does so as to catalyze and expand PPPs. Regarding the IFCs potential privatesector competition in developing and funding PPPs, Paulo sees it as a complementary relationship with the private sector consulting market. I wouldnt say we have a market competitor. We do a type of market advisory that does not do. We take develop harder, riskier projects for the public sectors, which often the private sector is still not willing to do on its own. In this segment we strive to generate bankable deals, which later will require the participation on banks and consulting companies in advising and financing potential sponsors. Paulo sees it as a healthy, virtuous circle, from which all parties can benefit. The fact that the IFC is doing its work there, the way it is doing it, does not impede these other players from providing advisory and other services to the public sector; the public sector still hires them. Its just that we offer something different, that we think is unique, and its been working out very well in the last two years. Several other projects are under development for the Fund, Paulo says, including another large hospital and the abovementioned schools project, both in Belo Horizonte. A major irrigation project, called Projecto Pontal, in the So Francisco valley in Northeast Brazil, is currently being restructured and reformulated. There are several other in the pipeline, as well, pending negotiations with governments, including, among others, waste, and sustainable forestry in the Amazon.
worked together in the BR 116-324 BA project, a 680 km federal road concession linking the States of Minas Gerais and Bahia, successfully tendered to the private sector in 2009, mobilizing over USD 1 billion in private sector investments. The auction for this project was won by the Rodobahia Consortium, led by the Spanish firm Isolux-Corsan, which partnered with Brazils Engevix and Encalso. Paulo sees such consortia as part of an interesting interplay between Brazilian and foreign companies and markets. The infrastructure market in Brazil is open to foreign companies; there are now Spanish concessionaires running toll roads, water, and sanitation concessions. But the Brazilian contractors and concessionaires are very strong and competitive, too, and their increasing experience in the PPP business has allowed them to compete in other markets. I see it as a two-way street, and as a very natural and competitive process. The Brazilian PSP Fund, however, if focused only on infrastructure within Brazil. In some cases, Paulo explained, national or sub-national governments approach the Fund requesting assistance with specific projects, while in others, the IFC and BNDES source projects with governments and help them further conceptualize them. We select projects with high development impact that we think combine sound business principles, making them attractive to private sector participation, with adequate public policy requirements, making them interesting public goods, useful for society. We fund technical and legal consultants hired to do these projects, and we use in-house staff at IFC and BNDES to perform financial structuring and economic modeling. The gestation and implementation time varies from project to project, but generally, he says, it takes between 10 and 18 months for a project to reach completion. These projects are large and complex, so they take time to structure and mature. If you really want to structure it well, to take it to bid, you have to do technical studies, environmental studies, sound economic and financial modeling, intense market
Companies
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64
Companies

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Companies

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