Alterra Partners, the sponsor group on the Juan Santa María airport project near San José in Costa Rica, is potentially nearing resolution of a four-year negotiation with the country's aeronautical authority (CETAC), the IFC and the Central American Bank for Economic Integration (CABEI) over the restructuring of financing for the project.

The deal – which reached financial close in 2001 – was the first PPP in the country and was expected to be a template for future PPPs. However, problems with the finances, political adjustments to the contracts and a number of unimplemented solutions have made the project a weak precedent for future infrastructure financing in the country.

A curious concession

The project was launched as an 'Investment Management Contract', though its features were very similar to those of an infrastructure concession. Total cost was estimated at $160 million, with a need for $120 million in debt and a heavy outlay by the sponsor in the first three years of the 25-year concession.

The contract differed from traditional concessions in that its terms allowed the government more authority in supervision and control. It stipulated a 64.8%/35.2% split in distributable revenues between operator and government, which was temporarily altered following contractual readjustments in 2003 but has since been reinstated. The non-distributable revenues go 100% to the government, and various fees, including air traffic control, approach and 25% of landing fees go to the government before the division.

The need to redevelop the airport terminals came as a response to the increased volume of traffic; Juan Santa María airport had seen an 8% rise in the previous decade. As Project Finance Magazine reported at the time of financial close, there needed to be an increase in tariffs to fund the work, which had the potential to cause trouble.

Changing the rules

The problems started in 2003 when Costa Rica's Comptroller General issued a report amending Resolution 79-2001, the original contract. This report resulted in caps imposed on tariffs additional to five that were listed in the 2001 financial model. Both the government and the sponsor group wish to keep the precise details of the changes to tariffs confidential until the negotiations close.

The IFC originally arranged a loan of $120 million in 2001, at the outset of the concession, of which an $85 million B loan was syndicated with the participation of ten banks. The first $90 million of the loan was disbursed before the 2003 report invalidated the terms of the IFC's commitment to the project.

Gayle McGuigan, Chief of Special Operations at the IFC, says the IFC had disbursed the financing based on the future cash flows as detailed in the 2001 resolution, and also on legal opinions proffered before the financial close, "including one by the legal advisor to OFGI [CETAC's oversight authority in Costa Rica] confirming that the approval of the Comptroller in Costa Rica was not required". Around $11 million has been repaid to date of the syndicated $85 million. There remains an outstanding loan of $79.3 million, of which $55 million is syndicated and $24 million is owed directly to the IFC. The IFC has not dispersed more funds to the project since the tariff methodology changed.

The parties met again to readdress the problem. The IFC, the project company and CABEI submitted a fourth proposal to CETAC in December 2006, suggesting that the IFC and participant banks would extend the repayment terms of their loans by 9 years, and that the shareholders of Alterra would agree to an aggregate equity contribution of $4 million in 2008 in addition to the $40 million in equity already invested in the project. The government would then agree to extend the contract by 5 years, to allow the company to meet its projected target revenues, which have proved lower than was expected in the original analysis in 2001.

Alfredo Aguileta, the CEO of Alterra in Costa Rica, explains the situation from Alterra's perspective: "Changes to the rules of revenue generation directly affect the economics of the project and consequently the equilibrium of the cost/revenue formula". The inability to repay the IFC has been addressed, to a certain extent, by using a $16 million letter of credit posted by the shareholders in the form of equity. Currently, the payment default stands at $9.7 million, with an aggregate financial shortfall of $25.7 million on the project since the 2003 report capped certain revenues, and the IFC withdrew from the project.

The government has rejected three previous proposals of addendums to the Management Contract in the last eighteen months, aimed at re-establishing the financing equilibrium of the project. Alterra requires a further $48 million, in addition to $4 million put up by shareholders, to complete the project. This figure is the projected cost of completing the construction at the airport. The sponsor company will use the income during the 5-year extension to maturity of the project to repay the debt and equity that is owed. Alterra is in talks with CABEI, which is in the process of analysing and authorising the additional loan the term sheet for which is due on 28 February.

Resolution?

There are four steps to a resolution to the airport's problems. First, there must be a settlement between Alterra and the government regarding a fines issue. The government is penalising the company for the default on work since 2003. Alterra and its shareholders have a contingency reserve of $9 million, though the amount of the fines has not yet been announced. The shareholders of the sponsor group remain the same since financial close: Alterra holds 85%, AGI owns 10% and local shareholders own the remaining 5%.

Following that agreement, financial equilibrium must be attained, along with a guarantee that the funds can be repaid to the banks. The term sheet must then be sent to CETAC for approval. Lastly, the Controloriá General de la República, the government body for all project approval, must sign off on the deal. These four steps are expected to be completed by the beginning of April. Alfredo Ortuño, the president of CABEI in Costa Rica, says that as soon as the political process is complete, the bank is in a position to release the funds.

Sources close to the negotiations suggest that the newly-elected Democratic Republic Party wants to see the matter resolved swiftly. The Minister of Public Works and Transportation, Karla González, is directly involved in the talks, and was also Vice Minister under the previous administration. She has been associated with the case from the outset of the financial problems and the imposition of the reformed contract. However, neither she nor anyone from the ministry was available for comment on the airport situation.

What is clear is that all parties would like to see the situation resolved by the earliest possible date, and to see a reliable regulatory framework in place for infrastructure operations in the country.

In a country with a strong potential for future PPP, given its political and financial stability, the precedent set by the Juan Santa María situation is both surprising and unfortunate. Whether the principal fault lies in the use of the 'Investment Management Contract' as opposed to a concession, or with one or more of the involved parties is, at this point in the case, immaterial to the resolution of the negotiations. However, the outcome of the talks will be fundamental not only in determining the fate of the airport and the sponsor company, but also to the possibility and structuring of Costa Rica's future infrastructure financings.