Chile and Mexico have recently undergone subtle shifts in the way that they approach the private financing of transport and infrastructure assets. The changes are less the result of changes of administration, and more a reflection on the changing nature of their respective capital markets and the assets that they are looking to finance in coming months. For Chile this means adapting its successful template to less conventional or less commercially robust assets, and in Mexico it means responding to the changing expectations of the country's equity investors.

A steady trickle of expertise across borders – from Europe and Chile in particular – has increased awareness of the challenges associated with public-private structures. While its international work is a small part of its remit, Partnerships UK has spent time working on hospital and university projects. Many of the bankers, advisers and monolines that cut their teeth in the Chilean market are now scouting Mexico for opportunities, at least when they are not pursuing projects in the US.

Mexico and Chile have demonstrated markedly different signs of progress. Chile, for long the cradle of private finance in Latin America, is still enjoying a brief lull after the large urban and intra-urban road projects of the late 90s and early part of this century. In the future lie hospitals, smaller roads, and more bespoke projects, but for now the market subsists on refinancings.

The United Mexican States have experienced a fitful start to their federal PPP programme. The Mexican transport and communications ministry, SCT, was days away from closing its first PPS (Proyectos para Prestación de Servicios) project – for a road concession – before government and sponsor decided to rework the financing to accommodate a second asset. Meanwhile, several constituent Mexican states, some of which also have PPP programmes, are enjoying more successes in raising financing off the back of existing assets.

Chile – more gains on the way

The most dynamic illustration of the value attached to Chilean infrastructure assets was the sale of the Costanera Norte concession. Costanera Norte, which runs east-west through Chile's capital Santiago, was the first urban toll road to raise financing, and benefits from a minimum revenue guarantee from the country's ministry of public works (MOP). And the concession fetched $277 million, not including debt, when it was sold on 22 June.

Impregilo, which financed the 30km section in 2003, was 70% sponsor, while the Italian investment fund Simest held 10%, and two Chilean construction companies own 20% between them. Impregilo subsequently bought all but 2.1% of Simest's stake, bringing its own to 77.9%. All the sponsors agreed in December 2005 to sell their stakes to Autostrade and SIAS of Italy, and by the time that approvals from lenders and the Chilean Ministry of Public Works (MOP) came in the buyer group had expanded to Autostrade (45%), SIAS (45%) and Mediobanca (10%).

The acquisition also includes the assumption of $265 million equivalent in local currency debt wrapped by Ambac and the Inter-American Development Bank (IDB), and led by ABN Amro. Since the merger, Autrostrade has agreed to merge with Abertis, which leaves Skanska, part-sponsor of the Autopista Central concession, as the only non-Spanish sponsor of a Santiago road concession. But Autostrade is likely to enjoy wide operational latitude, and Autostrade and SIAS have expressed an interest in pursuing additional concessions in Chile. And Abertis and Autostrade have also designated the capital-hungry US as their main area of interest.

Still room for tinkering

The MOP's approach to financing public works continues to please the finance market, and has endured the change-over to the socialist presidency of Michelle Bachelet, which emphasised a continuance of free-market policies, with a greater emphasis on social programmes. A private infrastructure programme encompasses both aims.

But the Chilean government wants to expand the range of projects from its base of roads, airports and prisons. Among the slate of forthcoming projects that it put forward in August 2005 are reservoir, hospital and educational assets. In March 2006, the minister of public works, Eduardo Bitrán, announced a redesigned concession structure for the country's slate of hospital projects, one that he said would be applied to other assets.

The hospital concessions, which had incorporated an element of clinical risk, had not excited a great deal of private sector interest, and the new concession document, while shorter, clearly defines both equipment provision, and keeps private sector involvement to construction and maintenance of hospitals.

The MOP will thus rebid the three pilot projects in healthcare – Salvador-Infante, with 454 beds and a price tag of $220 million, Exequiel González Cortés ($100 million), Maipu ($100 million) and Sótero del Río ($100 million). There are indications that while finding road builders has to date been straightforward, more complex deals are less popular – Bitran has been anxious to interest European developers in these and other projects, with a total value of $3.6 billion equivalent (for more on the list of forthcoming projects, visit www.concesionioneschile.cl).

The financing market's activity, however, has centred on refinancing deals and smaller transactions for additional works. OHL, for instance, recently completed a UF970,100 (an inflation-linked unit of the Chilean peso, equivalent to $40 million) financing for additional works on its Autopista del Sol concession, which runs on Ruta 78 between Santiago and San Antonio. The new bonds were wrapped by FSA, which also insured the road's UF5.5 million series B financing in 2002, and led by ABN Amro.

The new deal finances the Convenio Complimentario number 4, a list of additional works designed to increase access to the port of San Antonio, for which the concession-holder will be able to raise tolls. The project has performed well, has experienced increased traffic levels, and benefits from a minimum revenue guarantee until 2018. Other sponsors have had the opportunity to receive grants from the MOP instead, and have monetised these with bank facilities that allow the banks to purchase the rights to these grants at a discount.

Mexico moves on up

Mexico is the next frontier for the domestic financing of infrastructure assets. It has experienced a successful string of refinancings of formerly distressed assets, enjoys an investment-grade credit rating, and has an ambitious slate of PPS projects in the works at both Federal and state level. At the same time, the SCT has put forward several real toll concessions, of which four have been awarded

But no PPS deals have closed to date in Mexico. The first project for which a financing package has been arranged – CONIPSA – has yet to close, and still awaits SCT approval. CONIPSA's sponsor, ICA, is now working on financial close for a second concession, and is likely to use a similar structure to the Ps730 million ($67 million) CONIPSA financing, although the second still requires approvals from lenders and ICA's board.
CONIPSA, the SPV for the Irapuato-La Piedad concession, has a Ps580 million facility in place through Banco Santander, and is also slated to benefit from a partial guarantee from the International Finance Corporation. It receives revenue based on a mixture of availability payments (roughly 85%) and traffic-related payments. The IFC facility – for Ps189 million – backstops the SCT's obligations under the concession, and is designed to mitigate some of the risks associated with the ministry's inability to earmark specific funds towards projects over successive years.

ICA is still waiting for SCT approval of the CONIPSA financing, nearly three months since it had hoped to wrap up the deal. It is, however, a little better disposed towards the SCT than it was in April. The PPS connection that adjoins CONIPSA – Queretaro-Irapuato, was re-bid even though ICA was favourite. ICA, however, won this concession on the second time of asking, and is working with Santander on a deal, likely to be equivalent to $150 million, which will be in outline similar to CONIPSA (for more on the deal, search its name at www.projectfinancemagazine.com).

The real toll concessions have moved at a slightly brisker pace, although they have also been largely the province of Mexican players. IDEAL, an infrastructure fund set up by Carlos Slim, won the Arco Norte Mexico City bypass concession. It bid a higher construction price than FCC and Acciona, but also offered a higher equity contribution (concession holders must contribute 25% equity to real toll projects), and offered a more rigorous verification of its prices.

The presence of Slim, comfortably the country's richest man, complicates the market. Slim's Grupo Carso will pick up IDEAL's construction business, and his Imbursa financial services assets will likely provide financing. Arco Norte covers a distance of 223km and will connect highways in the states of Mexico, Hidalgo, Tlaxcala and Puebla. It is going forward on the back of financing from FINFRA, the state investment fund, and Banobras, the state public works bank.

One multilateral says that even though Mexican banks can go out to 14 years or more for projects structured with partial guarantees, IDEAL has not shown a great interest in such enhancements. "We actually sat down with Slim, and explained what the product did, and he seemed interested. But nothing came of it." IDEAL has also won the Tepic-Villa Union road – a 132km section in the state of Nayarit, with a $360 million equivalent cost.

The older snag the longer

The small volumes of PPS and real toll greenfield financings compare with the potential funding available to existing projects. The Mextol refinancing, for the 21km Mexico-Toluca project, illustrates the terms on offer in the capital markets for existing projects. It essentially took advantage of the capital markets' increased tolerance for toll road assets to put in place longer debt and to reduce tolls.

Mextol issued Ps4.2 billion in 22-year debt through an MBIA-structured programme known as PADEIM (Programa AAA de Infraestructura Mexico). PADEIM could provide an of-the-shelf funding source for a wide range of assets, cutting down on transaction costs and holding a diverse portfolio of assets, albeit with toll roads at the fore. The owner of the road, PACSA, can redeploy the proceeds, beyond those required to refinance existing debt, as it sees fit.

Such transactions are more amenable to monolines, since existing roads, and their traffic risk, usually have a risk profile that, combined with Mexico's BBB/Baa2 country rating, is enough to produce an investment grade rating. Including construction risk, for a newbuild toll road, or incorporating operational risk for a PPS road, is more difficult.

But PADEIM, while it has a total capacity of Ps25 billion, is not a fixed pool of fundng, more a relatively flexible set of documentation that will allow fast-moving sponsors to benefit from an expedited securities approvals process. It does not yet constitute a fixed pool of funding, more a mechanism somewhat akin to a US shelf registration.

Other monoline activity has been limited – XL Capital has completed a $30 million equivalent wrap for the Matehuala toll road. Matehuala is a 14km, four-lane toll road located in the state of San Luis Potosi, and its sponsor is domestic construction specialist Omega. Banorte provided the new package, which allowed Omega to withdraw some equity from the project. According to a source close to the project, who declined to provide further details, the deal is evidence that the second wave of toll road projects, of which Matehuala was the first, will grow into attractive assets for secondary investors.