Empresas ICA is set to close the financing for the first project in Mexico under its public-private partnerships programme. The Ps730 million ($67 million) financing for the Irapuato-La Piedad concession is small, especially next to the Ps4.2 billion ($400 million) refinancing of the Mexico-Toluca road, which also closed in the last month. But it gives a better picture of how availability-based concessions in the country might be financed – warts and all.

Mexico's Proyectos para Prestación de Servicios (PPS) scheme is an attempt to translate the UK, Portugal and Canada's experience into a viable system for financing projects without robust internal commercial cashflows. The mechanism is key to financing schools, hospitals, and the less high-profile transport projects at federal and state level in the coming years.

Irapuato-La Piedad is the first concession to reach close under the scheme, and closing it has been a protracted process. This stems in part from a complex set of bidding parameters, and partly from institutional sclerosis at the Mexican transport and communications ministry, or SCT. The mandated lead arranger of the financing is Santander, which has worked on the deal for more than a year and underwrote the sponsor's bid.

The deal also features a partial risk guarantee from the International Finance Corporation that could be readily adapted to transportation projects worldwide, so long as commercial lenders can learn to love it. It is one of the first concrete signs that the IFC is creating products specifically for PPP structures. It has not, however, yet closed this element.

Irapuato-La Piedad is a 75km stretch of road located within the states of Guanajuato and Michoacán, in the centre of the country. It runs east-west, and is presently single-track in many places. At one end lies the Queretaro-Irapuato highway, also slated to be a PPS project. The SCT put out a tender for the road in December 2004, and ICA won the concession in the third quarter of 2005.

The private sector developers had to submit a bid that featured a term sheet from a lender, as well as the minimum yearly payment that the bidder would require and the shadow payment that the concessionaire would require for traffic levels between two predetermined bands. The SCT had conducted a traffic study, which it provided to bidders and used to create a model for what the baseline revenue under the concession should be.

The bid structure is a clear attempt to limit the potential for escalating shadow toll payments, as well as ensure the cheapest construction bids possible. But it was a confusing mix of inputs, and sources close to the process complain that bids with a low availability level and a high fee per car reward the riskiest bidders. It would also create the most uncertainty with respect to the SCT's payment obligations under the concession.

Construction work, by ICA's construction subsidiary and guaranteed by ICA, is due to be complete in 2008 and takes place over 16 sections. To encourage the operator to bring the project into operation as quickly as possible, the concessionaire receives 70% of the amount due on each section, rising to 100% when the whole road is complete. These revenues should total Ps40 million, and are considered as equity in the project company.

ICA's bid appears to be relatively conservative, since it is believed to make 85-87% of its revenues from availability payments. Its own construction subsidiary will be responsible for the work, so it should be able, in theory, to better spread its exposure to traffic over the 20-year life of the concession. The payments from the SCT will be forthcoming quarterly, and total Ps147 million per year.

The sponsor has arranged a Ps580 million loan from Santander with a tenor of 14 years. Mexican institutions look for a healthy tail for project debt, even where the counterparty is the federal government. Tenors of up to 17 years might be possible on a longer concession, and wrapped financings have also stretched out longer.

But banks have to contend with step-in rights that are extremely curtailed by comparison with other jurisdictions. There are no rights over the road, and so lenders must be content with the rights to payments under the concession contract, which are assigned to a trust for their benefit. The trust structure conforms with the Mexican law governing mortgages, and will also have as collateral a letter of credit, which ICA is substituting for a six-month debt service reserve.

The final enhancement to the deal is a Ps189 million partial guarantee from the IFC. The product is part of a push by the IFC and its peers to expand the use of such guarantees, which rests on the logic that it is better to put a little balance sheet at work to promote the growth of domestic funding capability than provide B loan cover, albeit implied, to international commercial banks.

Lenders could call on the guarantee in the event that the Mexican government is unable to live up to its obligations to the project. The project does not benefit from a specific, earmarked, revenue stream, but does get paid between government salaries and all other expenses. In the event that no payment is forthcoming, the lenders could call on that guarantee for the first Ps189 million of their losses.

The facility has yet to be closed, since the documentation process is not yet complete, and the IFC and senior lenders have yet to decide which of them would be repaid first in the event of the guarantee being drawn but the money owed being recovered. The project, however, would likely be financeable without the enhancement, since it has an underlying AA+ (local, equivalent to BBB- international) rating.

But the array of enhancements is promising, and could be adapted both to less robust concession and in less robust economies. More troubling is the slow progress so far in bidding out PPS road concessions. ICA is angry that the SCT has re-bid the Queretaro-Irapuato highway, which ICA was a favourite to win. Wider interest in the sector will depend on a smoother bid process gaining traction.

CONIPSA
Status: Closed, waiting on SCT authorization
Size: Ps730 million ($67 million)
Location: Guanajuato, Mexico
Description: 75km PPP road concession
Sponsor: ICA
Debt: Ps580 million
Lead arranger: Banco Santander
Maturity: 14 years
Lender legal counsel: Ritch Mueller
Sponsor counsel: White & Case
Independent engineer: Aries