Chile's infrastructure finance market is showing all the signs of advanced maturity. On the one hand, sponsors and their advisers are working furiously to fine tune their operational concessions. At the same time, these sponsors are working on a series of smaller concessions and financing them almost exclusively in the local market. Indeed, far from being a priority target for outside financial institutions, Chile is now looking to bring its experience to other countries.

Chile has long been a trailblazer in the financing of transport concessions and public-private partnerships (PPP). It has frequently been identified as a laboratory for structures and concepts that have turned up – with or without attribution – elsewhere regionally and globally. Variable concessions, partial guarantee structures and several other enhancements have either debuted or been perfected in Chile.

The consensus at the international banks and monoline insurers which have financed Chile's development thus far is that large-scale opportunities for bond insurance, and particularly dollar lending, are over. Indeed, few opportunities above $100 million in size will likely be forthcoming.

Mega-bridges, maxi-hospitals

The most prominent remaining concession – the Puente Bicentenario de Chiloe – will call for roughly $410 million in financing. It will connect the mainland of Chile with the large island of Chiloe via a 2.6km span resting on three pillars. Hochtief and Vinci, advised by Santander and BNP Paribas – are currently working on the engineering feasibility for the project.

The two were named as preferred bidders in January 2005, and will likely need a long time to bring the project to a financeable state. The bridge concession has a sufficient level of technical risk – including the use of a small rock in the middle of the channel to hold up one of the supports – and is in a sufficiently remote part of Chile to attract high levels of government support. Indeed, persistent rumours have suggested that the eventual debt financing – or at least the concession's revenue – might use a government guarantee.

Such government-backed concession credits would bring Chile much closer to the norm for PPP financings in the UK. In fact, on several forthcoming concessions the UK model's influence is likely to be explicit. Chile's Minister for Health, Pedro Garcia, told Project Finance that he considers the UK model the only viable and proven method for hospital development. Several health ministry personnel, including the minister, have travelled to the UK and examined projects such as St Barts.

That deal, on which Skanska and Innisfree are preferred bidders, has been in the works for over a year, and is the most ambitious UK hospital PFI to date. But the health ministry is very attracted to the idea of consolidating several facilities on one site. The hospital programme, with the children's hospital of Salvador in front, should amount to $500 million in business.

According to Garcia, this will go some of the way towards closing the gap between the $600 million allocated to healthcare investment to 2015, and the $1.554 billion that it says is required. The ministry says that it wants to use the new hospital facilities to consolidate several older and more generalised facilities into single large campuses. While the Salvador hospital is to the north-east of Santiago, the Red Sur, Dr. Sotero del Rio and Maipu projects are all to the south of the capital.

Salvador, at $220 million, is much larger than the other three projects, all of which will be $80-100 million. It will also be a complex undertaking, since it will be required to service several different, and autonomous, groups. The ministry is unlikely to devolve any clinical services to the private sector, but has also been looking carefully at whether it can bring in such equipment suppliers as Siemens and GE into the concessions.

Chile's hospital concessions

Between 2005 and 2007, Leonel Vivallos at the ministry of public works, which coordinates with the assorted other ministries in developing infrastructure concessions, estimates a need for $800 million in dams and rainwater collection projects, $670 million in roads and airport projects and $195 million in other works, as well as the aforementioned bridge and hospital deals. To date, Chile has raised $6 billion equivalent for infrastructure.

The MOP's investment programme

The challenges for sponsors going forward will be managing transaction costs on smaller deals and managing relationships with local bank lenders. For instance, OHL, which has been awarded a concession for a road between Los Andes and the country's main port of Valparaiso, is working with BBVA and Santander on a bank deal, and will be looking for terms as close to a bond financing as possible.

Tweaks and pieces

Such plentiful liquidity in bank and bond markets is encouraging sponsors to be increasingly creative. Most are looking to make further alterations to the financial profile of their concessions, as well as to bring them to a condition where they can be sold on with an attractive return.

Last year's most important innovation – the MDI – was designed to allow sponsors to assign a net present value to their concessions with confidence. It did not allow them to set the likely cashflow from a concession, but it did allow them to assign a value to the concession. Put simply, and for a longer explanation, search for "MDI" at projectfinancemagazine.com, the MDI provides for the extension of a concession by the MOP should traffic volumes not produce sufficient cash at the concession.

The MDI usually included some additional work to be provided to the MOP, as well as an additional issue of local bonds, accompanied by a liquidity facility from a bank with a local balance sheet. The first MDI restructuring, in the middle of 2004, was for Santiago Airport, a Dragados and Skanska-led concession, with Cintra's Autopista del Maipo following shortly after.

The most recent refinancing of this nature – for Talca-Chillan – was a l7-year local issue of UF6.65 million (the inflation-linked Chilean Peso instrument, equivalent to roughly $190 million) led by ABN Amro, which also provided a liquidity facility to backstop a delay in cashflow under the MDI. Talca-Chillan, like Maipo, featured a guarantee from MBIA of both the bonds and the facility, and had a 3.25% coupon.

The MDI has its critics, which charge that the mechanism limits the amount of upside available to sponsors, and in some cases eliminates equity altogether. It makes the concessions solid investments, although probably not the type of asset that would attract an international infrastructure equity fund.

However, not all concessions are the same – several sections, in particular those located in and around Santiago and the country's main ports, are likely to exhibit strong growth. Costanera Norte, the first of the urban concessions, is already open, although it benefits from a government-provided minimum revenue guarantee. The other urban concessions – the $795 million equivalent Skanska and Dragados-led Autopista Central the $525 million Sacyr and Acciona-led Vespucio Sur and the $432 million Hochtief and Dragados-led Vespucio Sur – all dispensed with a guarantee.

Norte and Maipo, which feature dollar benefit, have decided to restructure the currency hedge that the MOP offered them at the time of their original financing. They have entered into long-dated currency swaps with private counterparties, with their obligations wrapped by MBIA, also the guarantor of their project debt. Since the dollar concessions were structured conservatively to counteract the currency risk, the new arrangement has improved their underlying rating a notch, to BBB/Baa2 (Moody's/S&P).

Bargain hunting

Given the tweaks from which these assets have benefited, sponsors' desire to find ways to withdraw some equity from their projects has intensified. In 2004, the market's hopes were fixed on the possibility that Chilean institutional investors might provide a graceful and acceptable way for construction firms and operators to recycle their contribution. This has not happened, because the investment strategies of pension funds and insurers have remained regulated and conservative.

But the spectrum of options has broadened. According to Willem Sutherland, from ABN Amro in New York, there are four available – a sale of 100% of a project's equity, a partial sale, a capital reduction, and sale of future dividend rights as a securitization. All of them have challenges, the first three largely regulatory, and the last largely economic.

The difficulties with a complete exit are demonstrated by the time it has taken Impregilo to sell its stake in the Costanera Norte concession to fellow Italian contractor Autostrade. The two agreed earlier in 2005 to a sale of the stake, but it has been held up following discussions as to the value of the stake, as well as getting a host of approvals from government and monoline, among others. All this, despite the fact that Autostrade is a much more appealing credit than Impregilo.

Bancomext, the Mexican state-owned bank that owns controlling stakes in the ITATA and Aconcagua concessions, is the nearest that Chile has to a pure financial investor. Bancomext acquired its stakes during the restructuring of Mexican contractor Tribasa, which was an early investor in the Chilean concession programme. Both concessions were restructured as Tribasa's mid-1990s troubles intensified, but the new owner wants to optimise them.

According to Octavio Colmenares, who heads up both concessions, the improvement in the roads' operational profile, as well as the improvement in macroeconomic conditions in Chile, allows the sponsor to withdraw substantial equity through a refinancing. The two concessions are very different – Aconcagua is a sparsely-used section of Ruta 5 (the Pan-American Highway) running through the north of the country, while ITATA runs from Chillan to Concepcion, the country's second largest port.

So, while ITATA has performed strongly since it began operations, Aconcagua has had to call on the MOP's minimum revenue guarantee. In both cases, however, the roads were suitable candidates for a refinancing. The sponsor began talking to several banks, monolines and institutions about the optimal structure and pricing for a refinancing, and narrowed the field down to Banco de Chile and XL Capital Assurance.

Banco de Chile was able to match the terms offered for an insured bond (market rumour suggests that XL offered a premium as low as 30bp), and has agreed terms with the sponsor for a financing that will upstream roughly $150 million to the shareholders and extend the tenor on the project's debt by two years. The financing was set to close as Project Finance went to press.

Heading north

Given the relative paucity of big-ticket opportunities in Chile, several domestic and international participants have turned their attention to its northern neighbour Peru. The two countries have frequently been rivals, and are currently engaged in a maritime border dispute that covers the world's richest anchovy grounds. But the Chilean example is one that several of its neighbours wish to follow.

Peru's finances, however, are not as robust as Chile's, and its government is not as likely to use the real toll model as Chile was. However, Peru does benefit from impressive growth in funds under management, and is close to an investment grade from both ratings agencies – Moody's has it at Baa3, but S&P puts it at BB. Recent deals such as Lagunas Norte, as well as the forthcoming Cerro Verde issue, and the Camisea pipeline financing, have had a substantial capital markets element.

The domestic funds have a fair tolerance for shakier credit, assign a high level of comfort to government credits, and can supply both dollars and Peruvian soles to projects. Moreover, some bankers in Santiago have suggested that Chilean pension funds might be interested in Peruvian credits. This last speculation appears to be fanciful – most of the investors surveyed by Project Finance were as wary of Peruvian credits as they have been of taking equity in Chilean road concessions.

According to John Graham, an investment officer in the private sector department at the Inter-American Development Bank (IDB), Peru needs to attract $20 billion in investment simply to catch up with Mexico and Chile, and 97% of investment in the country's infrastructure has focused on energy and telecoms. And many of the forthcoming investments will also be gas and power related.

The Peruvian government wants to spend the time it has before the 2006 election in putting in place a programme with some similarities to the UK PFI model. But even if the government achieves only nominal risk transfer, it will be difficult to persuade a monoline insurer to take on a Peruvian asset. As Graham suggests, the IDB might be able to provide a partial guarantee to a project, or first loss protection, but this would depend on a properly structured deal and continued progress in the macroeconomic sphere.