The Chilean Public Private Partnership (PPP) programme already has a number of toll road projects and airport concessions completed, including the $400 million Rutas del Pacifico project which reached financial close in 2002. But the PPP programme is now being broadened to include prisons, reservoirs and water treatment facilities.

Substantial equity investment is usually required by sponsors to get projects underway, accompanied by construction loans. But as the construction progresses, Chilean projects have the advantage of being able to access the local currency bond market, where the appetite for long-term paper is stronger than in any other country in Latin America.

Last year's deal for Rutas del Pacifico pushed out tenors to a record 23 years for local infrastructure bonds, though the amortising structure made for a shorter average life. But the upcoming deals for the urban toll roads in Santiago have even longer concession periods of 30 years, which means that bond underwriters are having to push the local market to its limits.

And the four urban toll roads present other challenges. On Rutas del Pacifico there was many years' worth of traffic data on the existing 109km road running West from Santiago to the port of Valparaiso, which was the longest stretch of the new toll road system.

Motorists had little choice but to take the new toll road highways operated by Rutas del Pacifico. But for the four urban toll roads, though they do include existing stretches of road and the accompanying traffic data, motorists will always have the option of taking alternative routes through the city. This makes the levels of traffic hard to predict, and this latest set of deals will present difficulties for bondholders in terms of risk assessment.

In addition, the competition for infrastructure funding is increasing as the size and volume of projects grows, and bond investors may be concerned at the number of similar looking transactions that are being marketed over the next twelve months.

Monoline support

This will make multilateral and/or monoline insurer support an important element of the planned financings, although fortunately the main monoline insurers have a strong appetite for Chilean risk at present.

The monolines will only consider wrapping deals to triple-A when they already have an underlying investment grade rating. Whereas this requires structuring in countries such as Brazil, Chile has a sovereign single A rating which makes it a particularly attractive country for the monolines to operate in. Most of the monolines are currently wary of adding to their risk exposure in Brazil, and Chilean PPP projects are giving them an attractive source of business within Latin America.

In Chile, Ambac Assurance Corporation has already stepped up on one of the Santiago urban toll road projects, and will provide guarantees on the Costanera Norte project. This is a 34km six lane highway running East-West through the city, with total project costs of approximately $400 million. The concession will run for 30 years. The provisional operational date is May 2004, and most of the major tunnel segments have already been completed.

The toll road will have an electronic billing system using transponders on vehicles, and this tried and tested technology has already been used in other parts of the world such as Australia and Canada.

The concessionaires on Costanera Norte are Impregilo of Italy, together with local Chilean partners Fe Grade and Tecsa SA. The Interamerican Development Bank (IDB) is providing guarantees to bondholders alongside Ambac, in a similar way to last year's deal for Rutas del Pacifico where the IDB was co-guarantor with Financial Security Assurance (FSA).The arranger for the bond offering is ABN Amro.

"We have had discussions with all the multilaterals over the last several years, and one of our goals is to try to find ways to work with "he multilateral agencies," says Douglas Renfield-Miller, Managing Director at Ambac in New York. "In this deal, while we are not relying upon the multilateral for credit support, there is some halo effect since the IDB is right alongside us and has similar economic interests. And aside from the involvement of the IDB, we are also very comfortable with the project itself."

"This is one of the few projects that benefits from a Minimum Revenue Guarantee from the government," Renfield-Miller explains. "So if the traffic does not materialise there is some government support, and that is one reason that we chose to get involved with this road project and not some of the others."

Wrapping local currency bonds in emerging markets is a growing trend for all of the major monoline insurers. Ambac had been involved in a previous toll road deal in Chile under its since discontinued joint venture with MBIA. Though that was booked as an MBIA deal, the exposure was split fifty-fifty.

"We are quite open to doing local currency deals because you eliminate the transfer and convertibility risk that you have in cross border transactions," Renfield-Miller explains. "To some extent we see local currency deals as having a natural hedge, because if something serious is happening to the economy which is impacting the deal, and where we might have to pay claim, it is quite possible that the currency will also be depreciating. This would mean that in dollar terms we are going to pay much less than the nominal amount of the policy at the time we booked it. Also, as a global firm, we like diversity across geographical regions, asset classes, and currencies."

A banker in Santiago familiar with the deal says that Costanera Norte is likely to be the first of the four urban road deals to reach financial close. "Hopefully sometime early in the second semester we should be in a position to come to market," he says.

The main potential buyers of long term bonds are the Chilean pension funds, plus the life insurers. Local bond offerings are actually denominated in Unidades de Fomento, the daily inflation-adjusted financial units which are used in Chile for everything from buying a house or car to renting an apartment. As of late April one UF was worth around 16,900 Chilean Pesos ($23.80). Thus, though the interest rate on the bonds is fixed, investors are actually getting an inflation-adjusted return with a fixed margin.

Another road which will be looking to raise funds late this year or early next, with Banco Santander as arranger, is Americo Vespucio Sur, which is the southern section of the urban beltway located in the southeast of Santiago. It will run 24 kilometres, and construction includes 29 overpasses. Estimates demand is 70,000 vehicles a day, and the concession will run for 30 years. Estimated cost is around $300 million.

The concessionaires are two Spanish construction companies Safil and Aciona. There is no IDB involvement, but MBIA has signed up to provide insurance support for the debt providers.

"There is more uncertainty about traffic forecasts with these urban concessions, and the investment needed is very large, so concessionaires are being compensated with 30 year concessions," explains Raul Zorrilla, vice president at Banco Santander in Santiago, which has been the foremost bookrunner on Chilean toll road transactions to date.

"In previous deals, Rutas del Pacifico was the longest concession at 23 years, while the others all had concession periods of 20 years or less," Zorilla adds. "Rutas del Pacifico also had a variable term, which meant that the concessionaire won a project offering a certain amount of revenues, and once they get those revenues the concession ends. But this structure was used only on that one concession, and the upcoming deals are fixed term."

The third Santiago toll road involves the northern section of the Americo Vespucio ringroad, and Citibank has been lined up as arranger. German BOT specialist Hochtief is leading the Americo Vespucio Norte consortium, and with an estimated construction period of three years it is hoped to begin operations by 2006.

The last of the four Santiago roads involves the General Velasquez axis, which runs north-south through the city, and goes under the name Autopista Norte-Sur. The concessionaires are Skanska and Grupo Dragados, with local partners Empresa Constructora Protec and Belfi. Citibank has been lined up as bond underwriter, and has retained law firm Dewey Ballantine as counsel.

Taken together, these four urban toll roads, plus some other smaller deals in the network of roads and motorways along Chile's five thousand kilometre north-south axis, present quite a significant amount of infrastructure paper for the bond market to digest.

"It is important to remember that the largest projects of the whole Chilean toll road programme have still to be financed," comments one banker. "There could be some problems if some of these deals come to market at around the same time."

This situation arose with the financings for two previous toll roads. By coincidence, both Rutas del Pacifico, which was the largest private sector bond placement ever made in Chile, and Autopista del Sol both signed with the bond insurer Financial Security Assurance (FSA) on the same day, and wanted to progress quickly with their bond offerings. It was informally agreed that Rutas del Pacifico would go first in order to avoid problems, but there is no certainty that on future deals the various concessionaires involved will be so co-operative.

Broadening PPP

Further down the line, Chilean investors will start to see deals involving other types of infrastructure, in addition to the toll roads and airports that have dominated the market thus far.

Commuter rail is one area of activity, while the prison service is also following the PPP route to keep up with a growing prison population. The government is offering four separate concessions on ten prisons, with concession periods of between 15 and 20 years. Progress on the commuter rail concession has been slow, since several potential bidders felt that the concession on offer may not have been economic.

There is also activity in the water sector, and in January of this year the IDB signed off on a $20.5 million A/B Loan for a desalination plant in the northern city of Antofagasta. The 20-year build-operate-transfer (BOT) concession on the Antofagasta Desalination Plant was won by the OHL Group of Spain, via its wholly-owned environmental/water subsidiary Inima, Servicios Europeos de Medioambiente.

The offtaker is Empresa de Servicios Sanitarios de Antofagasta (ESSAN), the water service utility in Chile's Region II. This project will be the first desalination plant in Latin America financed by a multilateral institution.

Over the past decade the volume of PPP projects in Chile has totalled in excess of $5 billion, and the signs are that the financing requirements over the next five years will exceed that amount.

But with IDB assistance, together with guarantees from the monolines, bankers remain confident that there is sufficient investor appetite to get deals done, with Chile enjoying the advantage of having deep domestic capital markets, and being less reliant than many other Latin American countries for both bank debt and access to the international capital markets.