Bridging the PPP divide
The government of Argentina may just have found a way to finance
its second-tier infrastructure projects ? although all eyes will be
on the country to gauge its level of commitment to one of the
region's first public-private partnerships. The $370 million
Puentes del Litoral is designed to bring development to one of
Argentina's more impoverished regions, and therefore an ingenious
solution has had to be found to bring a sceptical private sector to
the table. The question now remains over whether both federal and
provincial administrations in a fragmented country can put their
money where their bridge is.
The government's commitment to greater public sector involvement has until now been demonstrated by a series of privatizations, in particular in the power sector, although deregulation has been a feature of the telecoms industry. As with the UK experience, however, the government has been left with a rump of required spending where the private sector can see few visible returns ? on a standalone basis. The original decision to go ahead with the project was made back in 1996, when little knowledge of any kind in the PPP arena existed.
The official name for the project is the Rosario to Victoria link, a connection between two cities on either side of the Parana River and its marshy flood plain. Rosario, in Santa Fe province, is a large and prosperous city of around 1.5 million people, whilst Victoria, less developed, has a population a tenth of that. Moreover, the link lies upon a major route between the two Southern Cone coasts, and is expected to carry large volumes of freight traffic.
Nevertheless, the project has been proposed to stimulate growth, and not to follow it, and is therefore greenfield in the truest sense. It has no precedents upon which to base traffic forecasts and, although it is the last remaining section to be upgraded on the routes between the ports of Parana (Brazil) and Valparaiso (Chile), is dependent on the establishment of a good economic community springing up nearby. Having made the economic case, as it saw it, the government then devised a tender process to bring in the necessary firms.
The federal government carried out a number of surveys, which included an estimated total cost for the work done ? from which the authorities could work out how much they could afford to pay. This survey was not released before the bidding process, although some indication was made in the documentation. The next step was the commissioning of a traffic survey that assessed the willingness to pay tolls of various potential users as well as the likely type of vehicle breakdown. From here a rough idea of the ability of the private sector to finance a portion of the works could be gained.
The final stage was the issue of the bidding documents, which were ultimately decided on the basis of the bid that offered the lowest grant requirement from the government. However, given the risks involved, the consortia that came forward were few and large. The first stage of bidding attracted only one, and this was rejected for not conforming to the bid requirements. The second attempt attracted two bids, of which the winner was a multinational group made up of five construction experts.
Puentes del Litoral comprises Italian firm Impregilo SpA as the lead sponsor, as well as German giant Hochtief (a leading light in the Scandinavian Oresund Bridge project), and local entities Sideco Americana, through its subsidiary Iecsa, Techint and Benito Roggio e Hijos. The first four are active in engineering and the last is a toll operator throughout Argentina. The difference between their winning bid and the losers' was a mere $500,000, or $206.5 million to $207 million.
The bidders conducted their own surveys to analyse construction and technical issues, as well as independent traffic surveys, although, according to Luis Rurbio, the operations group head of the private sector department at the Inter-American Development Bank (IDB), the negligible difference between the two bids is testament to the detailed ground work already done on the project. The IDB has been involved in the project from the start of the government's tender process up to its role as a lender in the eventual financing.
The contract follows a design-build-operate-maintain (DBOM) contract with a duration of 25 years. The main risks, therefore, were:
? The minimal experience and precedents available for the route of the bridge.
? The question of the sovereign risk exposure of the project, given the country's nascent economic recovery. Argentina has a BBB- local currency rating and a BB- foreign currency rating
? The presidential election in October 1999. The Centre-left Alliance President Fernando de la Rua replaced the 10 year-old Peronist government of Carlos Menem, amidst corruption allegations. Not the best time to have a new government executing the deal signed by a former administration.
? Difficulties in guaranteeing that tolls paid would continue to be in US dollars.
The sponsors therefore required the support of the IDB to bring the commercial banking in for the remaining $73 million of the financing requirement. The $100 million equity requirement was sourced from the sponsors.
The IDB used a standard A/B loan structure, keeping the majority of the financing ? in the region of $40 million ? on its books. The remaining $33 million was provided by Banco Santander Centro Hispano, under the B loan umbrella. From the bank's, and the IDB's, point of view the most important factors here were the toll fundamentals, which had been set by and large politically, the credit quality of the sponsors, and the government's willingness to advance the promised money.
The last factor would not have a material factor in the project's default, although it is a worry that looms into the project's construction phase. The bridge, as the first PPP-type deal done in the country, does not have revenues serviced out of the dedicated infrastructure that has recently been set up. Instead the project must rely upon grants voted for in congress out of the next year's budget, and cannot be ringfenced by the administration beforehand.
And then there is the relationship between the provinces and the central government. The provinces enjoy a high degree of autonomy from the government in theory. They can raise taxes independently to add to the money that they receive from the central government. Some have even used the power to issue bonds at this level, partly serviced by central government grant. But this means in practice that some provinces ? essentially the most prosperous ? are less beholden to the government that others.
At the time of planning, the provinces were given stakes in the venture, largely to obviate any local opposition to the huge building works. Assurances have been provided that money will be forthcoming, and congressional support is widely predicted, but this is not a 100% probability in Argentina's turbulent political system.
The bridge itself is the most complex part of the construction work, a 12km span across the longest unbroken part of the river close to the western (Rosario) side. The link in total, however, is 59km in length and consists of a number of spans linking up small islands on the river's flood plain. There is a certain amount of work to be done in obviating variable river currents and strong winds, but these have been tested to reasonable stresses. Further viaduct linking work has still to be done.
The financing, at least, has closed smoothly and the wait for government fund disbursement can continue. It is unlikely, however, that the deal will provide a real template, especially for Argentina. The involvement of a government grant in financing is seen as a transitional tool in bringing the private sector into projects, and could be a sizeable strain upon state finances. Indeed, were it not for the quasi-strategic nature of the bridge such a large commitment could not be taken as a given.
The government, therefore, is likely to move far closer to a British PFI way of thinking, largely because concession payments do not come in such frighteningly large jolts. These may even be extended beyond transport and into such areas as schools and hospitals, as soon as a clearer political consensus emerges. Indeed local observers report the presence of several members of the Treasury Taskforce (soon to become Partnerships UK) in Buenos Aires, in town to assist the government in drawing up a set of ground rules.
The IDB, with its mission to raise living standards and accountability in the region, will be watching the process closely. As Rurbio points out, ?it was a greenfield project both conceptually and physically. It's already an experience, however, that's difficult to repeat. But a lot of useful lessons have been learnt?. Expect other Latin American governments to flock to the classroom.
The government's commitment to greater public sector involvement has until now been demonstrated by a series of privatizations, in particular in the power sector, although deregulation has been a feature of the telecoms industry. As with the UK experience, however, the government has been left with a rump of required spending where the private sector can see few visible returns ? on a standalone basis. The original decision to go ahead with the project was made back in 1996, when little knowledge of any kind in the PPP arena existed.
The official name for the project is the Rosario to Victoria link, a connection between two cities on either side of the Parana River and its marshy flood plain. Rosario, in Santa Fe province, is a large and prosperous city of around 1.5 million people, whilst Victoria, less developed, has a population a tenth of that. Moreover, the link lies upon a major route between the two Southern Cone coasts, and is expected to carry large volumes of freight traffic.
Nevertheless, the project has been proposed to stimulate growth, and not to follow it, and is therefore greenfield in the truest sense. It has no precedents upon which to base traffic forecasts and, although it is the last remaining section to be upgraded on the routes between the ports of Parana (Brazil) and Valparaiso (Chile), is dependent on the establishment of a good economic community springing up nearby. Having made the economic case, as it saw it, the government then devised a tender process to bring in the necessary firms.
The federal government carried out a number of surveys, which included an estimated total cost for the work done ? from which the authorities could work out how much they could afford to pay. This survey was not released before the bidding process, although some indication was made in the documentation. The next step was the commissioning of a traffic survey that assessed the willingness to pay tolls of various potential users as well as the likely type of vehicle breakdown. From here a rough idea of the ability of the private sector to finance a portion of the works could be gained.
The final stage was the issue of the bidding documents, which were ultimately decided on the basis of the bid that offered the lowest grant requirement from the government. However, given the risks involved, the consortia that came forward were few and large. The first stage of bidding attracted only one, and this was rejected for not conforming to the bid requirements. The second attempt attracted two bids, of which the winner was a multinational group made up of five construction experts.
Puentes del Litoral comprises Italian firm Impregilo SpA as the lead sponsor, as well as German giant Hochtief (a leading light in the Scandinavian Oresund Bridge project), and local entities Sideco Americana, through its subsidiary Iecsa, Techint and Benito Roggio e Hijos. The first four are active in engineering and the last is a toll operator throughout Argentina. The difference between their winning bid and the losers' was a mere $500,000, or $206.5 million to $207 million.
The bidders conducted their own surveys to analyse construction and technical issues, as well as independent traffic surveys, although, according to Luis Rurbio, the operations group head of the private sector department at the Inter-American Development Bank (IDB), the negligible difference between the two bids is testament to the detailed ground work already done on the project. The IDB has been involved in the project from the start of the government's tender process up to its role as a lender in the eventual financing.
The contract follows a design-build-operate-maintain (DBOM) contract with a duration of 25 years. The main risks, therefore, were:
? The minimal experience and precedents available for the route of the bridge.
? The question of the sovereign risk exposure of the project, given the country's nascent economic recovery. Argentina has a BBB- local currency rating and a BB- foreign currency rating
? The presidential election in October 1999. The Centre-left Alliance President Fernando de la Rua replaced the 10 year-old Peronist government of Carlos Menem, amidst corruption allegations. Not the best time to have a new government executing the deal signed by a former administration.
? Difficulties in guaranteeing that tolls paid would continue to be in US dollars.
The sponsors therefore required the support of the IDB to bring the commercial banking in for the remaining $73 million of the financing requirement. The $100 million equity requirement was sourced from the sponsors.
The IDB used a standard A/B loan structure, keeping the majority of the financing ? in the region of $40 million ? on its books. The remaining $33 million was provided by Banco Santander Centro Hispano, under the B loan umbrella. From the bank's, and the IDB's, point of view the most important factors here were the toll fundamentals, which had been set by and large politically, the credit quality of the sponsors, and the government's willingness to advance the promised money.
The last factor would not have a material factor in the project's default, although it is a worry that looms into the project's construction phase. The bridge, as the first PPP-type deal done in the country, does not have revenues serviced out of the dedicated infrastructure that has recently been set up. Instead the project must rely upon grants voted for in congress out of the next year's budget, and cannot be ringfenced by the administration beforehand.
And then there is the relationship between the provinces and the central government. The provinces enjoy a high degree of autonomy from the government in theory. They can raise taxes independently to add to the money that they receive from the central government. Some have even used the power to issue bonds at this level, partly serviced by central government grant. But this means in practice that some provinces ? essentially the most prosperous ? are less beholden to the government that others.
At the time of planning, the provinces were given stakes in the venture, largely to obviate any local opposition to the huge building works. Assurances have been provided that money will be forthcoming, and congressional support is widely predicted, but this is not a 100% probability in Argentina's turbulent political system.
The bridge itself is the most complex part of the construction work, a 12km span across the longest unbroken part of the river close to the western (Rosario) side. The link in total, however, is 59km in length and consists of a number of spans linking up small islands on the river's flood plain. There is a certain amount of work to be done in obviating variable river currents and strong winds, but these have been tested to reasonable stresses. Further viaduct linking work has still to be done.
The financing, at least, has closed smoothly and the wait for government fund disbursement can continue. It is unlikely, however, that the deal will provide a real template, especially for Argentina. The involvement of a government grant in financing is seen as a transitional tool in bringing the private sector into projects, and could be a sizeable strain upon state finances. Indeed, were it not for the quasi-strategic nature of the bridge such a large commitment could not be taken as a given.
The government, therefore, is likely to move far closer to a British PFI way of thinking, largely because concession payments do not come in such frighteningly large jolts. These may even be extended beyond transport and into such areas as schools and hospitals, as soon as a clearer political consensus emerges. Indeed local observers report the presence of several members of the Treasury Taskforce (soon to become Partnerships UK) in Buenos Aires, in town to assist the government in drawing up a set of ground rules.
The IDB, with its mission to raise living standards and accountability in the region, will be watching the process closely. As Rurbio points out, ?it was a greenfield project both conceptually and physically. It's already an experience, however, that's difficult to repeat. But a lot of useful lessons have been learnt?. Expect other Latin American governments to flock to the classroom.
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