Chile was once the southern cone’s infrastructure development powerhouse, though it slowed the pace of procurement of new projects while it drafted a new concessions law during the administration of former president Michelle Bachelet. But concessions are back with a vengeance under new president Sebastián Piñera, who until recently owned roughly a quarter of Chile’s largest airline, LAN.

Hernan de Solminihac, Chile’s minister for public works, laid out a $15 billion, four-year concessions programme in July 2010. Included are 92 infrastructure projects, ranging from the $1.3 billion Americo Vespucio Oriente toll road in Santiago to the $286 million Antofagasta hospital in northern Chile and numerous other road, airport, transit, health and prisons projects. The pro­gramme, if the Ministry of Public Works (MOP) fully implements it, would surpass the entire amount invested in infrastructure concessions in the country during the past 15 years.

Under Bachelet and her public works minister Eduardo Bitran, the MOP shifted its emphasis to streamlining the country’s concession regulations and away from procuring new projects. This included improving the competitiveness of tender auctions, re­ducing contract renegotiations and improving its dispute resolution mechanisms. But most private sector market participants complained of a “dry period” in new concessions. One local sponsor says the government under Bachelet was not very “visionary” when it came to long-range infrastructure planning.

Highlights of the new programme include eight hospital and four prison concessions, which have many sponsors predicting social infrastructure will be the next big thing in Chile. But market players question whether there is enough domestic debt capacity for an average of nearly $4 billion in new concessions annually for the next four years.

“Sponsors and financial market players will be up to the challenge,” says Nicolas Uauy, executive director of corpor­ate and investment banking at Banco Santander Chile, on the MOP’s concessions programme. “The key issue is execution, in order to make this plan a reality. For that we need an MOP that can deliver.”

Unsolicited plaudits for transport

Roads have long dominated Chilean infrastructure concessions. Throughout the dry spell, the MOP continued to award road concessions, though these were mostly smaller rural or regional corridors. Those won by Acciona and Skanska have recently reached close, while those won by ACS, Besalco, Belfi, Icafal are likely to close soon.

Skanska’s $331.5 million Autopista de Antofagasta road concession was the first to close, on 16 December 2010. Banco Santander was mandated lead arranger for the $242 million equivalent loan, which was denominated in UF, the inflation-linked unit of the Chilean peso. BBVA, BCI and Corpbanca joined on the 18-year financing and the sponsor contributed $89.5 million equivalent in equity. Pricing was over the induce camara promedio (ICP) benchmark, which is a more transparent overnight interbank rate than the com­monly used TAB. The real toll concession, which was award­ed in May 2010, includes construction of roughly 120km of new roads and upgrades to another 87km around the city of Antofagasta in northern Chile. Heavy truck volume serving the region’s mining operations is expected to enable the sponsor to recoup its investment without subsidies.

Antofagasta is notable for a number of reasons. First, it is the first use of the ICP base rate for a road concession in Chile. According to Marcelo Palacio Consolo, a manager at Skanska in Santiago, the base rate was selected because it is easier to hedge into a fixed rate than TAB. Second, it was tendered under the country’s private initiative scheme, which encourages what are essentially unsolicited bids. Sponsors develop projects independently, and these are then be tendered by the MOP. In return the developers receive a bonus on their final bids for the resulting concession. That Antofagasta reached close is significant because, according to various local sponsors, the MOP discouraged these private initiatives for a number of years.

The MOP, under Solminihac and concessions coordinator Mauricio Gatica, is now actively soliciting private initiatives. Pinera’s private sector background and desire to support entrepreneurial initiatives are likely important reasons for the shift. At least four privately developed projects were included in the current concessions programme, including OHL’s $1.3 billion Autopista Costanera Central, a plan to upgrade a number of existing roads in southeastern Santiago to a limited-access tolled highway, and Besalco’s $198 million Nahuelbuta highway, a plan to upgrade and extend highway 180 between Huequen and Los Angeles in the Biobio and Araucania regions of central Chile. The former is scheduled to be tendered in 2013 and the latter in 2012.

The other significant concession to close recently was Acciona’s $364 million Ruta 160 from Tramo Coronel to Tres Pinos. A BBVA-led club that included Banco Estado and Banco Itau closed on a $192 million term loan with a tenor of 18.5 years, a $22 million VAT facility with a tenor of three years and a $7 million revolving guarantee with a tenor of 15.5 years on 21 December 2010. The sponsor contributed $143 million in equity. The UF-denominated financing includes a hedge that fixes pricing on 80% of the term loan for 15.5 years. The 40-year design-build-finance-operate-main­tain concession includes improvements and rehabilitation of 90km of Ruta 160 over the Coronel pass, which connects Chile’s Concepcion and Arauco provinces. The MOP awarded the contract to Acciona in September 2008.

Currently awaiting close are ACS’ 55km Route 5 from Puerto Montt to Pargua and Consorcio Vial Chile’s (Besalco, Belfi and Icafal) 136km Ruta 66 Camino de La Fruta project. The former is expected to be financed with a UF3.2 million (roughly $150 million) syndicated bank loan led by BBVA. The financing will have a tenor of 20 years door-to-door for the 40-year concession. The latter is expected to include a $360 million investment over the 35-year concession term.

Airports and transit are also included in the MOP’s transport concession plans. Sponsors are gearing up for the retendering of Santiago’s Arturo Merino Benitez International Airport, valued at roughly $480 million, in 2012 as well as an average of one regional airport per year through 2013. Two bus rapid transit lines, the 6.4km Corridor Gran Avenida ($66 million) and the 8.8km Avenida Indepeendencia corridor ($107 million), in Santiago are also part of the ministry’s upcoming slate of concessions.

Can hospitals learn from the prisons’ experience?

Roads may offer the most concessions but the MOP’s hospital and prison concessions have excited sponsors the most. In addition to the 12 facilities included in the current four-year plan, there is talk of at least 22 additional hospitals that would be tendered if all goes well. In total, the first round of projects will equally roughly $1.8 billion in investment, according to the government.

Social infrastructure concessions may represent an exciting new asset class for sponsors but they do not come without complications. An earlier round of jail projects, including 10 facilities valued at roughly $280 million in 2002, were poorly struc­tured and ultimately cost the Chilean government more than double its initial estimates, according to a Santiago-based lender. In addition, issues around how to design per­for­mance standards so that they conform to promises to voters have plagued the MOP. These and other issues precipitated a hiatus in social infrastructure concessions until 2009.

Grupo San Jose, led by San Jose-Technocontrol, won the 15-year design-build-finance-operate-maintain concession for the Maipu and La Florida hospitals in the Santiago suburbs – the first social concession since the ill-fated prisons – in June 2009. BBVA is lead on the bank loan for the roughly UF5 million project. The con­tract includes construction of a new rough­ly 70,000 square-metre facility with 275 beds in Maipu and a roughly 72,000 square metre facility with 391 beds in La Florida. Close is expected during the first quarter of 2011. While the project is not part of the pro­gramme it is notable as the first hospital concession in Chile.

The MOP plans to release a request for proposals for the first hospital in its slate of eight, the multiyear build-finance-operate-maintain (BFOM), plus medical equipment, concession of the Antofagasta Hospital, during the sec­ond quarter. The estimated $286 mil­lion 670-bed project would be sup­port­ed by milestone or substantial com­pletion pay­ments dur­ing construction and avail­ability payments during operations.

Depending on the response the ministry receives for Antofagasta and how the tender proceeds, it will then move forward with the other seven medical facilities, including ones at Cauquenes, Constitucion, Curico, Parral, Felix Bulnes, Salvador and Sotero del Rio.

Tenders for the new slate of prison concessions are ex­pect­ed to begin this year. Addressing the past cost overrun issues, sponsors expect the projects to be structured as BFOMs and contain specific service quality benchmarks. According to the MOP, investment in the facilities at Bio Bio, Calama, Temuco and Valparaiso will total roughly $268 million. The ministry hopes to tender all of them by 2013.

Hospitals and jails are just a start. If all goes well with the current programme, say various sponsors that work in the market, schools, universities and parks are next. Whether these are developed by the MOP or under the private initiative programme has yet to be determined but models from both Canada and Europe could offer a starting point.

Living without the monolines

The collapse of the monolines in 2008 precipitated a significant shift in Chilean infrastructure financing. The standard model of selling an internationally-wrapped bond sold to local pension funds to finance a project has ceased to be an option. But local banks stepped in after the monolines’ col­lapse with sufficient appetite to finance the infrastructure pipeline.

Banks are providing debt in the form of club or syndicated loans with 15- to 20-year tenors and pricing a few hundred basis points above either the TAB or ICP. Spon­sors working in Chile say they have faced no issues raising debt – one even describes local banks as “very eager” to lend to projects – but all note that spreads are slightly higher today than pre-2008.

But banks’ ability to digest mega-projects has not yet been tested. No new infrastructure concession larger than $500 million has come to market in Chile since the collapse of the monolines. They may struggle to support larger concessions, such as the proposed Americo Vespucio Oriente and the Autopista Costanera Central toll roads, both estimated to cost roughly $1.3 billion.

Lenders are wary of the demand risks associated with both projects while, at the same time, the government is adamant that both roads be built without an operational subsidy. Struc­turing a financeable project, especially considering residents’ demands that portions of the roads be expensively tunnelled, will be difficult. Finally, infra­structure concessions should be financed in UF or Chilean pesos to avoid currency mismatches, effectively excluding the participation of international banks.

Chilean peso-denominated bonds remain an option only for mature infrastructure concessions because of restrictions on pension fund investments in non-investment grade paper. These restrictions make it difficult for funds to lend to projects with con­struction or traffic risk, or both. Some market participants, however, believe that institutional lenders are more the victims of a lack of in-house expertise than regulatory restrictions.

Until their collapse, monolines provided much of the guidance on how to structure bond deals, as well as investment grade wraps, in order to attract pension fund investors. A local financial adviser says that it is more this lack of expertise on deal structuring than the added element of construction risk that is keeping private placements off the table when sponsors look to finance infrastructure concessions. Asked what occurred to the previously wrapped deals after the monolines’ market exit, they say that on the local rating scale most were only downgraded to A, which is still considered investment grade. Bonds coupled with bank loans might solve these financing issues but many local market participants believe that Chile’s capital markets are not ready for such structures.

When push comes to shove, the MOP is likely, if needed, to give sponsors and lenders the bump they require. It has demostrated its flexibility in the past when it had to restructure the 1990s-vintage toll road concessions. Perhaps a large road deal with a small operating subsidy could reopen the capital markets to project bonds, perhaps not. A number of sponsors and lenders expressed doubts over whether the government could even stick to the current ambitious concessions programme, a fact that could make the financing concerns moot.

“All governments announce big plans for infrastructure,” says one Santiago-based lender. “But they generally shrink. We can expect between $1 billion and $1.5 billion in con­cessions per year based on history.” But even if the MOP only tendered $1.5 billion in new concessions per year, that would still be a solid comeback. n