These turnkey infrastructure projects are everywhere. Transport projects include more than $1 billion in up­grades to the Panama City road network and $360 million for new national highways. Airports are getting more than $200 million and transit projects include the $1.9 billion Panama City Metro as well as the $468.2 million Metrobus concession.

The programme is not limited to transportation, $360 million is going towards five new hospitals, four new prisons are being built and there is talk of a $360 million government city and future financial tower in Panama City. This flurry of activity lacks one thing common in other top-tier Latin American economies – long-term concessions.

Panama has several differences with the surrounding region. It has a services-oriented economy compared to its neighbours’ export orientation and a relatively stable political regime, with strong fiscal controls. Panama, like El Salvador and Ecuador, uses the US dollar, and has a better reputation with foreign investors than the other two. Its economy grew at an average annual rate of 8.3% during the five years ending in 2010 and is expected to grow another 7% this year, according to Fitch Ratings.

Its future economic prospects, and need for infrastructure, are expected to get an additional boost when the Panama Canal expansion is completed in 2014. The canal expansion was funded with $2.3 billion in multilateral-pro­vided and export credit agency–covered debt in December 2008. Because of the timing of the deal, just after the crisis, it was more of a windfall for advisers than commercial banks, though the excitement the deal engendered high­lighted Panama’s good reputation with lenders.

Off-balance sheet, yes, concessions, no

Panama has turned away from a concession model for infrastructure even as investment has increased. Its two legacy toll road concessions – ICA’s 19.8km Corredor Sur and PYCSA’s 14km Corredor Norte – are currently in the process of being bought out by the quasi-public agency Empresa Nacional de Autopista (ENA). A $420 million deal for Corredor Sur closed in August (see Deal Analysis p23 this issue) and a roughly $550 million deal for Corredor Norte is still in negotiations.

A representative of Panama’s Ministry of Economy and Finance (MEF), the agency responsible for the financing the turnkey projects, says the government does award long-term concessions, though it limits them to ones in strategic sectors. Those include airports, energy, ports, telecommunications and tourism. But Panama has an equal fondness for semi-public bodies with their own off-balance sheet funding capabilities. The owner of the canal, the Autoridad del Canal de Panamá, funded the canal expansion independent­ly of government. Aeropuerto Internacional de Tocumen, a quasi-public organisation with its own balance sheet, revenue streams and borrowing capabilities, operates Panama City’s Tocumen International Airport, and not a private concessionaire. It is structured, like ENA, in order to insulate the government from airport debtholders’ recourse.

Panama’s concessions policy is probably better described as favourable towards the structure as long as it does not have to consolidate their debt obligations. Transporte Masivo de Panama’s 15-year Metrobus design-build-finance-operate-maintain concession fits this bill. HSBC arranged a $468.2 million debt package for the project that includes a $193.7 million international term loan with a tenor of 10 years for the buses guaranteed by Swedish export credit agency EKN, as well as a $66.1 million local term loan. Caja de Ahorros and Banco Nacional de Panama participated in both tranches, which are backed by the buses and farebox receipts. A third $14.7 million tranche will finance construction of bus depots and is backed by the mortgages on those properties. A minimal public subsidy for operations will be provided to guarantee fare levels and facilitate financing. The debt closed in stages between June and August.

Metrobus is the only true long-term concession, albeit one where the private sector bears most of the risk, out of all of the turnkey projects. Francisco Arias, a partner at Morgan & Morgan, who represented the lenders on the deal, says the government was willing to offer the transit deal as a concession because the sponsors bear the risk with a minimal public subsidy. The project company, a joint venture between Colombia’s Fanalca and the local Motta family’s Felgate Enterprises, won the concession by offering the lowest base fare, $0.45 per passenger, with the lowest public subsidy, in August 2010.

Contracts for other turnkey projects range from construction to design-build or design-build-finance. The MEF is willing to take on multi-year sovereign payment obligations by issuing cuintas pago parcial (CPP), or partial payment invoices, for DBF-style projects but not to sign long-term operations and maintenance concessions that include equity from sponsors.

Expensive equity

“The government considers repaying sponsors’ equity over the long-term more expensive than just repaying debt,” says one Panama City-based sponsor. All of the major turnkey deals awarded involve the MEF either raising long-term debt to pay contractors directly or issuing CPPs that allow a developer to raise short-term financing but lack any equity components. While other jurisdictions, notably Peru and Colombia, offer similar payment invoice struc­tures for infrastructure investment, they tend to be longer in duration and are often blended into concessions with operational risk transfer.

The Panama City Metro and the Cinta Costera phase III are good examples of the MEF’s approach. The Metro involves building a 13.7km underground line – the country’s first – from the Los Andes business district to the Albrook bus terminal in Panama City. The Panama Metro Secretariat awarded a $1.447 billion design-build-operate-maintain contract for the line to an Odebrecht (55%) and FCC (45%) consortium in October 2010. However, the grantor and MEF are borrowing to finance the line, and the consortium bears no operational risk.

Debt for the Metro is split between a $450 million loan from Citi, a $400 million loan from the Andean Development Corporation (CAF), a proposed Eu200 million ($277.5 million) loan from the European Investment Bank and a potential Inter-American Development Bank A loan. The grantors are also considering a BNDES loan. The Multi­lateral Investment Guarantee Agency will provide a $657 million guarantee of Citi’s loan and future interest payments. Coface is expected to provide a guarantee of a loan for Alstom-supplied rolling stock for the line.

Cinta Costera III was financed using CPPs. Odebrecht holds the $777 million DBF contract to build the last phase of a new coastal highway and park along the waterfront in Panama City. BNP Paribas, HSBC, and Sumitomo Mitsui Banking Corporation are arranging a five-year financing package for the project, backed by the CPPs. The developer will sell the invoices to the lenders in return for the proceeds of the construction loan, entitling them to payments from the government under a previously stated profile through maturity. The model is similar to Peru’s RPICAO except with a shorter tenor and no operations and maintenance attached.

Lenders have few issues with either model. CPPs carry a sovereign guarantee from the Panamanian government. Fitch Ratings upgraded the country to BBB from BBB- in June, while Standard & Poor’s and Moody’s have both affirmed their AAA and Baa3 ratings, respectively. In addition, local and locally incorporated foreign banks, including Banco General, Citi, Global Bank and HSBC, have ample capital and compete fiercely for deals. One local lender describes Panama as a small lending market with healthy competition.

The MEF’s ability to raise debt is limited. The representative of the agency did not comment on whether or not it views private equity as expensive but they did cite the 2008 Fiscal Responsibility Law, also known as Law 34, for imposing limits on the amount of debt the sovereign can assume. This includes the commitments it can make under long-term contracts, which includes concessions. They add that there are also constraints on each granting ministry’s respective budget.

Concession long shot

The Metro and Metrobus deals demonstrate Panama’s ambivalence towards long-term debt obligations. The country’s first two concessions, Corredors Sur and Norte, did not cast private sector infrastructure investment in the most attractive light. While ICA built a popular road that improved the transport network in Panama City, the public expressed discontent with the sponsor following a significant toll increase in 2002.

In addition, the concessionaire has been subject to various legal proceedings, including a lawsuit from Banco Hiptecario Nacional claiming damages to its property during construction of the highway, a defamation case filed by the project company against Victor Martinez, who filed a suit challenging the terms of the concession, and a pending appeal in a case where a third party claims that the concessionaire has not paid its income taxes in full (Panama’s tax agency, Direccio´n General de Ingresos, has dismissed the claims).

PYCSA’s Norte faced its own difficulties. The road opened later than planned and was not being completed to the full length outlined in the original concession agree­ment. Getting a head start on its yet-to-close purchase of the road, ENA has already awarded a $114.8 million construction contract to ICA to build a 10.3km extension. The grantor will finance the works through public funds and the proceeds of a $500 million bond issue, on which HSBC and Global Bank are joint lead managers, that also plans to use to buy the concession back.

Panama’s successful use of corporate quasi-public non-profits and trusts to operate and maintain its infrastructure assets is another reason for the lack of concessions, says Arias. Examples include ACP, ENA and Tocumen. This model has, in short, left the public content with the existing methods.

Finally, an updated PPP law is pending in the national legislative assembly. It would expand the scope of long-term concessions that the government can enter beyond roads and would include, among other things, availability-based deals. The current law mostly regulates toll road concessions. The new law has passed two rounds of debate and, if it passes a third, will be sent to the president.

Even if that happens soon, Panama’s national investment spree is already mostly over. Construction contractors and local lenders will continue to reap the majority of the benefits of the programme – if it continues. New limits on the total amount of long-term financial liabilities the government can assume for turnkey projects are expected to dampen future dealflow. Multi-year concessions look to remain a dream for some time to come in Panama. ■