The thriving Latin American market has recently seen a surge of activity on the transport front - particularly toll road projects - and can now add the financial close of Coatzacoalcos toll Tunnel PPP in Mexico to its continental portfolio

The US$228 million project had been languishing for the last 15 years and finally made it off the drawing board in 2003 when the federal, state and municipal governments teamed up to push for the DBFOM project to go ahead.

Having established that the three governments would not be able to finance the project on its own, the private sector was brought in to turn the submerged toll tunnel into a reality.

With the Mexican government pushing ahead with its Proyectos para Prestacion de Servicios - PPS (Projects for the Provision of Services), its version of the UK's PPP/PFIs programme - a large number of projects have made it to market to begin the procurement process.

The Ministry of Communications and Transport - SCT (Secretaria de Comunicaciones y Transporte) is the concession awarder and bidders are pre-qualified on their technical submission, a winner is selected through its economic submission.

Projects in the pipeline in Mexico include:

• Neuvo-Necaxa shadow/real toll road project for US$1 billion (84km)
• Queretaro - Irapuato toll road for US$142 million (93km)
• Tapachula - Talisman toll road for US$62 million (45.1km)

Another project that is due to select a winning team is the Mexico toll roads lease-FARAC - which is the first project under the country's toll road concession programme.

It will involve the concession of a network of four highways covering 558km in the states of Guanajuato, Jalisco, Michoacán and Aguascalientes.

Rationale 

The River has an existing bridge built over it by the German government over one hundred years ago.

However, the mechanisms of the elevated bridge - which allowed ships to dock on the east side of the river bank - stopped working 30 years ago, causing disruption for parties living on either side of the river.

On the west - there is the city of Coatzacoalcos and on the east there are the larger oil refineries belonging to Mexican company Pemex - a state owned oil corporation.

The two sides were unhappy with the situation, the population of Coatzacoalcos needed an easy access route to work at the oil refineries and Pemex needed somewhere for ships to dock to take oil to and from the refineries.

Pemex and the city of Coatzacoalcos lobbied with the federal government for funding to provide a solution.

It was then established that the government did not have enough funding available for the project providing an opportunity for the private sector to project finance the tunnel.

For the first time, Mexico saw the federal, state and municipal governments working together and launched a public bid so that the project was out in the open.

The Project

The project involves the DBFOM of a two lane toll tunnel under the Coatzacoalcos River in the eastern state of Veracruz.

The total length if the tunnel is 2.2km - 1.2 km of that is made up of 828 metres of underwater tunnel and 368 metres of 'cut and cover'.

It also includes the construction of a safety and rescue tunnel between lanes.

The toll project will link the urban area with the industrial area via a 140 metres and 113 metres long ramp respectively.

The financial scheme for the execution of the project looked at participation from resources including:

• Risk capital of the investors
• Banking credits
• Income by the operation of the Bridge Coatzacoalcos
• Initial Contribution (FINFRA)
• Initial contribution of the Government of the State
• Complementary contribution of the Government of the State
• Contribution of the Municipality of Coatzacoalcos (PEMEX)

Alejandro de la Vega, investment officer within the structured finance team at Grupo Santander, said: 'It is the first submerged tunnel in Latin America, the project would support the development of the region of Coatzacoalcos as it wants to be considered one of the most important ports in Mexico.'

Procurement

When the project made it off the drawing board 15 years after it was first heard of, tender documents were prepared and released in late 2003.

Bids were then presented in August 2004 with the contract awarded in November 2004.

The then winning team comprised of:

• FCC
• OPC
• Capsa
• Impulsa (subsidiary of FCC)

In the time it took to reach financial close from 2004 to 2007 - OPC and Capsa were then excluded from the consortium.

The companies found that they did not have enough equity on their balance sheets and were then bought out by Spain's FCC.

The deal took nearly three years to reach financial close, Pablo Garcia, director of project finance within the structured finance team of Mexico at Grupo Santander said: 'the reason for the project to close financing three years later was due to the three governments, FCC and Grupo Santander working closely together to ensure every aspect of the financial package was covered.

'Essentially, this five-way process worked efficiently and methodically to provide the best possible structure for the submerged Coatzacoalcos Tunnel Project.'

A decision to construct a submerged tunnel was made because it was believed that it would cost less and provide greater benefits for both sides.

Financing

Grupo Santander closed the financing for the US$228 million project with FCC acting as sponsors to the project.

In Tranche 1, FCC provided US$48 million in equity. In Tranche 2 - Grupo Santander provided an 18-year term loan with a value of US$64 million.

Total debt for the 30-year concession is US$64 million.

Pricing on the term loan is a step-up structure: Tasa de Interés Interbancaria de Equilibrio (TIIE) + 150bp during construction, thereafter TIIE + 200bp.

Alejandro de la Vega, investment officer within the structured finance team at Grupo Santander, said: 'It is the first Project in Mexico where you have two public entities (Coatzacoalcos Municipality) and the State of Veracruz injecting funds into a private trust to finance a Project.'

The fund breakdown is as follows:

Galicia y Robles acted as legal adviser to the lender with Mott McDonald acting as technical adviser.

Mier y Terán y Valero was the legal adviser to the SPV and Grupo Santander provided financial services.

Volker Stevin Boskalis is technical adviser to the government.

Conclusion

For Mexico, its economy is much healthier than in the 1990s when the country devalued the peso, prompting a banking collapse and startling investors in other emerging markets in what became know as the 'Tequila Crisis'.

Now, the country's debt and budget deficit has been reduced while the peso is stable.

With Mexico's economic and financial stability, the PPS road programme seems a very attractive prospect to foreign investors, particularly European construction companies.

A number of Spanish firms are already heavily involved in the country's infrastructure sector, including:

• Acciona
• FCC Construction
• Sacyr Vallehermoso
• OHL

All that international banks interested in breaking into the Mexican market need is to offer competitive packages that reflect the reality of the country's economic market.

The project at a glance