port of paita case study - dla piper

XXXXXX XXXXX Latin Infrastructure Quarterly 1Latin Infrastructure Quarterly

Uruguay:

The Project Bond Evolution: Port of Paita Case Study

Pension Funds and Infrastructure

The Canadian Way

Health PPPs

Gianluca G. Bacchiocchi

XXXXXX XXXXXLatin Infrastructure Quarterly2

Latin Infrastructure Quarterly 3

To Our Readers:

As always I am very excited with what you will find inside and I want to make public how much I appreciate the support from the practitioners that made this Issue possible. Given that large number of articles inside I will not offer brief descriptions of each of them. What I do want to com-

ment on is that, keeping in line with the previous issues of LIQ, this Issue brings you coverage of: current matters such as project bonds; new and evolving ones such as infrastructure investment funds; profiles of companies and projects such as Terminal Internacional del Sur (Peru), among other really interesting topics.

LIQ has partnered with Latin Markets to provide relevant exposure to the up-coming “Peru Capital Projects & Infrastructure Summit” and has interviewed three of the speakers that will be sharing their knowledge and experience at said Summit: Michelle Haigh of Conduit Capital Partners; José Quiñones of the Oficina de Nor-malización Previsional; and Erick Hein Dupont of Terminal Internacional del Sur. I am very happy with the outcome of these interviews and I hope you find them interesting.

On a last note, please do not close this Issue without reading “Rawson Wind Project: A landmark in the Argentine Renewable Energy Generation Market”. This article should be the first of a series of articles covering infrastructure development and finance in forgotten Argentina. As I write these paragraphs I am on a plane re-turning from delivering a presentation titled “Unveiling the Successes and Critical Considerations for LatAm Companies in the Brazilian Infrastructure Market” at the Marcus Evans’ Brazilian Infrastructure and Property Development Summit that took place close to Salvador (Bahia). The context of delivering said presentation that ob-viously touched on Corporación América and being on a plane made me think about the highly successful tender of four Brazilian airports that showed the world how interested investors and operators worldwide are in Brazilian infrastructure. After connecting in São Paulo, I will arrive in Argentina, one of the most hostile jurisdic-tions in Latin America for private capital and resources in the business of developing and financing infrastructure.

The difference between Brazil and Argentina when it comes to current infrastruc-ture policy, investment and development is great. As an Argentine national and an observer of how the region develops its economic and social infrastructure it deeply saddens me (but does not surprise me) when international and regional players talk to me about how they do not even consider Argentina as a possible market in which to allocate their capital and resources. Hopefully this scenario will change in the future and the articles featured in LIQ will serve the purpose of introducing the Ar-gentine infrastructure market to international players.

Please do not hesitate to contact me at [email protected] with feedback on this Issue, questions, issues you would like to read about, events you want to pro-mote, and practitioners, companies or projects you would like see covered.

Best regards,

Patricio Abal.

Azpiroz, IgnacioUnión Capital

Bacchiocchi, Gianluca G.DLA Piper

Barrios, AdriánPwC

Bentivegna, EnricoPinheiro Neto Advogados

Celio, JorgeIOS Partners

da Rita, PaulPwC

Del Vento, MaximilianoPartners Group

Garver, MathewPatton Boggs LLP

Gutiérrez, LuisEMBARQ Latin America

Haigh, MichelleConduit Capital Partners

Hein Dupont, ErickTerminal Internacional del Sur

Jauhari, AnadiEmerging Energy and Environment Group

Llamosas, CeciliaVouga & Olmedo Abogados

Motta, Carlos EduardoAdmiral, Lawyer and Engineer

Nascimento, JoãoPinheiro Neto Advogados

Queiroz, CesarInternational Consultant

Quiñones, JoséOficina de Normalización Previsional (Perú)

Rodriguez, Victor HugoThe Hedge Fund Association – LatAm Chapter

Russo, RicardoPinheiro Neto Advogados

Sawant, RajeevAssistant Professor at Baruch College

Vazquez Acuña, MartínMarval, O’Farrell & Mairal

Vouga, RodolfoVouga & Olmedo Abogados

Contributors


Connect | Unite | Inspire

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With the maturity and institutionalization of the global hedge fund industry, the HFA advocates for the industry by giving voice to the issues affecting the industry through the education of investors, the media, regulators and legislators. Members of the HFA also serve the community at large through a commitment to philanthropy..

JOIN US AT HFA LatAm MEMBER BENEFITS: Exclusive Opportunity to be interviewed at Top Publications Unique Private Events with Asset Allocators (Exclusive to Managers Members) Your Logo and Core Strategies Description on HFA Web Site Authorization to display HFA Logo in your firm literature Private Invitations & Industry Conference Discounts Access a network of leaders for expanding professional opportunities Introductory Annual Membership Pricing

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Latin American Chapter Director Victor Hugo Rodriguez, LatAm Alternatives New York-LatAm Chapter Director Les Baquiran, Park Hill Group (a division of the Blackstone Group) Brazilian Chapter Co-Directors Marcia Rothschild, Citibank Latin America Otavio Vieira, Fides Asset Management Chilean Chapter Director Juan Luis Rivera, Moneda Asset Management Colombian Chapter Director Daniel Osorio, Andean Capital Management Argentinean and Uruguay Chapter Co – Directors Michelle Furnari, LatAm Alternatives Martin Litwak, Litwak and Partners Peruvian Chapter Director Carlos Rojas, Andino Capital Management Panama Chapter Director Jose Abbo, SFC Investments

Advancing Transparency and Trust in LatAm Alternative Investments

LatAm Chapter

5Contents

ContentsLocal Pension Funds and Infrastructure Development in Uruguay......................6

The Project Bond Evolution: Port of Paita Case Study.......................................13

Brazilian Fostering of Private Financing of Infrastructure Projects...................18

Peru: Port of Matarani - Terminal Internacional del Sur....................................22

Peru’s National System of Pensions...................................................................27

The Canadian PPP Model and Its Applicability in Latin America.....................29

Health PPPs: Rationale & Drivers......................................................................32

Integrated Transit Systems and Bus Rapid Transit in Latin America................36

Infrastructure Investing – An Alternative Perspective.......................................40

Divergence in Foreign Direct Investment and Infrastructure Development in Latin America....................................................................................................45

III Brazil Infrastructure Investments Forum......................................................49

The Peruvian Electricity Market.......................................................................51

Energisation of Paraguay’s Eastern Region.......................................................53

LatAm Infrastructure: Outlook for 2012 and the role of PPPs..........................55

Critical Steps for Implementing Successful Public-Private Partnerships in the Brazilian Road Sector.........................................................................................58

Rawson Wind Project: A Landmark in the Argentine Renewable Energy Gen-eration Market....................................................................................................63

Latin American Hedge Funds..............................................................................66

Adrian Barrios

Paul da Rita

Latin Infrastructure Quarterly6 Infrastructure Financing

Ignacio Azpiroz: Last year a new PPP law was approved unanimous-ly and the recent steps towards its implementation represent an ap-

propriate legal framework to promote the participation of local investing insti-tutions in future projects. Access to the asset class had been quite limited until now, but given the new regulation, I en-vision a substantial shift in the following months. In Uruguay, there is consensus among economists that, in order to main-tain economic growth in the long run, the investment/GDP ratio must increase. As long as the PPP projects are adequately structured I am convinced that pension funds will support these initiatives.

Maximiliano Del Vento: Partners Group was founded in Switzerland in January of 1996 and has seen then steadi-ly increased its presence to a global or-ganization that includes over 550 profes-sionals in 15 offices around the world.

Local Pension Funds and Infrastructure Development in UruguayLIQ talks to Ignacio Azpiroz of Union Capital and Maxmiliano del Vento of Partners Group

With approximately EUR 24.8 billion in assets under management across private equity, private infrastructure, private real estate, and private debt, the firm has re-mained as an independent company, al-lowing it to focus exclusively on private markets assets and minimizing potential conflicts of interests. Partners Group has been an early player in the infrastructure sector, making its first investment in 2001 and its first private infrastructure fund investment in 2002. As the infrastructure market matured, Partners Group devel-oped significant infrastructure expertise through a number of investments in in-frastructure partnerships, direct and sec-ondary investments. These investments have been broadly diversified across geo-graphic region and sector (e.g. transporta-tion, communication, utilities and social infrastructure). Early on, Partners Group recognized the importance of making use of the full spectrum of private infrastruc-

ture opportunities: brownfield (existing), rehabilitative brownfield, and greenfield (development), across geographic re-gions and accessed through direct, sec-ondary and primary investments. As a result, Partners Group began to establish the team, tools, systems and geographic presence necessary to address this broad set of opportunities. Since then, Partners Group has built up its expertise, relation-ship and knowledge base in global infra-structure markets, by investing over EUR 1.3 billion and completing 52 transactions in more than ten countries in the course of the past decade.

How was the portfolio of the local pen-sion funds, AFAPs, made up before the recent changes to the legal framework? Can you describe these changes in the framework? And, how do you envision the portfolio to change in the near future?

Ignacio Azpiroz: Current portfolio op-portunities are reduced, not because of lit-

Latin Infrastructure Quarterly 7Infrastructure Financing

tle interest from AFAP but because there are few projects available in the market. Considering both direct and indirect investment in infrastructure, AFAP’s participation today is about 5% of the portfolio. Montevideo’s International Airport is now a new landmark for the country and we are proud to have partici-pated in this project. With regards to the recent changes to the legal framework, there are two main points from the lend-ers point of view: the concession pledge and the step in right implementation. In addition the pension fund limits regard-ing PPP investments was increased from 25% to 50%. I envision 10% to 15% par-ticipations in the asset class. The system currently holds 9 billion AUM which represents 17% of GDP and, if we take into account that it is still in the accumu-lation phase, these are big numbers for the size of the country.

Why do infrastructure investments make sense for local pension funds?

Ignacio Azpiroz: I believe that this type of assets is intrinsically related to the portfolio’s objectives. These are long-run investments with a very attractive risk/return relation. In addition, there are several other positive aspects, including: a) diversify our portfolio; b) cash flows are indexed to inflation; c) improves the quality of life of our affiliates. It is im-portant to point out that this kind of in-vestments in infrastructure are also part of other pension fund portfolios of the region, such as in Chile, Perú, Colombia and México.

Maximiliano Del Vento: The continu-ing volatile macro-economic backdrop and record low real yields for safe assets have resulted in growing interest by in-stitutional investors in an asset classes that can generate stable performance whilst still producing desirable yields. Infrastructure investments are attractive to institutional investors such as pension funds as they can assist with liability driven investments and provide dura-tion hedging. Infrastructure projects are long term investments that could match the long duration of pension liabilities. In addition infrastructure assets linked to inflation could hedge pension funds liability sensibility to increasing infla-

tion. In our experience, pension funds are increasingly looking at infrastructure to diversify their portfolios, due to the low correlation to traditional asset classes. In summary, the asset-class is attractive for pension funds because infrastructure as-sets typically: i- show low correlation to broader economic cycles, providing a key diversification benefit to pension fund portfolios heavily exposed to equities and bonds; ii- provide a stable predictable return with strong downside protection; iii- generate a running cash yield provid-ing capacity to fund pension obligations; iv- trade at compelling risk premiums over government bonds; and v- provide inflation protection due to inflation-linked (or at least inflation correlated) payment structures.

When it comes to infrastructure invest-ments, do AFAPs invest/work together?

Ignacio Azpiroz: This is an important is-sue. At Union Capital we believe that any improvements regarding the development of the final security will benefit all inter-ested parties. All key actors (developers, sponsors, funders and government agen-cies) should look for synergies in order to achieve goals, gain experience and move forward in a synchronize way.

Are there opportunities for internation-al institutional investors? Has there been interest shown by big international play-ers in the Uruguayan market?

Ignacio Azpiroz: Yes, I believe new conditions clearly favor the participa-tion of international investors. It is clear the Uruguayan prestige abroad based in a market friendly legal framework and a strong macroeconomic outlook. FDI/

GDP ratios of about 5% and high demand of sovereign debt endorse this statement. I am sure that securities related to infra-structure investments will have also high demand if investors can custody them at an external clearinghouse.

Maximiliano Del Vento: The OECD report on Infrastructure to 2030 (volumes 1 and 2) published in 2006/2007, esti-mated global infrastructure requirements to 2030 to be USD 50 trillion. Such levels of investment cannot be financed by traditional sources of public finance alone. The result has been a significant infrastructure gap and the need of r new sources of finance. Public budgets fed by taxes will not suffice to bridge the infra-structure gap. What is required is greater private capital participation, together with greater diversification of public sector rev-enue sources. Institutional investors will play a relevant role in bridging this gap, financing long-term, productive activi-ties that support sustainable GDP growth and increased national competitiveness. Partners Group believes that emerging markets exposure can be an important re-turn driver when incorporated into glob-ally diversified infrastructure portfolios. As a result, all of Partners Group’s infra-structure programs have an allocation to emerging markets infrastructure assets (typically 5% - 20%). In addition Part-ners Group manages a separate account for a European pension funds focused solely on emerging markets infrastruc-ture investments. Despite a recent slow-down in the growth trajectory of several key economies, many emerging market countries still exhibit strong growth fun-damentals, are in a healthy fiscal position, and have a high need for infrastructure

“Montevideo’s international airport is now a new landMark for the country and we are proud to have participated in this project.”Ignacio Azpiroz

Latin Infrastructure Quarterly8build-out as well as the ability to invest in infrastructure assets. Emerging market governments have increasingly adopted stable regulatory frameworks, a prerequi-site for attracting long-term capital. Con-sequently, country and regulatory risks in many jurisdictions have declined, thereby increasing the set of investment opportu-nities in emerging markets. For instance, this can be seen in Thailand, where the first independent power producer regu-lation was established in 1992. Today, a 15- year plan is driving investments in the renewable energy sector. Partners Group recently completed an investment in Wind Energy Holdings, the company constructing Thailand’s first utility-scale wind projects. These projects benefit from a highly attractive ten-year adder tariff and considerable downside protec-tion through conservative underwriting assumptions. Partners Group continues to believe that the most compelling opportu-nities in emerging markets involve asset-creation strategies (i.e. greenfield) rather than buying existing assets (i.e. brown-field), which tend to be priced at a premi-um. We are seeing particularly attractive deal-flow in the renewable energy sec-tor in Asia (in particular Thailand, India and Malaysia), Latin America, Eastern Europe and South Africa. Many of these geographies have established attractive feed-in tariffs to promote development in

the renewables space but have sensibly structured such subsidies to make them fiscally acceptable longer-term (thereby reducing the risk of retrospective changes as we have seen in Europe). Outside the renewables sector we also believe that transportation and energy infrastructure assets remain attractive in the emerging markets, particularly in Asia.

How should pension funds access the infrastructure investment opportu-nity?

Maximiliano Del Vento: Pension funds that wish to access the investment op-portunity should prioritize building a diversified portfolio of quality infra-structure assets. Partners Group be-lieves it is important to diversify private infrastructure investments by region, sector, and maturity stage (greenfield/brownfield). Such diversification within

the asset class is important due to the independent and significantly uncorre-lated nature of the risks to which private infrastructure assets are exposed (e.g. political risk, regulatory risk, project risk and potentially some demand risk). Pension funds should also appreciate that there is not a “one size fits all” ap-proach to how best to access this oppor-tunity. Partners Group approaches the infrastructure investment opportunity through an integrated approach of in-vesting in infrastructure funds (on both a primary and a secondary basis) as well as directly into infrastructure projects/assets. Investing in this manner allows the firm to take maximum advantage of market opportunities for the benefit of its clients. In this way Partners Group also can construct portfolios that more effectively mitigate the J-curve, pro-vide earlier distributions and enhanced liquidity.

“in our experience, pension funds are increasingly looking at infrastructure to diversify their portfolios, due to the low correlation to traditional asset classes.”

Infrastructure Financing

MaxiMiliano del vento

Latin Infrastructure Quarterly10 Deals

Maximiliano Del Vento, Investment Solutions, Partners Group

Maximiliano Del Vento is a member of the investment solutions team in the New York office. His responsibilities include investment origination and cli-ent relations in Latin America. Prior to joining Partners Group, he worked at Merrill Lynch in New York, covering pri-vate clients and middle market institu-tions in Latin America. Previously, he was an associate at Bank of America Merrill Lynch global investment bank in New York, covering financial sponsors in North America. He holds a Master’s degree in corporate finance from the University of Barcelona in Spain, an LL.M. in Law and Economics from the University of Torcuato Di Tella in Argen-tina, a juris doctor degree (J.D. equiva-lent with honors) from the University of Belgrano, Argentina and earned a Financial Risk Management Certificate from New York University.

Partners Group strategically allocates capital to the segments of the private in-frastructure market that the firm believes will offer superior value “relative” to other segments at a given point in time within strategic asset allocation ranges. Partners Group considers this integrated, relative value approach to be the founda-tion for superior long-term investment performance.

What have been major works financed in the past by AFAP? And, what are the projects in the pipeline?

Ignacio Azpiroz: I have already men-tioned the construction of Montevideo’s International Airport that involved a total investment of over $ 200 million. Some other major projects funded by AFAP in the past include the improvement of na-tional highways, energy production proj-ects and the development of sanitation systems. These projects were developed by national and local governments. Re-garding the pipeline, the first two projects are a Greenfield of a correctional institu-tion and a Brownfield of roads. We also foresee some other investments in rail-roads, ports development, and wind ener-gy which will demand investments close to $ 5 billion in the next 5 years.

What is the role of the Uruguayan Cen-tral Bank in AFAP investments?

Ignacio Azpiroz: The Uruguayan Central Bank (UCB) regulates the entire system. The availability of this type of invest-ment projects is based on three minimum requirements: 1) the UCB must approve the investment; 2) the instruments must be listed on an exchange; and 3) obtain a local rating of at least BBB-. The main challenge now is to obtain a good rating during the pre-operational phase with some credit enhancement that can ensure the participation of pension funds from the start. One important issue is that the AFAP cannot bear construction risk. I think that a mechanism to minimize this risk must be developed.

Ignacio Azpiroz: In sum, I am con-vinced that the economic environment as well as the adequate legal framework will promote the success of PPP projects. I expect a high interest in this type of

investment, both locally and internation-ally. PPP projects are not only a great op-portunity for portfolio diversification but will also help improved competitiveness as well as quality of life for our affiliates.

Maximiliano Del Vento: The suc-cessful expansion of pension funds into infrastructures depends to a large extent on regulatory changes to pension fund re-gimes. Several countries around the world

are adapting their regulations to address infrastructure needs, putting local pension funds and other institutional investors in a leadership position to champion the de-velopment of asset class. Failure to make significant progress towards bridging the infrastructure gap could prove costly in terms of slower economic growth and loss of international competitiveness.

Ignacio Azpiroz, Chief Invest-ment officer, Union Capital AFAP (Pension Fund – Uruguay)

Ignacio Azpiroz is the Chief Invest-ment officer of Unión Capital AFAP, one of the four pension funds in Uru-guay with USD 1.450 million of asset under management as of September, 2011. He has more than 15 years of experience in the market. He has also advised Boston Fondos mutual funds from 1999 to 2001. He is an econo-mist from the Udelar University, and holds a Finance Diploma from ORT University. Besides he is a CFA char-terholder since 2007.


Just recently, however, on April 18, 2012, the first Rule 144A/Reg S project bond was issued for a Latin American Brownfield project be-

fore construction and without credit en-hancement. This landmark project bond was issued by Terminales Portuarios Eu-roandinos Paita S.A. (the “Issuer”) for the expansion of the Paita Terminal Port in the region of Piura, Peru (the “Port”). The notes (the “Notes”), which are due in 2037, raised $110,025,000, carry a fixed interest rate of 8.125%, and were rated “BB-” by Fitch and “BB” by Standard & Poor’s. This article provides an overview of the transaction, and explores some of the key structuring issues that had to be overcome in order to complete the first successful Rule 144A/Reg S project bond with full demand, operating and construc-tion risk for a Latin American project.

The Issuer

The Issuer operates, maintains and devel-ops the Port, which is the second largest coastal port in Peru based on twenty-foot equivalent units (“TEUs”), and the largest T

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coastal port in the northern region of Peru in terms of container volume. Its opera-tions are carried out pursuant to a 30-year design, build, finance, operate and transfer concession granted by the Government of Peru (the “Concession”) in September 2009. The Issuer derives its revenues from tariffs charged for the provision of cer-tain standard services to users of the Port which are required under the Concession, including, among others, the loading and unloading of cargo, cargo movement and weighing, and from fees charged for the provision of any special services to users of the Port not required under the Conces-sion, including, among others, stevedor-ing, reefers, shiftings and late arrivals.

The Issuer is 50% owned by Cosmos Agencia Marítima S.A.C. (“Cosmos”), a subsidiary of Andino Investment Hold-ing S.A. (“AIH”), 40% owned by Tertir – Terminais de Portugal S.A. (“Tertir”), a subsidiary of Mota-Engil, SPGS, S.A. (“Mota-Engil”), and 10% owned by Mo-ta-Engil Peru S.A., a subsidiary of Mota-Engil and formerly known as Translei S.A. (“Mota-Engil Peru” and together with Cosmos and Tertir, the “Sponsors”).

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Infrastructure financing in Latin America has developed rapidly over the last 6 years. What was generally limited to syndicated bank and multi- and bilateral lending, gov-ernment funding and insured project bonds, infrastruc-ture financing has evolved to rely on the capital markets like never before, even without the support of traditional credit enhancers. In the past, especially before the 2008 market meltdown, when the capital markets were accessed to finance Greenfield and Brownfield projects, interna-tionally placed bonds were either wrapped by credit en-hancers, or involved the securitization of payments com-ing from a central government that were not tied to the completion of the project or operating risk. Only once the project was completed could a project bond that relied on the cash flows of the particular project be issued without credit enhancement in the capital markets. In the latter case, the original debt that was incurred for the construc-tion of the project was refinanced with bonds that a pro-vided longer tenor with fixed interest rates (if US dollar based) and perhaps even lower interest rates.

Latin Infrastructure Quarterly 13Deals

The Port

The Port was built in 1966 and reno-vated in 1999. The Port was managed by Empresa Nacional de Puertos, S.A. (“ENAPU”), an entity owned and con-trolled by the Government of Peru, from its construction until October 7, 2009, when the Issuer took over operations in accordance with the Concession. The Port’s operations are focused on exports, which represented approximately 71% of its total activity in 2011, 99% of which consisted of container shipments. The main exports shipped through the Port are fish, fishmeal, fish oil, mangos, coffee and bananas. The main imports shipped through the Port are solid bulk products, such as fertilizers and grains, and liquids, such as soy oil.

The Concession

Pursuant to the Concession, the Issuer has the right to operate and maintain the Port’s existing facilities and is required to design, construct, operate and maintain a new container pier and, depending on the level of utilization of the Port, make certain other improvements, including the installation of additional port equipment and reinforcement of the existing jetty pier. The Issuer is also required to pro-vide the standard services, but is entitled to collect fees for any other services that are provided to users of the Port.

Pursuant to the Concession, the Min-istry of Transport and Communications of the Republic of Peru (Ministerio de Transportes y Comunicaciones de la República del Perú) (the “Grantor”) pro-vides the Issuer with a minimum annual income guarantee (“IMAG”) pursuant to which the Grantor will pay the Issuer the shortfall between the revenues collected by the Issuer for a particular calendar year and the minimum annual guaran-teed income for that year (which amount increases each year that it is available). An IMAG can be an important consid-eration for a financing, especially if it is sized to cover debt service during the life of the debt service and is paid quickly once a shortfall determination has been made. However, in this transaction it was not given any consideration by the rating agencies because it was not sized

to cover the debt service on the notes ac-cording to their model, and because the bulk of the IMAG was only available for a period of 15 years, beginning one year after the completion of Stage 1 (described below), whereas the Notes would be out-standing for approximately 7 additional years. One final consideration regarding the IMAG for this transaction was rele-vant: it is paid 12 to 13 months after the fiscal year in which a shortfall determina-tion has been made, and not on a month-by-month basis, meaning that it does not cover demand volatility during a year, but rather such volatility had to be mitigated by a debt service reserve.

The Concession may be terminated prior to its original expiration date for the following reasons, among others: (a) mu-tual agreement of the parties, (b) unilater-ally by the Grantor for reasons related to public interest, (c) by the non-breaching party upon a breach of the other party’s material obligations, or (d) at the Issuer’s option in case of force majeure or acts of God that affect the completion of the Is-suer’s contractual obligations under the Concession for a period of 6 months and produce losses of over 60% of the Port’s operational capacity.

The Issuer is required to invest ap-proximately $293 million in the Port (the “Works”) in four stages, so long as cer-tain demand levels are reached at the Port. Stage 1 of the Works, with an estimated total cost of $130 million, is required to begin immediately and consists of the construction of a new terminal, which will have a 300 meter berth and 13 me-ter depth and a container yard of 12 hect-ares, and the installation of three gantry cranes at the Port (“Stage 1”). Stage 2 of the Works is required to be completed within 18 months of the Port achieving container volume of 180,000 TEUs per year, and involves the purchase of addi-tional port equipment with an estimated cost of approximately $19.3 million (“Stage 2”). Stage 3 of the Works is re-quired to be completed within 18 months of the Port achieving container volume of 300,000 TEUs per year, and involves the reinforcement of the existing jetty pier, its support area and the purchase of addition-al port equipment, with an estimated cost of approximately $19.8 million (“Stage 3”). The remaining investment of ap-

proximately $123,000,000 (“Stage 4”) is at the Issuer’s discretion for the operation of the Port, but must be completed ac-cording to the following schedule: by the 5th year of the Concession $5,000,000 of Works are to be completed, by the 10th year an additional $10,000,000 of Works are to be completed, by the 15th year an additional $10,000,000 of Works are to be completed and by the 20th year the re-mainder of the additional Works are to be completed. The Concession requires the Issuer to set aside and transfer to a special trust (the “Additional Investments Trust”) each year, for the first 20 years of the Concession, amounts required to com-plete the Stage 4 Works according to a schedule that ensures that adequate funds will be available to complete these Works in accordance with the above timing.

As compensation for the Concession, the Issuer is required to pay two fees on a monthly basis. The first fee is paid to the Grantor, and is equal to 2% of the net monthly income of the Issuer from pro-viding standard and special services at the Port. The second fee is paid to the regulator of the Port, the Peruvian Pub-lic Transport Infrastructure Regulatory Agency (Organismo Supervisor de la In-versión en Infraestructura del Transporte de Uso Público) (the “Regulator”), which is currently equal to 1% of net annual in-come received from standard and special services at the Port. In addition, the Is-suer must make a contribution every year to the Port of Paita Social Fund in the amount of U.S.$195,858, which funds are intended to promote sustainable develop-ment in the Paita Province.

Construction and Equipment WorksAll the construction Works that are in-tended to be completed with the pro-ceeds of the financing (the “Construc-tion Works”) include the construction for the Stage 1 Works and certain Stage 4 Works. These Construction Works are to be completed by Mota-Engil Peru, with the support of Mota-Engil, Engen-haria e Construção S.A. (collectively, the “Contractors”), pursuant to a fixed price engineering, procurement and construc-tion services contract (the “EPC Con-tract”). The Contractors, pursuant to the


EPC Contract, are required to provide a performance guaranty in an amount equal to 10% of the total compensation to be paid under the EPC Contract and a qual-ity guarantee in an amount equal to 1.5% of the total compensation to be paid un-der the EPC Contract. Other than these guarantees provided by the Contractors, no other guarantees are provided to the Issuer for the Construction Works.

The equipment Works that are to be completed with the proceeds of the fi-nancing (the “Equipment Works”) include all of the cranes required for the Stage 1 Works and two additional mobile cranes that qualify as Stage 4 Works. The Equip-ment Works will be completed under two separate sale and installation contracts. The Stage 1 Equipment Works will be completed by Liebherr Container Cranes Ltd. and the Stage 4 Equipment Works will be completed by Liebherr Werk Nenzing GMBH. Both supply contracts require the suppliers to provide the Issuer with letters of credit to support the completion of their obligations under the supply contracts and to support the advance payments required to be made by the Issuer under them.

Supervision of the Works

The Issuer entered into a construction and equipment installation supervision contract (the “Construction Supervision Contract”) with Bureau Veritas del Peru S.A. (the “Supervisor”) to supervise the construction of the Construction Works and the installation of the cranes, and to coordinate these Works to ensure timely completion of the Issuer’s obligations un-der the Concession Agreement.

In addition, the Issuer entered into a contract (the “Independent Engineer Agreement”) with R. Rios J. Ingenieros (the “Independent Engineer”), which is acting as the independent engineer on behalf of the bondholders, and with Ci-tibank, N.A., as bondholder trustee (the “Indenture Trustee”), pursuant to which the Independent Engineer provides, for the benefit of the Indenture Trustee on behalf of the bondholders, all services contemplated to be performed by the Independent Engineer under the various transaction documents. These services include, among others, reviewing and au-thorizing payments for the Construction Works and Equipment Works and moni-toring the progress of construction under the EPC Contract, and the installation and assembly of the cranes. In addition, the Independent Engineer was requested to prepare an independent engineer’s report, that was attached to the offering circular for the Notes.

Because the financing is pursuant to a project bond, rather than a traditional loan transaction, the Independent Engineer will also be required to re-test the Issuer’s debt service coverage ratio upon the oc-currence of certain events and provide approvals or disapprovals with respect to certain actions of the Issuer under the transaction documents, such as changes to budgets, the Issuer’s three-year capi-tal plan and the implementation of any major Works. These additional actions are significant in a project bond, since the Issuer will not know the identity of the bondholders to discuss these actions with them, and bondholders, unlike lend-ing institutions, tend to be passive inves-

tors, holding the bonds without getting involved in decision-making, unless fac-ing a significant change or an event of de-fault. In this transaction, not all approval rights were given to the Independent Engineer, which is normal for a project bond. In those situations where the Inde-pendent Engineer was not given approval rights and the bondholders are required to approve certain actions (other than an event of default scenario), the bondhold-ers will be deemed to have approved such actions unless a certain percentage (usu-ally a majority) of the bondholders have responded within a set amount of time after receiving the applicable approval request notice, disapproving of the ac-tion. This deemed approval approach prevents bondholders who fail to respond to an approval request from keeping the Issuer from going forward with necessary changes, even though these bondholders would have agreed with the request if they had responded. The assumption is that only bondholders that disagree with a certain action will be motivated enough to respond to an approval request. In an event of default scenario, the bondholders will be required to give actual instructions to the Indenture Trustee.

The Notes

The Notes, which are senior secured obli-gations of the Issuer, were issued pursuant to a New York law-governed indenture and indenture supplement (collectively, the “Indenture”). The Notes carry a fixed interest rate of 8.125% throughout the life of the Notes and fully amortize over a pe-riod of 25 years; however, during the first 5 years only interest is paid on the Notes. The long tenor and fixed interest rate are probably the biggest advantages the Is-suer achieved by issuing a project bond, rather than entering into a traditional loan. Even though the Notes were rated “BB-” by Fitch and “BB” by Standard & Poor’s, which classifies the Notes as high yield bonds, the Issuer was still able to obtain an attractive long term fixed interest rate due to the structure, low interest rate en-vironment, stable country risk (Peru cur-rently has a foreign debt rating of “BBB” by both Fitch and S&P) and the demand for long-term fixed income.

“the notes carry a fixed interest rate of 8.125% throughout the life of the notes and fully aMortize over a period of 25 years”


For those that are not familiar with project bonds, the Indenture contains all of the various covenants and representa-tions and warranties of the Issuer and the events of default, similar to a loan agree-ment. Most of the covenants, representa-tions and warranties and events of default are similar to what would have been ne-gotiated in a traditional loan agreement; however, there are some key differences. As mentioned above, the approval rights have been modified to reflect the different protocols for approving various actions, which includes giving greater rights to the Independent Engineer and using deemed approvals when bondholders are required to weigh in. In addition, greater flexibil-ity was given to the Issuer before approv-als are required. This was accomplished by giving more materiality carve-outs and increasing certain dollar thresholds. Another significant difference from a tra-ditional project finance loan transaction is that the Issuer is not required to abide by the Equator Principles. This is not the case in all project bonds, especially if the arrangers and initial purchasers of the bonds are also Equator Principles Fi-nancial Institutions (“EPFIs”). Two key factors that are generally discussed when determining whether an issuer of a proj-ect bond must comply with the Equator Principles are, first, whether the potential investors require compliance and, second, if the initial purchaser is an EPFI, whether its internal policy requires compliance for a project bond.

In order to give the Issuer maximum flexibility to finance future Works within the same structure, the Indenture for this transaction allows for future series of pari passu notes to be issued to finance such Works. Even though the Issuer is required pursuant to the transaction documents to set aside monies for future investments at the Port, the ability to anticipate Works before the money has been set aside, so long as certain conditions precedent are met, such as debt service coverage ratios, allows the Issuer to choose when it makes the most economic sense to complete ad-ditional Works. In addition to providing flexibility, the ability to issue additional series of pari passu notes under the same indenture also alleviates the need to enter into intercreditor agreements, since all of the waterfalls, voting rights and collateral

rights are already contemplated in the payment and guarantee trust agreement (discussed below), the Indenture and any future indenture supplements for all po-tential series of notes issued by the Issuer pursuant to the Indenture.

Although the Notes are expected to remain outstanding for 25 years, they are subject to the following redemption events: (a) optional redemption with a make-whole premium for the life of the Notes, (b) withholding tax redemption, (c) change of control of the Issuer and (d) mandatory redemption upon the occur-rence of certain events of default.

Security

The Notes are secured equally by first priority liens and ratably on a pari passu basis by (a) a pledge of all of the capital stock of the Issuer held directly or indi-rectly by AIH and Mota-Engil pursuant to a shareholder pledge agreement, (b) a mortgage over the Concession, (c) a per-fected beneficial and/or security interest in substantially all of the Issuer’s assets, granted pursuant to a Peruvian payment and guarantee trust agreement (the “Pay-ment and Guarantee Trust Agreement”) entered into between the Issuer and Ci-tibank del Perú S.A., as Peruvian trustee (the “Peruvian Trustee”), and (d) an un-conditional and irrevocable pledge, as-signment and transfer to the Indenture Trustee pursuant to the Indenture, for the benefit of the bondholders and all other secured parties, of a security interest in all of the Issuer’s rights, title and interest in, to and under any other assets. Since most of the security is subject to Peruvian law, Citibank del Perú S.A. was appointed by the Indenture Trustee and the Issuer as sub-collateral agent pursuant to a sub-collateral agency agreement to act on be-

half of the Indenture Trustee with respect to all Peruvian collateral. In addition, the Notes also have the benefit of a debt ser-vice reserve account equal to 6 months of debt service.

Payment and Guarantee Trust

The Payment and Guarantee Trust Agree-ment is the key security agreement for the transaction. All of the cash flows of the Issuer from the Concession, including all revenues from services and insurance proceeds, are deposited in a revenue ac-count and flow through the accounts es-tablished by the Payment and Guarantee Trust Agreement pursuant to a waterfall that terminates with the excess cash flow account. In addition, all payments to the Issuer for operations and maintenance costs (including setting aside monies in a reserve account for operations and maintenance) and Construction Works are made by the Peruvian Trustee, as well as payments required to be made to the Grantor, the Regulator and the Port of Paita Social Fund under the Concession. The Peruvian Trustee is also required to set aside the debt service required for the Notes and any future series of notes, as well as any amounts required to top up the debt service reserve account, both of which are transferred to the Indenture Trustee for application pursuant to the In-denture.

With respect to future Works, the Pe-ruvian Trustee is required to begin setting aside monies required for Stage 2 Works in a separate trust account (the “Stage 2 Trust Account”) once container volume at the Port reaches 160,000 TEUs per year. The schedule of the amounts to be set aside each month, which is based on the financial model’s projections for the Port at closing, is expected to ensure

“another significant difference froM a traditional project finance loan transaction, is that the issuer is not required to abide by the equator principles”


that sufficient monies will be set aside to complete the Stage 2 Works once the Port has achieved container volume equal to 180,000 TEUs per year.

Similarly, with respect to the Stage 3, the Peruvian Trustee is required to begin setting aside monies required for Stage 3 Works in a separate trust account (the “Stage 3 Trust Account”) once container volume at the Port reaches 260,000 TEUs per year. The schedule of the amounts to be set aside each month, which is based on the financial model’s projections for the Port at closing, is expected to ensure that sufficient monies will be set aside to complete the Stage 3 Works once the Port has achieved a container volume equal to 300,000 TEUs per year.

With respect to the Stage 4 Works, the Peruvian Trustee is required to set aside monies immediately according to a sched-ule set forth in the Concession agreement that ensures that sufficient monies are set aside to complete the Stage 4 Works when required, as described above. The Peruvian Trustee transfers these monies to the trustee of the Additional Invest-ments Trust on a yearly basis, or earlier if required to complete such Works. The requirement of the Issuer to both (a) make significant additional investments at the Port pursuant to the Concession and (b) reserve for future Works according to a schedule mandated by the Concession, with respect to Stage 4, and the schedules set forth in the Payment and Guarantee Trust Agreement, with respect to Stage 2 and Stage 3, added complexity and lever-age to the structure, but it also provided assurance to investors that the structure accommodates all future investment ob-ligations of the Issuer under the Conces-sion.

All equity contributions required to be made by the Sponsors pursuant to a spon-sor support agreement are deposited, after passing through a separate escrow account set up for tax purposes, into an equity pro-ceeds account maintained by the Peruvian Trustee. The Notes raised approximately 68% of the amounts needed for the Con-struction Works, Equipment Works and to fund various transaction accounts. The Sponsors’ equity contributions cover the balance and are supported by letters of credit that can be drawn upon by the Peru-vian Trustee and deposited into the equity

proceeds account. The Sponsors were required to make equity contributions on or prior to the issuance of the Notes to pay for their contribution with respect to (a) the costs for Equipment Works, (b) up-front payments for the Construction Works, (c) the required balance of the operations and maintenance reserve ac-count, (d) the required balance of the debt service reserve account, (e) an up-front amount to be set aside for the Additional Investments Trust and (f) and other costs being funded and pre-funded on the issu-ance date of the Notes.

After the issuance date of the Notes, the Sponsors are required to make periodic equity contributions to pay for Construc-tion Works and any other costs required to be paid for by equity contributions, such as certain Equipment Works and certain operating and maintenance costs.

droughts, plagues and natural disasters. In addition, demand can be affected by macroeconomic factors and competi-tion. An independent traffic consultant, APOYO Consultoría S.A.C., provided a traffic study of the Port that incorporated weather and macroeconomic factors to predict potential demand volatility at the Port. This traffic study was a very impor-tant component for the rating process and for creating the financial model.

Because of the long tenor of the Notes, it was important to consider structural elements that could provide liquidity if demand is negatively impacted at the Port over the life of the Notes. A debt service reserve is a typical enhance-ment for moderate demand volatility. However, in order to address significant demand volatility, the Issuer was given the following additional liquidity: if de-mand decreases and either (a) container volume drops below 160,000 TEUs per year before 18 months have passed af-ter it reaches 180,000 TEUs per year (i.e., when the Stage 2 Works must be completed) or drops below 260,000 TEUs per year before 18 months have passed after it reaches 300,000 TUEs per year (i.e., when the Stage 3 Works must be completed), as applicable, or (b) the Issuer reasonably believes that it will not achieve container volume of 160,000 TEUs per year or 260,000 TEUs per year, as applicable, within 1 year of the date predicted for achiev-ing such volume levels in the financial model on the closing date (collectively, “Demand Events”), the Issuer is al-lowed to tap into the Stage 2 Trust Ac-count or the Stage 3 Trust Account, as applicable, for debt service and also to suspend deposits into the applicable ac-count until a new date agreed upon with the Independent Engineer. The Issuer must first demonstrate to the satisfac-tion of the Independent Engineer that a Demand Event has occurred before the Issuer will be given these rights. Since the Stage 2 Works and Stage 3 Works only need to be performed once the re-quired volume levels are reached, this additional liquidity benefits both the bondholders and the Issuer without compromising the Issuer’s obligations under the Concession.

Demand Risk

As with any project with demand risk, there is always a possibility that de-mand may decrease and result in lower revenues at the Port than originally an-ticipated. Since the Port is mostly export oriented, the main drivers for demand are agricultural and oceanic output in the Port’s area of influence, which can be affected by, among other things, cli-mate change, including El Niño, floods,

“one of the Most significant aspects of

this project bond is that the construction

risk was not fully Mitigated, which is

the first tiMe this has been accoMplished

for a latin aMerican rule 144a/reg s

project bond.”


Operating Risk

The Issuer enjoys the benefit of the global and local experience of its joint venture partners in operating ports and providing related logistical services. In addition, before the bond offering, the Issuer was able to operate the port for 2 and 1/2 years to create a positive track record that could be analyzed by both the rating agencies and the bondholders. These factors, along with a reserve account for operating and maintenance, were able to significantly mitigate the operating risk to the satisfac-tion of the rating agencies and the bond-holders.

Construction Risk

Based on the report provided by the In-dependent Engineer, the Construction Works and Equipment Works are not complex and can be completed within the timetable established by the Issuer. Also, the EPC contractor, which agreed to do the Construction Works pursuant to the EPC Contract that includes a perfor-mance guarantee and quality guarantee, has significant construction experience in Peru. In addition, the supply contracts for the Equipment Works are with reputable suppliers of cranes who agreed to pro-vide performance guarantees pursuant to the supply contracts. These factors, along with the involvement of the Supervisor and the Independent Engineer, helped to considerably reduce the construction risk of the project, although construction risk was still a factor.

One of the most significant aspects of this project bond is that the construction risk was not fully mitigated, which is the first time this has been accomplished for a Latin American Rule 144A/Reg S project bond. The key reason the proj-ect bond was able to proceed with con-struction risk is that, as a Brownfield project, the Port has been generating revenues for years, including the most recent 2 and 1/2 years pursuant to the Concession, which allows bondholders to be paid, whether or not construction is completed on time. There still is the risk of a default under the Concession due to the construction, but not having to rely on the construction of a project to be completed for revenues to be gen-

Gianluca G. Bacchiocchi is a partner at DLA Piper and focuses his practice on representing sponsors, issuers and underwriters in cross-border capi-tal markets transactions with Latin America, including project bond fi-nancings, public and private issuanc-es of asset-backed securities, private issuances of future-flow backed secu-rities and high-yield debt issuances. Mr. Bacchiocchi also assists sponsors, borrowers and lenders with project and infrastructure financings, public-private partnership transactions, gen-eral secured and unsecured lending arrangements and international debt restructurings. He has been named a leading capital markets and bank-ing and finance lawyer by Chambers Latin America. Transactions handled by Mr. Bacchiocchi have received a number of awards from IFLR, Project Finance and Latin Finance, includ-ing most recently the Latin American Water Infrastructure Deal of the Year 2010 Award from Project Finance and the 2011 Americas Project Finance Deal of the Year Award from IFLR. Mr. Bacchiocchi is fluent in Italian, Portuguese and Spanish.

erated was a very important consider-ation for bondholders.

Negative Carry

Probably one of the most challenging as-pects of a non-refinancing project bond is how to address negative carry, which is the interest paid on bond proceeds that cannot be fully deployed since the con-struction will occur over a period of time. In a number of project bonds, this issue has been addressed by issuing variable funding notes. In this transaction, it was decided that for obtaining the best execu-tion, only one series of regular upfront funded notes would be issued. However, since the negative carry incurred by the Issuer will be amortized over 25 years, its impact will be minimized. Since is-suers tend to focus on the all-in costs of the transaction, the all-in costs will not be significantly impacted by negative carry so long as the bonds they issue are ex-pected to have a long tenor.

Conclusion

As project bonds have evolved, espe-cially over the last 6 years, sponsors now have more options available to them, even if some traditional lending op-tions are less accessible due to the cur-rent banking crisis in Europe. Although the capital markets may be unfamiliar territory for some sponsors, the advan-tages that project bonds provide spon-sors, namely long term financing at fixed rates (if US dollar based) and potentially lower interest rates, can significantly outweigh the disadvantages, namely ob-taining consents from bondholders, dif-ficulty analyzing construction risk and negative carry, which as the Paita Port project bond demonstrates, can be read-ily addressed. If this was a Greenfield project, it is unlikely that the construc-tion risk would have been left complete-ly unmitigated for a project bond, but as bond investors and rating agencies be-come better at analyzing infrastructure projects and governments get better at structuring concessions, project bonds will continue to evolve in Latin America and perhaps Greenfield project bonds with construction risk may someday be-come a reality.


Brazilian

Fostering

of Private

Financing of

Infrastructure

ProjectsRicardo Simões Russo (Partner), Enrico Bentivegna (Partner) and João Fernando A. Nascimento (Senior Associate) of Pinheiro Neto Advogados

After more than a decade of economic stability and timid (when compared to other emerging countries) although

resilient growth, it is time for Brazil to tackle its most critical deficiency: the country’s infrastructure.

With most of the investments in in-frastructure deployed back in the 1970’s and mid 1980´s, Brazil now faces a grim scenario: recurring power blackouts (apagões), especially during draught seasons, overwhelmed airports, roads re-quiring immediate maintenance, incipi-ent railway network and insufficient port services. According to the latest “Global Competitiveness Report 2011-12”, Bra-zil, currently the 6th largest economy in the world, occupies the 53rd position in general competitiveness and only 104th in quality of overall infrastructure.

This scenario is a consequence of, among several other macroeconomic fac-tors, a low rate of investments in infra-structure. It is estimated that Brazil has invested, in average, approximately 2% of its GDP in infrastructure since 1985. The main reason for this decline in infrastruc-ture investments is the general deteriora-tion of the macroeconomic environment verified in Brazil in the mid-1980’s, when the country was suffering with a soaring inflation and an upsurge in its public in-debtedness.

There is consensus among all sectors of the Brazilian society that if the govern-ment does not act energetically in order to create a favorable environment for in-vestments in infrastructure the country’s development may enter stagnation in the next years.

The Growth Acceleration Programmes (“PACs”) and BNDES

As an attempt to remedy the shortfalls concerning public and private invest-ments in infrastructure, Brazilian federal government has put in place two large infrastructure programs, the first one in 2007 (“Programa de Aceleração do Crescimento” or “PAC” - Growth Ac-celeration Program), and the second one in 2010 (also known as “PAC II”). As a result, the share of public investments in

infrastructure alone reached 3.2% of the country’s GDP in 2010.

Both PAC and PAC II program and the investments deriving therefrom rely heavily in public financing. As the main financing agent for infrastructure proj-ects in Brazil, the Brazilian National So-cial and Economic Development Bank (“BNDES”) plays an essential role in the Brazil’s equation to sustain economic growth, competitiveness and innovation.

According to its own reports, BNDES is likely to disburse up to R$ 150 billion (US$77 billion) in 2012, which represents a slight increase over last year’s R$140 billion (US$ 71 billion). This increase, although not very significant, evidences that Brazil is not ready yet to reduce the role of BNDES in the economy, so as to foster the participation of the private sec-tor in the financing of infrastructure proj-ects.


Brazilian

Fostering

of Private

Financing of

Infrastructure

Projects

In addition, according to research re-ports published by the BNDES, there is a need in Brazil for investments in the amount of R$ 1,324.00 billion during the period of 2010 to 2013. Further, pres-ently, approximately 90% of long term financings in Brazil were granted by state owned banks, BNDES and federal finan-cial institutions.

In order to accomplish the above men-tioned endeavor, the Brazilian govern-ment must improve the tools available in the Brazilian market, in order to promote the participation of the private sector in long term financings required for the im-plementation of infrastructure projects.

In this regard, recent rules and regula-tions were enacted in order to promote the creation of a long term financing private market. Such rules have as their main pur-pose not only foster the participation of private entities on long term credit trans-actions but also aim to promote in Brazil the development of the local debt securi-ties market.

Infrastructure Bonds – Re-quirements and BenefitsThrough the enactment of Law No. 12,431, of June 24, 2011 (“Law 12,431/11”), which was further regulated by Decree-Law No. 7.603, of November 9, 2011 (“Decree-Law 7,603/11”), the Brazilian government created certain mechanisms to promote the use by local companies of the capital markets for the purposes of their long term financing. Among these mechanisms the so-called “Debêntures de Infraestrutura” (Infrastructure Bonds) were created, the first type of securities in Brazil designed specifically to raise long-term private funds to be applied in infra-structure projects.

RequirementsThe main requirements in connection with the issuance of Infrastructure Bonds can be summarized as follows:

1. such debt securities must be issued by a special purpose company organized for the specific infrastructure project;

2. the project to which they are linked must be approved by the applicable ministry overseeing the industry in which the project is inserted;

3. offering must have a minimum weighed tenor of four years;

4. securities cannot be called upon or re-deemed within the first two years of their issuance;

5. the buyer cannot have a commitment to resell the securities to the issuer;

6. securities must have a fixed interest rate, linked to a price index or to the

Brazilian Reference Rate (TR);7. interest payments cannot be made in

intervals shorter than one hundred and eight days;

8. the Infrastructure Bond must be regis-tered for trading in a regulated securi-ties market; and

9. they must contain a simplified proce-dure to demonstrate the purpose of al-locating the proceeds in investment projects, including the ones related to the intensive economic production con-nected with research, development and innovation.

For the purposes of the ministry approval mentioned in item (2) above the respec-tive projects must: (1) be addressed to in-vestments in infrastructure or to intensive economic production connected with re-search, development and innovation, and

“Both PAC and PAC II program and the investments deriving therefrom rely heavily in public financing.”

“The Brazilian National Social and Economic Development Bank (“BNDES”) plays an essential role in the Brazil’s equation to sustain economic growth, competitiveness and innovation.”

Latin Infrastructure Quarterly20(2) aim at the establishment, expansion, maintenance, repair, adaptation or mod-ernization, among others, of one of the following areas: (a) logistics and trans-portation; (b) urban mobility; (c) energy; (d) telecommunications; (e) broadcasting; (f) sanitation, and (g) irrigation.

Infrastructure Bonds must be distrib-uted by means of public offerings pursu-ant to the Normative Ruling No. 400, of December 29, 2003, issued by the Brazil-ian Securities and Exchange Commis-sion (Comissão de Valores Mobiliários – CVM), or also by means of public of-ferings with restricted efforts (i.e., for a limited number of investors and without the need for registration with local secu-rities commission), pursuant to the CVM Normative Ruling No. 476, of January 16, 2009.

The offerings of Infrastructure Bonds that are subject to the terms of Law 12,431/11 must be made prior to the deadline of December 31, 2015.

Tax Aspects – Benefits of the Infrastructure Bonds Law 12,431/11 not only created a specific type of long-term investment, but also es-tablished additional measures to stimulate the market for Infrastructure Bonds, espe-cially by means of the tax treatment appli-cable to the investors in such securities.

Under Law 12,431/11, in general terms, income earned by investors shall be subject to the Brazilian withholding income tax, at the following rates:

1. 0% (zero percent) when ascertained by foreign investors (provided they are not resident or located in tax heav-en jurisdictions);

2. 0% (zero percent) when ascertained by individuals that are tax residents in Brazil;

3. 15% (fifteen percent) when ascer-tained by Brazilian legal entities that are subject to taxation according to the “actual profit regime” (lucro real), “estimated profit regime” (lucro pre-sumido) or “imposed profit regime” (lucro arbitrado); tax- exempted legal entities; or legal entities subject to the Simplified Tax Payment System for Small Businesses and Small Compa-nies (Simples Nacional).

In addition, foreign investors that make the acquisition of Infrastructure Bonds are subject to the Brazilian so-called “IOF exchange” assessment (tax assessed at the foreign exchange transac-tion verified at the moment of the entry of the investment proceeds in Brazil) at a 0% rate (as opposed to a rate that may reach up to 6% in other types of fixed in-come investments).

Other measures to stimulate long-term private financing

Brazilian federal government also estab-lished additional measures to stimulate the market for long term financing, such as exempting the long-term bank bonds called letras financeiras from mandatory reserve requirements.

The letras financeiras were created by Provisional Measure No. 472, of De-cember 15, 2009 (“MP 472/09”), which was regulated in the following year by Brazilian Monetary Council’s Resolution

No. 3,836, of February 25, 2010. In June 11, 2010, MP 472/09 was converted into Law No. 12,249 (“Law 12,249”), which further defined the legal terms and condi-tions applicable to the letras financeiras.

The main characteristics of the letras financeiras are:

1. they are fixed income instruments is-sued by financial institutions;

2. they have a minimum maturity of twenty-four (24) months; and

3. their minimum nominal amount is R$ 300,000.

The first letras financeiras issued with the abovementioned characteristics were reg-istered with CETIP (Central Agency for Custody and Financial Settlement of Se-curities) in April of 2010. One year later, the stock of such instruments had already reached R$72.8 billion. At the end of March, 2012, the stock of letras financei-ras reached R$175.6 billion.

A market for long term private debt instrumentsIn order to increase the trading volumes of all these private, long-term bonds, the Brazilian government is structuring, to-gether with the private sector (under the coordination of ANBIMA), the Liquid-ity Enhancement Fund (Fundo de Apoio à Liquidez – “FAL”), which main purpose is to function as a “market maker”, funded by BNDES and by mandatory deposits held by banks with the Brazilian Central Bank under mandatory reserve requirements.

The idea behind FAL is to provide a safer environment for individuals and for-eign investors interested in investing in this new debt instruments, thus increasing trading volumes for corporate debt (espe-cially in the secondary market).

Conclusion

As seen from the initiatives described above, Brazilian Government has put in place sev-eral measures to promote long term invest-ments in infrastructure. These measures en-tail the continuance of public investment and financing related to infrastructure projects, as well as the creation of a friendlier environ-ment for the private sector to participate in the long-term corporate debt market.

“the so-called “debêntures de infraestrutura” (infrastructure

bonds) were created, the first type of securities in brazil designed

specifically to raise long-terM private

funds to be applied in infrastructure

projects.”

Deals


Enrico J. BentivegnaTelefone: +55 (11) [email protected] São Paulo Enrico J. Bentivegna has been a member of the corporate area of Pinheiro Neto Advogados since 2000, and is based at the São Paulo office. He practices in the areas of securitization of receiv-ables, investment funds, corpo-rate law, mergers and acquisitions, capital markets, and regulation of financial institutions, project fi-nance and PPPs (Public-Private Partnerships). Having graduated from the University of São Paulo Law School (1996), he holds a specialization course in Corpo-rate Law from the same University. He worked as a foreign associate at Hunton & Williams (Miami) in 2004. He was admitted to the Bra-zilian Bar Association in 1997.

João Fernando A. NascimentoTelefone: +55 (11) [email protected] São Paulo João Fernando A. Nascimento has been a member of the corporate area of Pinheiro Neto Advogados since 2000, and is based at the São Paulo office. He practices in the areas of corporate finance, project finance, trade finance, debt restructuring, regulation of finan-cial institutions and banking prod-ucts, having graduated from the Mackenzie University in 2002. He worked as a foreign associate at Hughes, Hubbard & Reed (Miami) in 2008-2009. He was admitted to the Brazilian Bar Association in 2002.

Ricardo Simões RussoTelefone: +55 (11) [email protected] São Paulo Ricardo Simões Russo has been a partner at Pinheiro Neto Advo-gados Corporate Area since 2009. He focuses his practice on financial and banking law, foreign exchange, M&A and securities markets. Ri-cardo has a LL.B. degree from the Catholic University of São Paulo (1997). He also has a LL.M degree in Banking and Financial Law from the Boston University School of Law (2002). Fluent in Portuguese, English, Spanish and Italian, he was a foreign associate of Cleary, Gottlieb, Steen & Hamilton in 2002 and 2003. He was admitted to the Brazilian Bar Association in 1998.

Deals

Latin Infrastructure Quarterly22 Companies

Our major customers are min-ing companies that use the terminal facilities to export their different products, con-

sidering that the amount of cargo moved through Matarani Port represents the 50% of their total cargo. Among them we can name Sociedad Minera Cerro Verde Port Free McMoran, Xstrata Copper, Compa-nia de Minas Buenaventura, Glencore, Ares and Suyamarca that belong to Ho-schild group, and Minera Pampa de cobre of Milpo Group. Copper concentrate, cop-per cathodes and gold concentrate are the main products which are shipped to ports in Asia.

It is worth mentioning that Tisur is a multi-purpose port due to the experience at handling all types of cargo. The econo-my of the region is growing significantly and the road infrastructure is improving, allowing the communication among other towns and making new important projects possible. Based on this, we can say Mata-rani is on its 25% capacity. As a result, a very important growth will be seen in the following years, especially in container cargo by decreasing the mining relative weight in our operations.

In container cargo, our Customers are Tecnológica de Alimentos S.A. – Tasa and Pesquera Diamante which export fishmeal to Asia. Consorcio Peru Murcia and ALSUR S.A produce agro industrial products that are shipped to The USA and Spain, Inkabor S.AC distributes borate in The USA and Europe.

How would you describe the state of the economic infrastructure assets bringing those products to the Port’s facilities? (Roads, railroads, navigable rivers (if any))

Being a strategically multi-junction of different roads and the southern rail road, among them the main road that connects the country from south to north. Two roads to the Peruvian highlands and con-necting with Bolivia and the central states of the Brazilian amazon.

As regards air transport, Rodriguez Ballon International Airport in the city of Arequipa is located 120 km from the port.

TISUR has held the concession since 1999, could you describe the invest-

Per

uPo

rt o

f M

atar

ani

Ter

min

al

inte

rn

acio

nal

d

el s

ur

LIQ talks to Erick Hein Dupont, General Manager

The Port of Matarani (the “Port”) is of great importance for the south region of Peru, who are the main clients of Terminal Internacional del Sur (“TISUR”), which are the main products exported from its facilities and the main destinations of Peruvian production coming out of the Port’s facilities?

Latin Infrastructure Quarterly 23Companies

ment plan for the enlargement and modernization of the Port’s facilities?

The investments in infrastructure have been performed by commitments associ-ated with the Contract of Concession and accompanying the growth of load vol-umes that we handle.

Tisur has made important investments in the past 12 years, such as the construc-tion of new silos of 25 thousand tons by increasing the capacity from 50 to 75 thousand tons and the acquisition and implementation of a grain tower with an unloading capacity of 400 TM/HR which enabled us to increase our capacity from 200 to 600 TM/HR. Since 1999, Tisur has made investments worth more than $ 35 million dollars.

In the year 2004, Tisur turned into the first Peruvian port in possessing a port

handy size. This new system loads near a million and a half tons per year.

In the year 2011, Tisur acquired the Liebherr crane HM 400 of 100 tons of ca-pacity. Possessing these two cranes has al-lowed Matarani to enhance its containers services, being able to offer the shipping lines the attention of gearless vessels.

Also worth highlighting are (i) the acqui-sition of equipment of last generation for the handling of load such as top picks, forklifts, telescopic cranes, and frontal mini loaders; (ii) the addition of 5 acres have been added to our storage areas are also worth high-lighting; (iii) the building of a heavy vehicle outer harbor that increases the loading and unloading of trucks; and (iv) the building of liquid storage tanks.

The company carries out studies of demand for port services with a projec-

CAL, MAJES SIGUAS II, as well as the various projects that will be generated in the region.

For the next years Tisur has planned to execute investments orientated at in-creasing its capacity to manage minerals, containers and bulks. To accomplish this objective, the following projects are held in portfolio:

System of Reception, Storage and Loading of Concentrate of Mineral and Berth F in Bay Islay – Berth F: this proj-ect is destined to attend the projects of The Bambas, Antapaccay of the mining Xstrata and Cerro Verde 1 and Cerro Verde 2 of the mining Sociedad Minera Cerro Verde. It will possess a capacity of 2,000 ton/h of capacity of loading and it has the potential of attending to 5 million tons per year. Es-timated investment: US$ 200MM.

mobile crane: the Gottwald HMK 280 E of 60 tons of capacity for the attention of bulk, break bulk and containers.

In 2005, a reception, storage and ship-ping system was built and implemented for copper concentrate. As of today, this system is the most modern one in the South Pacific coast. Environmental re-quirements were taken into consideration for this project for the managing of con-centrate of mineral. With this implemen-tation it passed from storing the mineral in slabs without coverage to closed stores, the first tubular conveyor belt was imple-mented and installed in Peru and a “ad hoc” shipper for these operations. This project undoubtedly constitutes a signifi-cant improvement in how mining opera-tions of the south of Peru manage envi-ronmental matters. The project included: (i) a system of reception for trains and another one for trucks; (ii) the construc-tion of two mineral stores of 75,000 and 45,000 tons of capacity; and (iii) a system of loading of concentrates with a capac-ity of 1,500 ton/h for the loading of ships

tion of five years. The demand growth is evaluated according to the GDP and spe-cific projects, this is why in the next four years, and projections for investments are around $ 200 million to meet the demand generated by the new mining operations or expansions like THE PETROCHEMI-

Fitting out new areas of storage: this project consists of the incorporation of new zones and areas of storage, mainly in the high part of the port. The project con-templates a new access with truck scales and the progressive fitting out of 10 hect-ares of zones and stores covered, as it is

“copper concentrate, copper cathodes and gold concentrate are the Main products which are

shipped to ports in asia.”

Latin Infrastructure Quarterly24 Regulation

Latin Infrastructure Quarterly 25evolving the demand of spaces. Estimat-ed investment: US$ 5MM.

Port extension – Berth E and Network System of Liquid Cargo- Berth E: this project is thought to attend to the increase of demand for the unloading of liquids in Matarani port, principally sulphuric acid. It consists of the construction of a berth to the interior of the current south break-water and the laying of a pipeline up to the tanks of storage of the high part of the port. Estimated investment: US$ 7MM.

How have been the risk allocation pro-visions of the concession agreement (as may have been amended since its execution) respected by TISUR and the Port Authority along the life of the concession? Please provide us with ex-amples to illustrate this ongoing rela-tionship between TISUR and the State.

In Peru, the regulation of private in-vestment in public infrastructure in the port sector has mainly focused on three issues: (i) prices; (ii) competition in the provision of services; and (iii) access to infrastructure. OSITRAN has jurisdiction as a regulator in this issue.

Access to intermediate service provider to essential facilities is a central aspect in the regulation of activities related to infra-structure. In our case, intermediary com-panies are dedicated to stowing or towing.

The National Port Authority (NPA or Autoridad Portuaria Nacional, in span-

“the coMpany carries out studies of deMand for port services with a projection of five years. the deMand

growth is evaluated according to the gdp and

specific projects, this is why in the next four years, and

projections for investMents are around $ 200 Million.”

Companies


Erick Hein Dupont

ish) is the one, which is in charge of the port system management and adopts poli-cies that promote and encourage private investment to improve infrastructure as well as implementation of the port and port operations in general.

In these twelve years our relationship with both NPA and OSITRAN has been outstanding. An interesting fact that must be taken into consideration is that with OS-ITRAN we practically initiated activities to-gether and we preceded NPA, in this sense we have grown together and a lot of Tisur’s experiences have served to mark the guide-line for the new port system in Peru.

With the growth of the Peruvian econ-omy, the availability of financing for in-

frastructure projects in Peru and a State that strongly incentives private invest-ment in public infrastructure assets, there has been considerable investment in port terminals in Peru, do port terminal opera-tors in Peru compete among each other? If so, in what way and how does that ben-efit the Peruvian economy?

In some cases the port terminals compete between themselves, the most important case is the one given in Callao, where in 2006 Dubai Ports World was awarded with the concession of the South Pier for 30 years and APM Terminals was awarded with the concession of the North Pier in 2011.

Both terminals are competing in order to win the business of different shipping lines,

which find the opportunity to bring ships of major capacity reducing in this way the cost of maritime freight. To this benefit we should add the reduction of port costs also generated by the competition between ter-minals, which encourages exporting and benefits Peruvian foreign trade.

Furthermore, this competition in Cal-lao strengthens the network of feeder ports as other Peruvian ports find in Cal-lao multiple opportunities of transfer to direct traffic.

• General Manager of Terminal Internacional del Sur S.A. Matarani Port, Areq-uipa.

• General Manager of Almacenes Pacifico del Sur S. A. Operadores Logísti-cos. Bolivia.

• Board Member of Alpasur (Almacenes Pacífico del Sur S.A.). • Board Member of JPQ Bayovar Port. • Board Member of LQS, Liquid Terminal. • Regional Counselor of Senati Arequipa.• Board member of the Chamber of Commerce and Industry of Arequipa.• Chairman of the South Regional Directive Committee 2021• Board Member of the Public Charity of Arequipa (2001)• Officer of the Peruvian Navy in retirement with a major in Naval Aviation, Pilot.• Postgraduate in Business Administration Program in ESAN and the Advance

Management Program at the University of Piura.

Latin Infrastructure Quarterly 27Institutions

Peru’s National System of Pensions LIQ talks to José Quiñones, Chief Investment Officer of the Previsional Normalization OfficePlease provide us with a brief intro-duction explaining what are the ONP, FCR, and SNP and describing your work.

Way back in December 1992, the Peru-vian Government, planning to reform the social security system by creating fixed contribution private pension plans, enact-

ed a law (Decreto Ley N°25,967) creat-ing the Previsional Normalization Office (Oficina de Normalización Previsional or “ONP”), entitled to administrate the Na-tional System of Pensions (Sistema Na-cional de Pensiones or “SNP”). This was followed by the law N°26,323, enacted on June of 1994, detailing ONP’s functions. The SNP is the Peruvian fixed benefit

pension plan covering near 480,000 pen-sioners and 2,900,000 workers created by law (Decreto Ley N°19,990) enacted on May 1973.

On April 1996, another law (Decreto Legislativo N°817) creates the Pension Reserve Consolidated Fund (Fondo Con-solidado de Reservas Previsionales or “FCR”), meant to preserve the resources established to pay for pensions. FCR can not use its resources in any other way. The FCR is governed by a Board of Directors with the President being the Minister of Economy and Finance, and ONP acting as its technical secretariat.

The Board sets the investment guide-lines and ONP manage the resources. The investment decisions are made by the ONP’s Investment Committee, integrated by ONP’s CEO, General Manager and Chief Investment Officer (Director de In-versiones). The Risk Officer and the Con-troller also participate in said sessions.

My work, as Chief Investment Offi-cer, is to propose investment alternatives to the Investment Committee, as well as asset allocation and guidelines updates to present to the Board.

“The Board sets the investment guidelines and ONP manage the resources. The investment decisions are made by the ONP’s Investment Committee, integrated by ONP’s CEO, General Manager and Chief Investment Officer”

Latin Infrastructure Quarterly28 Institutions

Jose Quiñones

Jose Quiñones is Investment Director of Oficina de Normalización Pre-visional – ONP and by so he is the Secretary of the Fondo Consolidado de Reservas Previsionales – FCR’s Board of Directors. Currently he is responsible of the management of the financial resources and the real es-tate assets of the FCR, serving also as a member of the investment com-mittee of the ONP, Technical Secretariat of FCR. He is Vice President of Empresa de Electricidad del Peru – ELECTROPERU’s Board of Directors.Prior to joining ONP in November 1998, he worked as a consultant (1995 – 1998). Before that, he was General Manager of Coril SAB, a bourse agency (1994 – 1995), Financial Manager of Extebandes, a multinational bank (1982 -1993), Technical Advisor to the General Manager of the Cen-tral Bank of Peru – BCRP (1982; 1975 – 1980), General Director of Eco-nomic and Financial Affairs of the Ministry of Economy and Finance – MEF (1980 – 1981) and a National Accounts Division Chief of the BCRP (1968 – 1975).He also represented MEF as a member of the Board of Directors of the Banco de Fomento Agropecuario (1980 – 1983) and as Vice President of the Board of the Fondo Nacional de Propiedad Social (1977 – 1981). He worked as a professor in the Universidad del Pacífico (1969 – 1981) being Head of the Academic Department of Economy (1976 – 1981).He is an economist graduated from the Pontificia Universidad Católica del Peru and has post-graduate studies (Doctorat de l’Université de Paris) in Economic Development.

What is the current composition of the portfolio of the FCR?The current FCR portfolio is made up of the following (in US$ MM): • TOTAL PORTFOLIO: 2,953,299 • FCR Local Market: 2,346,345 • Government (long term): 278,762• Non Financial Corp. (medium term):

185,785• Financial System (short term):

1,523,595• Central Bank (short/medium term):

144,874• Mutual & Investment Funds: 24,493• Real Estate: 125,724• Infrastructure: 63,112• FCR External Market: 606,954• Merril Lynch 1-3 y. Corp/Gov. A

(B110): 167,724• Lehman Brothers Agg. Bond Index:

395,307• Citigroup World Gov. ex-US Bond

Index: 43,923

Why do infrastructure investments make sense to the ONP?There are two main reasons to invest in infrastructure: (i) these investments are designed for the long run and FCR, as a pension fund, must invest considering that time horizon, saving only for the short term the part that should provide the required liquidity to pay for pensions; and (ii) developing infrastructure helps Peru to grow countrywide, it contributes to the economic and social development of our country.

Let’s not forget that it also helps to diversify our portfolio and improves the expected return.

What major works have been financed by the FCR? How those investments structured? We have invested in the Waste Water Treatment Plant (PTAR, for its name in

Spanish) Taboada last year with Peru-vian AFP´s. We are currently investing in infrastructure project bonds issued by Public-Private Partnerships.

Are there co-investment opportunities for international players to invest with FCR?Not yet. We do not invest in infrastructure in the international market as we are not permitted by our Board of Directors. We are planning to present a proposal and ex-ecute some investments through Private Equity Funds (Fund of Funds as a first phase), but not co-investments properly speaking.

In the domestic market we are doing the investments through infrastructure project bond programs.

What are the main projects current be-ing analyzed by the ONP (FCR)?We are evaluating investments in Linea Amarilla toll road in Lima.

“there are two Main reasons to invest in infrastructure: (i) these investMents are designed for the long run and fcr, as a pension fund, Must invest considering that tiMe horizon, saving only for the short terM the part that should provide the required liquidity to pay for pensions; and (ii) developing infrastructure helps peru to grow countrywide, it contributes to the econoMic and social developMent of our country.”


Is this a good model for a Latin American country to follow? How far is the Latin American infrastruc-ture market with respect to the ma-

ture Canadian market? There is no doubt that Canada is an

example to follow. In the western hemi-sphere, Canadian PPP development is ahead from the one in the United States. It has contributed to consolidate an infra-structure market that includes construc-tors, operators, financiers, public authori-ties, which now are used to high-level standards to fulfill.

For Latin America, it is not just a mat-ter of following a model. It is of trying to bring a market.

The infrastructure market will go where there are the minimal conditions regarding returns and risks. When the market arrives, there will be more inter-action between local and regional players with worldwide players. The public au-thority will need to understand the tech-nical concepts and regard them as a new alternative to be used, that has proven successful in other latitudes.

Value of a PPP structure

Often PPPs have been labeled as an al-ternative procurement method or a way for a government to fund infrastructure projects when government resources are simply not enough to meet the needs. Is this true, what is the true value that a PPP structure brings to the table according to the Canadian experience?

The adoption of a PPP is not a matter of

Adrian Barrios - Vice President, Infrastructure & Project Finance - PwC Canada

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aThe Canadian model in Public Private Partnerships (“PPP”) is considered one of the most successful in the world, jointly with the numerous PPP projects in other ju-risdictions like UK or Australia. During the last decade there have been around 100 infrastructure projects pro-cured as PPP representing billions of dollars in investment.

the government having resources or not. The government could have the capital to finance entirely an infrastructure project, but a Value for Money analysis could in-dicate that the best procurement process is through a PPP. It is not exactly the same situation, but this could be compared with the decision of purchasing a house and choosing either paying 100% or getting a mortgage. If the rate of the mortgage is less than the opportunity cost of invest-ing that money in an investment fund, a rational investor will get a mortgage. In a PPP a Value for Money analysis reflects the savings the government could get if transferring the risks of owning the infra-structure property to a private partner.

A PPP can be summarized as a pay-ment from the public authority to the pri-vate sector for performance.

The effects a PPP market brings on the private sector are related to the long-term compromise a company or consortium must assume with respect to an infrastruc-ture. An incentive is created to deliver the infrastructure project on time and on budget, and to comply with the required standards during all the lifecycle of the project.

The effects on the public sector are that it becomes disciplined, where the requirements of a project must be clearly identified and defined, in order to avoid poor initial assessments. In the news we have seen many examples of infrastruc-ture projects than were announced with an X budget and finished with a 3X or 4X budget. That also brings a bad political reputation.


And yes, it is true that PPP procure-ment is a way of providing infrastructure without a public sector payment until the infrastructure is delivered according to the public sector’s requirements. It is an alternative way to control a project: if it does not comply, no payment.

Lessons learned

What have been the lessons that Canada has gained over the past 20 years that can benefit others wanting to follow the same path?

As we wrote early, there is already a big bundle of examples of PPP success stories in Canada. One of the main lessons learned is compromise. If the government is not compromised with the project, if the objectives are not clear, there is a big possibility that the project will fail. The compromise shown by the public author-ity gives a good signal to the market. Bad signals from the government, inconsis-tencies, lack of coordination with stake-holders, will discourage investors who would prefer to go to more“predictable” markets.

Another lesson learned is that as more projects are procured under a PPP, a minimal set of standards is reinforced. Constructors, operators, financiers, will become used to a way of working. There-fore, for one of these participants to jump to new environments, will depend if there are certain compatibilities between the way they are use to work and what the new environment is offering.

A procurement process is long. Some-one will be committed to spend time and resources if he/she finds that the new en-vironment is somehow familiar. This is why logically the first investors are local or regional. But when we are dealing with large infrastructure projects, global play-ers are always required. This is what Can-ada did to create and reinforce its infra-structure market, basically following the UK model and improving it, especially with the financial closing timing.

Communication from the government is very important, not only to stakeholders involved in an infrastructure project (like the owner of a property where a highway will pass through) but also inside the dif-ferent government levels: ministries, re-gions, municipalities. Historically, the PPP promotion process has begun from a specialized Infrastructure or PPP agency. Public servants working in ministries or municipalities at first will not see any benefit from changing their way of work-ing. But as they are exposed and trained

in concepts like Value for Money, Public Sector Comparator, PPP screening, they will be eager not to prefer this method-ology as a dogma (which is not), but to regard it as an available alternative tool for procuring infrastructure projects.

To attract investors to a PPP proj-ect it is required a good management of the procurement process, with a fair and transparent evaluation, where the objec-tives of the government are well defined, the technical requirements are well speci-fied, and the contracts are financeable.

A success story

A good example of a success story in Can-ada is the Canada Line Project, named in 2010 as one of the 100 most innovative and socially significant infrastructure projects in the world by KPMG. PwC was the financial advisor.

The Canada Line was the first rail proj-ect realized as a PPP in North America that implied the connection of an airport with two cities (Vancouver and Rich-mond). It is composed of approximately 19 km. of a light train system, with 18 sta-tions and a number of passengers of about 100,000 per day. It had an approximate cost of US$2 billion.

One of the key elements of this project was the level of coordination between the involved authorities. This project implied the participation of 8 agencies or govern-ment institutions which contributed with its financing: the Government of Canada, the Provincial Government of British Co-lumbia, Translink, the International Airport of Vancouver, the cities of Vancouver and Richmond, the Vancouver Port Authority, and the Regional District of Vancouver.

This coordination between so many government authorities, difficult but in

“one of the Main lessons learned is coMproMise. if the governMent is not coMproMised with the project, if the objectives are not clear, there is a big possibility that the project will fail.”

“as More projects are procured under a ppp, a MiniMal set of standards is reinforced. constructors, operators, financiers, will becoMe used to a way of working.”


the end successful sent a strong message to the market: the Canadian Government, at all its levels, is compromised with the success of a major infrastructure project.

With respect to the technical aspects, a key success factor was the transfer of geotechnical, excavation and demand risks. Normally in Canada there have been few examples of a full demand risk transfer. In the case of Canada Line, the level of demand risk transfer was low, as the concessionaire did not have control over the tariffs, and therefore over the volume of passengers. However, and here is where the innovation comes, the con-cessionaire was allowed to promote the “passenger experience” of using the Can-ada Line based on values like punctual-ity, neatness, order. So the concessionaire received an availability payment not only for fulfilling a schedule, but also for the number of passengers using the service.

The recipe of success of PPP in Latin AmericaSo, Latin America could reply this model, receive and embrace this market of global players?

investment, and that keeps an untouch-able track record referred to the respect of contracts.

This last issue has been a burden in Latin America for many years. Private investment will not go and do a favor to anyone. It will go where there is an option of a profit with bearable risk. It will not go to a location where the common place is that after some years, the State declares “change of rules” and nationalizes or ex-propriates its assets.

This is why the procurement process phase is fundamental. The final con-tent of the contract between the public and private sector should protect the Government, in the short, medium and long-term, during the construction, op-eration and maintenance phases of the project.

Latin America has a lot to learn about the Canadian PPP experience. At the beginning of the PPP development in Canada, 15 years ago, there were many voices against it, like unions, politicians, academics. But time showed that the PPP methodology was not a dogma, or an un-contestable solution. It was just an alter-native.

Adrian Barrios

Adrian Barrios has more than 10 years of professional experience in project finance, business valua-tion, mergers and acquisitions, fi-nancial modelling, feasibility anal-ysis, microfinance and financial audit. In the last 5 years he has led more than 50 business valu-ations and transaction projects in Canada, Peru and Ecuador. His experience comprises the mining, energy, financial services, health, agribusiness, infrastructure and commercial sectors. He holds an MBA from ESADE Business School and is BA in Economics from the Universidad del Pacífico. He can be reached at [email protected].

First, it would work better in a country with investment grade. The Latin Ameri-can rankings put in the first places coun-tries like Chile, Mexico, Brazil. Also ulti-mately there is more activity in emerging economies like Peru or Colombia.

Second, and most important, there should be a commitment from the gov-ernment with respect to developing its infrastructure market. A commitment that considers the ultimate available tools re-garding project financing, that prepares all its government levels in the concept of a public-private partnerships, that has a legal framework that welcomes foreign

According to a recent Canadian Coun-cil for PPP Poll, Canadian support for PPP is on the rise reaching 70% acceptance. The reason for this is that taxpayers can see infrastructure projects being built and delivered on time and on budget, that the levels of services are adequate, and that their standard of living rises accordingly.

Would we have these results some day in Latin America?

“coMMunication froM the governMent is very iMportant, not only to stakeholders involved in an infrastructure project.”


32

Government spending on healthcare around the world is growing at a pace that is likely to be unsustainable unless new funding sources are found and more ef-ficient delivery methods are sought. As this reality

dawns governments are increasingly looking to PPPs to solve the larger problems in care delivery that are driving spending.

Healthcare has been largely overshadowed in the PPP market by super projects in energy, telecommunications, and transporta-tion. While estimated at only about 10% of all PPPs, healthcare projects are among the most complex and require a special un-derstanding of the delicate balance in delivering such a critical public service. For example, in other types of PPP projects, the physical infrastructure is the desired end product and any provi-sioning to maintain and run it is secondary. Health systems are different. For health systems, a hospital is a small part of what keeps people healthy; the desired end result for government is better health for a population.

To address this reality, health PPPs have evolved significantly over the last 20 years. They started as a way for governments to build new or revamp crumbling hospital infrastructure in countries like the UK and Canada. More recently their scope has expanded from a primarily infrastructure-oriented model to a clinical services delivery model; some projects include both.

Health PPPs: Paul da Rita – Global Leader for Health PPPs at PwC

Examples of such projects can be seen in Spain, Brazil, the Ca-ribbean and the UK.

The trend has gathered momentum due to a number of rea-sons. Investment need and government budget constraints are foremost among them. Governments today are spending in-creasing portions of their budgets on health. Spurred by ageing, chronic disease and technology, as well as the growing expecta-tions of the population, health spending will increase by over 65% over current levels by 2020. This will intensify the need for alternative methods of financing and care delivery. According to PwC estimates, the OECD and BRIC nations alone will need to spend $3.6 trillion on infrastructure over the next 10 years. How-ever, health spending beyond infrastructure -- which represents 95% of health spending -- will total more than $68.1 trillion. This huge spend will become a target for government efficiency and create a market for private organisational investment and management.

Chart 1: The more aspects of healthcare that are included in the PPP, the more the potential for savings increases

. As governments at central and local levels grapple with sig-

nificant deficits following the global financial crisis, private in-vestment and expertise have become even more vital to address

Rationale & Drivers


33

Drugs, devices, home, long-term

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health system needs. There is often wide divergence between public and private healthcare in developing countries; PPPs pro-vide a way to harness the skills, knowledge and capacities of the private sector to achieve public policy goals. This in turn paves the way for a shift in the government’s role from provider to regulator.

However, ultimately the scope and structure of health PPPs reflect specific needs and context. While some countries seek to add new beds, others require skills that are in short supply in the local/regional economy. For instance, PPPs have been used in the Turks and Caicos Islands and Lesotho as a way of securing access to not just infrastructure but also skills and technology.

Payment mechanism

As in other infrastructure PPPs, the payment mechanisms in health PPPs are based on the contractual allocation of risk and the scope of services. However, the development of new mod-els has necessitated the development of new models of payment which incentivise risk sharing.

Traditional payment mechanisms are availability-based, set-ting out the level of performance that is required by the private provider, how this will be measured, pricing arrangements and any volume or value guarantees. The incentives are largely pu-nitive in nature, containing deductions that the private provider will face should it not provide the expected level of service or make the facilities available, as well step-in and termination rights for extreme cases of poor performance. These established models are still evident today in health infrastructure deals in projects all over the world including Brazil and Mexico.

However, with health PPPs now increasingly focused on better procurement and value for money, measurements of success are evolving away from simple availability toward better health outcomes. For instance, the Alzira project in Spain covers infrastructure and clinical services for hospital and primary care clinics and the government pays the hospi-

tal operator through a capitation payment. Under this system payments are based on the number of people to be served by the provider. The payer pays a monthly per-capita payment to the provider institution to deliver a package of services to consumers who subscribe to that plan or are resident in that region. The provider receives no extra payments regardless of whether a patient is hospitalized once in a year or 5 times. The payment mechanism hence creates a positive incentive to keep patients healthy and out of the hospital and shifts some of the demand risk to the private sector.

More integrated projects may combine these approaches, creat-ing mixed payment streams. As previously mentioned, the Turks and Caicos Islands project Includes 2 payment streams – one for the facilities (2 small hospitals) and funded by the government, and the second for the provision of clinical services on a capitat-ed basis and funded through a new mandatory health insurance scheme. Both types of payments are subject to periodic review/adjustment and deductions for poor performance against a range of performance indicators.

The Healthcare PPP market in Latin America

Latin America has had an active PPP market for some time al-though healthcare projects have been relatively slow to take off. However, in common with many other parts of the world, we are

“healthcare projects are aMong the Most coMplex and require a special understanding of the delicate balance in delivering such a critical public service.”


now seeing increasing interest from Latin American countries who are looking to improve access to and the quality of health-care for their citizens.

Brazil is one of the largest and most active infrastructure markets in Latin America. While PPPs provide an attractive avenue for the government to make progress towards its ambi-tious developmental goals, they are constrained by a variety of reasons that are also relevant across sectors. For instance,

Many states have PPP laws (in addition to a federal PPP Law). Additionally, federal law establishes that the annual PPP at State or Municipal level should not be higher than 3% of their net revenue;

Municipalities and States do not typically have the budget to develop PPP studies and can only develop these studies through partnerships with IFC, BNDES or private companies willing to develop unsolicited proposals;

Private investors require robust guarantees to protect their investment in the event that State or Municipal governments are unable to make the appropriate payments and default. Many of these Municipalities and States do not have access to appropriate assets to deposit in these guarantee funds.

In many cases the authorities also lack the skills required to successfully structure and procure PPP projects.

As a result, there are relatively few projects being procured across all sectors. To address the issue, there is a growing rec-ognition that the rules for unsolicited proposals need to be re-defined to enable private investors to participate in the tenders.

Like other sectors, the experience in health has also been mixed so far with much interest (and need) but not very much progress. In one of the early projects, the municipality of São Paulo proposed to develop a substantial project which included

a number of Hospitals and Diagnosis Centres on a PPP basis. However, the project ran into problems due to various issues. Consequently, the procurement has been postponed 4 times due to lack of interested parties. Newer projects, such as the expan-sion and renovation of a general hospital in the State of Bahia, which includes both clinical and non-clinical services and equip-ment supply, fit with the broader international trend towards more integrated models.

The market in other Central and Latin American countries is also developing rapidly. By defining risk allocation more clearly and allowing for unsolicited proposals, Mexico’s new Federal PPP law is expected to facilitate greater private investment in infra-structure through PPPs and it is hoped that it will speed up a num-ber of health PPP projects at both Federal and State level, that have been in the pipeline for some time. Interestingly, Mexico has used the PPP model to procure not just hospital infrastructure but also very high tech services such as IT. Such services, due to their complexity and the risk of obsolescence, have struggled to be successfully delivered through PPP around the world. It may be that in this case, there are lessons that can be learned from the Mexican experience.

Chile has a history of health PPPs since 2000 but has failed to make significant inroads into a substantial pipeline of projects, with only 1 currently in procurement.

Key success factors

There are a number of lessons that Latin American governments can learn from the international experience as they embark on PPP programmes. Successful programmes around the world have a number of consistent success factors, some of which are set out below:

Role of the government: Market interest and participation in PPP projects, particularly in newer markets, is significantly dependent on the role, and perception, of government. It alone can establish the over-arching policy and legal framework under which such projects can be conceived and developed. PPPs de-pend heavily on contracts that are effective and enforceable, so a clear legal and regulatory framework is an important pre-req-uisite, and a lack of clarity and consistency creates uncertainty for investors. Given the significant investment and long-term na-ture of PPPs (which often cover multiple election cycles), dem-onstrating high-level political support and commitment is also important. For instance, governments may draw up investment plans to indicate the potential flow of future projects and explain how such projects fit together within the context of national or regional economic plans to build a broader consensus. Such steps send a powerful message of consistency and credibility to private sector counter-parties and lenders about the public sector’s seri-ousness of intent

Transparency and objectivity: A number of developing coun-tries have a long and difficult legacy of corruption and misman-agement of public funds. However, by embedding commercial and procurement discipline PPPs offer powerful incentives for projects to meet allocated budgets and deadlines. Establishing and adhering to a transparent PPP process, including clear pre-

“spurred by ageing, chronic disease and technology, as well as the growing expectations of the population, health spending will increase by over 65% over current levels by 2020. this will intensify the need for alternative Methods of financing and care delivery.”


Paul da Rita

Paul is an experienced PPP practitioner who has worked with many pub-lic and private sector organisations in delivering innovative and complex healthcare PPP projects across the world, over the last 15 years. Paul is a senior member of PwC’s Corporate Finance healthcare team in the UK and is also the Global Leader for health PPPs for the firm across our inter-national network .

Paul joined PwC in September 2000. Since that time he has completed a number of high profile and complex deals from the largest UK Healthcare project at Barts and The Royal London, to the largest international project for the New Karolinska Hospital in Stockholm. In between, Paul closed other notable deals in the UK and the innovative project in the Turks and Caicos Islands, which included the provision of long term clinical services. More recently, Paul is providing support to the PwC international network on projects in Brazil and South Africa. In addition, Paul is keen to explore how PPPs can be used to improve the delivery of assets and healthcare services to developing economies.

qualification criteria and short listing methodology, objective and quantifiable bid evaluation and award criteria as well as quality assurance and approvals processes, help to attract both local and international bidders, thus creating the competitive landscape which is key to delivering value for money.

Invest in skills and resources: Infrastructure projects are com-plicated by their very nature and implementing PPP solutions in healthcare is significantly different from concessions for toll roads, airports etc. The public sector needs access to commercial and financial skills to fulfil its role as an effective client. In many cases, this is one of the most important investments most health bodies will make.

Be flexible: The global economic crisis in 2008 had far-reaching consequences for the project finance market, with delays in financial closures, higher financing costs and project cancellations. However, the upward pressure on credit spreads has gradually subsided. We find that well-structured pipeline projects are able to obtain financing, facilitating a trend towards project restructuring and renegotiation. Such developments em-phasise the need to adapt to market conditions and experience by evaluating on-going projects and improve the process where necessary. Such a willingness to learn from “pathfinder” type projects is particularly crucial for countries with ambitious project pipelines.

Conclusion

There is no country in the world where healthcare is financed entirely by the government. While the provision of health is widely recognised as the responsibility of government, pri-vate capital and expertise are increasingly viewed as welcome sources to induce efficiency and innovation. Hospitals - and healthcare more broadly – are unrecognisable today compared to 30 years ago and health PPPs must continue to adapt to keep up with the accelerating pace of change. This is as true in the developing countries of Latin America as it is in more mature economies in Europe and elsewhere. Governments in Latin America can learn much from the successes as well as the fail-ures of health PPP projects around the world. It is clear that PPPs are one of the tools that can be used by governments to deliver the improvements in healthcare systems that are needed. It is also clear that unless PPP programmes are carefully struc-tured and lessons learnt from the international experiences, projects can continue to struggle and potential improvements to healthcare not delivered.

“while the provision of health is widely recognised as the responsibility of governMent, private capital and expertise are increasingly viewed as welcoMe sources to induce efficiency and innovation.”

Latin Infrastructure Quarterly36 Projects

Could you briefly explain EMBARQ and SIBRT?

EMBARQ’s mission is to act as a catalyst and help implement environmentally and financially sustainable transport solutions to improve the quality of life in cities.

Since 2002, the network has grown to include five Centers for Sustainable Transport, located in Mexico, Brazil, India, China, Turkey and the Andean Region, that work together with local transport authorities to reduce pollution, improve public health, and create safe, accessible and attractive urban public

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LIQ Talks to Luis Ricardo Gutiérrez, EMBARQ Latin America Strategic Director and General Secretary of the Latin American Association of Integrated Systems and BRT (“SIBRT”) Special thanks to Julián Sastre, Deputy Chair of the Infrastructure and Services Forum (Spain), for arranging and contributing to this interview.

spaces. The network employs more than 100 experts in fields ranging from archi-tecture to air quality management; ge-ography to journalism; and sociology to civil and transport engineering.

SIBRT brings together Latin Ameri-ca’s most influential Integrated Transit Systems and Bus Rapid Transit (“BRT”) agencies. SIBRT facilitates the exchange of knowledge, produces “best practice” studies of the management, standard-ization, and operation of urban public transport, and proactively promotes In-tegrated Systems and BRT adoption as the safest, most efficient and sustainable

Latin Infrastructure Quarterly 37Projects

form of mass transit. The Association is committed to quality urban public trans-portation development. SIBRT is present in 19 cities of 8 countries, which together comprise more than 95 million urban in-habitants. Its Associates provide public transit services to more than 20 million riders per day on more than 700 km of exclusive bus corridors (further informa-tion in www.sibrtonline.org). SIBRT was created in April 2010 with headquarters in Curitiba.

EMBARQ acts as SIBRT’s General Secretariat.

What is the functional concept of BRTs and why are they interesting for Latin America.

BRTs are high-performance transporta-tion solutions for urban corridors with elevated demand. BRT was conceived as an alternative to metros and light rails, which are more expensive, take longer to implement, and are less flexible than BRTs. BRTs, like railways, are one solu-tion to sustainable urban public transpor-tation challenges; they are an important part in managing the complex transporta-tion needs of growing cities.

The BRT model was invented in Curi-tiba. The design features that constitute a BRT are:

• Exclusive corridors • High-capacity buses, either articu-

lated or bi-articulated buses• Closed stations using pre-paid ticket-

ing systems

• Centralized control system • Smart card payment collection sys-

tem• User information systems

Curitiba’s BRT has two additional de-sign elements which are often overlooked in other BRT systems throughout the world:

1. The BRT system was designed as part of an integrated network of buses that serves the entire city.

2. The BRT and integrated network are linked to land use management, providing a comprehensive citywide transportation vision.

These two components were not suffi-ciently present in the following BRT sys-tems: Trole of Quito (1995), and Trans-milenio in Bogotá (2000). In the Quito Project, only the colonial center was con-nected to the city’s other bus networks and in Bogota the BRT was implemented above the Avenida de Caracas (the cor-ridor with the greatest level of demand), making it detached form the city’s center. It is worth highlighting that Transmilenio revolutionized the mass transit industry when it achieved the highest level of BRT capacity at 45,000 passengers per hour per direction. Transmilenio shifted the mass transit paradigm, proving that BRT


is indeed a mass transit solution that can compete with rail-based technology.

Transmilenio’s success led to the ac-ceptance of BRTs in the mass transport industry. Its impact can be seen in the graphs below, which show the evolution of BRTs and exclusive corridors for bus routes worldwide. In a 10 year period be-tween the launch of Transmilenio in 2000, when there were 23 BRTs in the world, the number of BRTs worldwide has reached 134 cities. As of 2012, 53% of BRT pas-senger demand is located in Latin America although significant growth levels are be-ing noted in China and India.

In Latin America, EMBARQ and SI-BRT have been promoting the integration of BRTs into the entire city transporta-tion network. We have found that it is not enough to have solutions that only focus on main corridors; rather to provide high-quality service the transportation system needs to be integrated operationally, physi-cally, and fares must allow for transfers. Fortunately, Latin American cities are in-creasingly moving towards high-quality in-tegrated transport solutions for all citizens.

What problems are found during de-velopment?

The lack of clear policy on the part of na-tional governments with regards to sus-tainable transport and the prioritization of

public transport is a challenge for cities attempting to develop a BRT. Some na-tional governments have highly advanced transit policies while others do not. Bra-zil stands out as a leader in the field. Brazil voted last April to adopt a highly-advanced Public Transport Act which is geared towards sustainable mobility founded on the following basic pillars:

• Collective and non-motorized (bicy-cle) public transport.

• Physical and fare integration of mo-bility aimed at the entire population.

• Demand management of the use of private vehicles.

• Acknowledgement of persons and rights of public transport users (qual-ity standards of vehicles, informa-tion, time-keeping and openness of service).

• Establishment of directives which state:

• Efficiency and quality of service are demanded of Public Sector Managers.

• The reduction of contaminating sub-stances and emissions.

• Transport and Transit Plans (PlanMob) for cities with more than 20 thousand inhabitants (previously 60 thousand) in order to provide federal resources.

Another policy element that is lacking in most countries is the adoption of urban

mobility as a social right. This would al-low for governments to assign resources more efficiently and take into account the social and economic impacts of urban transport projects.

Limited institutional capacity, with regards to infrastructure (public sector) and operations (private sector), limits the funding options available to regional gov-ernments. These problems are even more of a problem when city and local govern-ments are searching for funding options.

With regard to institutional capacity, we have found that there are limited hu-man resources availability that have the skillset needed to carry out and promote BRT and integrated transportation solu-tions. As demand continues to grow for transit modernization projects this will create a bottle-neck. Available financial resources are beginning to increase, but the lack of institutional capacity at the city and local level will prevent funders and investors from dispersing their funds, creating lost opportunities for public transportation improvements.

The challenge of private operator capacity is of the utmost importance. The majority of transport services (80 to 85%) are provided using buses or mini-buses with highly de-teriorated service levels, operating under precarious company structures. Public trans-portation services run by professional and modern companies are still the exception to the rule. Where they exist they are found in tandem with BRTs or integrated transport systems (the latter generally in Brazil). Per-haps this might be the most sensitive issue for the transformation of public transport in Latin America. The quality of private transit companies deserves greater study in order to best understand how to change from conven-tional operators to professional operators.

What were main conclusions drawn from the 2nd SIBRT Congress held in Leon in April 2012, and what were your highlights from this event?

During the 2nd SIBRT Congress twenty-eight high-quality presentations were given on the four transportation issues: Public Policy for Sustainable Urban Transport, Financing of Integrated Trans-port Systems, Road Safety for Urban Bus Networks and Quality of Service / User Satisfaction / Image of BRTS. These pre-


sentations allowed us to reach conclu-sions which will guide the next stage of SIBRT’s benchmarking work.

Amongst the dignitaries present at the event, the following are worthy of special mention: the President of the Municipal-ity of Leon, Ricardo Sheffield Padilla; the Mayor of La Paz, Bolivia, Luis Revilla; the Columbian Deputy Transport Minis-ter, Felipe Targa Rodríguez; the General Manager of the EMBARQ Network, Hol-ger Dalkmann; the General Manager of URBS-Curitiba and Deputy Chair of SI-BRT, Marcos Isfer; the General Manager of BHTrans, Ramón Víctor Cesar; The World Bank’s Urban Transport Advisor, O.P. Agarwal; and the Deputy Chair of the Infrastructure and Services Forum in Spain, Julián Sastre; as well as the Gen-eral Manager of Excelencia ALC-BRT, Juan Carlos Muñoz.

The event attracted the attendance of more than 350 specialists and operators in the field of urban public transport from 15 Latin-American countries and beyond. Management representatives and techni-cal staff from 19 SIT and BRT associate management agencies in countries such as Brazil, Colombia, Chile, Ecuador, Guatemala, Mexico, Paraguay and Peru were present. Other attendees included transport managers and public sector representatives from countries such as Argentina, Bolivia, Botswana, Canada, Spain, the United States and India. Also participating were representatives of op-erators from the aforementioned coun-tries amongst which was Otavio Cunha, the General Manager of the NTU, the Na-tional Association of Brazilian Operators for Urban Transport.

21 sponsors took part including: DINA, Pagobus, ACS, Andina Technology, Em-presa1, Inteligensa; Silver Plus: Volvo, GMV, Servyre; Caliper, Doppelmayr, Hersan, Trapeze, BEA, Transconsult, In-terBerica, Grupsa, Nettropolis, Hyundai, Régie T, Bioplast. The organization of the event was funded by EMBARQ.

How are these projects linked to the philosophy behind PPPs?

Due to their very nature urban public transport projects imply PPP style solu-tions. The public sector usually assumes financing of BRT infrastructure, as well

as duties pertaining to regulation and management of operational contracts. The private sector generally operates and manages the bus fleets and drivers and receives a concession from the govern-ment to operate for a determined number of years. In this way a combined action between public and private sectors is in-dispensable in order to avoid serious neg-ative externalities, which are generated in the urban transport market:

Inefficient land use (congestion and urban chaos)

Negative effect on public health (ac-cidents, pollution, lack of public space for physical activities) utterly onerous for governments, companies and families.

All of this demands the presence of the public sector combined with an effi-ciently managed and professional private sector presence, which incorporates state-of-the-art technology in order to provide

Luis Ricardo Gutiérrez Mr. Gutiérrez has 36 years of experience as an expert in decision-making processes and capacity building. He has extensive experience in BRT and urban transportation projects in policy and planning arenas. An engineer and economist, Mr. Gutiérrez holds a master’s in Development Planning from the National University of Engineering of Lima, Peru as well as a mas-ter’s in Economics and studies for Ph.D. in Political Science from Boston University.

Mr. Gutiérrez has been an economic research professor at some of the most esteemed universities in his native Peru. He managed the prepara-tion phase of the BRT Transportation Project for Lima and Callao, Peru from 1996 to 1998 for the World Bank. As a consultant for the World Bank, he worked on a variety of sustainable transport and poverty relief projects in Latin America. In 2001, he was recruited for the position of Vice-Minister of Transport in Peru and later became the executive director of an ambi-tious reconstruction program aimed at rebuilding the area affected by the 2000 earthquake in southern Peru.

Mr. Gutiérrez has been the strategic director for Latin America at EM-BARQ since 2003. From this position, he helped establish CTS-Mexico, CTS-Brazil and CTSS-Andino; and built strategic partnerships with the An-dean Development Corporation (CAF) and the Pan American Health Or-ganization (PAHO). In September, 2009 Mr. Gutiérrez was honored with the WRI President Award. He is a founder and honorary associate of the Association of Latin American Integrated Transport Systems and BRT (SI-BRT), and serves as the General Secretary of SIBRT. He is also a member of the Executive Committee of the Center of Excellence ACL BRT (Across Latitudes and Cultures Bus Rapid Transit). Throughout his career as an ac-ademic, journalist, public official, consultant, and director he has authored a number of books, essays, and articles.

the service levels expected. For this rea-son, there must be a meeting of minds and an alignment of wills geared towards the citizens’ needs with an eye towards how those needs align with private sector in-terests.

What is the outlook for major projects on the horizon?

According to estimations made by EM-BARQ and SIBRT, the modernization of public transport networks in 242 Latin American cities with more than two hun-dred and fifty thousand households which signifies around three hundred and sev-enty million inhabitants requires:

27,000 M US$ for public investment in infrastructure, in order to put into service 5,400km of additional BRT corridors, and

A further 70,000 M US$ of private in-vestment for fleet renovation.


In this article, Anadi Jauhari shares his insights on the topic of alterna-tive investment strategies, including hedge funds, listed and unlisted pri-

vate equity in the context of the region’s huge infrastructure needs. Dr. Sawant explores the perspective of institutional investors as capital providers for infra-structure development focusing on both the promise and the challenges of invest-ing in infrastructure assets.

Could you give us a sense of the scale of the challenges and investment required in the region in the context of the capi-tal-raising environment?

Anadi Jauhari: Infrastructure investment in the region has lagged that of the middle income Asian countries such as Korea, Malaysia and Indonesia by a wide mar-gin. At roughly about 2% to 3% of GDP annually in recent years, infrastructure investment levels in the region are con-sidered barely sufficient to maintain the existing base of infrastructure. Similar to other emerging markets, economic and population growth, urbanization, and ris-ing per capita incomes have created the need for more infrastructure-related in-

Infrastructure Investing – An Alternative PerspectiveLIQ talks to Anadi Jauhari, CAIA, Senior Managing Di-rector at Emerging Energy and Environment LLC and to Rajeev J. Sawant, Ph.D., Assistant Professor at Baruch College in New York

vestments. There is clearly an acknowl-edgement of the fact that the region’s existing infrastructure bottlenecks ham-per productivity, limiting the full growth potential of the economies. A level closer to 4% to 6% of GDP per annum is recom-mended by the World Bank to meet new growth and maintain existing infrastruc-ture stock. At about $5 trillion nominal regional GDP, this crudely translates into $200 billion to 300 billion per annum of infrastructure investment over the next 15 to 20 years. These investments are required in transport, energy, water and

communication, as well as other social sectors, and will likely come from public and private sources.

How will such huge demands for capi-tal be met?

Anadi Jauhari: These demands will be met by a combination of private capital both foreign and local, as well as by de-velopment banks and multilateral insti-tutions. Local capital includes pension funds, insurance companies, family offic-es and high net worth individuals, while private capital may potentially include foreign institutional investors, pension funds and the sovereign wealth funds. Such foreign investors find some coun-try markets in the region attractive due to their view on long-term fundamentals underlying such markets.

“recycling local savings to productive investMents requires institutional and governance arrangeMents which are beginning to get established and be noticed following the success of the chilean Model.”Anadi Jauhari


Recycling local savings to productive investments requires institutional and governance arrangements which are be-ginning to get established and be noticed following the success of the Chilean mod-el. The region’s favorable demographics support the growth in the pension assets in Chile, Mexico, Peru, Brazil and Co-lombia. This is motivating for pension fund managers and country regulators to go beyond conservative investing and look to public equities and alternatives. The combination of more capital coming into equities via the growth of the local equity markets including the potential in-tegration of the Chilean, Colombian and Peruvian stock exchanges in addition to the relatively more developed Mexican and Brazilian exchanges, is a positive de-velopment.

Private equity funds being raised in the market - $8 billion in 2011 and $16 billion expected in 2012 as per Preqin – are more generalist funds which target the overall growth in the region, though some of the capital may find its way into infrastructure, and over time in the medi-um term, we will see the development of sector or country focused infrastructure funds. Though private equity will still be part of the ecosystem, it alone cannot meet the region’s infrastructure needs, and will likely complement and or act as a bridge to the public equity markets in the region, especially as public markets become deeper and more integrated. Pri-vate equity capital can bring in private sector efficiencies in the build-out or in the private ownership and operation of such assets and will be important in the development of infrastructure stock in the region.

The interest of many foreign asset man-agement firms to set up shop in the region to benefit from the favorable trends in the availability of local pools of capital, and the emergence of a local talent base of fund managers, is also a positive develop-ment which will likely further reinforce the deployment of alternatives.

Infrastructure assets by their very na-ture can support debt due to their stable cash-flow and operating profiles. The availability of debt capital to support in-frastructure investments will come from local banks and local capital markets, though development banks are expected

to play a role with the pull-out of the European banks. Foreign institutional investors in certain markets may view in-frastructure debt attractive relative to the risk and return profiles of the assets and their favorable view on the sovereign and regulatory risks in these markets.

Do you see hedge fund strategies as part of alternatives allocation playing a role in the development of infrastruc-ture in general?

Anadi Jauhari: Hedge fund strategies can certainly be applied to infrastructure as a subset, but in general hedge fund manag-ers tend to be more generalist and sector-

agnostic and I am not aware of hedge fund managers that solely specialize in infrastructure in the region. Rising in-come levels and wealth-creation result-ing from commodity related booms, local land sales, acquisition of local companies by foreign companies will increase levels

of capital which may be reinvested into alternatives, and grow the alternatives/hedge fund investing space.

Unlike private equity funds which de-ploy capital based on lock up periods >10 years, hedge funds invest in listed secu-rities, which provide daily or monthly li-quidity, and often employ leverage as part of their strategies. Hedge fund strategies will likely expand as the listed universe of companies with infrastructure assets and cash-flows grows over time. The com-position of public companies on the key stock markets does not often accurately reflect the composition of the underlying GDP, and tend to be concentrated with a few big names – in some cases, with sec-tor (for example, commodities or natural resources, consumer, financial services). This will evolve over time as more GDP sectors get represented in the mix and as more Latin American infrastructure ori-ented companies grow in number and be-gin to access public equity markets.

Hedge fund strategies and mandates commonly and currently being imple-mented by Latin American hedge funds include long short, macro, relative value, arbitrage, managed futures, fixed income, event driven, relative arbitrage and dis-tressed debt. Of these, long-short, macro, distressed debt, event driven, and fixed income accounts for over 2/3rd of as-sets under management (AUM) in Latin America. In terms of geographic focus, Brazil accounts for the lion’s share of as-sets under management.

Hedge funds in the region have done well relative to other emerging markets and were less impacted in the financial crisis as compared to other markets and have continued to attract inflows. How-ever, in terms of AUM, LatAm hedge funds account (AUM $59 mm as per Eu-rekahedge) for close to 5% of total hedge fund assets under management globally (though not a perfect metric, very roughly in line with the region’s share of the glob-al GDP).

Do you see listed infrastructure as an investment strategy in the region?

Anadi Jauhari: Listed strategies around infrastructure assets (utilities, transport and logistics, energy) are likely to be-come more common similar to the trend

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we are seeing in the developed markets, and will provide an efficient way for in-vestors to get exposure on infrastructure assets. These may include investing via the shares of infrastructure companies, or the securities created by the bundling of infrastructure assets. The primary benefits that come with listed strategies include liquidity, more targeted exposure on in-frastructure investment attributes that investors seek (income, inflation protec-tion, cash-flow stability) and efficiency. The downside is that listed strategies can be correlated with the broader equity mar-kets and hence, can be more volatile.

The development of local and regional public equity markets and the ability of local infrastructure companies to access such markets will provide an effective way to invest in listed infrastructure. This will lead to the development of investable infrastructure indices and infrastructure-oriented mutual funds and ETF’s, a trend also being seen in the developed markets.

What sectors you feel are promising for infrastructure investments in the region?

Anadi Jauhari: Energy, transport, water and waste management are among the most promising sectors for investments. Low per capital consumption of these infrastructure services or products and the need to improve existing and build new infrastructure due to rising income levels and urbanization is cre-ating a huge demand for new investments. An area that is promising relative to the developed markets is the promise of clean

and renewable energy and deployment of clean technologies which have been proven elsewhere and which can benefit from the region’s very favorable resource base. De-spite its “clean” energy matrix, the region can tap its vast untapped energy resources – without subsidies - to increase energy se-curity efficiently and play an important role in the global fight against climate change.

How does infrastructure fit institution-al investor portfolios and what role do infrastructure funds play?Rajeev J. Sawant: Infrastructure assets produce stable, long dated cash flows reaching out to 75 years and beyond. As-set lives for roads and electricity aver-age over 30 years. In combination with inelasticity of demand and their monop-oly like positions, these long dated cash flows provide an excellent match to long dated liabilities particularly from pension funds which need to pay out their mem-ber retirees over increasing periods of time. Infrastructure assets provide natural hedges against inflation because inflation increases the price of replacement assets. The risk reward profile for this asset class is attractive, providing a defensive posi-tion against economic downturns. Finally from a portfolio perspective, research suggests that infrastructure returns from direct investing are not perfectly corre-lated with other asset classes such as eq-uities and debt thereby providing diversi-fication benefits.

These diversification benefits decline when equities of listed infrastructure firms such as utilities, construction con-

tractors etc. are used because returns from listed infrastructure equities are cor-related with other equities. It is clearly difficult for institutional investors to in-vest directly in infrastructure assets as equity or debt holders because finding, evaluating, structuring, monitoring and operating infrastructure assets require significant expertise and experience. In-frastructure assets are also lumpy invest-ments and institutions may take on con-centration risk with a limited number of investments possible with their allocation to infrastructure. Infrastructure funds can help overcome these constraints through experience in specified sectors and geog-raphies and by pooling funds to diversify across assets. Of course, infrastructure investing has challenges too. Illiquid-ity and exposure to regulatory or policy or political risk constitute some of these challenges. Infrastructure funds can also help inexperienced investors in mitigat-ing these risks.

What are the challenges facing infra-structure funds in Latin America and how do they manage them?

Rajeev J. Sawant: The primary challeng-es arise from illiquidity and political risk.

Illiquidity

Infrastructure assets are relatively illiquid and investors need to manage illiquidity. Illiquidity may be understood in a num-ber of ways – as the opportunity cost of foregoing other comparable investments in the time it takes to exit a position, ad-ditional costs paid by investors to reverse a position such as larger bid-ask spread, or the difference in price at which an as-set owner can sell at a given point in time relative to its ‘true’ price, or simply the excess time it takes to unwind a position.

Infrastructure funds manage illiquidity in a number of ways. One strategy is to al-locate illiquidity risk to the investors most able to bear it. Thus the selection of in-stitutional investors to match the level of illiquidity is important. Typically, pension funds are able to deal better with illiquid-ity because of their long dated liability structures which mirror the increasing life spans of their members. In fact seeking il-liquid assets can be an attractive strategy

“listed strategies around infrastructure assets (utilities, transport and logistics, energy) are likely to becoMe More coMMon siMilar to the trend we are seeing in the developed Markets, and will provide an efficient way for investors to get exposure on infrastructure assets.”Anadi Jauhari


for such investors because of higher il-liquidity adjusted returns. Endowments such as Yale University for example, selected portfolio investments that paid illiquidity premiums. The strategy for managing illiquidity then is to select in-vestments that incorporate an illiquidity premium sufficient to generate a higher illiquidity adjusted return than a compa-rable liquid investment.

We know that investors seek inflation adjusted returns which infrastructure assets are able to provide. Yet there is a relation-ship between illiquidity and inflation. In-frastructure assets are capital intensive but once operations commence, infrastructure assets require little capital expenditure. In-flation increases the value of capital assets since inflation increases replacement costs to obtain the same output. Since the initial capital investment has a long life, generat-ing stable cash flows over long period of time, infrastructure assets are excellent hedges against inflation. Moreover, infra-structure output is undifferentiated. After all, electricity generated by a 30 year old plant is identical to electricity generated by a 5 year old plant. Therefore, the ad-ditional investment in replacement assets because of high inflation provides no ad-ditional value.

The additional value accruing to exist-ing capital infrastructure assets from high inflation can be realized in two ways. One way is by increasing output prices to keep pace with inflation. And the second way is by unlocking the capital appreciation in these assets through their sale. These two methods serve different investor needs. The first method, increasing output prices to keep pace with inflation which involves in-creasing user prices for electricity, tolls etc. is more likely to meet investor needs with liability matching requirements. An excel-lent example is pension funds with cash flow needs that increase with inflation to meet their liabilities. In the second method, assuming that user fee increases face resis-tance; investors can achieve inflation linked returns through asset sales. Lack of liquidity affects this method. Illiquidity implies that sale of infrastructure assets requires more ‘time to sale’ as compared to liquid assets. Investors able and willing to bear the addi-tional time to sale can consider this method because while they wait they are compen-sated by the increase in value from inflation.

Additional illiquidity management strategies suggested by academic re-search involves the creation of ‘synthet-ic instruments’ that mimic infrastruc-ture returns, are indexed to inflation but are liquid thereby providing liquid inflation adjusted returns. These strat-egies however remain in their infancy particularly in Latin America but strong investor appetite for such a product is likely to drive innovation and increase in their supply.

A final illiquidity issue arises from the distortion in price discovery that occurs due to illiquidity. Illiquidity makes price discovery difficult and since returns and return volatility measurement requires accurate prices, infrastructure returns are measured incorrectly. Return vola-tility is likely to be depressed due to il-liquidity. Moreover, since returns tend to be incorrectly measured, it is difficult to monitor fund performance, for example, against a fund benchmark. Infrastructure benchmarks usually comprise of traded infrastructure equity indices such as Mac-quarie Index, and bond indices. The mis-match between a liquid benchmark and an illiquid asset return can create problems in fund performance monitoring. The se-lection of an appropriate benchmark for

monitoring fund manager’s performance is in itself a subject of great importance large enough to fill a book.

Illiquidity reduces demand for infra-structure assets. This is an important con-straint that prevents capital allocation to in-frastructure assets and leads to mispricing.

Political risk

A significant challenge that infrastructure funds need to manage is the challenge of political risk or the risk of loss to inves-tors from government actions. Infrastruc-ture services remain politically salient. Governments are directly involved either as buyers and suppliers or indirectly in-volved as regulators of infrastructure ser-vices which tend to be natural monopolies because infrastructure services have tra-ditionally been provided by governments and consumers expect their provision as public goods. However, private capital’s advantages which include superior moni-toring abilities, overcoming incentive problems, greater allocation efficiency, and higher operational efficiency improve the quality, quantity and lower the costs of infrastructure services.

While these capabilities probably re-main one of the safest bulwarks against

“in coMbination with inelasticity of deMand and their Monopoly like positions, these long dated cash flows provide an excellent Match to long dated liabilities particularly froM pension funds which need to pay out their MeMber retirees over increasing periods of tiMe.”Rajeev Sawant


Anadi Jauhari, CAIA, is a Senior Managing Director at Emerging Energy and Environment Group (EEE), a Connecticut-based alter-native investment firm with offices in Rio, Mexico City, and Panama. EEE specializes in alternative in-vestment strategies with a focus on clean and renewable energy infrastructure.

Rajeev J. Sawant, Ph.D. is an Assistant Professor at Baruch College in New York, NY and an expert in infrastructure finance and research. His research on infrastructure has been published in the peer reviewed Academy of Management Review, Journal of International Business Stud-ies and Journal of Structured Finance. He is the author of ‘In-frastructure Investing: Managing Risks and Rewards for Pensions, Insurance Companies and En-dowments’ published by Wiley & Sons. He advises EEE in the development of alternative infra-structure investment strategies and insights.

appropriation, it is important that infra funds leverage these capabilities into political capabilities. Political capabili-ties refer to capabilities of assessing risk and managing the policy-making pro-cess. This is an additional dimension of infrastructure investing that is difficult to master, and can provide competitive ad-vantage to infrastructure funds because it is difficult to imitate. Best practices com-prise of understanding regulators prefer-ences, constraints and political environ-ment while simultaneously ensuring that operational practices match these prefer-ences and constraints. For example, seek-ing a rate increase during an election year is likely to reduce an investment’s po-litical capital while high quality, reliable service and inclusion of vocal influential constituencies is likely to increase politi-cal capital.

Appropriate structuring of the invest-ment also leads to better management of political risk. Components of structuring include selection of the debt equity level, choice of lenders, local partners, output customers, input suppliers and construc-tion contractors. For example, selecting lenders with high influence in the invest-ment country as part of the lending syn-dicate reduces the likelihood of political risk down the road.

Other mechanisms such as front load-ing cash flows may prove problematic because this step typically results in in-creased user charges early in the life of a project. This can engender a backlash and put at risk the return on the investment. Infrastructure funds may also manage po-litical risk by matching investments with investors who are able to manage politi-cal risk. Pension funds can mobilize their subscribers such as teachers, firemen, to manage political risk and are therefore one such investor group that can earn higher returns from taking on political risk.

What are some innovations that we can expect to see that address these chal-lenges?

Rajeev J. Sawant: An interesting innova-tion in infrastructure investing that seeks to overcome the issue of liquidity is the use of synthetic assets. Synthetic infra-structure assets are engineered to mimic

the returns from infrastructure assets but because they are implemented using exchange traded instruments they are liquid and no longer bear counter-party risk. One approach explored academical-ly builds on the insight that government regulation prevents equity infrastructure investors from obtaining excess returns, i.e. government regulations create an ef-fective cap on the upside. Government regulations also protect infrastructure investors from excess downside since infrastructure services are public goods and contracts usually guarantee a re-turn. Government regulations then cre-ate a floor on infrastructure returns, ef-fectively creating a collar. A synthetic collar thus mimics infrastructure returns when inflation protection is added to the synthetic asset. Among many possibili-ties, the cap may be created by using an equity buy-write index while the down-side guaranteed return may be created by buying an inflation linked bond index. This synthetic portfolio is rebalanced dynamically using factor weights ob-tained by regressing listed infrastructure and utility returns against covered call index and inflation linked bond index as risk factors. This creates an inflation protected collar on equity returns which mimics infrastructure returns but is liq-uid. An important caveat to bear in mind is that the synthetic asset portfolio will not be perfectly correlated with and will not have the return distribution of infra-structure returns but investors essentially trade perfect correlation with infrastruc-ture assets with liquidity which for some investors may be more desirable. An in-teresting question of course is how the difference in correlation affects the over-all portfolio because one advantage of investing in infrastructure assets is their low correlation with equities and debt. A synthetic infrastructure asset that is even less correlated with equities and debt will be even more attractive to investors.


Divergence in Foreign Direct Investment and Infrastructure Development in Latin AmericaMathew G. Garver Senior Advisor to Private Capital and Infrastructure GroupPatton Boggs LLP

In 2011, Latin American and Carib-bean (“LAC”) inbound foreign di-rect investment (“FDI”) increased to US$ 153.5 billion, a 12% increase

over its 2008 historical high water-mark, based upon the recent report published by the Economic Commission of Latin American and Caribbean (“ECLAC”). The region has experienced increased FDI for several decades; however, it has not translated into higher productivity. In fact, despite this increased investment, the region’s economic productivity has remained stagnant over this time.

This article argues that, given the likelihood of an economic slowdown in China and recession in the Eurozone, in-creases in productivity will be essential for growth to continue in the LAC re-gion. Productivity will not grow without a substantial increase in infrastructure investment throughout the region over a sustained period of time. Leadership within the region must continue to attract and incentivize partnerships with the private sector to build a modern infra-structure, particularly in transportation systems, while commodity prices remain strong and FDI robust.

In a recent interview with Luis Alberto Moreno, President of the Inter-American Development Bank (“IDB”) conduct-ed by the Economic Intelligence Unit (“EIU”), Moreno remarked that “slow growth was a function of productivity in Latin America, which has stagnated for the last 15 years.” He continued, “pro-ductivity is closely linked to the region’s huge infrastructure gap. Logistics costs in our countries continue to range from 18% to 34% of the value of traded goods, compared with an average of 9% in the OECD countries.” Moreno concluded “to close these gaps and build infrastruc-ture…Latin America needs to spend the equivalent of 6% of its GDP on infra-structure.”

Decades of Declining Infra-structure Investments and its EffectsDespite increased FDI flows into the region, discussed below, infrastructure investments have steadily declined as a percentage of GDP over the past three

decades. Investments into critical fa-cilities such as transportation, logistics, ports, and other enabling infrastructure have consistently lagged FDI. The result-ing infrastructure gap is substantial.

Based upon a joint report published in February 2012, entitled Infrastructure for Regional Integration by ECLAC and Union for South American Nations (“UN-ASUR”) it states, “infrastructure invest-ments declined from 4% of GDP in 1980 to only 2.3% in 2008.” The gap has been attributed to a consistent decrease in in-frastructure investments over the past

three decades, although several LAC countries have recently completed public private investments in airports, rail, and social infrastructure with noteworthy suc-cess.

The effect of this declining investment is exemplified by Brazil, by far the largest beneficiary of 2011 FDI, with US$ 67B of the US$ 153B overall flow. Brazilian work-er productivity in the manufacturing indus-try has fallen 15% over the past 30 years as compared to an 82% increase in Chile, 17% increase in Argentina and 808% increase in China, according on the Institute of Applied


Economic Research (“IPEA”) calculation of worked hours and number of employees in the industry. Another effect of this gap is illustrated by the 2010 IDB report compar-ing logistics costs as a percentage of GDP of select LAC countries with the USA and OECD countries:

Overall, the IDB report shows logis-tics costs as a percentage of GDP in LAC countries between 50% and 350% higher than in the OECD countries (referred in chart above as “OCDE”). This report at-tributes these excessive costs and result-ing stagnant productivity to inadequate investment in critical infrastructure, par-ticularly ports, rail and roads.

Foreign Direct Investment Capital Flows Globally and in Latin America

creased to US$ 153.5 billion, a 12% increase over its 2008 historical high water-mark. Despite the growing economic uncertainty, LAC inbound FDI is expected to reach US$ 150 billion in 2012. More importantly, the region’s aggregate share of global FDI grew from 6% in 2007 to more than 10% in 2011. Table 1 illustrates the FDI flows to developing regions.

In 2011, Brazil’s FDI inflows increased by 37% to US$ 66.7 and received more

Global Net Foreign Direct Investment by Developing Regions (in billions)

Investment flows Region 2007 2008 2009 2010 2011World 1,971 1,744 1,185 1,290 1,509Latin America & Caribbean 117 137 82 121 153South Eastern Europe 573 137 82 121 153Africa 63 73 60 55 54Middle East 78 92 66 58 50

Source: Economic Commission Latin American Report; FDI, 2011 page 22; Table 1.1; based upon official figures via United Nations Commission Trade and Development

than over half of the overall increase in FDI inflow to all LAC countries. In 2011, the percentage of FDI received by the natural resources sector in Brazil fell sharply from its previous high. Most South American countries experienced increased FDI inflows, with new high-water marks in Chile, which increased by 15% to a new high of US$ 17.3 billion and Colombia, which increased by 92% to a record US$ 13.2 billion; largely in the natural resources sector. As the region’s second largest inbound recipient, Mexi-co’s FDI increased 10%, at an estimated US$ 19.4 billion, well below its 2008 high of US$ 31.3 billion.

As indicated below, the largest share of FDI inflows to LAC countries originated

“this article argues that, given

the likelihood of an econoMic

slowdown in china and recession in the eurozone, increases in productivity will

be essential for growth to continue in the lac region.”

Table 1

In the past two decades, global FDI has risen almost five times from US$208 billion in 1990 to its historical high of $1.97 trillion in 2007 per the ECLAC re-port. Global foreign direct investment has become an indispensible element of the global economy, reflecting the structural

changes characterized by the increasing demand for international investments to support growth.

Following the 2008 financial crisis, FDI flows fell sharply by 16% and again by an additional 40% in 2009. In 2011, the global FDI flows once again increased by roughly 17%, rising from US$ 1.29 trillion to US$ 1.509 trillion, but still down from its 2007 high.

LAC countries were significant benefi-ciaries of this upward FDI trend. After two decades of growth, 2011 proved to be the re-gion’s best year on record. In 2011, FDI in-


from Europe investors representing 39% of 2011 FDI, of which Spain comprised 14%, whereas Asia represented only 9%. Europeans have been the region’s largest investors for more than a decade, averag-ing an estimated US$ 30 billion per year in FDI; however, this trend may slow be-yond 2012.

In April 2012, The International Mon-etary Fund (“IMF”) published the Global Financial Stability Report warning that global economic growth may be hurt by the deleveraging underway at European banks. The report estimates that bank balance-sheets could be reduced by as much as $2.6 trillion over the next two years, as banks raise capital and divest assets in a credit constrained environ-ment. As the region’s largest investment partner, this deleveraging trend will likely have a dampening effect on European in-vestments in the coming years.

Slowdown in Global Commod-ity Cycle The LAC region’s remarkable economic growth has been driven, not by increased productivity, but in large part by global demand for commodities and natural re-sources. The region’s dependence on commodities as its primary economic en-gine has risen to 39% of GDP from 26%

just 10 years ago as referenced by March 2012 EIU report. This structural increase is a growing concern as fluctuations in commodity prices may have a dispropor-tionate effect on the region’s growth. Its natural endowments are a blessing; how-ever, the increased dependence has cre-ated vulnerabilities.

Brazil, by far the region’s most signifi-cant economy, represents roughly 43% of its GDP, and serves as a regional proxy for future growth. In a recent article by Ruchir Sharma in Foreign Affairs, Sharma states that “Brazil rests on an extremely shaky premise: commodity prices.” Sharma continued “the problem is that the global appetite for those commodities is begin-ning to fall.” The author continued, “Bra-zil must recognize that the era of high commodity prices and easy growth in emerging markets is ending.” High inter-est rates attract foreign capital but prohibit stronger growth. More acutely, its curren-cy has increased roughly 100% against the U.S. dollar over the past decade, dampen-ing its competitive position in global mar-kets. Should this forecast prove accurate, suggesting the “Commodity Slowdown” Brazil and the region must drive a more balanced development model.

China is a large driver of global com-modity demand, as their insatiable demand for commodities has made Latin America

a region of strategic importance. The chart below illustrates their respective share of global commodity consumption:

In 2011, China was the third largest in-vestor with an estimated $8 billion, down significantly from a high of $15 billion in 2010 according to ECLAC. Investments from China were predominantly focused towards natural resources on more than 30 projects across South America in countries from Ecuador to Brazil to Ven-ezuela. In April, officials reported the Gross Domestic Product in China slowed


more than was forecasted to 8.1% down from 8.9% in 2011. China’s base metal imports are already slowing, and metals are being warehoused in growing quanti-ties as manufacturing has slowed.

An economic slowdown is under way in China, signaling decreased demand for LAC commodities in the near-term fu-ture. The region’s vulnerability to price fluctuations and sudden capital flow dis-ruptions must galvanize the region’s lead-ership to coordinate and promote system-ic infrastructure investments to enhance productivity, while commodity demand remains strong.

Closing the Infrastructure Gap

With the increasing likelihood of a global economic slowdown, a Eurozone reces-sion and slowdown in China, it is prudent for the LAC region to expect a slowdown in future FDI. Growth expectations must also forecast the likelihood, at least in the short to medium-term, of decreased com-modity demand from China. If growth will not be driven by increased FDI or commodity demand, it must be driven by productivity gains, and this will not happen without sustained investment in critical infrastructure. A modern econ-omy must have a modern infrastructure to support its growth. As the evidence is undeniable, drawing a clear correlation between a modern infrastructure and its positive impact on trade, growth, and de-velopment with increased physical move-ment of goods, services, and ideas from one country to another.

The report Infrastructure for Regional Integration estimates that Latin American countries “need to invest an annual aver-age of between US$ 128 billion and US$

180 billion or between 5.7% and 8.1% of regional GDP for required capacity expansion and maintenance.” The study continues, “an additional US$ 74.5 bil-lion and US$ 126.5 billion or between 3.4% and 5.8% of regional GDP should therefore be spent per year in the period 2006-2020 in order to maximize the posi-tive effects of infrastructure on the econ-omy.” Without sustained infrastructure investments, existing infrastructure will grow obsolete; transportation networks will remain costly and inefficient, ulti-mately diminishing the region’s growth and comparative advantages.

Public and private leaders in Latin American are increasingly aware of this pressing need for infrastructure invest-ment, and recent projects have experi-enced robust attention from the global investment community. It is estimated that Brazil, Mexico, Peru and Colombia will account for roughly US$200 billion in infrastructure finance projects in Latin America over the next several years, ac-cording to a report published by CG/LA Infrastructure. The region is riding a wave of renewed interest in infrastructure development; however, sustained invest-ments must be made spanning several economic cycles to bridge the gaps be-tween FDI and infrastructure quality in the region.

Conclusions

Over the past several decades, sustained increases in FDI with a focus on natural re-sources have helped boost the region to its current competitive position. Over the past 10 years alone, the region’s economic de-pendence on commodities has risen from 26% to 39% of GDP. Despite increased

Mr. Garver is a Senior Advisor to the Global Infrastructure and Private Capital Group with Pat-ton Boggs, LLP; a global law firm based in Washington DC. He worked with global investment funds on infrastructure finance and development projects around the world. Previously, Mr. Garver served as the Secretary to the Global Steering Committee for DLA Piper, LLP, one of the largest law firms in the world. Mr. Garv-er also serves as a director to a private investment firm focused on international arbitrage invest-ments. Mr. Garver is a graduate of Michigan State University and Oxford University.

exports and higher investment in the re-gion, the LAC countries have failed to direct sufficient resources to infrastructure investment, dropping from 4% of GDP in 1980 to 2.3% of GDP 2008. Although the region has enjoyed recent noteworthy suc-cess, it is estimated that the region should invest roughly 6% of its GDP to achieve maintain its economic growth outlook.

Leadership within the region must contin-ue to attract and incentivize partnerships with the private sector to build a modern infra-structure, particularly in transportation sys-tems, while commodity prices remain strong and FDI robust. Time is of the essence. With Europe preoccupied by the Euro Crisis, and China’s economy slows, two of its three larg-est trading partners will likely see slower growth over the next several years. This slowdown could have a disproportionate ef-fect on the region’s economic foundations. The time is now to expand upon recent suc-cess to build a modern infrastructure that en-ables increased productivity, through a more balanced development model based upon systemic infrastructure investments over the next decade and beyond.

“The LAC region’s remarkable economic growth has been driven, not by increased productivity, but in large part by global demand for commodities and natural resources. This structural increase is a growing concern as fluctuations in commodity prices may have a disproportionate effect on the region’s growth.”


The program of the event will feature panel discussions on the recent developments in Brazil-ian airports, railways and ports,

as well as in the areas of oil and gas – a permanent source of interest in Brazil – and civil construction, a basic instrument for private involvement in infrastructure.

With the 2014 World Cup and the 2016 Olympic Games drawing near, Brazil has spent billions on public works. Infrastruc-ture development has become a great con-cern of the Brazilian government, in order to keep pace with its rapidly expanding economy and growing cities.

Many investors are confident that Brazil´s strengthening internal capital market, growing consumer class and rap-id industrialization hold the promise of long-term sustained growth.

Airport industry witnessed a major shake-up this year when it offered private companies concessions to operate three of the major airport terminals in Brazil. Major expansions are also underway in airports of the cities that will host the sports events.

Railway and ports are one of the pri-orities of the federal growth acceleration program (PAC) in view of the rise in de-mand of Brazil foreign trade and internal transportation of goods. Several major projects are underway to improve the countries surface transportation networks and waterway systems, even in cities such as Belém, not directly affected by the up-coming sports events.

Richard Klien, Chairman and Vice-Chairman of the Board of Multiterminais and Santos Brasil, logistics giants that own some of the largest port operations in Brazil, will join the seminar, as both his companies have decided to sponsor the event. He briefly commented and showed his enthusiasm about the development of the port sector in Brazil:

“The Brazilian social and economic development depends on the growth of international trade, which relies on mod-ern ports in expansion. The private sec-

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Following the success of its previous editions the III Brazil Infrastructure Investments Forum will once again bring together leading experts for this unique event on strategic infrastructure sectors already in great expansion.

tor invested US$2.5 billion and promises to invest another US$5 billion until 2015 only in container terminals.

In 2011 the growth of Brazilian sales abroad was surpassed only by three coun-tries – India, Russia and Australia. Our business transactions with the rest of the world accounted for more than 20% of our GDP, helping the country reach the position of sixth largest economy in the world, surpassing the United Kingdom.

The Programa Nacional de Dragagem da Secretaria de Portos (PND) [National Program of Dredging from the Ports De-partment], Regime Tributário para In-centivo à Modernização e à Ampliação da Estrutura Portuaria (REPORTO) [Tax Incentive Scheme for the Moderniza-tion and Expansion of Port Structure], Planejamento Estratégico da Logística Portuária e Programa de Incentivo da Cabotagem [Strategic Planning of Port Logistics and Cabotage Incentive Pro-gram] together with the solid regulatory model of the Public Ports operated by the Private Sector ensure the provision of ser-vices in the sector”.

The President of the Brazilian Asso-ciation of Port Terminals and Customs Clearance Areas, Agnes Barbeito, wrote about the measures taken by the Brazil-ian Federal Government in regards to the modernization of our port system:

“The actions of Antaq [National Wa-terway Transport Agency], the regulating body of the sector, the management of the Federal Government´s assets by the Companhia Docas, the Conselhos de Au-toridade Portuária (CAPs) [Port Authority Counsels] that allow for the participation of the private sector in the decision mak-ing process and the work force manage-ment bodies (OGMOs) acting in public ports are solid.

Today the port activity sustains itself in a legal framework that works very well. Otherwise, the country’s ports would not have borne the huge growth we had in for-eign trade. Many Brazilian terminals are equivalent to the best ports in the world


in productivity and work with the most modern equipment and technology “.

In regards to the oil sector, Brazil’s vast deepwater oilfields known as pre-salt promise to take the country into the ranks of the world´s top oil producers over the next decade. The gas industry in Brazil has also enormous potential for develop-ment and civil construction is the sector with the greatest expectation of invest-ment in the next years.

With a tailor-made agenda, this inter-national Forum enables the participants to find authoritative information and reliable insights on infrastructure projects and on the Brazilian legal framework. The pan-els and discussions will be conducted in English or Portuguese, with simultaneous translation.

The event also provides an unrivalled networking opportunity with high-calibre professionals - an aspect that has been key to the event’s success over the past two years.

This is an essential oportunity for ac-tive business people. US and Brazilians investors, consultants, law firms, com-panies and investment funds interested in partnerships or opportunities in the in-frastructure sector will definitely benefit from the expertise of the speakers and the high level of the debates.

Marcelo Almeida, former Congress-man in Brazil and current Board member of the Brazilian infrastructure conglom-erates EcoRodovias and C.R. Almeida,

attended the 2011 forum and shares his insights on the event: “The seminar had a rich agenda and offered a remarkable gathering of high-level business people and government authorities”.

The launch of the 2012-2013 edition of the book “Infrastructure Law of Brazil”, edited by Marçal Justen Filho and Cesar A. Guimarães Pereira and published by Editora Fórum, one of the organizers of the seminar together with the Brazilian American Chamber of Commerce, pub-lishing house, will take place during the event. The book provides the reader with a solid foundation on the Brazilian law in areas such as energy, oil and gas, tele-communications, transport and logistics, sanitation, waste management, mining, competition law, corporate taxation, envi-ronmental law and dispute resolution.

The program comprises a keynote con-ference on international arbitration that will be delivered by Justice Joao Otavio Noronha, a Brazilian judge in the higher court (STJ) charged with recognizing international awards and a specialist in arbitration. This most important instru-ment to advance worldwide trade and business will be discussed during a net-working luncheon, the perfect format to raise all possible issues and discuss them thoroughly with other participants and experts.

Richard Klien (second from left), Chairman of the Board of Multiterminais and Santos Brasil, attend-ed the 2011 Forum and will be a speaker in 2012. Some of the 2011 speakers were Marcos Pinto (Ga-vea Investments), Minister Marcio Fortes (Head of the Brazilian Public Olympic Authority) and Marcal Justen Filho (Justen, Pereira, Oliveira & Talamini).

Justen, Pereira, Oliveira & Talamini (partners Fer-nao Justen de Oliveira and Marcal Justen Filho) and the EcoRodovias Group (board member Mar-celo Almeida and general counsel Marcos Oliveira Moreira) supported the 2011 edition of the Brazil Infrastructure Investments Forum. Marcal Justen Filho was one of the speakers.


How does the current state of Peru’s economy and political situation affect the electricity market from your invest-ment criteria point of view?

Peru’s economy has experienced steady growth over the past ten years, from four to ten percent annually. In fact, it has been the fastest growing economy in South America in the last ten years. This GDP growth has led to an increase in power consumption of 85% over the period from 2000 to 2009. During that period, electricity demand has grown seven percent per year, while sup-ply expanded by only three percent per year, putting pressure on the system and increasing the need for new investment. As economic growth is projected to continue at around five percent per year, we expect continued increase in power demand, par-

The Peruvian Electricity Market

ticularly considering that Peru has among the lowest level of per capita electricity con-sumption in the region. Electrical power is needed to support increasing industrial ac-tivity. Continued advances in electrification (rural access) to provide power to the 15% of the population that does not currently have access to electricity will also contrib-

ute to the growth of power demand. Finally, as the middle class expands, the increased use of household appliances and other pow-er-consuming devices increases demand for power on a per capita basis. This rapid growth in the demand for electrical power results in a very large need for new invest-ment as power generation is a highly capital intensive business.

Economic growth in Peru is supported by a stable political environment and continuity in the regulations that govern the power sec-tor and investment in general. When Presi-dent Humala was elected in 2011, there was concern that Peru’s history of protecting in-vestor rights could be threatened. However, experience to date and the selection of the

ministers surrounding the president demon-strates a continued commitment to protect in-vestor rights and maintain a predictable regu-latory and tax environment, which is critical for any private investor. This is demonstrat-ed by Peru’s investment grade rating from the credit rating agencies. The regulatory framework in the power system is balanced

with specialized agencies responsible for oversight of defined segments. The Comité de Operación Económica del Sistema In-terconectado Nacional (COES) coordinates the operation of the national power system, while the Organismo Supervisor de la Inver-sión en Energia y Mineria (OSINERGMIN) oversees reference prices and power conces-sion contracts.

When you analyze the Peruvian elec-tricity industry, do you see a greater potential for greenfield projects or for acquisitions of existing assets?

In any market, we seek opportunities both to acquire operating assets and to build

LIQ talks to Michelle Haigh, Vice President and Investment Manager at Conduit Capital Partners

new generation plants. In new plants, we focus on projects with full permitting that are close to entering construction. Given the growth in demand in Peru, we see compelling opportunities for new proj-ects to add capacity to the system. There are an estimated $5 billion of new private projects in the planning stages.


Further, greenfield opportunities are supported by the existence of experienced construction companies in Peru. Green-field projects require construction con-tracts that have a fixed price and which require the contractor to complete the project by a fixed date, with guarantees for on-time delivery and plant perfor-mance levels.

Talking about Power Purchase Agree-ments, as owners of power plants, why do you need them? And particularly in Peru, what is the average term length of PPAs and who are the most common counterparties?

The Power Purchase Agreement (PPA) is the foundation of any generation project. Only with visibility on the future revenues of a project is it possible to evaluate the cost of building the project and the result-ing return to the investor. Without a long term contract, it is very difficult to obtain a reasonable level of debt financing. A contract period of 15 to 20 years allows for long-term financing and a reasonable equity return at an attractive power price. It is critical that the counterparty to the PPA, the off-taker, is a credit-worthy entity with the financial position to support the revenue payments over that period of time. Further, it is important to the long term vi-ability of the project for the price of power to be competitive with alternative sources.

In Peru, most PPAs are with the dis-tribution companies and large industrial companies. There are periodic auctions to sell energy to the system, and these are

awarded based on the most competitive price. These are market-friendly con-tracts and allow for long-term financing.

Is your Firm interested in the produc-tion of electricity out of renewable sources of energy? Should your Firm be interested in this kind of projects, could you comment on projects in Peru?

Conduit is interested in both traditional (ther-mal) and renewable energy projects through-out the region and in Peru. Latin America benefits from strong natural resources, in-cluding some of the best wind and solar re-gimes in the world. To date, during our eigh-teen year investing history, we have invested in small hydroelectric plants, geothermal and wind, and are currently evaluating our first solar power opportunity.

Peru has compelling hydro, wind and solar resources, providing the basis for renewable power opportunities. The government has supported the creation of power projects to take advantage of these resources by structuring bid pro-cesses specifically for renewable energy generation, for up to five percent of the system. The renewable energy bids are organized by the Ministerio de Energia y Minas. The contracts are well-structured and the projects add diversification to the energy matrix in Peru. Any difference in the renewable energy contract price com-pared to the prevailing spot market price is levied through a small charge to all fi-nal consumers. We are actively pursuing a number of these types of projects.

What is the current situation of Con-duit Capital Partners?

The Conduit team has been investing in the power and energy infrastructure sec-tor in Latin America and the Caribbean since 1993. Through the Latin Power funds, we have invested in 35 projects in 11 countries. Latin Power I and II have been fully liquidated. Latin Power III, a $392 million fund, has been fully com-mitted; three investments have been sold to date and we are managing the remain-ing portfolio of assets. We continue to be dedicated to the sector and region and ac-tively seek new investment opportunities.

Michelle Haigh is a Vice Presi-dent and Investment Manager at Conduit Capital Partners, sourc-ing, evaluating and executing new investment opportunities for the Latin Power Funds. Conduit Capital Partners is a private eq-uity investment firm focused on the significant investment oppor-tunities presented by the inde-pendent electric power industry in Latin America and the Carib-bean. Michelle joined the firm in 2007 from Goldman, Sachs & Co.’s Public Sector & Infrastruc-ture Banking group, where she served infrastructure clients in the Commonwealth of Puerto Rico and State of New York. She start-ed her career at SJF Ventures, a venture capital fund that invests in companies with both strong fi-nancial growth and positive com-munity impact. Michelle holds an MBA from The Wharton School of the University of Pennsylva-nia and a BS in Economics and Political Science from the Univer-sity of Pittsburgh. She is fluent in Spanish and Portuguese.

“econoMic growth in peru is supported by a stable political environMent and continuity in the regulations that govern the power sector and investMent in general.”


Paraguay is the largest net en-ergy exporter in the world. The country annually exports 45,000 GWh and imports nil. Para-

guay’s installed capacity is of 8.8 GW. In contrast, Paraguay is one of the lowest consumers of energy in South America, with its annual per capita consumption being only 6,388 KWh. Paraguay has reported losses of about 30% of the total energy distribution per year.

From the macro point of view, one of the most desired assets in the region and in the world is without any doubt energy. The country produces and wastes energy every year, depriving the region of clean and abundant energy as well as its own economy from receiving market-priced retribution for its export product which could very well be invested in more infra-structure projects to enhance its transmis-sion and distribution systems as well as export installations.

As some studies report, even if the country´s energy demand were to grow 200 MW per year there would still be a long way to go until the situation turns critical as is currently the case in other countries in the region.

The region is in dire need of energy. In 2012, Paraguay exported over 39,000 GWh to Brazil and about 6,000 GWh to Argentina. Additionally, it received gen-erous offers from Uruguay and Chile to buy its energy surplus. By not seizing these opportunities, Paraguay is throw-ing away its most valuable commodity. Not only is the country squandering its chances of obtaining instant income in exchange of its product, but it is also los-ing an invaluable chance to become a true integration catalyst.

ENERGISATION OF PARAGUAYS EASTERN REGIONRodolfo Vouga and Cecilia Llamosas of Vouga & Olmedo Abogados

However, being one of the world’s largest producers of energy does not en-sure Paraguay energy availability. Up until now Paraguay has proven incapable of taking advantage of its most abundant asset. As an example, the city of Salto del Guairá, located in the Eastern Region, is currently satisfying its energy demand with imported fuel-based energy, pro-duced by generators that were installed as an emergency measure. The fact remains that, albeit abundant and excessive, ener-gy lacks a physical way to get to the focal points of development.

So far, the absence of modern transmis-sion lines has hampered Paraguay´s abil-ity to offer a solid internal energy trans-mission and distribution system, which in addition to the competitive prices and availability of resources would attract en-ergy-intensive industries. Not only would the enhancement of the transmission and distribution system facilitate the installa-tion of such industries, but moreover it may lead to a cost-effective management of the energy surplus which would enable the optimisation of exportation.

In September 2011, the construction of the first high voltage transmission line started. The transmission line will con-nect the Itaipú Hydroelectric Dam –the largest operating in the world- with the Department of Villa Hayes in the Chaco (Western) Region, 37 km north-east from the capital Asunción..

The installation of this transmission line alone will bring substantial benefits to the industrial sector in the country. As more energy is served to the industrial centres, the sector will blossom by boost-ing the creation of new industries and the development of the areas adjacent to the project.

“the absence of Modern transMission lines has haMpered paraguay´s ability to offer a solid internal energy transMission and distribution systeM.”


Along with the Itaipú-Villa Hayes line, the construction of a second high voltage transmission line is under study. The Eu-ropean Investment Bank is currently con-sidering the possibility to grant a credit that will allow the triangulation of the en-ergy produced by the two largest dams in the country (Itaipú and Yacyretá).

This second line is projected to run from the city of Ayolas (close to Yacyretá) to Villa Hayes (like the first transmission line, passing through Asunción). Both

projects are of the utmost importance for the country because they will energise the Eastern Region which is home to 97% of the Paraguayan population, the country´s capital and its industrial and commercial focal points.

The triangulation of energy will be a turning point for the country´s energy situ-ation. It may contribute to pull Paraguay out of the agro-exporter stigma and cata-pult it to an industrialised economy model.

Of course, it must be added that the

industrialisation will to a great extent de-pend on foreign investment, that is, for-eign industries with interest in investing in the country. On this latter point, the general consensus is that the relatively-low cost of the local workforce and the low tax rates in Paraguay, combined with high tax rates in Brazil and difficulties in Argentina, among other factors, will most likely convince investors. As a matter of fact, an important number of Brazilian and Asian companies, have already start-ed setting up operations in the country or have at least shown great interest to invest in the near future.

In sum, there is an evident grow-ing need in the market that must be ad-dressed. As well as a clear surplus of such resource in the country, it seems only logical that the next step should be to make the resource available to cover such necessity, both at the internal and external levels.

The first step was already taken with the installation of the first high voltage transmission line. However, if the gov-ernment obtains funding from the Euro-pean Development Bank or through other credit facilities, the energisation of the eastern region will be consolidated and Paraguay will be ready to welcome en-ergy-intensive industries and offer them energetic stability and competitive prices.

“the general consensus is that the relatively-low cost of the local workforce and the low tax rates in paraguay, coMbined with high tax rates in brazil and difficulties in argentina, aMong other factors, will Most likely convince investors.”

RODOLFO G. VOUGA ZUCCOLILLO is a Senior Associate at Vouga & Olmedo Abogados. He graduated with Honors from the National University of Asuncion (J.D., summa cum laude, 2007) and was awarded a Masters in Law (LL.M.) degree from Columbia Law School (LL.M., 2010). He passed the New York Bar exam. His fields of expertise are: Litigation, Arbitration and Mediation; M&A; Foreign Investments; Corporate and Commercial; Capital Markets; Tax and Customs Law. He has been actively involved in various projects related with foreign investments. He is a former assistant professor in Legal Technique at the National University of Asunción. Languages: Spanish, English, Portuguese, German.

CECILIA LLAMOSAS –is a Paralegal at Vouga & Olmedo Abogados. She is expected to obtain her law degree from at Nation-al University of Asunción, Paraguay / Katholieke Universiteit Leuven, Belgium this year. She speaks Spanish, English, German and Dutch and is a member of the European Law Students Association and Erasmus Mundus Alumni. She is also a participant of the Roundtable on Renewable Energies of the Paraguayan Ministry of Industry and Commerce.


The outlook for Latin America infrastructure is stable in 2012, reflecting the ongoing favor-able demand dynamics despite

the backdrop of a weaker U.S. economic recovery and concerns over Europe, ac-cording to Fitch Ratings.

The outlook encompasses the toll road, airport, social and power segments of the infrastructure sector, each of which indi-vidually has a stable outlook. Fitch ex-pects ratings in larger economies in the region to be relatively resilient.

At IOS we expect regional growth to drive demand for infrastructure expan-sion through Latin America. In Brazil, the 2014 World Cup and 2016 Olympic Games is further boosting infrastructure investment. Even in the event of a ‘hard landing in China’ or a double dip reces-sion in the US.

Increasingly open societies and reli-able monetary and fiscal policies favor the development of transportation and energy projects given population growth and latent demand for basic public ser-vices.

Interest rate increases pose a potential risk given the long-term fixed rate debt financing nature of most infrastructure projects, although we expect the major economies to continue a trend of fiscal discipline, keeping financing costs rela-tively stable. Rating agency Fitch also

LATAM Infrastructure Jorge Celio – VP IOS Partners USA & Director General de IOS Partners SL Europe

believes that higher inflation in the near term is not a major concern for infrastruc-ture projects in the region.

billion in infrastructure assets between 2012 and 2015, mostly in the surface transport and energy sectors.

The rise in infrastructure PPPs bodes well for the region. When one looks at countries that have allowed a fair amount of private investment from either con-struction firms or concession operators in infrastructure, one finds that these coun-tries have better infrastructure and higher GDP growth. Infrastructure is incredibly beneficial to a country and its people. Getting it built is a good idea, and gov-ernments simply can´t build all of it with the capital constraint they all face today.

The backlog of infrastructure in the region needs government intervention through investments and public policies to reverse inefficiencies. One of the main challenges is to achieve greater coherence and coordination between relevant actors in the area of infrastructure. In particular, the need for such coordination between agencies of different institutions but simi-lar levels of government, agencies from different levels of government, private and public actors. For example, better use of existing infrastructure such as trans-port reduces the cost of deployment of broadband networks. Better coordination of transport policies in the sector agencies should also be a must.

Greater efficiency in the public pol-icy cycle infrastructure can achieve a

Outlook for 2012 and the role of PPPs

In the last two decades, investment in infrastructure projects that rely on private-public partnerships (PPPs) has steadily increased in Latin America, and the region is expected to invest US$450

“when one looks at countries that

have allowed a fair aMount of private

investMent froM either construction firMs or concession operators

in infrastructure, one finds that these

countries have better infrastructure and

higher gdp growth.”


higher level of development. To identify the bottlenecks that limit effectiveness of infrastructure policies, the process of policy development should be evaluated and reinforced in its different phases: pri-oritization and planning, implementation, operation and maintenance. This requires the definition of a framework and of regu-lations that establish checks and balances along with accountability mechanisms and transparency.

Although the success of PPPs depends to a large extent on public sector readiness and execution, questions remain about how and why private sector parties should invest. The answers vary from country to country, and depend largely on investment climates and financing conditions. A recent Economist Intelligence Unit (EIU) report rates such conditions across the region, finding that Chile scored best, “with 97.2 out of 100 for the PPP financial facilities category, leading the region with an almost perfect score.” Brazil, Mexico, Panama and Peru also scored relatively well. The EIU states, however, that there is vast room for improvement almost everywhere.

The general benefit of investing in

seaport, and high-speed rail investments, for instance, than for investments in en-ergy distribution or telecom.

There are other factors that increase risk, as well, such as unpredictable po-litical factors; the possibility of overzeal-ous governmental regulation and price-capping, or even nationalization; and the risks inherent in large markets. But in terms of the fundamentals that determine long-term risks, infrastructure companies tend to be strong.

We want to remark on the dependabil-ity of infrastructure investment. If inves-tors want exposure to an economy like Brazil´s, it is better to be invested in infra-structure than, for instance, certain com-modities, as the value of infrastructure is determined more directly by Brazil´s ex-panding economy. Investing in a big sugar or soybean producer, is not making a bet on the Brazilian economy. It is betting on commodity prices, which are very volatile.

There are several sources through which the private sector can finance the development of infrastructure. We look at these sources, examining their unique roles.

in Latin America. Examples include a fund established by Ashmore Investment and Inverlink in Colombia, Brookfield Asset Management´s Colombian and Pe-ruvian funds and a Macquarie Group fund in Mexico.

The Brazilian investment bank BTG Pactual and the domestic conglomerate EBX have each announced plans to set up major infrastructure funds. And Celfin Capital, one of Chile´s largest investment banks, has an infrastructure fund, Celfin Infraestructura, as well.

Many countries in the region allow do-mestic pension funds to commit capital to infrastructure funds and hold long-term debt issues. In a recent report, the Ban-co Bilbao y Vizcaya Argentaria (BBVA) sums up the mutually beneficial relation-ship between pension funds and infra-structure PPPs in the Latin American con-text. From the point of view of the funds, for one, they are often interested in in-frastructure funds because the long-term life cycle of infrastructure assets tends to match their long-term liabilities and “permits optimal planning.” At the same time, “It´s to be expected that the partici-

infrastructure assets is that they tend to offer consistent returns. Infrastructure companies usually have solid fundamen-tals, hold concession rights or licenses that restrict competition and protect them against inflation, and are usually relative-ly immune to the economic cycle. Though there are high development costs, includ-ing design and construction, there are relatively low marginal costs for produc-tion, and little or no competition once in operation.

Risk-return will vary according to sub-sector, with greater risk-return for airport,

Infrastructure funds purchase shares in infrastructure project companies and work with strategic investors such as operators and construction companies to maximize revenue and increase equity value over time. The performance of such funds is tied to their ability to extract divi-dends from the operating asset or through refinancing.

They may ultimately sell their shares to other owning members of the project´s consortium, a third party, or the public through an IPO. In recent years, several major infrastructure funds have emerged

pation of pension funds in the infrastruc-ture investment will reduce the political and regulatory risk, as one expects bet-ter discipline on the part of governments with respect to contracts and the rules of the game, if the wellbeing of local work-ers is at stake through private pensions,” says the report. Pension funds might also be attracted to the relatively good cost/benefit ratio of infrastructure projects. Lastly, the report notes that private pen-sion funds “can garner public favor if the public sees that the funds are investing in projects that improve their daily lives as

“greater efficiency in the public policy cycle infrastructure can achieve a higher level of developMent. to identify the

bottlenecks that liMit effectiveness of infrastructure policies, the process of policy developMent should be evaluated and

reinforced in its different phases: prioritization and planning, iMpleMentation, operation and Maintenance.”


well as the returns and risk profile of their pension funds.”

Listed infrastructure shares in capital markets are seen by investors as an attractive option because of intrinsic characteristics of both the underlying business and the invest-

Jorge Celio has been a Consultant and Lead Strategist in Capital Markets, Banking & Infrastructure, has worked in Latin America and New York for leading investment banks, rating agencies and multilateral financial institutions in Washington, DC. In this capacity he was responsible for the analysis and debt strategy of project finance, corporates, and countries in emerging and de-veloping economies. He has advised governments, banks and companies on debt rating issues and debt restructurings. Mr. Celio is characterized by his ability of make others buy-in the concept of strategic consulting. He has co-authored leading publications on emerging markets strategy, economic and infrastructure issues (“Rating Infrastrucuture Peojects in emerging Markets” Fitch Ratings . In 1998 he participated on the peace accord between Peru and Ecuador presenting “Integracion Peru-Ecuador: Forjando un Futuro Compartido.” Previously he worked as a Computer Scientist for General Electric and Hoffman La-Roche. Mr. Celio studied Computer Science and also holds a Master’s Degree in Economics and International Studies from New York University and advanced studies at the Harvard Kennedy School of Government. He is currently VP of IOS Partners and General Director of IOS Partners Europe.

IOS Partners, Inc. (www.iospartners.com) IOS Partners Europe SL (www.ioseurope.eu) is an international economic develop-ment and financial services firm with dual Headquarters in Miami and Barcelona, IOS Partners, Inc. is a leading international economic development and financial advisory firm with offices throughout the world and recognized global leadership and ex-perience delivering pragmatic, market-driven solutions to clients in diverse fields, including Private Sector Development (PSD), Public Private Partnerships (PPPs), Risk Management, Infrastructure and Capital Markets Development Strategies, Institutional and Capacity Building for the development of PPPs and PSD, the establishment of respective legal and regulatory policies and frameworks, institutional structure and operational guidelines to support successful Private Sector Development and Public Pri-vate Partnerships.

ment vehicle. They represent a dependable way to diversify portfolio risk. The highly local nature of infrastructure businesses and projects and their relative immunity from the economic cycle gives them a low correlation with broader stock trends.

In recent years, shares of Latin Ameri-can infrastructure companies have out-performed their benchmarks: the S&P Global Infrastructure Fund; Macquarie Global Infrastructure 100 ETF; and the S&P Emerging Markets Infrastructure In-dex Fund.

We observe four reasons why invest-ing in listed shares is particularly attrac-tive: the efficiency an open market gives to asset prices; greater clarity of dividend yields; added liquidity; and higher stan-dards of transparency and reporting than one finds with private equity deals. The last point can be especially important for a skeptical public sector. There is a cor-relation between the depth and breadth of country´s capital markets, on the one hand, and that country´s ability to expand economically. Brazil has benefited from São Paulo´s dominance as a truly world-class financial center, one of the few in the southern hemisphere. It´s clearly has been a huge benefit to the recent growth of their economy to have a domestic fi-nancial center with a great deal of scale and scope and international presence.

“We observe four reasons why investing in listed shares is particularly attractive: the efficiency an open market gives to asset prices; greater clarity of dividend yields; added liquidity; and higher standards of transparency and reporting than one finds with private equity deals. The last point can be especially important for a skeptical public sector. There is a correlation between the depth and breadth of country´s capital markets, on the one hand, and that country´s ability to expand economically.”


AbstractBrazil, occupying a land area of more than 8.5 million square kilometers, is predomi nantly a roads country. About 64 percent of all cargo and 90 percent of pas-sengers are transported by road. Further social and economic growth in the coun-try requires a sustainable road network, with significant improvements to the cur-rent existing network.

The increased use of public-private partnerships (PPP) in the roads sector

Critical Steps for Implementing Successful Public-Private Partnerships in the Brazilian Road SectorCesar Queiroz, International Consultant, Former World Bank Highways Adviser and Carlos Eduardo Motta, Admiral, Lawyer and Engineer

seems to be a logical approach to relieve the road infrastructure deficit, without overburdening the public budget at na-tional, state and local levels.

A review of the main steps in the preparation of a PPP project for roads in Brazil is pre sented, including the main responsibilities under both the public and private sectors. The authors expect that the discussion of critical steps in the process serves as guid ance for investors interested in joining the successful PPP market for roads in Brazil.

Introduction

Today’s Brazilian road transportation infrastructure is not consistent with the require ments of the country’s economic dimension. About 75% of the road net-work presents some form of deficiency, which translates into increased costs, harming production and, conse quently, the consumer. Only 6% of the country’s road network is paved, in contrast with usually more than 90% observed in de-veloped countries.

Moreover, the poor quality of Brazil-ian roads contributes to the country’s poor safety records: every year there are about 400,000 injured victims and 34,000 deaths from road crashes.

This article describes the main steps (e.g., technical, legal, social) in a way to serve as a guide to potential investors in-terested in the PPP roads market in Bra-zil. Increasing the use of PPP in the roads sector seems to be a logical approach to relieve the road infrastructure deficit, without overburdening the public budget at national, state and local levels.

The Brazilian Federal Law 11,079 The PPP legal framework was established through the Brazilian federal Law 11,079, of De cember 30, 2004, which brought out the general rules for tendering and con-tracting PPPs in the country. Henceforth, the federal PPP law will be referred to as PPP Law.

The PPP Law establishes general rules for competitive bid ding and contracting the private partner at both the national and sub-national levels. It complements the concession laws (Laws 8.987/95 and 9.074/95) and the pro curement law (Law 8.666/93). The law also established an organizational structure in the federal government to oversee the Brazilian PPP program.

Among its features, the PPP Law al-lows government entities to assume long-term com mitments, including the pay-ment of subsidies to service providers, with the overall ob jec tive of increasing efficiency. The law also requires public hearings to be held, and economic and fi-nancial as sessments to be carried out for each proposed PPP project.

Latin Infrastructure Quarterly 59Regulation

Sponsored and Administrative Concessions

The PPP Law defines PPP as a concession contract that may take one of two forms: (a) “sponsored” concession; or (b) “ad-ministrative” concession. In a sponsored concession, the private partner revenues come from (a) fees charged to the users, and (b) financial subsidies paid by the contracting public entity as the services are delivered.

In the case of administrative conces-sions, the contracting state entity pays fully for the services provided; there are no user fees. This might occur, for exam-ple, when the state decides not to charge any kind of toll, taking charge of all ex-penses, on a road intended to promote the development of a deprived region.

If a project is shown to be financially viable without any public funding, in-stead of falling under the PPP Law, it should be managed as a “common” con-cession, to be bid and im plemented under the country’s concession laws and other related norms. This is the case of all the road concession contracts awarded in Brazil before the PPP Law was enacted.

Basic PPP Concepts Under the Brazilian PPP LawThe Brazilian PPP law provides several useful definitions, such as:

The Public Partner - may include gov-ernment agencies, special funds, mu nici-pali ties, public foundations, public com-panies, joint stock compa nies and other entities controlled directly or indirectly by the Union.

The Private Partner – should be a Spe-cial Purpose Company (or SPE, us ing the

Brazil ian acronym), to be established by the successful bidder. The SPE is usually a consortium of entrepreneurs and inves-tors who will fund and man age the PPP pro ject.

Types of PPP – may include typical public services, such as roads and other transport infrastructure, transportation services, sanitation, health, and edu-cation. Services to be provided to the pub-lic administration can also be con tracted as a PPP.

The ability to generate revenues is a key factor in the choice of the form of concession. Common concessions ap-ply to self-sustaining projects, while PPP projects (i.e., spon sored or administrative concessions) are those that require public financial support.

PPP Institutional Arrangements

In Brazil, at the federal level, several agencies are responsible for different as-pects of the PPP program, as discussed below.

The Ministry of Planning, Budget and Management assesses models and moni-tors poten tial PPP projects, which have been identified as priorities by the Part-nership Steering Committee (CGP).

The Ministry of Finance is responsible for appraising any proposed PPP project and mak ing sure that the program is with-in the maximum allowable allocation for PPP projects. Such limit is set as 3 percent of the net current revenues, as defined in Articles 195 and 239 of the Con stitution. The limit applies to all levels of govern-ment. The National Trea sury Secretariat (STN), after receiving information about the project, verifies that the pro posed spending is within the spending limits

established by the Fiscal Responsibility Law.

The PPP Steering Committee (CGP), established by presidential decree (De-cree No. 5385/05, modified by Decree No. Decree 6.037/07), works under the coordination of the Ministry of Planning and Budget, and is also composed of rep-resentatives from the Minis try of Finance and the Presidency. Its responsibilities in-clude to:

• Approve the Projects and PPP con-tracts.

• Authorize the opening of the bidding process.

• Define the priority services to be pro-vided under PPP arrangements.

• Define the criteria for analyzing the appropriateness and timing of the contract.

• Set up the procedures for contract award.

• Authorize the launching of the bid-ding and approve the bidding docu-ments.

• Approve the PPP plan, and monitor and evaluate its implementation.

• Review the contract monitoring re-ports.

• Develop standard bidding documents and sample PPP contracts.

• Authorize the use of the resources of the PPP Guarantee Fund (FGP) to guaran tee the government financial obligations.

The Technical Committee of Public-Pri-vate Partnerships (CTP) is coordinated by the Chief Eco nomic Advisor of the Minis-try of Planning, Budget and Management, and also includes members from the Min-istry of Finance and the Presidency of

“about 75% of the road network presents soMe forM of deficiency, which translates into increased costs, harMing production and, conse quently, the consuMer.”


the Repub lic. CTP can re quest studies, surveys or investigations to support a proposed PPP project, which has al ready been established as a pri ority.

The Special Purpose Company (SPE), to be established by the successful bidder, will be exclu sively responsible to imple-ment and manage the object of the part-nership (e.g., a motorway or an airport). This feature facilitates the control and supervision by the Gov ernment, as the SPE cannot have any other responsibility. The SPE may be incorporated in the form of a publicly traded corpo ration, with the majority of its voting capital in the pri-vate sector. The PPP law forbids the gov-ernment to be its majority partner. In any case, the government participation in the SPE requires legislative authorization.

The PPP Guarantee Fund (FGP) was established by the government to provide guarantees for the financial obligations as-sumed by the government under the PPP program. The FGP is managed by the Bank of Brazil.

The PPP Bidding ProcessThe Brazilian PPP law pro-vides for two distinct phases in the bidding process: (a) inter nal phase (or planning); and (b) external phase (or bid-ding).

The Internal or Planning PhaseInitially, a Preliminary Pro-posal (PP) should be prepared by a public entity, such as an agency of the federal govern-ment, special funds, munici-palities, public foundations, public companies, or joint stock companies. Such entity

is referred to as the Concerned Public En-tity (or OIP, using the Brazilian acronym).

The PP is then submitted to CGP by the ministry or regulatory agency (such as ANTT) re sponsible for the sector. The PP should indicate the type of PPP to be adopted and basic information, such as project description, expected demand and economic and so cial bene fits, as well as the projected cash flow during construc-tion and operation of the project.

The CGP first checks whether the proj-ect has been included in the Multiyear Plan (PPA), which summarizes the gov-ernment’s strategy for the economic and social devel opment of the country. Next, it reviews the impact of the proposed project implementa tion for gov ernment and society in general, as well as the availability of public re sources to imple-ment the project. In setting priori ties, the CGP takes into account that projects with lower re quirements for public financial

support will allow a higher num ber of projects to be im plemented.

The CGP then includes the projects deemed as priorities in the PPP Federal Plan (PLP) and author izes the responsible entity to carry out detailed studies for the project. Decree No. 5977 of De cember 1, 2006, regulates the presentation of project studies and design.

The public entity responsible for the proposed project, usually with the assis-tance of pri vate con sultants, will carry out more detailed studies, including:

Technical studies: detailed project identification, preliminary design and feasibil ity studies to support the imple-mentation of the project as a PPP.

Fiscal studies: the impact on the bud-get and financial provisions, including com pli ance with the law on fiscal respon-sibility.

Legal studies: preparation of draft bidding documents and PPP contract, particu larly describ ing the services to be provided, the required quality or perfor-mance parameters, applicable technolo-gies, contractual terms (not less than 5 years, not more than 35 years), and the share of risks between the partners.

Once the studies have been completed, the entity responsible for the proposed project submits a Technical Proposal to the CGP, requesting authorization to launch the bidding process.

FIGURE 1 - The Process of Planning and Contracting PPP in Brazil

(Source: Authors)

“increasing the use of ppp in the roads sector seeMs to be a logical approach to relieve the road infrastructure deficit, without overburdening the public budget at national, state and local levels.”

Latin Infrastructure Quarterly 61Regulation

The External Phase or Bidding The external phase includes public con-sultation, the invitation to bid, the receipt of ten ders, and the contract:

Public consultation: a notice contain-ing general project information (e.g., de scrip tion, the term of the contract and its estimated value) is published in the official press, major newspapers, and electronic media inviting com ments to be submitted by a specified deadline. Public hearings may also be conducted.

Invitation to bid: taking into account the results of the public consultation, the bid ding documents are reviewed and fi-nalized, and a formal invitation to bid is pub lished.

Receipt of tenders: tenders are received in a public session and the success ful bid-der is selected according to the criteria in the bidding documents.

Contract: the winning bidder establish-es a SPE and the PPP contract is signed be tween the responsible entity and the SPE.

A summary of the steps in both the internal and external phases is given in Figure 1.

Guarentee

Irrespective of how good the project preparation and how appropriate the PPP model adopted, guarantees may still be needed by the investors should any de-fault of public sec tor financial obli gation occur. The guarantees available in Bra-zil provide increased comfort to the pri-vate partner, as they are designed to be promptly implemented, with out the in-tervention of the Judiciary.

The PPP Guarantee Fund (FGP) was es-tablished by the government to guarantee the pay ment of financial public obligations under PPP projects awarded by federal agen cies. It has its own assets, consisting of fixed and variable income securities and varia ble. The FGP capital is entirely public, subscribed by eligible shareholders (i.e., the Union and public companies and foundations). The legal limit for the FGP capital is R$6 billion (about US$3.8 bil-lion), which is also the overall limit for the provision of guarantees by the Un ion. The CGP is managed by the Bank of Brazil.

In order to reduce the cost of raising fi-nance, the FGP can also provide counter-

guaran tees to in surance companies, financial institutions and international or-ganizations, which ulti mately will assure payment of the public sector obligations to the private partner.

According to the PPP law, the public entity may only assume financial obliga-tions with the private partner for payments related to services delivered. Consequent-ly, until the begin ning of project opera-tions, all funding for the project (e.g., for construction) has to be pro vided by the pri-vate partner. It is interesting to note that the legal framework of several other countries does not have such restriction.

Good Governance in PPP ContractsRoad concession contracts in Brazil, as in many other countries, include re-quired standards for construction, op-eration, maintenance, and toll collection. For monitoring the quality of the facility during the life of the concession, several performance indicators of condition are used, including roughness, skid resis-tance, luminescence of pavement mark-ings, and the presence and condition of signs, lighting, and other safety features. Performance on these indicators that falls outside the boundaries of acceptability may lead to penalties for the concession-aire. Enforcing such standards helps the government and the users to reap maxi-mum benefits of road concessions.

Any future revision of the PPP Law should also establish clear mechanisms for renegotia tion and amendments (as a way to minimize potential contract dis-tress and cancellation). The renegotiation of projects is not an unusual occurrence (Harris et al. 2003). In fact, about half

of all concessions become subject to re-negotiation, often due to unrealistic cost and revenue assumptions (Amos 2004). While not all renegotiation is undesirable, opportunistic renegotiation should be dis-couraged in both existing and future con-cessions. The appropriate behavior for governments is to uphold the contractual obligations result ing from the competi-tive bidding process, and not to concede for opportunistic requests to renegotiate. Improving concession design and estab-lishing credible regulations can lower the incidence of renegotiations (Guasch 2004: 38, 96).

Conclusions

The steps discussed in the article for pre-paring and implementing PPP projects in roads in Brazil is ex pected to serve as a general guidance for domestic and inter-national investors interested in participat-ing in com petitive selection of conces-sionaires in Brazil.

In order to make PPP projects more at-tractive to private investors, the Brazilian PPP law pro vides the Contracting Entity with several options to extend guarantees to the private partner, including those given by the PPP Guarantee Fund, guar-antees linked to revenues, and guaran tees provided by international financial insti-tutions.

The authors believe that the Brazilian PPP framework provides for a balanced partnership that is ad vanta geous to both contracting parties, and that the Brazilian road sector offers great opportunities for foreign investors interested in the design, construction, operation and maintenance of roads under the country’s PPP program.

“if a project is shown to be financially viable without any public funding, instead of falling under the ppp law, it should be Managed as a “coMMon” concession, to be bid and iM pleMented under the country’s concession laws and other related norMs.”


Carlos Eduardo Motta

Lawyer and EngineerRua Osvaldo Cruz, 1 sala 612Meireles, Fortaleza, CE, 60125-150 BrazilTel +55-85-304747 8797 / Tel +55-85-8895 9999 http://cemottaadvocacia.jur.adv.br/[email protected] Carlos Eduardo Motta, Admiral, En-gineer and Lawyer, Master and Ph.D. in Marine Sciences, is currently a con-sultant with main operations in For-taleza and Rio de Janeiro. While with the Navy, his professional experience included executive and operational po-sitions.In Washington D. C., he was the head of the Brazilian Representation to the Inter-American Defense Board, an in-ternational organization under the Or-ganization of American States (OAS), offering advice on matters of hemi-spheric defense.His specializations include public-pri-vate partnership (PPP) contracts, and provision of legal services with empha-sis on PPPs and the Law of the Sea.

Cesar Queiroz

International Consultant, Former World Bank Highways Adviser4601 North Park Ave Chevy Chase, MD, 20815USATel +1 301-755 [email protected] Cesar Queiroz, former World Bank Highways Adviser, is an interna-tional consultant on roads and transport infrastructure. His main expertise is in public-private part-nerships in infrastructure, road maintenance, financing, manage-ment and development, perfor-mance-based contracts, improving governance, quality assurance and evaluation, research, teaching and training. Between 1986 and 2006, he held several positions with the World Bank, including Lead Highway Engineer and Principal Highway Engineer. Prior to joining the WB, Cesar was the deputy director of the Brazilian Road Research Institute in Rio de Janeiro, Brazil. He holds a Ph.D. in civil engineering from the University of Texas, a M.Sc. in production engi-neering from the Federal University of Rio de Janeiro, and a B.Sc. in civil engineering from the Federal University of Juiz de Fora, Brazil. Cesar has published two books and more than 130 papers and articles in more than 10 countries. His recent assignments with the World Bank and other agen-cies include infrastructure advisory services in Russia, Brazil, Latvia, Lithu-ania, Poland, Ukraine, Moldova, Philippines, Uganda, Tanzania, Sri Lanka, India, Laos, Yemen, Egypt, Saudi Arabia, Tunisia, Sweden and Norway. He was a professor of transportation engineering at the Brazilian Military Institute of Engineering in Rio de Janeiro from 1983-1986, has lectured on private participation in infrastructure at George Washington University since 1996, and is currently a visiting professor at the University of Bel-grade, Serbia. He has gained considerable experience in monitoring and evaluation not only by leading World Bank-transport projects in a number of countries (in-cluding managing a US$1.05 billion loan portfolio to the Russian Federa-tion), but also through the preparation of World Bank implementation com-pletion reports (e.g., Guinea Bissau, Estonia), Quality Assurance Group (QAG) project assessment in several countries (e.g., Tanzania, Brazil), and carrying out a Project Performance Assessment Report (PPAR) of the Nicaragua Second Road Rehabilitation and Maintenance Project, for the World Bank Independent Evaluation Group (IEG).

While his experience has been mostly in the road sector, his work has also covered other forms of infrastructure, including supervision of the World Bank-financed Klaipeda Port Project (2001-2005) and advising research work at the Universities of Mississippi (USA) and Belgrade (Serbia) to adapt the financial models of the Toolkit for PPP in Roads and Highways, respectively to the water and railways sectors.


Introduction – The Argentine Energy Market

After a decade of robust eco-nomic growth Argentine en-ergy market is facing unprec-edented challenges. Energy

consumption has significantly increased since 2003 driven not only by the posi-tive performance of the economy but by price regulations that have kept Argen-tine energy prices below international prices. Nevertheless growth production of energy has slowed and, and in the case of crude oil production has recently de-clined, due to Argentina maturing oil and gas fields and pricing policies taken by the Argentine government to prioritize domestic supply. As a result of that, Ar-gentina has increased the import of hy-drocarbon, especially natural gas in the form of liquefied natural gas and natural gas imported from Bolivia. Imports of hydrocarbons have had a significant im-pact in the process of deterioration of the foreign trade surplus and in the reduc-

Rawson Wind Project: A landmark in the Argentine Renewable Energy Generation MarketMartín G. Vázquez Acuña of Marval, O´Farrell & Mairal

tion of the reserves held by the Argentine Central Bank.

All these factors have resulted in insuf-ficient investments in energy infrastruc-ture which may in turn trigger a damag-ing shortage of energy supply which may limit the ability of the Argentine economy to maintain a sustainable path of growth.

This complex environment presents particular challenges in the case of the electricity generation market. Argentine electricity generation market is highly dependant on the supply of hydrocarbons due to the fact that a significant portion of the power generation is produced by thermal power generation plants fired by natural gas, diesel, fuel oil and coal. Consequently, all future investments in power generation infrastructure will be constrained by the perspective of a re-duction in the availability of hydrocar-bons resources, especially natural gas. Renewable energy generation projects are called to play a significant role in the search of alternative sources of electric-ity generation.

Argentine Renewable Energy Generation Market – Regula-tory Framework

Argentina has an extraordinary potential to produce electricity from renewable sources, especially wind, solar and bio-fuels. Nevertheless, investments in this type of infrastructure projects have not been significant until recently and, con-sequently, the contribution of renewable energy sources to the total energy genera-tion supply has been marginal. In order to promote the development of renewable power generation market, Argentine Con-gress passed on December 6, 2006 Law 26,190 which approved the “National Re-gime of Incentives of the Use of Renew-able Sources Directed to Power Genera-tion” (the “GENREN Program”).

Renewable energy sources included in the GENREN Program are: (i) wind, (ii) solar, (iii) geothermal, (iv) tidal, (v) small hydro (plants up to 30MW), (vi) biomass, exhaust gases and biogas.

The aim of the GENREN Program is to achieve in the year 2016 a contribution form the renewable energy sources equal to 8% of the total consumed energy in the country. To that end the Regime has adopted an incentive program for invest-ments for new power generation facilities from renewable sources. This program will be in force for ten years and has the following characteristics:

Tax benefits.(a) An alternative between: (x) Anticipated refund of the VAT of

the new amortizable goods used in the project. The VAT charged to the benefi-ciaries in concept of purchase, manufac-turing or definitive import of goods, or in concept of infrastructure works, will be credited against other taxes that should be collected by the National Tax Author-ity (“AFIP”) after, at least, 3 fiscal years since the investments had been made. Otherwise, the VAT will be refunded within the lapse set in the project’s ap-proval, in the terms and with the guaran-tees foreseen therein.

(y) Accelerated amortization of the goods in relation with the Income Tax. The beneficiaries will be entitled to amor-tize the investments made after the proj-


ect’s approval and pursuant to the terms provided therein.

(b) The goods related to the projects will not be considered for the Minimum Supposed Income Tax.

(ii) Additional payment: The proj-ects will receive the additional benefit which consists on the payment of an amount equals to A$ 0.015 per KWh to the generators of energy from renewable sources. Solar energy projects will re-ceive A$ 0.9 per KWh.

GENEIA: A Key Player in the Argentine Renewable Energy Generation Market

Geneia S.A. (formerly Emgasud S.A.) (“Geneia”) is an Argentine energy com-pany primarily engaged in the power gen-eration business and Argentine´s largest electricity generation company based on installed capacity for wind power gen-eration. Geneia is directly engaged in the power generation business through its ownership and operation of various thermal power generation plants fired by natural gas and diesel fuel located in the provinces of Buenos Aires, Entre Ríos and Chubut with a combined installed capacity of approximately 280 MW, and the wind farm located in the province of Chubut with an install capacity of 77.4 MW, which comprises the Rawson Wind Project.

In addition, through its subsidiar-ies Emgasud Renovables and Patagonia Wind, Geneia is currently constructing five additional wind farms located in Puerto Madryn, Chubut with an expect-ed combined installed capacity of 220 MW. Through its subsidiaries Emgasud Renovables, Nor Bragado and Aldyl San Lorenzo, Geneia is also developing three thermal power generation plants fired by biofuel and natural gas located in the provinces of Entre Ríos, Buenos Aires and Santa Fe with an expected combined installed capacity of 102 MW.

Rawson Wind Project

IV.1. Overview of the Project

In 2009 Geneia participated in an interna-tional bidding process (Bidding Process

No. 1/09) conducted by Energía Argen-tina Sociedad Anónima -a corporation controlled and managed by the Argentine government for the exploration, exploita-tion and commercialization of petroleum and natural gas, as well as the generation, transmission and commercialization of electricity- (“Enarsa”) in accordance wit the GENREN Program to develop and operate 895 MW in new renewable en-ergy installed capacity.

In 2010 Geneia was awarded the right to develop and operate the Rawson Wind Project, which comprises two wind farms located in Rawson in the province of Chubut.

The Rawson Wind Project is a wind power generation project comprised of two wind farms with a combined in-stalled capacity of 77.4 MW provided by 43 Vestas wind turbines (model V90 1.8 MW, class IEC IIA) purchased from Vestas pursuant to a turbine supply and installation agreement signed with them in October 2010.

Under this agreement, Vestas has is-sued a manufacturer’s warranty for the turbines, towers and other equipment to be supplied for an amount not to exceed the purchase price paid by us for such equipment for a term of 2 years and one additional year in case of any repairs dur-ing the warranty period.

In addition, in October 2010 Geneia entered into a services and availability agreement with Vestas pursuant to which Vestas provides technical assistance, training and maintenance services to us with respect to the turbines comprising the Rawson Wind Project, and has guar-anteed that the wind farms achieve a min-imum average availability factor for a five year term.

The commercial operation date of the Rawson I wind farm was January 1, 2012, and the commercial operation date of the Rawson II wind farm was January 20, 2012.

IV.2. Wind Resources Assessment

The unique topography and climate of the area in the Patagonian region where the Rawson Wind Project is located results in peak wind intensity adequate for wind power generation. As this area heats up during the day it creates upward convec-

tion air currents. To replace this rising air, cool air from the Atlantic coast moves in, which results in strong and consistent wind resource in that area. During the de-velopment phase of this project Geneia engaged Garrad Hassan, the world’s lead-ing independent wind resource consultant to conduct a wind resource assessment to determine the feasibility and potential of the selected sites, as well as the loca-tion of the wind turbines and towers. The consultant reports issued by Garrad Has-san for the Rawson Wind Project was based on the analysis of historical wind data recorded and provided by Geneia for approximately 2.4 years for the Rawson Wind Project, several site visits and an a review of the specific features of the wind turbines proposed to be installed by Ves-tas for these projects.

The reports concluded that the se-lected site for the Rawson Wind Project was adequate for a number of reasons, in-cluding the low incidence of wind gusts in the area, the suitability of the type of wind turbine selected for the projects, the capacity factor estimated based on avail-able wind data. The report also concluded that the average net electricity output es-timated of 300 GWh/annum over the first ten years of operation with a capacity fac-tor of 43% for the Rawson Wind Project.

IV.3. Power Purchase Agreements

Geneia is a party to two power purchase agreements (“PPAs”) with ENARSA in connection with the Rawson Wind Proj-ect which expire in 2026.

Under these PPAs, Geneia have the ob-ligation to build, operate and maintain the wind farms subject to such agreement and sell electricity to ENARSA when request-ed by ENARSA and, in return, is entitled to receive a variable payment for elec-tricity effectively dispatched by Geneia in an amount in U.S. dollars per MW/h, which is payable Argentine pesos at the exchange rate in effect on the last day of each applicable monthly billing period.

Although the electricity generated by the Rawson Wind Project benefits from the priority dispatch established by the current regulatory framework, as is cus-tomary in wind power projects, Geneia is not entitled to receive firm capacity charges.


The Project Bond

On November 18, 2010, Geneia issued a U.S.$77,179,200 aggregate princi-pal amount of Class III bonds under the Global Program (“Project Bond”). The proceeds from the issuance of the Project Bond were used to finance the construc-tion and operation of the Rawson I and Rawson II wind farms and for investments in other electricity generation projects, as well as repay other payments obligations incurred in connection with such projects.

The Project Bond is denominated in U.S. dollars and is payable in pesos at the exchange rate applicable on the third day prior to every principal payment date or interest payment date.

The Project Bond is non-convertible, unsubordinated and secured, and is am-ortized in 23 consecutive quarterly pay-ments (the first of which was made on March 30, 2012) and with a final maturity on September 30, 2017.

The Project Bond bears interest at a rate of 11%. During the grace period (which ended on March 30, 2012) interest were paid monthly and thereafter are paid quarterly.

Bonds Class II and Class III are se-cured by two Argentine trusts and a first priority registered pledge over four wind TM 2500 turbines acquired to GE Pack-aged Power Inc.

Pursuant to the first trust, or the Guar-anty Trust, Geneia assigned to such trust: (i) all receivables payable by Compañía Administradora del Mercado Mayorista Eléctrico Sociedad Anónima (“CAMME-SA”) and ENARSA under certain power purchase agreements entered into in con-nection with power plant projects owned by GENEIA, until the occurrence of cer-tain milestones, and the Rawson Wind Projects PPAs, in the aggregate, up to an amount necessary to pay in full the im-mediately following interest and capital service and (ii) the assignment of all pay-ment rights under a guaranty trust which shall receive equal to 5% to all payments made by CAMMESA to ENARSA under the PPAs (up to 10% of all amounts owed by ENARSA under the PPAs) in order to guaranty all payments obligations owed by ENARSA under the PPAs.

A second trust, the Default Trust, would receive all the collection rights

and receivables from CAMMESA in the event of an event of default related to the Bonds Class II and Bonds Class III.

The terms governing the issuance of Bonds Class II and Class III contain re-strictive covenants and other provisions that establish certain limitations with re-spect to, among others, (a) limitation of change of business, (b) maintenance of corporate existence, (c) certain limita-tions on mergers and consolidations, (d) maintenance of ranking of the bonds with respect to other unsubordinated debt, e) certain limitations on sale of assets, (f) certain commitments on asset mainte-nance, (g) certain limitations on the incur-rence of new debt, (h) certain limitations on related party transactions, (i) certain limitations on investments, (j) certain limitations on the incurrence of liens, (k) enforcement of collateral, (l) certain re-striction on dividend payments, (m) cer-tain limitations on the ability of subsidiar-ies to limit their ability to make payments to us, (n) enforcement of insurance, (o) fulfillment of obligations under the En-ergía Distribuida II Project PPAs (until the occurrence of certain milestones and until beginning of operations of Rawson I and Rawson II wind farms), (p) compli-ance with environmental regulations and authorizations, (q) compliance with re-porting obligations, (r) certain limitations on the amendment of project agreements.

Martin G. Vázquez

Martín G. Vázquez Acuña joined Marval, O´Farrell & Mairal in 2002. His areas of specialization are banking law, capital markets and corporate law. His profes-sional practice includes banking regulatory and foreign exchange matters, project, acquisition and structure finance, capital markets transactions, mutual funds, trusts, derivatives. He graduated from the Law School of the University of Buenos Aires (1996) and ob-tained a master’s degree in law and economics from the Torcuato Di Tella University. Previously he was a foreign associate at Skad-den, Arps, Slate Meagher and Flom in New York (2007-08) and worked as attorney at the Legal Department of Banco Société Générale (2000-02) and Banco Tornquist (1998-2000). He is the co-author of a book on derivates transactions and of a book on for-eign exchange controls and au-thor of articles on different bank-ing matters. He is a member of the Bar Association of the City of Buenos Aires and of the Bank Lawyers Association of Argentina. He was recognized as an “Associ-ates to Watch” - “Chambers Latin America” during the years 2011 and 2012.


As Director of the LatAm chapter of the Hedge Fund Association, what is your overall opinion on the state of La-tAm based hedge funds?

The state of local and regional hedge funds is a great indicator of the state of the regional capital markets. For the last ten years, LatAm hedge funds have shown a strong and steady growth primarily due to the activities of hedge funds based out of Brazil. What are the main reasons? Excel-lent macroeconomic policies, great politi-cal leaders and the fact that the Brazilian mutual fund industry evolved in such a way that facilitated the development of hedge funds, under the regulation of the local Comissão de Valores.

Currently, more than 80% of LatAm hedge funds are headquartered in Brazil.

While Brazil has taken the lead in re-cent times, the hedge fund industry in other LatAm countries will benefit in the short to medium term future as the quest for alternative investments among asset managers around the world continues.

The regional industry showed relative strength during the market dislocation of 2008. The performance of LatAm hedge funds only declined 4.98% which showed that capital preservation was of the utmost importance for managers. While one can claim that the BRIC economies have fallen a bit behind lately, there is no doubt that, among them, Brazil represents a great entry point in the event of a healthy pull back.

Do these hedge funds invest regionally or in a particular country?

Interesting question. Practitioners always try to invest in their own countries be-cause of the comparative and competitive advantages they can have. However be-cause managers look for liquidity, diversi-fication and new investment opportunities it is natural for them to adopt a regional perspective. Currently, some hedge fund managers have two main portfolios (sub-funds): (i) the domestic portfolio and (ii) the LatAm ex-Brazil portfolio.

Why would a hedge fund manager have an ex-Brazil portfolio?

Well, like I said before, 80% of the hedge funds are based out of Brazil. A hedge

fund manager from any other LatAm country will find it hard to convince in-vestors about his/her expertise in the Bra-zilian market. It is easier to sell the com-parative and competitive advantages you may have in other countries.

The line between hedge funds and pri-vate equity funds is getting more and more blurry in more consolidated mar-kets, is this case too in Latin America i.e. do hedge funds invest in private equity?

Hedge fund managers can and do invest in what are now called “special oppor-tunities”. Private equity investments are very important for institutional investors around the world and Latin America is not an exception. However, as the region begins to see more Initial Public Offer-ings, I think that the typical hedge fund managers will stick to listed equity in-

vestments. You should note that the tech-nological infrastructure of regional stock exchanges is more than ready to handle large trading volumes as more inves-tors and issues access the regional capi-tal markets. Also note that in order for IPOs to continue growing, governmental incentives are needed for family busi-ness to consider trading off opening their companies for public scrutiny. To finish, it is important to remember that a great number of hedge funds in Latin America have a very important mix of equities and credit (bonds) in their portfolios; this is the way they prepare for possible times of increased volatility. They are pretty savvy managing risks these days.

Are there funds of hedge funds active in Latin America?

This is also a very interesting question. There are funds of private equity funds

Latin American Hedge FundsLIQ talks to Victor Hugo Rodriguez, Founding Director of The Hedge Fund Association (HFA) – LatAm Chapter


and hedge funds. This is because institu-tional investors from the United States, Europe and Asian consider these vehicles to be very valuable and are willing to pay extra fees for the know-how of where to invest considering the large number of hedge funds in the region in order to re-duce their exposure to operational risks. This is interesting because funds of funds are retreating in other regions. Worth commenting as well is that local pen-sion funds are currently analyzing these investments for potential changes in the future.

Given your job as Director of LatAm Alternatives you are probably the right practitioner to ask about how do La-tAm’s institutional investors view al-ternative investments.

At LatAm Alternatives we deal with North American and Latin American in-stitutional investors. In the case of LatAm institutional investors they have been rather cautious. For these investors, edu-cation is and has always been a very im-portant issue. This particularly true after the big mistakes of 2008 and fraud cases such as the well known Madoff case. Having said this, the LatAm institutional investors are eager for solid, transparent and sound alternative investments op-portunities because of the diversification benefits, adjusted volatility and returns.

What are some of the main concerns global institutional investors have when it comes to analyzing potential alterna-tive investments in Latin America?

They consider the following aspects: (i) liquidity of the investment strategy; (ii) strength of the strategy (iii) the team’s professional and academic background and what kind of relevant exposure the team’s members have had; (iv) fund’s size; (v) market’s size; (vi) social and political stability of the country; (vii) correlation between the fund’s past per-formance and the economy and world’s markets; (viii) the custodians (Multi primes perhaps); (ix) what type of risk management tools the fund’s manager is using; and (x) how the manager separates alpha from beta and how he/she actually generates returns.

How do they approach the due dili-gence of these vehicles?

Institutional investors have rigorous due diligence questionnaires and they also perform internal investigations of poten-tial investments. They also hire firms such as LatAm Alternatives as consultants to know “who is who” which is critical when negotiating.

Are there infrastructure funds active in the region?

Of course. In the alternatives markets there are three fundamental areas: mar-ket strategies, private equity and infra-structure. There are funds active in Bra-zil, Mexico, Chile, Peru, and Colombia. I would like to mention that these types of funds will grow even more in the next decade due to the consolidated expansion of middle class in Latin America and the great infrastructure need in the region.

If so, what is the state of these funds?

They are very active particularly because local institutional investors find them as a very appropriate investment. As I men-tioned before, infrastructure funds togeth-er with hedge and private equity funds will all keep on growing because there is a lot of liquidity out there and the region’s middle class keeps expanding.

On a last note, people that work in the capital markets and particularly in Alter-native Investments around the world have a particular mission to “give back to so-ciety” in the form of philanthropy. We in Latin America should do the same. There are no excuses. If you can’t give out mon-etary resources you can give out your time. We will be proactively promoting The Hedge Fund Care in Latin America. Our countries need our help and we the LatAm Hedge Fund Community will step in even further. Please visit http://www.hedgefundscare.org/

Latin American Hedge Funds

Victor Hugo Rodriguez

Victor Hugo Rodriguez is the Founder and CEO of LatAm Alternatives. Victor Hugo has over 17 years of experience in Management, Sales, Marketing and Business Development across the securities industry in the US-LatAm region. He was Partner and Head of Latin American Prime Brokerage for Merlin Securities (Mid Tier Prime Bro-ker) and Director of Global Institution-al Sales at Trade Station Securities. Before he worked as Director of Latin America for Terra Nova Trading (now Light Speed Trading) and in the late 90’s he was the Founding President & CEO of Pristine.com Latin America. He has been a live TV Economics News Anchor and currently serves as the Founding Director of The Hedge Fund Association (HFA) – LatAm Chapter. Also he is Member of the STAF Board (Security Traders Asso-ciation) of Florida and Member of the Board of Advisors at Emerging Mar-kets Virtual Exchange (EMVx). Re-cently he co-published a white paper “The Spectrum of Investors for Latin American Hedge Funds”, and has been interviewed by The Wall Street Journal, Institutional Investors, Euro-Money, Bloomberg, The Trade News, Traders Magazine LatAm Fund Man-ager, Financial Times, Inversiones.com, FinWeek, Finalternatives, HFM-week, Yorba TV Alternative Latin In-vestors Magazine and Funds People during the last few weeks.


Cumbre de Proyectos de Capital & Infraestructura

CP&I 2012

20 países representados15 horas de networking2 días de contenido1 gran oportunidad de expandir su negocio y su red profesional

300 participantes55 oradores30 consesionarios estudios de casos

agosto 2012 SWISSOTEL, LIMA, PERÚ

8 - 9

Latinmarkets.orgPara más información, por favor contactar hoy mismo a Daniel Para Mata al teléfono 212-213-3271 o un correo a [email protected]

Cooperación estratégica:

Platinum Sponsor:

Silver sponsor:

Expositor:

Enrique CadenasCEO Contugas

Jorge Vilches CEO, LAN Peru

Henrik Kristensen, Managing Director, APM Terminals Callao

Gonzalo Tamayo, Socio Director, Macroconsult S.A.

Mark Hoffmann Gerente General Duke Energy Egenor

Susan Tinker, Vice President of Partnerships Services, Partnerships BC

Aldo FuertesGerente General, Popular S.A - Sociedad Administradora de Fondos de Inversión S.A.

Dulio CostaManaging Partner & CEO, Macrocapitales

Rubén LoraManaging Director of Production, Mota-Engil Peru

“Con el objetivo de

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en infraestructura a

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inversión en el Perú y así

mismo, abrir la puerta al

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de nuevos proyectos “

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