Latin Infrastructure Quarterly Issue 3

XXXXXX XXXXX
Latin
Latin Infrastructure Quarterly 1

Infrastructure
Quarterly
Intelligent Transport Systems
for the Chilean Railways

The
Colombia Short Story
PPP Law on Infrastructure
Private Equity Project
Fund of Funds Bonds

2 Latin Infrastructure Quarterly XXXXXX XXXXX

Contributors Latin Infrastructure Quarterly 3

Dear Infrastructure Practitioners, Contributors

Abello, Alessia
Welcome to the third issue of Latin Infra- Posse, Herrera & Ruiz Abogados

structure Quarterly! Abrantes, Mariana

A
PPP Lusofonia
llow me to briefly take you through every article featured inside. This
issue starts by covering the initiative of the Chilean government to im- Bogan, Andrew
prove the national rail network with the participation of the private sec- Bogan Associates
tor through the adoption of Intelligent Transport System applications. In
this issue we also feature a really insightful article on a topic not much discussed but Brieba, Daniel
of great importance: shorting infrastructure stocks. A complete analysis of the recent ARA WorleyParsons
PPP legislation enacted in Colombia is also focus on this third issue. From Spain we
received a thorough examination of the legal and financial aspects of the structur- Casanova, Mauricio
ing of a PPP through a case study. We put together an interview with a Managing Ministerio de Transporte y
Director of a private equity fund of fund firm based in the U.S. and Brazil focused Telecomunicaciones (Chile)
on underserved markets such as infrastructure because we believe that the creation
of such a firm is an exciting development for our region. Project bonds has been a Corvalan, Ana
topic much discussed lately which is why we are featuring a complete analysis on Espirito Santo
the state of that market and its reality in Latin America. We also feature an article
on one of the biggest infrastructure projects currently being analyzed in Paraguay Duke, Russell
which is the modernization of the public transport system in the metropolitan area National Standard Finance
of Asunción. This issue also presents some guidelines for infrastructure projects and
companies trying to raise funds internationally. We present a piece on the state of Figueroa, María Fernanda
infrastructure development in Costa Rica which argues for further encouragement ARA WorleyParsons
of private sector investment. Another topic widely discussed nowadays, particularly
in countries going through economic contraction, is the management of PPPs con- Hidalgo, José Miguel
sidering budgetary restrictions; we feature an integral piece of this issue in Portugal. International PPP Consultant
We also interviewed a PPP consultant with vast experience in Chile to discuss the
factors behind the successful Chilean experience and the lessons learned that can be Latini, Estevao
applied in other countries. The last article is a comprehensive view of the state of the Latin America Alternatives
infrastructure industry in our region considering worldwide economic conditions.
As we have done in the past covering a specific infrastructure conference, in this Ortiz, Raul
issue we cover the II Brazil Infrastructure Investments Forum as we prepare for the Deloitte
third Forum that will take place in New York during the fall.
Sherman, Declan
I would like to thank all of the contributors for this issue for their great work. Everlight Capital

I hope you find this third issue interesting and enjoyable. Please do not hesitate to Villalobos, Federico
contact me at patricio@liquarterly.com should you have any questions and/or com- E3 Capital Costa Rica
ments. As always, I encourage you to send us feedback on, and new ideas for, our
product. Vouga, Rodolfo
Vouga & Olmedo Abogados

Sastre, Julián
International Transport Consultant

Patricio Abal.

Editor

Contents 5

Contents
Intelligent Transport Systems for the Chilean Railways:
A Proposal based on Public Private Sector Partnerships ......................................6

The Short Story on Infrastructure .......................................................................14

Colombia:
The Infrastructure Plan Relies on the New PPP Law..........................................17

Legal and financial structuring process of Zaragoza
LRT Line 1 under a Public Private Partnership scheme......................................19

Private Equity Fund of Funds – Latin America Alternatives...............................26

Project Bonds......................................................................................................28

Paraguay – BRT Public Transport System...........................................................32

Raising Capital offshore for infrastructure companies and projects .................34

Costa Rica’s Infrastructure Challenge ................................................................36

Managing PPPs for Budget Sustainability
The case of PPPs in Portugal, from problems to solutions ................................38

11 Brazil Infrastructure Investments Forum -NYC............................................46

The Chilean Experience......................................................................................49

The State of Investment in Turbulent Times .......................................................51

6 Latin Infrastructure Quarterly Projects

Intelligent Transport
Systems for the
Chilean Railways:
A Proposal based on Public Private Sector Partnerships

Mauricio Casanova Daniel Brieba
Head of Projects and Development Industrial Engineer, MBA
Logistics Development Program – Ministry of ARA WorleyParsons (http://www.ara-worleypar-
Transport and Telecommunications - Chile sons.com)
mcasanova@mtt.gob.cl dbrieba@ara-worleyparsons.com

Julián Sastre María Fernanda Figueroa
International Transport Consultant Civil Engineer
Technological Advisor at the Caminos de Hierro ARA WorleyParsons
Foundation (http://www.fcaminoshierro.com) (http://www.ara-worleyparsons.com)
juliansastre@juliansastre.com maria.figueroa@ara-worleyparsons.com

ITS – Intelligent Transport Systems – is a term which is used to describe the wide range of
computer and telecommunications based technologies and applications geared towards
the resolut ion of transport problems through the use of specially designed systems.

T
ransport management is in- • The exhaustion of conventional solu- Transport and Telecommunications, has
creasingly more aware of the tions, unable of solving on their own developed a plan aimed at the adoption
need to adapt to policies re- efficiency and capacity problems. ITS applications for use on the railways
garding the environment, city- • The reduction in relative costs of on a national level, in order to propose
planning, passenger safety and security, these systems in recent times. guidelines for the application of these
as well as economic and social factors • The universal adoption of informa- programmes, designed to improve the
such as time lost, comfort etc. Likewise, tion and communication applications. national rail network. This has been con-
ITS have become more relevant as den- • The increase of disposable income, ceived from the viewpoint that, although
sity of traffic and railway operational and therefore, living standards of rail private initiative is vital for the develop-
speed has increased, at the same time, users, who demand increasingly great- ment of these systems, the State must un-
safety levels demanded by users has er levels of comfort and place higher dertake policies which foster them, and
risen. It is difficult to imagine transpor- value on information and time. The in- at the same time, provide leadership on
tation in the future without use of ITS, formation provided to the users must research and development of these proj-
especially as these systems will take on be reliable and swiftly delivered. ects. Likewise, and given that there are
a continually more important role in the multiple needs and limited resources are
coming years. The success of ITS appli- With this reasoning in mind, the Chil- on hand to fulfil them, it is thus neces-
cations is based on: ean Government, through its Ministry of sary to manage and plan these projects,

Projects Latin Infrastructure Quarterly 7

detecting main needs, prioritising and ing standout points: lessons learnt from mation of numerous policies has allowed
choosing between different alterna- other areas and countries, opportunities the systematic and progressive imple-
tives, meaning it is necessary to make a for Chile, role of the State and the ex- mentation of these systems, which as a
deep-rooted analysis of the strategies to perts’ vision. All this with the aim of se- result of their magnitude and complexity;
be undertaken in order to ensure effec- lecting the most appropriate ITS projects require long timeframes, high investment
tive investment. In short, these incentive for the Chilean railway network. levels, the collaboration and coordination
policies will take on the form of Public of numerous agents of different natures,
and Private Sector Partnerships (PPP) International background and the difficulties caused by the exten-
in order to conform with these systems sion of these systems across national
characteristics, as well as with those of The compilation of information, ranging boundaries.
the railways. from bibliographical texts, the study of Depending on the aim of the railways,
competent bodies and authorities, analy- the European case is both a challenge and
Methodological structure of sis of ITS in place, the study of policies an aim, yet in other completely different
the plan development and regulations etc., allowed to formulate cases, the standardisation of systems, from
a relatively all-encompassing vision of their definition through to operation does
Figure 1 shows the synthesis of the struc- the current state-of-play with regards to not present a target. This is clearly noted
tural methodology and working scheme ITS, especially in the railway field. in countries such as the United States,
followed to develop the Railway ITS Plan. It has been clearly noted that Europe where the railways are almost entirely
Firstly, the review of international ITS is at the forefront of these Intelligent Sys- privately owned and the only government
applications already in place, as well as tems in terms of dedication and coordinat- requirements on them are with regard to
policies, plans and strategies operating at ed developments, encouraging organised safety in their operations, as well as in the
a national level, has allowed to charac- progress and mutual cooperation through interaction with other modes of transport
terise the “state-of-the-art” with regards the active participation of its different and the population in general.
to Intelligent Transport System applied member states. The European Union has It must be kept in mind that the aims
to the railways. In parallel, a diagnosis concentrated its efforts into projects such of the railways in Europe and the United
was performed on the ITS already in op- as: ERTMS (European Rail Traffic Man- States are totally different: Whilst in Eu-
eration in Chile as a whole. agement System), the ETCS (European rope, railways are geared mainly towards
The application of state-of-the-art Train Control System) and the GMS – R passenger transport; in the United States
ITS applications to the particulars of the (Global System for Mobile Communica- their main purpose is to transport freight.
Chilean case was focused on the follow- tions - Railway). In addition, the procla- This explains to a large extent the differ-

Figure 1 : Methodological Structure

INTERNATIONAL
ITS
ITS STATE OF LEARNED THE ROLE OF THE
THE ART LESSONS GOVERNMENT
POLICIES, PLANS
AND STRATEGIES

ITS STATE OF OPPORTUNITIES EXPERT’S POINT
DIAGNOSIS
THE ART FOR CHILE OF VIEW

ITS PROPOSED
SOLUTIONS


ent policies and developments in terms of ITS applications have always been narios based on video imagery, for smoke
ITS. These two different types of trans- present in the rail sector. The particulars and structural failure detection through
port result in services with hugely differ- of this transport mode as to its fixed tra- the use of wireless sensors.
ent requirements in terms of safety and jectory and its intrinsic relationship be-
quality. tween track and vehicles means that these Energy and the Environment
Additionally, the criteria through elements are adapted for this specific The management of energy substations
which these problems have been tackled purpose and these elements may provide already has automated processes for con-
are also different. Whilst in Europe the interesting results along different levels necting and disconnecting to the network,
development of these systems is visual- on the system, both with regard to traffic as well as self-checking devices. For ex-
ised as a direct action on the part of the circulation and passenger information. ample, in Japan phase change is no longer
State to establish specific technical norms ITS have been applied to many aspects done using rolling stock, but rather using
and standards, in the United States the of the railway sector, though the follow- the catenary (neutral area management).
system is oriented towards obtaining re- ing are worthy of special mention. This means that there are currently sys-
sults through the establishment of func- tems which make occasional decisions.
tional specifications. Infrastructures Between vehicle and substations/electri-
In general, from the international Signalling systems are intimately linked cal system techniques are being developed
picture we can identify two main areas, to the infrastructure. In reality, it can be which allow for the return of energy re-
which to a certain extent condition the stated that the first smart systems (intrin- covered to the High-Speed Rail Network,
management of proposals presented in sic safety systems) were applied to rail- which is, at the moment, only utilised
this ITS plan: way infrastructure at the beginning of the internally. It is important to highlight the
last century, to detect trains’ locations. fact that this technique is not new and is
• Systems interoperability. Other systems exist, for example those applied frequently in metropolitan rail
• High safety standards applied in tunnels, for emergency sce- systems, which have a sufficient traffic

density to make the currents produced by Germany, the system named RailCom • Passengers information provided
regeneration have a significant volume. Manager operates in the same fashion. through cell phones
There is a major concern regarding the There are also in operation on board • Trains equipped with internet connec-
environment, the need to save energy and smart train driving systems, sending mes- tions.
emissions reduction. In Spain, the Elec- sages from the control post to the train • Emergency scenarios management
Rail initiative aims to find solutions to itself, especially in the case of metropoli- and intelligence to execute protocols.
reduce energy consumption through stud- tan rail networks, through the use of the
ies undertaken by a group of universities CBTC system. High-Speed Rail vehicles Analysis of policies, plans and
and which involves modifications to roll- also offer possibilities for the implemen- the authority of the chilean
ing stock, to infrastructure and to railway tation of this system.
operations management. On board, the train itself already has transport ministry.
automated smart systems, running inde- At the present time, the Ministry of Trans-
Signalling, Safety, Accident rates and pendently from the Control Centre. This port and Telecommunications, through its
Communications transformation is extremely relevant as Transport Under-Secretariat, has suffi-
It can be stated that Control Centres are it changes the architecture in place. The cient empowerment to be able to estab-
where the greatest levels of communica- trains themselves carry on-board intelli- lish inter-operability requirements and
tion density is found and where the hub of gent systems geared towards safety and safety standards through the use of ITS.
the intelligent systems is located, as is the security (that is, of operational type and The Transport Under-Secretariat also has
case with systems such as ERTMS and against deliberate actions) towards envi- the authority to oversee and coordinate
EUROPTIRAILS in Europe, ADTCS and ronmental quality standards, traction and the operation and development of funda-
ATMS in Australia, STAC Rail in Spain engine issues, and braking in compliance mental and complementary services that
amongst others. with quality standards, and finally travel- are part of the public transport network.
There are applications for the traf- ling speed, especially in Japan and Eu- This entity also has regulatory powers
fic management along the lines of the Da rope (Germany, France and Spain). over those privately provided services,
Vinci system, developed in Spain which is which use the public infrastructure. These
a systems integrator, meaning that it takes User Information services must abide by basic regulations,
data from many subsystems and facilitates The following areas are worthy of special without compromising their freedom of
operator management using this data. In mention: operation but they do have to coordinate


their participation with state companies. The railways in Chile are divided firstly into two major geo-
Within the Transport Under-Secretari-
at, the work undertaken by the Railway graphical areas, the Northern regions (Arica – La Calera)
Department can be highlighted. This De-
partment is empowered to embark upon and the Central – Southern regions (Valparaíso – Puerto
studies and propose the construction of
complementary projects, which it consid-
Montt) and then into two sectors relating to passenger trans-
ers necessary for the improvement of rail- port and freight transport. Depending on these areas and sec-
way services.
From the analysis of the experiences tor of analysis, the railway system realities and possible pro-
regarding plans and policies we can ex-
tract two especially important initial con- posals to be offered might be diametrically different.
clusions. The first is that the role of the
State is fundamental for technological role played by the European Commission ETCS which was announced in an EC
advances in the railway sector. The sec- as an organising body is to be highlighted. communiqué to the European Parliament.
ond refers to the areas of activity of those This entity takes on the challenge of pre- Another important topic is the perma-
political plans, which have been centred senting the aims of the European Union nent impulse of railway research in gener-
on three following items: in order that each member state may be al, in which the following projects related
able to develop its own plans, in accor- to the rail sector may be highlighted:
• Inter-operability, compatibility and dance with EU directives. An example of LOGCHAIN for the optimisation of
standardisation of systems and tech- this is the Strategic Plan for Infrastruc- the logistical chain for freight transport
nology used on the railways. ture and Transport in Spain, which aims throughout Europe.
• Implantation and improvement of sat- to improve the efficiency of the systems, 7th Framework Programme for Re-
ellite localisation systems. strengthen territorial and social cohesion, search Policy in the European Union,
• Improvement of railway safety (against and contribute to the general sustainabil- from 2007 and before, a model for pro-
potential accidents and delinquency). ity of the system, as well as encouraging grammes which foster innovation and fi-
economic development and competitive- nancing.
Two main, yet different trends have ness, all within EU guidelines. The Galileo programme shows the
been noted with respect to, the role of We have also seen the relevance which need for the EU to have its own naviga-
the State: In the case of the European is given to the public-private sector part- tion system and has also required the de-
Union, there is a diversity of initiatives, nerships in order to respond to the invest- velopment of systems for its utilisation.
regulations and standards focused the ment needs and the social repercussions Within the confines of the work un-
homogenisation of national railway sys- derived from these technologies. dertaken in the framework of EU policy,
tems, to be able to operate on a single, The most ambitious plan undertaken in the drafting of documents intended to add
border-less network. In this sense, the recent years is the drafting of the ERTMS/ to the debate and initiate a consultancy
procedure (Green Papers) and reference
reports or background studies on specific
issues and how to perform these studies,
often the result of previous documents
(White Papers) can also highlighted. Nu-
merous resources involving the participa-
tion of experts and agents in the sector
add their voice to these documents and to
the debate.
Finally, it should be kept on mind the
importance given in EU plans and poli-
cies to passenger information and inter-
modality issues.
In the USA, the government deals
mainly with issues relating to safety
standards on rail transport, for example
through the application of the Positive
Train Control (PTC) programme. Unlike
its European counterparts, it only dictates
regulations which must be followed. The
government also participates in plans re-
lating to train capacity increase, both in


terms of passengers and freight, which to reduce congestion on the motorways Northern regions (Arica – La Calera) and
provide incentives for those who invest through the transfer of transport of freight the Central – Southern regions (Valparaíso
both from the public and private sector traffic towards less contaminating modes – Puerto Montt) and then into two sectors
through subsidies and/or tax rebates. of transport, such as the railway. relating to passenger transport and freight
The role of the Railway Administra- Another case worthy of special men- transport. Depending on these areas and
tion Authority, RAD, traditionally, has tion is Australia, where something simi- sector of analysis, the railway system re-
been very different to that of its Euro- lar to the scenario in the United States alities and possible proposals to be offered
pean counterpart. The Ministry (Depart- has been noted, by which we mean that might be diametrically different.
ment) of Transport is dedicated mainly from the government standpoint, safety In the Northern region, the privately
to the regulation of the safety conditions on the railways is the maximum priority. owned railways (Ferrocarril Antofagasta-
throughout the railway system, operating Nonetheless, as in the United States with Bolivia (FCAB) and Ferronor) only pro-
through the Federal Railways Adminis- the advancement of high-speed rail, the vide freight transport services. FCAB,
tration (FRA). government also promotes new invest- transports raw materials and copper to
With regards to financing, highly in- ments for top-of-the range rail services and from the mines, and to a lesser ex-
teresting legal regulation apply. These and facilities, using public moneys. This tent, other mining products and Bolivian
include fiscal breaks whilst at the same makes it perfectly clear that currently, the freight (also mostly minerals). FCAB has
time create specific funds, in addition to promotion of the railways as a sustainable managed to independently develop their
the funds created by the FRA y RAD, means of transport cannot be achieved own smart systems, and has achieved
with the latter being the body entrusted without the leadership of the Public Sec- interesting results. Meanwhile, Ferronor
with the definition of programmes for tor Administration. provides similar services serving mainly
acquisition of subsidies, administration the iron ore mining region. Main opera-
and negotiation of tenders, amongst other The national rail system in tions are the Potrerillos Railway (FCP)
activities. The government participates chile and the railway from Los Colorados Mine
in the incentives for research into new to Huasco (FAH). Ferronor has followed
technology, subsidising studies and also The railways in Chile are divided firstly a similar path to the FCAB with regards to
getting involved in initiatives which aim into two major geographical areas, the the field of technological developments,


yet it has involved the public sector in de- owned infrastructure. EFE manages all rails ing and problems in this area are substantial
veloping its smart systems, through tools traffic and also operates passenger traffic, and the difficulties lay on scarce resources,
and productivity instruments provided having to respond to the needs and condi- priorities defined by EFE itself, other agents
partly by the state owned Corporación de tions which arise from each type of service. intervention, and, therefore the need to rec-
Fomento de la Producción (CORFO) There are line sectors in which, due to the oncile varied and sometimes opposed needs
The Central Southern Region is, howev- level of passenger rail traffic, freight may and points of view. Thus on the rare occa-
er, rather more complex. Unlike the North- only be transported at night-time, though sions when collaboration and participation
ern Region, here we find concurrence of in others, as a result of the clients’ needs, between the State and the Private Sector
passenger and freight rail services on a ma- both services run during day and night. In occurs, there is a notable lack of fluid com-
jor proportion of the lines. The former ser- other sectors infrastructure related issues munication.
vices are managed by affiliates of the State directly affect the normal rail traffic flow, Below we have a chart which displays
Railways Company (EFE), and the latter causing problems and delays to all services the SWOT MATRIX of ITS projects in
by private rail carriers, both using the state running on the same tracks. Issues outstand- Chile.

Table Nº 1: SWOT Matrix of National ITS projects
INTERNAL FACTORS
Strengths
Exists in Chile, and is in operation technology of a highly developed level.
EFE is implanting technological elements for its different services.
Some state-of-the-art technology are already in operation on the Santiago and Valparaiso Metropolitan Rail Net-
works, FCAB and Ferronor, which provides an incentive for the remaining companies in the sector to reach these
standards and prove that this level of service is achievable.
The relative cost of ITS investments needed is lesser in comparison to the cost of infrastructure.
ITS applications allow for a more efficient management of the existing infrastructure.
Weaknesses
There is no specific planning schedule in place regarding ITS at a governmental level.
Investment in technology to develop ITS applications is not considered a priority.
There is a clear lack of institutional definition with regards to the promotion of ITS.
There is a different level of technological development between freight and passenger carriers which translates as
a lack of communication between systems.
Poorly coordinated development plans between carriers and the EFE.
Absence of definition of requirements for interaction between systems.

EXTERNAL FACTORS
Opportunities
The technology is in place.
The companies operating in the north of the country, which have shown so far to be successful and profitable, do
so without interference from EFE.
Increase in worldwide awareness regarding the railways as a sustainable transport system.
Growing demand levels in both passenger and freight services.
Presence of world renowned reference points for these systems to improve inter-operability, management, opera-
tion, mobilisation, etc. contributing to the national goals.
Increasing awareness of the importance on safety in all its aspects.
Threats
Independence of the northern network which leads to a lack of information and communication.
Limited investment capacity for the development of new infrastructures.
Scarce interaction between the State and industries.
Major competition from motorways as a result of a lack of regulation and proportional fare structures.
Lack of confidence in the railways ability to transport freight and passengers.
Deficits carried from the past and reduced investment budget.
Delinquency directed at installations which puts in danger the use of this technology.

The above leads to the conclusion that,
before could the Chilean railway system As can be appreciated, the combined par-
could aim to reach the operational levels
seen in modern systems such as those in
use in Europe and the United States, first-
ticipation of public and private sector
ly it is necessary to resolve several issues
on a strategic level. Thus the proposal for
agents in different forms of association is
this is as follows:
• The definition of technological plans pivotal, highlighting the role of the Minis-
which include specific projects for the
short, medium and long term, centring try of Transport, the Public Railways com-
on two major priorities:
1. Reduction of congestion levels.
2. Improvement in safety levels.
pany EFE, the private railway operators
• The Creation of an ITS Institution,
and corporations such as ITS Chile, to
comprised of:
1. Management Level: Inter-minis- agglutinate the national and international
try committee comprised of the
Ministry of Transport and Tele- technological companies.
communications, the Ministry of
Finance, Public Works and Tour-
ism. lish a data base detailing the ITS systems agents in different forms of association is
2. Technical Staff: made up of an ex- used in Chile became clear, as well as the pivotal, highlighting the role of the Min-
ecutive secretariat, given the role need to carry out ex-post studies to evalu- istry of Transport, the Public Railways
of creating plans for the promo- ate the success or failure of the projects, company EFE, the private railway opera-
tion of the use of and the develop- as well as bringing to the surface the actors and corporations such as ITS Chile
ment of ITS applications and ex- tion of different actors, in order to allow (http://www.itschile.cl/), to agglutinate
ercising authority relating to ITS for the delivery of an improved service the national and international technologi-
projects and an Advisory Board for the users. cal companies.
and technical experts, whose role As can be appreciated, the combined
would be the definition of regula- participation of public and private sector
tions and standards.
3. Collaborators: In-
cluded in this group
will be representa-
tives of the differ-
ent railway compa-
nies, both from the
public and private
sector, university
institutions, differ-
ent governmental
bodies regarding
investment and
technology, etc.
• Definition of regula-
tions and standards
which allow for the
communication be-
tween different systems
within the companies
which must interact in
the process.

From the analysis work un-
dertaken, the need to estab-


on Infrastructure
The Short Story

W
hile infrastructure investing has
long been considered to be pri-
marily a private equity investor’s
domain, the past decade has seen
a significant increase in infrastructure investment
in publicly listed infrastructure companies whose
stocks trade on equity markets around the globe.
Since the global scale of public equity investors is
far larger than private equity funds, it seems likely
that over time this trend will continue with more
infrastructure operators choosing to do initial
public offerings of their common stock to raise
additional capital. However, with listed securities
Andrew A. Bogan, PhD trading on an exchange, infrastructure companies
and Thomas R. Bogan, will not only have to contend with the scrutiny
CFA, Managing of investment analysts and their stock recom-
mendations, but also with short selling, where a
Members of hedge fund or other investor borrows shares from
Bogan Associates, LLC a broker and sells them into the secondary market,
betting that the price of the stock will fall in the
future.

Infrastructure Financing Latin Infrastructure Quarterly 15
Short selling is primarily the domain of
hedge funds, which “hedge” their long It is interesting to note that the share price of
equity and market exposures by shorting
equities that they believe are likely to fall Triunfo (TPIS3:BZ) fell sharply after it won
in price. This hedging of equity exposure
by short selling can be done with individ-
ual equities or by shorting whole indexes
the concession for Brasilia’s Airport, while the
using exchange-traded funds (ETFs), al-
though shorting ETFs pose another layer shares of Grupo CCR (CCRO3:BZ) rallied in
of risk and complexity that is outside the
scope of this article. Generally speaking, response to its losing all its Brazilian airport
infrastructure equities have not been very
popular among short sellers historically concession bids to other consortia willing to
for two reasons. First, listed infrastruc-
ture businesses tend to be established op-
erators of profitable infrastructure assets
pay much higher prices.
so they generate fairly stable and robust
cash flows. overly optimistic or overly pessimistic, Overwhelming Debt
Betting against the stock of a company both of which seem to occur more fre-
that has stable (or growing) cash flows and quently in recent years on an increasingly Another condition that can lead to an at-
the high margins commonly seen in natural global basis. When a frenzy of buying tractive short selling opportunity in infra-
monopoly businesses like infrastructure is erupts in infrastructure stocks that drives structure is overwhelming debt. Many
a dangerous game that rarely rewards its prices above a sensible price to earnings lenders like infrastructure businesses
participants. Secondly, infrastructure equi- ratio for a particular infrastructure stock, because the cash flows are usually more
ties typically pay some of the largest divi- or an entire sector, a carefully timed short predictable than for other, more cyclical
dends in the equity markets. Since a short sale can often capture the downside. For businesses. Infrastructure companies also
seller borrows stock from a broker and then example, in late 2007 the market enthu- have physical assets to help collateralize
sells it on the market hoping to buy it back siasm around listed Chinese infrastruc- their debts. While this allows for very effi-
at a lower price in the future, they incur ture and the upcoming Beijing Olympics cient and highly leveraged financial struc-
two costs—the interest owed to the lend- drove prices of Beijing Capital Inter- tures, it can also lead to reckless borrowing
ing broker and the dividend paid through national Airport (694:HK) above HKD and over-leveraged operations that run the
that broker to the original shareholder from $15 per share! The stock has traded for risk of wiping out equity value if a signifi-
whose margin account the stock was bor- many years since closer to HKD $3-$5. cant disruption (like a deep recession) oc-
rowed. Interest rates for stock loan are of- At current prices, the P/E ratio is around curs. Many of the Australian infrastructure
ten more than 5%, sometimes much higher 14 times. investment firms ran into serious problems
if the stock is difficult to locate for borrow- In Latin America, there has been a lot of with debt in 2008 and 2009, which helped
ing and short selling. In addition to that talk in recent weeks about the prices paid to facilitate the bankruptcy and liquidation
cost of shorting, the short seller also must at auction for Brazilian airport conces- of one of the industry’s most venerable in-
pay any dividend on the stock, which in the sions in the run up to both the 2014 World vestment firms, Babcock & Brown in Au-
case of infrastructure equities can be of a Cup and 2016 Rio de Janeiro Olympics. gust 2009. Even more problematic than
comparable scale, often 3-5% and some- Many investors find the high prices paid overwhelming debt at the level of the oper-
times much higher. difficult to justify, though the growth rates ating infrastructure company, some listed
The combined costs of interest and for air travel in LatAm are impressive (as infrastructure funds had two layers of debt,
high dividends coupled with underlying they were in China in 2007). However, having borrowed heavily at the asset level
natural monopoly businesses that rarely in this case only one of the three winning and again at the fund level, making it even
have downside surprises in their earn- bidders has a public listing on Bovespa. more difficult to survive a liquidity panic
ings makes shorting infrastructure stocks It is interesting to note that the share and credit crisis. Astute short sellers were
a very challenging and rarely rewarding price of Triunfo (TPIS3:BZ) fell sharply able to capture some of the downside as
strategy. However, there are some spe- after it won the concession for Brasilia’s many of these heavily indebted firms and
cific conditions that lend themselves to Airport, while the shares of Grupo CCR listed private equity infrastructure funds
shorting infrastructure profitably, several (CCRO3:BZ) rallied in response to its saw their share prices tumble.
of which are discussed below. losing all its Brazilian airport conces-
sion bids to other consortia willing to Loss of Monopoly Power
Valuation Shorts pay much higher prices. However, while
valuation shorts always look obvious in The driving economic force behind most
The price of any asset can overshoot in retrospect, they are extremely difficult to infrastructure businesses is the concept
either direction if market participants are time correctly in advance. of natural monopoly and betting against

16 Latin Infrastructure Quarterly Infrastructure Financing

a natural monopoly business is usually a has not yet detected. This opportunity oc- an exchange, so these opportunities are
fool’s errand. However, in some infra- curred in both steel producers and gravel infrequent.
structure industries changes in technolo- miners in 2008 and early 2009 since the
gy and/or the regulatory environment can credit crisis had halted funding for new Conclusion
create conditions in which a company or infrastructure development projects that
group of companies loses its natural mo- are large consumers of these kinds of In summary, when considering short sell-
nopoly characteristics. This happened in construction materials. Prices for these ing of listed infrastructure equities, it
the telecommunications infrastructure in- commodities fell sharply with disappear- is paramount to remember that betting
dustry with the adoption of wireless phone ing demand, and profitability suffered for against natural monopoly businesses is
technologies. Since massive tangles of several quarters. seldom a good idea. However, there are
wires to each home and business would certain conditions that create opportuni-
no longer be necessary, government regu- Under-Utilized Infrastructure ties for profit for a well-disciplined short
lators around the world broke up telecom seller willing to exercise patience and ap-
monopoly operators and forced competi- Another condition that can be exploited ply industry-specific knowledge to find
tion into the markets. by short sellers is when a newly con- infrastructure stocks that are over-priced.
When landline technology was domi- structed infrastructure asset that is just Among the myriad possible causes of
nant, most governments preferred a sin- beginning to attract users fails to meet over-priced stocks destined to fall in
gle natural monopoly telecom operator, the original projections. Historically, value, good places to look are companies
since the redundant costs and negative predicting the user uptake of an entirely that have unrealistic valuations due to ex-
externalities of many different company’s new asset like a new toll road, airport, uberant buying, dangerous levels of debt
separate telephone wires going to every tunnel, pipeline, or a metro rail system is at the operating and/or fund level, loss of
building were unappealing and a regulat- very difficult. When a listed infrastruc- monopoly pricing power due to technol-
ed monopoly operator was preferred. But ture firm is constructing a new piece of ogy changes or regulation (or both), large
with new technology making a few cell infrastructure, there are significant risks exposure to cyclical commodity prices, or
towers able to cover large regions with- associated with misestimating user up- the failure of a new infrastructure asset to
out all the extra bundles of wires, the ap- take that one does not see in more mature attract users quickly enough to overcome
peal of market competition for consumers infrastructure businesses. Sometimes the costs of its construction. Short sell-
trumped the historic telephone monopoly new assets are not adopted as widely as ing is usually considered a way to hedge
logic. In recent decades, short selling of expected (or as hoped for by an unreal- market risk, but always remember that
legacy monopoly phone operators forced istic government authority involved in there is no limit to the loss potential for
into the world of competition has often making the predictions) and short sellers every single short sale one makes—short-
provided return opportunities, and not can capture downside returns. However, ing is one of the most dangerous games in
only in LatAm, but all over the globe. In most new infrastructure projects raise pri- finance and even most hedge fund manag-
general, when looking to short infrastruc- vate equity capital and are not listed on ers are not very good at it.
ture stocks, businesses that have lost their
monopoly characteristics are a good place
to look since cash flows often become
less predictable and downside earnings
surprises more common in the face of ag-
gressive competition from new entrants
to the business.

Infrastructure Materials
Suppliers
Another group of infrastructure-related
businesses that sometimes lend them-
selves to short selling are the infrastruc-
ture materials suppliers, such as steel, ce-
ment, and gravel companies. Since these
commodity businesses are much more
competitive and cyclical in nature than
operators of infrastructure assets, they
can usually be sold short with success
more frequently, so long as the short sale
is timed to coincide with a cyclical down-
turn in the business that the broad market

Regulation Latin Infrastructure Quarterly 17

COLOMBIA:
Many of these initial projects were
awarded directly after the public bidding
process were declared vacant. Then came
the second generation of concessions,
with a different approach as to the risk
allocation, however of the two contracts
labeled as second generation, only one

The Infrastructure
“survived” while the other project com-
monly known as the COMMSA Project
ended-up being one of the most publi-
cized fiascos.
The third generation came with more

Plan Relies
complex contractual structures and high-
ly regulated risk allocation schemes and
budgeting; it also came along when the
country became calmer, more stable in
the security aspect, thus with more com-

on the petitors (although local). And with this
generation started all the contentious
bidding processes; and by contentious I
mean complex processes where bidders

New PPP Law.
faced each other in public hearings try-
ing to convince the government entity
that the offers of its competitors were not
valid or lacked certain information or was
Alessia Abello misleading or incorrect. We’ve seen of-
Partner Posse Herrera & Ruiz fers rejected due to technicalities, affect-
ing the ability of the government to have
In an unprecedented flash approval process by the Na- competitive bidding processes. Although
the third generation is substantially better
tional Congress, president Santos’ administration suc- structured the main criticism is the lack of
ceeded the enactment of law 1508, 2012, the PPP law. This technical studies supporting the financial
law was a “most expected” piece of legislation in a coun- model of the government and supporting
the due diligence of potential investors.
try in need of infrastructure development and projects Notwithstanding the foregoing, there
and sunk in unnecessary technicalities and bureaucracy was a kind of inertia in the government
and despite all the complications some
in its bidding processes. To address all aspects contained projects were structured and awarded in
in this law would require extensive space and time. How- the last 10 years. However, Colombia is
ever, in view of the interest Colombia has awakened in well behind its peers in infrastructure de-
velopment and one of the reasons gener-
the international infrastructure market, the purpose of ally raised is the existence of complicated
this article is to highlight the most important contribu- rules applicable to the structuring and
awarding of these projects.
tions of this law to PPP projects. One of the challenges this govern-

C
ment had was the approval of the TLC
olombia’s PPP history started tion structure. At the time these bidding Treaty with the US, once this challenge
in the nineties with the first processes were initiated, Colombia was was surpassed then came the need to in-
generation of concession under one of the darkest chapters of its vest in infrastructure but, with the same
agreements executed by the recent history, affecting the interest of in- existing, burdensome rules? The answer
Colombian Government (the Instituto vestors and leaving these projects in the was obvious, to meet the infrastructure
Nacional de Vías –INVIAS-) with pri- hands of local constructors that assumed requirements, a more simple regulation
vate parties. The initial structure of these the risks under quite complicated circum- was necessary.
contracts was somewhat different from stances (not only from the security stand- The next question is evident, is law
the current one (third generation of con- point but also assuming the risk to finance 1508 the answer to our needs? We still
cessions) particularly in the risk alloca- projects affected by security issues). have the possibility to amend any flaws in

18 Latin Infrastructure Quarterly Regulation

the up-coming regulation of the law that can also be a source of well-structured sary constraint that might, at some point,
is currently under study and preparation projects. limit the ability of the government to use
by the Government. However, let’s start Now, this new piece of legislation has these tools to keep the economic balance
with the good news: many critics, including myself. In my of a PPP contract.
From now on, the bidding process can opinion, it does not address the princi- To conclude, it is normal to have nega-
include the prequalification of bidders. pal issues that all the agents involved in tive reaction vis-a-vis this law since it
This is excellent news, although subject structuring infrastructure projects have will not solve the short term problems
in its entirety to further regulation, the identified as subject to improvement (i.e. currently faced by the Infrastructure
law allows to prequalify investors, and encumber some selection process and Agency, but with an adequate regulation
what is more important it expressly per- “seals and stamps” supremacy). The use addressing the main issues highlighted in
mits to finalize the structuring phase of of private initiatives for larger projects this article, it might become an important
the project with the prequalified inves- would have been interesting and block- piece of regulation for the infrastructure
tors by delegating additional studies to ing or limiting the additions in term and sector in Colombia.
the prequalified. If this provision is ad- price to the contracts can be an unneces-
equately regulated, it can be a lifesaver to
the enormous and expensive task the gov-
ernment has in structuring all the projects Alessia Abello is a partner of Pos-
it needs, it will also help accelerate the se, Herrera & Ruiz. Her practice is
pipeline of projects and untie the maze focused on bidding and conces-
the agencies are currently in with such a sions of public contracts subject to
large number of projects of all kinds. administrative law. She also works
To address the fact that PPPs are large- in Mergers and Acquisitions, Proj-
ly considered as financial deals rather ect Finance, Venture Capital and
than mere construction projects, the law Private Equity Funds.
determined that the government has to Alessia has worked in privatiza-
verify that potential bidders have the fi- tions in the financial and electric
nancing capacity and past experience in sectors. She structures infrastruc-
financing projects of this sort rather than ture concession contracts and
experience in construction. Although this their bidding processes, linking
factor is highly unpopular within the Co- them to private financing. She led
lombian construction sector, I believe, the legal team that structured con-
however, that our local industry can com- cessions for construction of Phase
ply with this new approach. Due to their II of the Transmilenio System
participation in the three generations of in Bogotá and advised IFC and
concessions above described the local INCO on the landmark structure
industry is more sophisticated and has a of the Ruta del Sol bidding pro-
great deal of experience in dealing with cess. She has advised bidders in
these complex structures and projects. several public bidding processes,
Finally, private initiatives for PPP proj- mainly for road concessions and
ects are additional tools that can be used procurement, and has counseled
in medium-sized and small projects. Al- private and public companies in
though the general contracting law (Law syndicated loans involving public budget and debt.
890, 1993) included private initiatives for Alessia led the legal team that structured the first public venture capital
construction concessions, this PPP law fund in Colombia, and has advised several fund managers on the struc-
went further on to allow private initiatives turing and incorporation of private equity funds.
in any infrastructure project that can be She has an LL.M. from Cornell Law School and a JD from Universidad
defined as PPP. Although the review and de los Andes. Her native language is Spanish and she is fluent in English
approval process by the government of and French.
any private initiative may take up to 17
months and some fundamentals need to
be further detailed in the regulation, such
as the allocation of the extra points to the
private party that originated the project
and the economic value of the studies and
designs of the originator, in case the proj-
ect is awarded to a third party, we believe
that duly implemented and used, this tool

Deals Latin Infrastructure Quarterly 19

Legal and financial
structuring process
of Zaragoza LRT Line 1 under a Public Private
Partnership scheme.
The first phase of the Zaragoza LRT has been operating since April 2011, although proj-
ect structuring process began in 2004.

Within a legal and financial scheme which incorporates the advantages of private man-
agement, the City Council has an active presence in the control and the management of
the Concessionaire’s activity. In the first eight months of operations, 7 million passengers
have already used this infrastructure.

I
n the beginning of 2004, the Gov- the Infrastructure and PPP team together (non-refundable) grants. The rest of the
ernment of Aragon and the Zara- with Deloitte Abogados, and were leaded investment amount has been financed via
goza City Council signed a General by both partners, Andres Rebollo and a combination of long term debt and eq-
Cooperation Agreement in order to Juan Martinez Calvo. uity from promoters.
promote actions in the urban transport The financial close took place in No-
sector in Zaragoza’s metropolitan area. The Project vember 2010 with a Club Deal integrated
As a result of this agreement, a Technical by BBVA, La Caixa, Ahorro Corporación,
Task Force was set in order to analyse the Zaragoza’s 1st LRT line links the north Caixa Galicia, Grupo Santander and In-
implementation of a LRT line in the city with the south side of the city. The route stituto de Credito Oficial (ICO), with the
of Zaragoza. Since that date and until the includes city areas like Valdespartera, Vía collaboration of the European Investment
end of 2008, a series of studies and tech- Ibérica, Rotonda de Toulouse, Isabel la Bank (EIB).
nical assistances were developed, among Católica, Fernando el Católico, Gran Vía, The construction of the line was
which we highlight the following ones: Plaza de Paraíso, Paseo Independencia, scheduled in two phases, the first one
the drafting of an intermodal transport Coso, Cesar Augusto, Puente de Santia- (Valdespartera – Plaza Basilio Paraíso,
plan and the sustainable mobility plan, go, Ranillas, María Zambrano/Gómez de 7.2 km) has been in operation since April
the feasibility analysis, the technical proj- Avellaneda (depending on the direction), 2011 (the construction started in Septem-
ect (including its preliminary draft ver- Luciano Gracia, Rotonda Juslibol, Parque ber 2009), while the construction of the
sion), and the PPP scheme under which Goya up to Avenida de la Academia Gen- second phase started in July 2011, expect-
the project would be tendered out. eral Militar. This route, which has a total ing to start its operations in 2013.
In November 2007, the Zaragoza City length of almost 13 kilometres, connects The management of the project (fi-
Council contracted services of Deloitte the main areas of expansion of the city. nance, construction, operation and
Spain in order to define the legal and fi- The initial forecasted investment maintenance) is carried out by a Mixed-
nancial scheme to be implemented in the reached 350 million euros, 130 million of Economy Company (MEC), a company
project, elaborate the financial feasibility which have been contributions made both participated both by the private and the
analysis and draft the tender documents. by the Zaragoza City Council and the Re- public sectors where the private partner
The advisory services were carried out by gional Government of Aragon through (SIP) underwrites a majority of shares

20 Latin Infrastructure Quarterly Deals

(thus, having control over it). In April ing a Mixed-Economy Company with a procedure, and
2009, Zaragoza City Council tendered out private major investor (80%), chosen via • Public control and presence in the
the selection of the SIP, which, together a public open tender, being the rest (20%) management of the public service.
with the City Council, would create the owned by Zaragoza’s City Council. The
MEC. selected scheme was chosen after ana- As an example, between the op-
Once the SIP was selected, and the new lysing different possibilities and options tions that were analyzed and discard-
company (MEC) was created, the City (multi-criteria analysis), assessing each ed, we mention the following ones:
Council signed with it a Public Service alternative’s pros and cons, and how each
contract for the construction, finance, op- of them would fit the criteria established • Public Works Concession contract.
eration and maintenance of the new LRT by the City Council, the private sector • Mixed-Economy Company with a
line for a 35 year tenor. and any other stakeholder presumably in- public entity as major shareholder.
Regarding construction, the infrastruc- volved during contract’s valid term. • Two different concession contracts,
ture and rail systems would be object Among the main objectives set one for the construction and mainte-
of a turnkey contract. This contract was out by the City Council, the follow- nance of the infrastructure, and anoth-
signed by the MEC with the construc- ing ones deserve to be highlighted: er one for the operation of the public
tion subsidiary of the private partner (but service.
could have been signed with any other • Public accounts’ off-balance sheet • Public Works concession and creation
one chosen by the private partner), with financing of all costs incurred in the of a Mixed-Economy Company solely
full risk transfer (except for those risks construction and operation of the in- to operate the system, and
established by law). frastructure, • Integrated management carried out
The operation of the service is carried • Minor administrative complexity and by a public company.
out through a sub-contract with a consor- low level of difficulty in project’s im-
tium formed by the shareholders of the plementation, After an initial analysis and the rule-out
SIP. • Need of minimum budgetary sup- of some of the proposed alternatives, the
port (particularly of non-refundable decision would be finally taken between
The management model grants), the first two alternatives, as these were
• Certainty about Contracts’ pricing, the ones that better fit pre-set preferences,
Regarding the legal and financial structur- • Generation of sufficient interest guaranteeing a reasonable and relatively
ing of the project, the decision was made among private promoters in order to high balance between fundamental goals
to implement a management contract us- guarantee a competitive awarding pursued by the City Council.

Selection of private partner
through public tender.

Zaragoza City Council

It contributes with 20% of equity in
exchange for dividends
Signing of Public Service
It contributes with Capital grant Management contract with Private Partner
the MEC
It contributes with Deferred Budgetery
Payments (Availability Payments)
It contributes with 80% of equity in
exchange for dividends

It contributes with know-how in ex-
Mixed Economy Company change for annual (management) fee
Banks
Financial contract (MEC)

Users
Payment of fares

Turnkey Contract

Construction Operation & Maintenance
Contrast Contract


The option of a Concession contract al- presence in the management of the public maintenance) Line 1 of Zaragoza Light
lowed to minimize the risk of non-obtaining service for which the infrastructure is built. Rail “. In April 2009, two bids were re-
an off-balance sheet financing categoriza- As a disadvantage of this scheme, in ceived from:
tion for all requested forecasted investment, comparison with the Public Works Con- “TRAZA” Joint-venture integrated by
it was less complex from an administrative cession contract scheme, there is a greater companies CAF, TUZSA, FCC Construc-
standpoint, it was the easiest to manage, and administrative and legal complexity in ción, Acciona, Ibercaja and Concessia.
it was more “tested” in Spain; however, it terms of project and contract structuring, Joint-venture integrated by companies:
did not allow the achievement of the goal as well as in the management of the pro- Iridium, and Arascón Vías y Obras, with
regarding institutional presence within the cess as a whole. ALSTOM as the rolling stock supplier.
project company. Finally, in July 2009, the Zaragoza
A Mixed-Economy Company, with a pri- The private investor (SIP) City Council issued the final award of the
vate partner as major shareholder, had many contract to the consortium TRAZA, pro-
of the advantages of the concession scheme Since the very beginning, it was clear that ceeding immediately to the incorporation
(to a lesser extent, though), and despite it the required profile for the private partner and formal registration the cited Mixed
complicated slightly the procurement pro- should be the one of an “investment and Economy Company.
cess and its management, it allowed to in- management company of transport infra- In this Mixed Economy company
troduce the factor of “institutionalization” structure”, which would have financial scheme, the private partner (SIP) in ad-
(i.e. public control and presence). strength, knowledge in the private financ- dition to receiving the corresponding
ing of this type of projects, could guarantee dividends as a shareholder, also perceives
Mixed Economy Company the construction of the infrastructure in due a “Know-how transfer Fee” from the
scheme time and at a fixed price, operate the sys- Mixed Economy company. This fee re-
tem and also its long-term management. munerates the contribution and transfer
Among the main advantages of the finally In addition to the control of the Mixed of knowledge by the SIP to the company,
selected scheme, the following ones de- Economy Company and the leadership in and allows to generate a “break” in the In-
serve to be highlighted: the management of the service, the City ternal Rate of Return (IRRs) of the differ-
It allows the involvement of the private Council would be contracting the con- ent partners, increasing the one from the
investor in the long-term management of struction works at the very moment of the private investor in comparison to the one
the project’s life cycle cost. award. of the public stakeholder.
It implies a significant risk transfer to In February 2009 the City Council of Regarding the procurement process for
the private investor, which reduces the Zaragoza launched the tender process for the selection of the SIP, it deserves to be
risk of on-balance sheet financing. the “selection of the private partner which noted that the tender documents access
It reduces the financial effort of equity will participate with the city of Zaragoza requirements (both regarding financial
contributions from the Public Authorities. in the constitution of the Mixed Economy strength and technical capabilities), par-
It “institutionalizes” the project, al- Company that will manage the public ser- ticularly demanding if compared to the
lowing the City Council to have an active vice (building, financing, operation and usual practice in the Spanish market.

Composition of the Mixed Economy Company

20%
5%

11.8%
25%

Tuzsa

CAF

FCC
16.6%
Acciona

Ibercaja

80% Concessia
25%

16.6%
TRAZA Ayto. Zaragoza

22 Latin Infrastructure Quarterly Deals

Requirements of financial standing Also, another of the particularities Thus, once chosen the alternative of a
were mainly related to the fill-out of a of this project is that the Shareholders Mixed Economy company with a public
statement of good financial standing pro- Agreement (incorporation deeds) of the entity as minor shareholder, a basic fi-
viding evidence (in accordance with com- future Mixed Economy Company were nancial structure was defined, taking into
mon practice in financial markets) that the drafted as a part of the public tender account Administration’s restrictions re-
private partner would be capable of carry- documentation provided to bidders. This garding potential contributions of public
ing out investments and payments for at fact had great significance because, if the resources for the operation period and
least 400 million euros in a similar time- legal relationship between the MEC and also, after having analyzed forecasted
frame to the one of the project and the the City Council will be governed by the demand and associated costs, the public
submittal of audited financial statements tender documents, the legal relationship contribution requested during construc-
of the past three years. The submittal of between the Private Investor and the Pub- tion (grant) to make the project feasible
an income statement with an average to- lic stakeholder will be governed by the from a financial standpoint, considering
tal turnover in the past three years over a said shareholders agreement. different volumes of public payments dur-
million euros, was also compulsory. ing operation period.
In what relates to technical and profes- Financial and budgetary struc- As it will be explained below, the pay-
sional standing, the following require- turing ment mechanism was partially structured
ments can be highlighted: linked to demand (payment per user) and
Experience in at least two construction Financial feasibility analysis was con- complemented with deferred budgetary
contracts for public works on rail infra- ducted by the City Council under the support configured as availability payments
structure (urban or metropolitan) with an assumption that no LRT system is self- and dimensioned on different payment lev-
investment of at least 100 million of euros sustainable from a financial perspective. els per user, combining different levels of
each, performed over the past five years, That is, the revenue (fees charged to us- average rate. This mechanism also allowed
Experience in the financing and man- ers) after operational and maintenance the revenue risk of the project to be trans-
agement of transport infrastructure (any cost would not be enough to compensate ferred into two parts; one part would be
type), in at least two projects already in the investment (including construction transferred on a demand basis and the other
operation and under any type of collabo- costs, financial expenses, profitability, part, in connection with the infrastructure
ration (including Public-Private Partner- etc.). Consequently, public support would and service availability and quality.
ship). The amount of the investment of be necessary. After defining these initial conditions,
each of these projects should be at least Public support in LRT systems under and based on all existing data, along with
100 million euros, concession or PPP structures usually are all technical, financial, macroeconomic,
Experience in the financing and man- as follows: tax and accounting assumptions, main cri-
agement of a railway infrastructure (urban teria of financial feasibility of the project
or metropolitan): at least one experience • Contributions as non-refundable were set out:
in operation at the time of the submittal, grants during construction period, • Requirement of a minimum equity
Experience in the operation of an in- • Contributions during operation IRR for the private partner (around
frastructure servicing up to 8,000,000 period (public deferred pay- 10%)
passengers per year o involving more ments), or • Requirement of a maximum leverage
than 1,000,000 kilometres per year. • A combination of the previous. (70%)
• Requirement of a minimum Debt Ser-
vice Coverage Ratio (1,35x – 1,40x).
• Requirement of a maximum debt re-
The initial forecasted investment reached 350 payment period (below 27 years).

million euros, 130 million of which have been Financing structure
contributions made both by the Zaragoza In broad terms, the financing scheme for the
structuring of the project considered that:
City Council and the Regional Government Zaragoza City Council committed the
contribution of a non-refundable grant
of Aragon through (non-refundable) grants. during construction of up to 140 mill €,
(definitive amount would be offered by
The rest of the investment amount has been the private partner, entitled to offer a re-
duction, subject to score in the bid evalu-
financed via a combination of long term debt ation process). Other variables subject to
scoring in the bid evaluation process were
and equity from promoters. the amount of availability payments and a
reduction in the construction term.


Non refundable grant
(max Eur 140M)

Long-term debt
Base funding structure in
Total Funding Needs (max 70%)
the financial feasibility study
Private Financing
20% Public
Equity
(min 30%) 80% Private

Source: Self Research

This partial public funding of the works nent linked to the infrastructure qual- amount will depend on the annual maxi-
was aimed at minimizing the amount of ity and availability. mum amount that TRAZA offered in its
public payments during operation period Under these premises, and considering bid and on the applicable deductions for
(availability payments) while maintaining the high level of revenue expected from all breaches in the fulfillment of the set
significant risk transfer and preserving a users (based on existing demand stud- criteria regarding availability and quality
preponderant weight of private financing, ies and the average fare estimated), the specifications.
thus not distorting the philosophy of the selected payment mechanism was struc- This amount is payable on a quarterly
PPP scheme. tured as a combination of (i) revenues basis and is updated annually according
The Mixed Economy Company is fi- related to demand, and (ii) “availability to CPI-index. The system of deductions
nancing the remaining cost through a mix payments” by the City Council. and penalties that applies to the availabil-
of equity and long term debt under Proj- In this sense, the revenue received by ity payment is not limited by any condi-
ect Finance scheme. the MEC in consideration of the service tion, that is, no minimum payment is
consisted of: guaranteed by the Administration for this
Payment Mechanism. Payment per user. That is the amount purpose.
of revenues that the management com- The “coefficient of availability and
The Payment Mechanism of this project pany is entitled to charge to whoever uses quality” is calculated on the basis of nine
was aimed at regulating the public pay- the LRT, considering just those users that criteria, among which we highlight the
ments complementary to the revenues effectively validate single or multiple following: Services Offered (degree of
collected directly from LRT’s users. In journey tickets. fulfillment of its offered services), Ac-
the structuring process of this payment The availability payment, which is cessibility (global accessibility, operation
mechanism, besides allowing the finan- the amount that the Zaragoza Council is of vending machines and ticket validat-
cial feasibility of the project, the follow- obliged to satisfy to the MEC (in addi- ing machines), Information to travellers,
ing goals were also considered: tion to the payment collected from users), Timing (punctuality), Customer Services,
• Mitigation of the demand risk while as payments connected to quality and Travel Comfort, Security and Environ-
keeping investors/manager signifi- availability of the infrastructure/service mental issues.
cantly committed to the success of the (arising from a strict monitoring system, According to the feasibility study, the
project, and including also an auto-monitoring car- mix of income of the Mixed Company
• Introduction of a significant compo- ried out by the own company). The total forecasted (Base Case) over the 35 year

Payments from Availability Deductions / Other commercial
Income MEC
Users Payment Penalties income

Source:Self Research

Latin Infrastructure Quarterly Issue 3

Latin Infrastructure Quarterly Issue 3

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