Latin Infrastructure Quarterly – Issue 7

1. XXXXXX XXXXX Latin Infrastructure Quarterly 1 Latin Infrastructure Quarterly Oil & Gas Infrastructure Odebrecht: Project Financing in Latin America Company profiles: Abengoa, Neoenergia and Grupo Hermes Lessons Learned in PPPs Moffatt & Nichol at the Puerto de Cartagena Peru – UHE Chaglla.Picture:Almir Bindilatti
2. Letter From the Editor W elcome to the 7th issue of Latin Infrastructure Quarterly! As always, we are proud to bring you coverage of key industry issues, projects and companies. As with the letter from our 6th issue I would like to, besides introducing you to the content, offer some brief observations of what I consider to be relevant devel- opments that occurred during the last quarter. LIQ 7 The ideas for most of this issue’s content came from two con- ferences organized by the Inter-American Development Bank (“IADB”) that I was invited to earlier this year. So I would like to thank the IADB as well as the contributors for making this issue possible. I certainly hope it is of interest to practitioners. This issue covers the topics of Oil & Gas and Logistics in- frastructure. As the economies in the region grow, infrastructure investments in these sectors are absolutely necessary to improve competitiveness and avoid bottlenecks. The articles discuss, among other things, the need for the public and private sectors to work together and the challenges to finance these investments. We are also featuring an interview to an executive of the Uru- guayan Corporación Nacional para el Desarrollo. This entity is critical for the successful development of the industry under the PPP model in that country. It is interesting to see how smaller markets, such as Uruguay, are beginning to be subject of analy- sis and conversation in industry gatherings due to the political and institutional support for private sector involvement in the industry. Brief Observations Reviewing LIQ’s weekly newsletters for the past quarter, I would like to bring to your attention the following topics: • The importance of roadshows. We read about the regular international roadshows conducted by public sector of- ficials from Peru, Colombia and Brazil. Not surprisingly, these were also the jurisdictions from where the majority of the relevant news came this quarter. The takeaway is clear: it is imperative for government officials from all around the region to regularly plan, at least, a yearly roadshow to showcase their project portfolio. Jurisdictions compete against each other. That is a fact that should be remembered. • The right course. Uruguay has been on the right course for quite some time now and the market has noticed. Investments were announced in the renewables sector (solar and wind) by various international actors. Contributors Baquero, Andrés Center for Latin American Logistics Innovation Cabello, Richard International Finance Corporation de Araújo Gagliano, Ulisses Nelson Wilians & Advogados Associados de Sivory, Charles Neoenergia Duke, Russell National Standard Finance Espelt, Ramón Esteruelas Aguirre, María José Abengoa Fonseca, Vinicio Odebrecht Engineering & Construction Gomez-Pardo, Federico Stratlegal Horton, Michael Moffatt & Nichol Ladeuix, Hernán Márquez Certucha, Eduardo Pérez, Marcelo Corporación Nacional para el Desarrollo Vaz Nogués, Camila Vouga & Olmedo Abogados Vouga Zuccolillo, Rodolfo Vouga & Olmedo Abogados Wu, Manuel Metro de Lima To our readers: Latin Infrastructure Quarterly2
3. Latin Infrastructure Quarterly 3Letter From the Editor • MTC’s announcements. During this past quarter we saw a very active Peruvian Ministerio de Transporte y Comunicaciones (MTC) with announcements relat- ing to the 2nd tranche of the Metro de Lima, Lima’s in- ternational airport, Jorge Chávez, and a large pipeline of projects to be marketed during the next few years. • News overload. News came out from numerous sectors in Co- lombia:(i)rail–FFCCCentraland“CorredorVerde”;(ii)roads – Bucaramanga-Cúcuta; (iii) waterways – Magdalena river; (iv) airports – Bogotá and Cartagena; (v) ports – Buenaven- tura. But perhaps the most significant announcement is the creation of a unit for large works within the Banco de Bogotá. • Brazilian ports. As was expected, we saw announcements of tender processes in this sector relating to the ports of Santos (São Paulo), Belem (Pará) and Paranaguá (Paraná). • Logistics hub. It is commendable how Jamaica has sought assistance from international experts and is actively look- ing to attract international investors and operators to im- prove its port and related infrastructure to take advantage of the increased regional and world-wide cargo traffic. • The usual suspects. Despite all the exciting news we read on a daily basis, the usual suspects keep reminding us that the region is still an emerging market. Political interfer- ence, strikes and social activists were subject of news af- fecting the industry in Argentina, Brazil, Mexico and Chile. I would like to conclude with a thought. At a conference I re- cently attended in Kiev, I heard about the challenges CIS coun- tries are facing when trying to develop much needed social and 2013 Latin Infrastructure Quarterly. No statement in this magazine is to be construed as a recommendation for or against any particular investments. Neither this publication nor any part of it may be reproduced in any form or by any means without prior consent of Latin Infrastructure Quarterly. economic infrastructure under the PPP model. A lot of these challenges are the same Latin America continues to face. Some of these challenges relate to technical matters such as regulatory approaches, capacity building techniques or project finance structures. However, the most significant challenge they face, the same way we do, is securing long-term political support to the idea of involving the private sector in the development of infrastructure. This is certainly not an easy obstacle to overcome as politicians tend to see infrastructure as a source of short-term opportunities and PPPs represent a complete overhaul to the tra- ditional procurement model that grants, with certain exceptions, too much discretion to politicians and government contractors. Should you have any questions and/or comments please do not hesitate to contact me. I hope you enjoy this issue. Sincerely, Patricio Abal. Editor 1.202.446.7367 @LIQEditor
4. Latin Infrastructure Quarterly4 Sponsors
5. 5Contents Contents New Frontiers for Public-Private Partnerships: The 2013 PPPAmericas Conference……………………………………………………………………………………………….6 Moffatt & Nichol at the Puerto de Cartagena…………………………………………………9 After the Boom… Investments Required……………………………………………………13 Lessons Learned and Good Practices on PPPs…………………………………………….18 Company Profile: Abengoa ……………………………………………………………………..22 Uruguay: The Corporación Nacional para el Desarrollo……………………………….28 IFC Advisory Services on PPPs………………………………………………………………..31 Odebrecht: Project Financing in Latin America…………………………………………..34 Logistics Infrastructure……………………………………………………………………………38 The Evolution of the Mexican Public-Private Partnership…………………………….41 Colombian PPPs’ Legal Framework in a Nutshell……………………………………….46 Planning, Developing and Financing Public Hospitals and insight into the grow- ing MedicalTourism Industry……………………………………………………………………51 New Regulation for Construction Financing and Engineering Projects in Brazil … …………………………………………………………………………………………………………….55 Company Profile: Neoenergia…………………………………………………………………..60 Benefits for Industrial Parks in Paraguay……………………………………………………62 Public-Private Partnerships Focus of the 2013 Inter-American Development Bank AnnualMeeting………………………………………………………………………………………67 Company Profile: Grupo Hermes………………………………………………………………70 9 22 34 70
6. Latin Infrastructure Quarterly6 Institutions New Frontiers for Public-Private Partnerships: The2013PPPAmericas Conference Public-private partnerships (PPPs) are an increasingly important tool for infrastructure development in Latin America and the Ca- ribbean. But the speakers and participants at the 2013 PPPAmer- icas conference, held in February in Cartagena, Colombia, made it clear that PPPs are a versatile and powerful instrument that can be used in a wider variety of projects and settings than they have traditionally.
7. Latin Infrastructure Quarterly 7Institutions P PPAmericas drew over 500 peo- ple from 27 countries, represent- ing government, international organizations, the private sector and NGOs, for discussions centering on the theme “PPPs in Latin America and the Caribbean: New Frontiers, New Actors.” The conference, organized by the Multi- lateral Investment Fund (MIF), a member of the Inter-American Development Bank (IDB) Group, has become the leading event focusing on PPPs in infrastructure and basic services in Latin America and the Caribbean. The National Planning Department of Colombia co-organized the conference. Colombia was well-suited to host the conference, given the country’s important developments concerning PPPs and the high level of interest in the topic. Last year Colombia approved a new PPP law that could support a larger project pipe- line through more standardized processes and improve risk allocation. The Colom- bian government has committed by 2014 to grant USD 26 billion through public- private partnerships for highways and railways alone. Many at the conference were interested in learning more about Colombia’s new PPP framework and en- joyed a related panel featuring prominent members of the Colombian public and private sectors. The theme of the conference, New Frontiers and New Actors, was ad- dressed throughout the event. One pan- el, New Frontiers: PPPs in the Social Sector, explored PPPs as an innovative means of not only building schools and hospitals, but also of providing im- proved health and education services. The panel featured Cecilia María Vé- lez, a former Secretary of Education of Bogota and Colombian Minister of Education who was responsible for de- veloping Bogota’s successful program of school concessions. At the same time, PPPs are no lon- ger limited to larger or more developed markets, as was demonstrated at the con- ference. Another panel, PPPs in Small Economies, featured participants from Ja- maica, Guatemala, Trinidad and Tobago and Honduras, all of which have launched ambitious PPP programs. The conference made it clear that governments continue to consider PPPs an important option for developing their infrastructure and providing essential services, notwithstanding the global eco- nomic problems of recent years. During the panel New Sources of Funding for PPPs, there was a discussion of the im- portance of local sources of funding, including pension funds, for closing fi- nancing gaps exacerbated by reduced in- ternational bank activity. There were knowledgeable and high profile speakers throughout the event including at a special “Davos-style” dialogue, “Public-Private Partnerships: When and How?” There, participants dis- cussed the potential benefits of PPPs and under what conditions these contracts are successful. The panel was moderated by Alexandre Meira Da Rosa, Manager of the IDB’s Infrastructure and Environment Sector, and featured Luis Fernando An- drade Moreno, President of Colombia’s National Infrastructure Agency, Sandro Testelli, Director for Mexico and Central America at KPMG, and Antonio López Corral, Professor of Applied Economics Alexandre Meira Da Rosa, Manager of the IDB Infrastructure and Environment Sector Luis Fernando Andrade Moreno, President of Colombia National Infrastructure Agency
8. Latin Infrastructure Quarterly8 Institutions at Polytechnic University of Madrid. The institutional framework for PPPs has always been an important topic at the conference, and in Cartagena it was ad- dressed by a panel on How to Develop an Institutional “Architecture” for PPPs. This issue is closely related to the MIF’s own work in the region, supporting the le- gal, regulatory and institutional environ- ments for PPPs through 19 projects total- ing US$20 million. The MIF also plays a leading role in disseminating knowledge on the enabling environment for PPPs, both through the PPPAmericas conferences and through the Infrascope, an interactive index and learning tool produced in partnership with the Economist Intelligence Unit that evaluates the readiness and capacity of 19 countries in Latin America and the Carib- bean to implement PPP projects in the transport, water and sanitation and elec- tricity sectors. At PPPAmericas, the MIF celebrated the release of the third edition of the Infrascope, which shows that the gap between emerging and developed PPP market readiness in Latin America and the Caribbean is narrowing. For the first time, this year’s edition also high- lights the opportunities for “green” PPPs as a growing and innovative area for the region. The Infrascope has also attained global reach; the Asian Development Bank has recently released a version fo- cusing on the PPP capacity of countries in the Asia Pacific region. At PPPAmericas, the MIF also un- veiled its new regional program, New Frontiers in Public-Private Partnerships, which aims to strengthen government capacities in the design, execution and management of PPPs using a new modal- ity of advisory services and will address gaps that prevent the launch of specific PPP projects. Luis Alberto Moreno, President of the IDB, and Mauricio Cárdenas, the Colom- bian Minister of Finance, closed the con- ference. Minister Cárdenas spoke of the important progress made by the Colom- bian economy, the continued need to de- velop the country’s infrastructure, and the important role that PPPs can play in this process. President Moreno outlined the important support the IDB has provided throughout all stages of the PPP develop- ment process. As announced by President Moreno at the conference, the MIF plans to host the next round of this successful event in ear- ly 2015 in Uruguay. All those interested in gaining insight on PPPs from important players in Latin America and worldwide are encouraged to attend. In the mean- time, the MIF will continue to share up- dates on its PPP-related activities through its website, Luis Alberto Moreno, President of the IDB
9. Latin Infrastructure Quarterly 9Companies Longterm Client-Consultant Partnerships – Relationship Readies CONTECAR and Manga for Profitable Future Moffatt & Nichol at the Puerto de Cartagena Container stacks at CONTECAR Terminal
10. Latin Infrastructure Quarterly10 Companies For more than a decade, Moffatt & Nichol has maintained a continuous and solid relationship with Sociedad Portuaria Regional de Cartagena (SPRC) and CON- TECAR S.A. on Colombia’s Atlantic coast. Unlike many client-consultant relation- ships that live from contract to contract, Moffatt & Nichol and the organizations have become true strategic partners, with a shared goal of making these facilities among the best in the hemisphere. SPRC had taken over the Manga Ter- minal from COLPUERTOS in 1992 and had quickly embarked on improving the efficiency of the terminal assets with new equipment, demonstrating to shippers that they could have confidence that their con- tainers would not be damaged or lost in “Moffatt & Nichol and SPRC teams work closely together in a partnership that is able to quickly adjust to the dynamics and challenges of the aggressive expansion program and operational pressures” Manga Terminal Moffatt & Nichol engineers working alongside SPRC staff
11. Latin Infrastructure Quarterly 11Companies transit. At the same time, Moffatt & Nich- ol had been involved in designing phased development for the CONTECAR Termi- nal for the Flota Mercante Grancolombi- ana and assisting SPRC with improve- ments to its Manga Terminal container operations and yard systems. Over the next 10 years, the organiza- tions established a professional rapport. In late 2007, when SPRC bought the CONTECAR Terminal, both develop- ment projects were brought under the same umbrella and Moffatt & Nichol was contracted to assist SPRC with the strategic investment plan for both facili- ties. This contract became the foundation of a close working relationship between Moffatt & Nichol and SPRC that has seen the Manga Terminal conversion and the partially built CONTECAR facility de- velopment emerge as two of the most modern and efficient container terminals in South America and the Caribbean to- day. SPRC and CONTECAR are targeting a capacity of 5 million TEU by 2017, look- ing to become the 25th busiest container port in the world. Further reinforcing the consulting rela- tionship is the close involvement by SPRC Executive Director Captain Alfonso Salas and his team at all levels of the expansion program and terminal operations – a team that includes approximately 900 perma- nent staff and port workers. As a result, Moffatt & Nichol and SPRC teams work closely together in a partnership that is able to quickly adjust to the dynamics and challenges of the aggressive expansion program and operational pressures. As designer, the Moffatt & Nichol team contributes strategic development and design recommendations used to prepare conceptual and final designs for expansion. The CONTECAR and SPRC engineers prepare and administer the contracts and oversee the construction. They are also fully involved in the chal- lenges of constructing new facilities with the added pressure of terminals that continue to operate at full strength even as demand for new capacity in- creases daily. Teamwork and commu- nication have proved essential during such times. In 2007, as can be seen in the images, the CONTECAR Terminal was essential- ly an unpaved yard of some 18 hectares with 350 meters of berth. The facility had no container cranes and boasted extremely modest gate and storage facilities. While the total area is about 100 hectares, much of the site was covered with poor quality dredged spoils lagoons left over from the original construction and completely un- suitable for storage of anything, let alone containers. The local name for these con- tainment cells was the “piscinas” because a stone thrown into the mud would im- mediately sink out of sight 10 years after the material was originally pumped there. The cost to clear approximately 3 mil- lion cubic meters of this dredged spoil from the terminal area was estimated at up to US $50 million, after which some 2 million cubic meters of clean fill was needed to bring the site to the level re- quired for development – at an additional cost of US $60 million. These initial technical and financial challenges were met with the preparation of a carefully phased ground improve- ment program that permitted the incorpo- ration of this poor material into the site improvements. This approach avoided the costly dredged material removal and drastically reduced the need for imported fill to develop the container yard. However, it was necessary to pre-load most of the expansion area to a height of some 3 to 5 meters, which meant that the paving plan had to be carefully phased to allow terminal expansion. At the same time, the demand to store vehicles and non-container traffic in the terminal was increasing daily and it was not unusual to see vehicles and equipment stored on top of the pre-loaded areas while the settle- ment was taking place. With the ground improvement plans in place, Moffatt & Nichol designed a series of berth extensions at CONTECAR, with the last section designed in late 2012 to provide the full terminal length of almost 1,000 meters. As the CONTECAR Terminal expan- sion moved ahead, SPRC turned its atten- tion to the Manga Terminal where Moffatt & Nichol designed a berth extension of 169 meters and storage area expansion in 2011, which was constructed in 2012 and is now in operation. The success of the SPRC operation and its rapid pace of expansion has proven to be a major attraction to large international shipping companies and has established 2007 2012
12. Latin Infrastructure Quarterly12 Companies Cartagena as a “must call” port on South America’s east coast and the Caribbean trade routes. At this time, 70 percent of the container traffic through the two terminals is brought by Hamburg Sud, which has also established Cartagena as its regional transshipment hub. As a result, 30 percent of the 2 million containers that arrive and leave the port are destined for Colombian customers, while the other 70 percent are transshipped to other destinations. The large volume of business reduces port handling costs, which in turn is economically beneficial to Colombian shippers and importers. Further expanding the terminals’ han- dling capacity, the new facilities have also been designed to accommodate the largest vessels that will be able to pass the Panama Canal after 2015, with new cranes that can reach out 24 containers wide, as compared to the previous stan- dard of 13. The two terminals, now modernized under the SPRC banner, have received numerous accolades over the past 10 years and have been named “The Most Efficient Port in the Caribbean” by the Caribbean Shipping Association six times. Over the course of the US $1 billion expansion program for both terminals, in addition to design, Moffatt & Nichol has prepared a series of commercial studies that include market analyses, evaluations of the implications of the Panama Canal expansion program and assessments of potential long term expansion alterna- tives. The firm has also prepared feasibility studies and design for a new deeper water access channel to Cartagena Bay and will shortly begin preliminary design work on a new river port about 500 kilometers up the Magdalena River that will connect to the SPRC facilities bringing contain- ers, coal and other commodities by river through the Canal del Dique. Moffatt & Nichol is proud to be as- sociated with every facet of this exciting program and is delighted to be part of the project team at SPRC. The working re- lationship between SPRC and Moffatt & Nichol has been a great success and it has also led to major economies of scale in the cost of the facilities. The cost of the expansion work at Cartagena consistently comes in at about 60 percent of the av- erage cost for terminal projects in South America. This incredible change in the con- version of both container terminals to state-of-the-art, high capacity facilities has been a clear demonstration of the far sighted and ambitious goals of the man- agement team and the SPRC board, which is constantly looking toward the future and improving the attractiveness of Carta- gena and Colombia as a place to do busi- ness. M ichael Horton, PE, CEng mhorton@mof- www. Mi- chael Horton, a vice president of Moffatt & Nichol, is a specialist in the evaluation and implementation of port and waterfront develop- ment projects. During his 35 years in the port planning sector, he has worked in more than 85 countries and is familiar with most of the major ports in the world. He has managed or participated in port projects, large and small, in both developed and developing coun- tries. His international project ex- perience includes the Panama Ca- nal Expansion, the Port of Tanjung Pelepas in Malaysia, the CONTE- CAR and Manga Container Terminals in Cartagena, a national port de- velopment plan in Algeria, a port master plan in Jordan and numerous projects in South America, Asia, Africa and the Middle East.
13. Latin Infrastructure Quarterly 13Projects After the Boom… An energy consumption boom following one of the most prosperous decades in recorded history has unveiled an urgent need to expand oil and gas infrastructure. Investments Required T he past decade has been one of most economically prosper- ous periods in recorded his- tory, leaving the period dubbed “the lost decades” behind. This has been translated into a strong oil and gas con- sumption growth. As a consequence, en- ergy infrastructure has been significantly stretched, forcing countries to increase imports and to think about capacity ex- pansions in several points along the en- ergy chain. Argentina and Brazil are both at a critical juncture. Both with massive hydrocarbon resources, they face finan- cial, operating and political constraints to properly develop them. But there have recently been signals that improved the outlook for energy investments in both countries. Forced by circumstances, gov- ernments appear to have slowly accepted that proper economic incentives – rather than mere political considerations – are the only way forward to achieve a proper energy supply. In contrast to the declining trend in the developed world, emerging markets have enjoyed an impressive wave of economic Hernán Ladeuix growth over the past ten years. Despite the great recession of 2008-09, they have accumulated an average growth of 6.6% over the decade that ended in 2012. That is 1.5 times the growth experienced in the previous decade. A similar picture has been emerged in Latin America, leaving two decades of meagre growth behind. Brazil and Argentina, South America’s two largest economies have also recov- ered strongly in economic terms. After the severe financial and economic crisis of 2001-2002, Argentina had a spectacu- lar average growth of 7.2% per year over the past decade. Brazil has had a less ex- plosive but much more consistent eco- nomic growth over the past several years. It is clear that growing economies need more energy. Depending on the eco- nomic structure, the intensity of energy needs varies, but an increasing supply of energy is a necessary fuel for economic growth. The so-called oil and gas elastic- ity (oil and gas demand growth divided GDP growth) could be as low as 0.1-0.2 for developed economic and as high as 1.5-2x for economies at initial stages of development. Brazil and Argentina are in the middle of the range. While Argentina has had an elasticity of close to 0.5x over the past 20 years, Brazil has been close to 1x. The strong economic growth over the past decade has translated into increasing needs for energy in Latin America. The strong economic growth, how- ever, has stretched energy infrastructure – particularly oil and gas related – to the limit. This has been particularly acute regarding refining capacity, which had barely been expanded over the past two decades. As a consequence, oil products imports have increased in Argentina and Brazil, evidencing a shortage of refining capacity. The decline in oil production in the case of Argentina and the plateau in oil output in Brazil have reduced the export balance in crude oil. In Argentina, declining natural gas production has pro- voked the suspension of exports to Chile, the resumption of imports from Bolivia and a rapid increase of liquefied natural gas imports. Refining has been the most underinvest- ed area within the oil chain with very little
14. Latin Infrastructure Quarterly14 Projects Argentina: Refining capacity vs oil consumption Source: IMF – World Economic Outlook Source: Indec, IBGE Net oil and oil products imports Figure 1 Figure 2 Figure 3 investments in new capacity over the past three decades. This has been due to several factors. First, construction costs have been increasing at a rapid pace, making it dif- ficult to budget costs and estimate a proper profitability. The US$20bn Abreu e Lima refinery in Brazil to be completed in 2014, where costs are expected to be 9 times the original estimate is a case in point. Second, even after a surge in refining margins over the past ten years, grassroots refineries economics are still poor with refining prof- itability lower than most upstream proj- ects. Third, domestic prices in LatinAmer- ica have been typically below international Source: BP Statistical Review of World Energy 2012 prices due to strong government interven- tion. Despite those obstacles, Petrobras is expected to increase its refining capacity by 20% over the next five years to 2.4m bpd, an issue that has been quite controver- sial in the investment community and have dragged down the price of the stock in re- cent years. Argentina seems to be quite far from undertaking significant investments in refining, as the focus is on the declining upstream sector. “The strong economic growth, however, has stretched energy infrastructure – particularly oil and gas related – to the limit”
15. Latin Infrastructure Quarterly 15Projects Brazil: Refining capacity vs oil consumption Figure 4 Figure 5 Figure 6 Source: BP Statistical Review of World Energy 2012 Source: BP Statistical Review of World Energy 2012 Source: BP Statistical Review of World Energy 2012 Argentina: Oil output vs oil consumption Argentina: Gas output vs gas consumption After peaking at 850k bpd in 1998, Argentina’s crude oil production has de- clined at an average of 3% pa over the past 15 years, with current production closer to 550-570k bpd. Although ma- ture geology could have exerted some influence, the severe decline has a lot to do with a lack of economic incentives to replace reserves as prices have been well below international prices over the past ten years. This has been cruel for YPF, Argentina’s largest oil company, whose reserves were devastated, declining 60% in terms of oil and 80% in terms of natural gas over the past ten years, reducing the average life from 9 to 6 years in the case of oil and from 17 to 5 years in the case of natural gas. After the Argentine government ex- propriated the majority stake in YPF in hands of Repsol, new management has been aiming to boost spending levels to “Petrobras has one of the most aggressive capital spending budgets among international oil companies, with an average of US$45-50bn per year over the next 5-10 years”
16. Latin Infrastructure Quarterly16 Projects stimulate production growth, particularly from shale hydrocarbons in the Neuquina basin. A good sign is that the government appears to be more prone to allow oil prices to catch up with international pric- es both in the upstream and downstream segments. That will be key for companies to restore profitability. In the latest stra- tegic plan, YPF envisioned a multi-year US$37bn plan to develop the Vaca Muer- ta field, which is considered one of the YPF oil and gas reserves Source: YPF SA Figure 7 Figure 8 Figure 9 Brazil: Domestic versus US Gulf fuel prices Brazil: Gas output vs gas consumption Source: Market data Source: Market data world’s most promising shale properties. The potential seems to be huge, although YPF needs to attract a world class partner and be able to get large financial resourc- es to achieve that goal something that is not coming easy so far, at least until there is some kind of clarity about how the con- flict with Repsol will be solved. In Brazil, Petrobras has its hands full with the development of the areas discov- ered in the pre-salt layers in the Santos and Campos basins. This is expected to more than double current production lev- els by year 2020 when oil production is expected to reach 4.2m bpd, making Bra- zil one of the world’s largest oil produc- ers, even surpassing Iran’s current pro- duction levels. Petrobras has one of the most aggressive capital spending budgets among international oil companies, with an average of US$45-50bn per year over “In Argentina, declining natural gas production has provoked the suspension of exports to Chile, the resumption of imports from Bolivia and a rapid increase of liquefied natural gas imports”
17. Latin Infrastructure Quarterly 17Projects the next 5-10 years. About 60% of the budget will be allocated to the Explora- tion and Production segment, with about 50% of it dedicated to the pre-salt areas development. Petrobras is expected to have an influencing role in the world oil market over the next decade. BrazilandArgentinaareonthewaytore- construct and expand oil and gas infrastruc- ture. Hydrocarbon resources appear not to be a limiting factor. Problems are more related to financial, operating and energy policy factors. On the financing side, invest- ment budgets largely exceed internally gen- erated funds for both companies, meaning that have strong needs of external financing. Operationally, both companies face a com- plex investment process. For Petrobras, the pre-salt development is the most demand- ing project line up it has ever faced, creating a strong pressure on management and there- fore easily prone to delays. The new CEO, however, looks quite determined to put and end to Petrobras’ never ending failure to keep up with production targets. For YPF, negotiating partnerships with international companies seems to be an ar- duous task until the conflict with Repsol is solved as companies appear to be extremely careful at negotiating business conditions. Finally, politics is a major factor in Latin America, as the largest companies in the region are typically controlled by the gov- ernment. Pricing is one of the main issues. Being Petrobras the dominant oil company in Brazil and being Petrobras a company controlled by the government, prices are the facto set by the government. Petrobras has historically justified the lack of timely ad- justments by the objective of not translating the volatility of international oil markets to domestic consumers. However, long periods of prices below international levels have put in evidence that there is an attempt to con- trol inflation though fuel prices. As a result, Petrobras has reported losses from its down- stream unit for eight quarters in a row. Over the past year, however, the government have given some positive signals by reducing in- ternal taxes a few months ago and increasing prices both in January and March. Although government seems to have a more understanding position and have allowed decent price increases over the past years the fact is that prices continue to be under their control. And over the past decade, fuel prices both in Argentina Brazil: Domestic versus US Gulf fuel prices Argentina: Domestic versus US Gulf prices Figure 10 Figure 11 Source: Market data Source: Market data and Brazil have been mostly below inter- national prices. This has not only reduced cash flow generated by the downstream segment but it has become an obstacle to convince foreign partners – which put a strong emphasis on getting international prices for the new investments – about the price path going forward. Governments have been comfortable at giving pricing issues a lower priority over the past sev- eral years, but as infrastructure becomes a more pressing matter, there is a chance that technical and economical factors dominate over politics-driven ones, creat- ing a much healthier investment environ- ment. H ernán Ladeuix is an en- ergy research analyst. For over 20 years, he’s been covering global oil & gas and refining markets as well as energy companies in Asia, Latin and North America for leading financial institutions. He has lived and worked in Latin America, Europe and Asia. He holds an Industrial Engineer- ing degree from the University of Buenos Aires, an MBA from CEMA and is a Chartered Finan- cial Analyst.
18. Latin Infrastructure Quarterly18 Institutions LessonsLearned andGoodPractices inPPPs LIQ talks to Ramón Espelt Please describe the initiative linking you with the IADB/MIF. I am currently carrying out work, in a consultancy role, for the Multilater- al Investment Fund (MIF) that seeks to identify lessons learned and good practice in the implementation cycle in public-private partnerships (PPPs). This will analyse eight projects undertaken by the MIF in the region, in particular Brazil, Colombia, Mexico and Uruguay. The MIF of the Inter-American De- velopment Bank (IDB) has seen almost 10 years of activity in which it has sup- ported the governments of the Caribbean and Latin America in improving their ability to plan, design and manage PPPs in infrastructure and related services. This period has entailed 18 collaboration projects, with varying degrees of scope, in 12 countries at both national and sub? -national levels. Moreover, both the IDB and the MIF continue to receive requests from other countries and sub-national authorities interested in receiving support to launch PPP programmes. These are usually countries with small and less-developed economies and sub-national authorities that lack the skills to select, implement and manage PPPs. There is little doubt that the experience accumulated by those that have already commenced work with such PPPcontracts may be of significant value for those new to PPP frameworks. It is for this reason that the MIF has set up a project with the aim to collate and document the lessons learned and good practices to be used in improving decision-making processes as PPP programmes evolve. The methodology that I am using involves meeting and interviewing in- dividuals who have played important roles in their respective projects, not only on the MIF side but also on that of the recipient agencies and invest- ment bodies. The reflections and con- clusions drawn are the main source of information for the preparation of a list of lessons learned that enable public bodies to receive advice on the regu- lation, skills and institutional frame- works required for successful imple- mentation of PPPs in the provision of public infrastructure. . The MIF finances PPP capacity build- ing. What does this mean? Why is it so important when bringing projects to market? How does a technically well- prepared public sector facilitate the de- velopment of projects together with the private sector? As I mentioned earlier, the MIF is sup- porting the development of PPPs in the region with the conviction, as internation- al experience shows, that private-sector participation in the financing, construc- tion and operation of infrastructure pro- motes efficiency and generates value for money. However, this participation needs to be based on proper contract design that not only assigns responsibilities and rights but also distributes risk with the public sector covering future contingen- cies, though in a way in which the project remains attractive and viable to the pri- vate sector. Although private-sector participa- tion in the region has existed for some The MIF has seen almost 10 years of activity in which it has supported the governments of the Caribbean and Latin America in improving their ability to plan, design and manage PPPs in infrastructure and related services
19. Latin Infrastructure Quarterly 19Institutions decades, it has generally been under the framework of the conventional conces- sion agreement and privatisation. This has not always provided success. In some cases, as a consequence of inefficient and at times unbalanced distribution of risk in favour of the private sector, it has given place to some degree of social rejection. The introduction of PPPs in accor- dance with international standards, which is something that is relatively recent, has – in some countries – reversed this opin- ion. This has meant that the PPP frame- work, without any doubt, has become an essential tool for the development of pub- lic infrastructure. The implementation of these ever-complex programmes, though, requires preparation by the public sector in creating the framework that makes PPP projects feasible and efficient and by the private sector in gaining an understanding of these schemes and in preparing itself for participation. In this context, the MIF supports the respective authorities around the region in the creation of the fundamental pillars needed to implement PPPs: those of ad- aptation of the legal framework, develop- ment of the institutional framework and overall preparation of the public and pri- vate sectors. What is the importance of enacting PPP laws? Although in the majority of the coun- tries in the region there are existing legal frameworks that enable – though in cer- tain cases with some minor modifications – the development of PPPs, it is clear that the enactment of specific legislation to regulate this type of contract is desir- able. First, as it clarifies and prepares the frequently complex and dispersed legal framework, enactment establishes gen- eral criteria for the distribution of risk; and second, given that it differentiates the concept of the PPP programme from pri- vatisation, it nurtures social acceptance. Subsequent regulatory development is fundamental, as it allows inadequacies or inconsistencies in the new legislation to be resolved. Enactment is also important in another way, given that it sends a message to the private sector that highlights the continu- ity, credibility and robustness associated with PPPs. Therefore, it is imperative that legislation be passed through receipt of significant levels of parliamentary sup- port. That is to say, what it really takes for PPP laws to be enacted is strong political leadership and commitment. Some commentators, nonetheless, hold the view that when the current le- gal framework is sufficiently robust and enabled to host PPPs, it may be plausible to structure projects under the existing legislation and postpone the design and debate surrounding new PPP legislation until experience is obtained. This, they suggest, allows design of legislation in a more specific and efficient manner. What does seem clear is that the exis- tence of legislation that covers PPPs does not guarantee success in their implemen- tation, given that this depends on several factors. There are examples in the region of authorities with legislation enacted some years ago that have not yet managed to structure any project. What are the common elements of the new PPP laws in the region? There are many likenesses in the new leg- islation governing PPPs across the region. The reasons are that it has involved inter- national standards and that there has been some degree of permeability among au- thorities, which would seem logical, with similar clauses and designs being adopted in many cases. In general, the new legislation defines PPPs and governs the distribution of risk in a conceptual way, conceives and implements availability payments as a tool to support the PPP structure through public budget support (when the revenues from the users are insufficient to make the project viable or in projects without pay for use, such as social infrastructure), and regulates the possibility to submit initia- tives for the private sector (identifying those projects which may be feasible with limited public support or without any at all). Only in certain cases does it define and assign specific institutional bodies tasked with the study, structure and pro- motion of PPP projects. Why are PPP units important, what should they be prepared to do and what have been the main obstacles to their action? The existence of specific institutional frameworks with responsibility for PPPs is paramount for the implementation and development of these contractual arrange- ments to be successful. Furthermore, it is clear that a primary theme in the devel- opment of PPPs is the design of a road map for the project to follow. This should define both the studies and reports to be prepared during structuring and the bod- ies responsible for their resulting analysis and approval. The creation or designation of PPP units as entities to be responsible for the development and dissemination of meth- odology and training to investors in the principals of the PPP is, thus, highly rec- ommendable. The mission of these units The MIF has set up a project with the aim to collate and document the lessons learned and good practices for be used in improving decision- making processes as PPP new programmes evolve
20. Latin Infrastructure Quarterly20 Institutions should be to support agencies and inves- tors, not only in the preparation of these studies but also in project structuring. There is no rule of thumb either for the design and location of these units within the institutional framework or the defini- tion of their specific skills, given that in each case the existing institutional state of affairs, the regulatory environment and the balance of power all require evalua- tion. Whereas some PPP units are located directly or indirectly in the respective finance ministry, others are independent entities and at times are under private law. Likewise, it is also advisable that these PPP units have as counterparts specific investor agencies that serve as partners in the project structure. At times, obstacles emerge that hinder the implementation of these units. Such stumbling blocks entail reluctance by investors concerning the role of the unit, given the surrender What are the main elements of the methodologies used in evaluating and structuring PPP projects? At the early stage the main element is the social and economic evaluation, or cost- benefit analysis (CBA), of the project. While a public infrastructure may origi- nate in political will alone, even in this case the CBA is critical and the results should be taken into account. After the CBA, and using more refined data, a public-sector comparator with a value for money (VfM) analysis is the main element used to evaluate whether the PPP approach is the most efficient or R amón is Co-head for In- frastructure Finance and PPP at Deloitte Spain, at present focussing his pro- fessional activity on Latin America and teaming up with the local De- loitte offices. Previously, he was founder as- sociate of Asesores de Infraestruc- turas, a company which Deloitte absorbed in 2008. Before that he held an executive position at CIN- TRA-Ferrovial, one of the main in- frastructure promoters. He enjoys more than 25 years of experience in the infrastructure promotion and finance disciplines. In recent times he has led more than 50 projects of infrastructure structuring under PPP schemes in several countries (Spain, the United States, Mexico, Colombia, Uruguay, Turkey, Romania and Bulgaria). Ramón has advised public bodies on PPP schemes on matters such as feasibility analyses, project structuring, bid evaluation and contract monitoring. Currently, he leads one of the advisory groups in structuring the Fourth Generation (4G) of Road Concessions in Colombia and several PPP projects in Uruguay (freight-rail infrastructure, a border crossing pro- gramme and a waste to energy plant) He also has experience as a lecturer in PPP training programmes in Spain,Colombia and Mexico,having participated as coordinator and / or speaker in many national and international PPP forums. He has been appointed as a specialised consultant in PPPs to the Inter- American Development Bank (IDB) and the Multilateral Investment Fund (MIF) in several opportunities. He holds a Degree in Civil Engineering from the Universidad Politéc- nica de Madrid and an MBA from the Instituto San Telmo in Seville. of control and decision-making capacity perceived by civil servants as regards the traditional nature of the methods involved in public works contracts. Whereas on some occasions the units perform the structuring, in others they are led by the investors and the unit only monitors and / or supervises operations. In either case, when there is a lack of har- mony between the teams, coordination problems usually emerge. not, and whether it generates greater value than the traditional one. It is at this stage when risk allocation takes place, with the right decision about this issue being criti- cal for project success. When VfM is ei- ther very low or negative, a multi-criteria comparison analysis is necessary to take the right decision about the project pro- curement path. Then, the final structuring phase is that which entails the design of the tender documents and contract framework, with the approach to the project monitoring during the construction and the operation phase being important. The enactment of legislation to regulate this type of contract is desirable but what does seem clear is that the existence of a PPP law does not guarantee success in their implementation
21. Your Only Source of Professional Analysis andNewsonLatinAmericanInfrastructure Development and Finance LIQ is the only source of professional analysis and actionable information about Latin American infrastructure development and finance provided exclusively by practitioners. It is a specialized publication targeted at the key players in the industry both in the private and public sector and it is intended to be the resource of analysts and decision-makers. • Information and analysis contributed by infrastructure practitioners wor- king at: development, commercial and investment banks, private equity and hedge funds, pension funds, lo- cal and international law firms, pro- ject sponsors, public sector, and consulting firms. • Weekly delivery of news and analysis. • Each issue reaches over 10,000 pro- fessionals. • Discounts for industry conferences. • Webinars. • Annual subscriptions for individuals and firms starting at $99. • 25% discount code “INFRALATAM”. Contact us:; @LIQEditor; WhatWe Offer:
22. Latin Infrastructure Quarterly22 Companies LIQ talks to María José Esteruelas Aguirre, General Director, South America Abengoa Construction of Transmission Tower Agua Prieta
23. Latin Infrastructure Quarterly 23Companies What kind of businesses does Abengoa perform in Latin America? Abengoa is present in Latin America since 1968. Abengoa has two main ac- tivities in Latin America: engineering & construction (EPC) and concession-type infrastructures in the energy and envi- ness, both renewable and conventional energy, as well as water, treatment and transmission, are more and more relevant in this market. According to the Engineer- ing News Record ranking 2012, Abengoa ranks fourth in the international contrac- tor in Latin America region ranking. 2012 is the sixth consecutive year that Abengoa ranks first as the largest international con- tractor in transmission and distribution. Latin America had been very relevant for obtaining this position. Which are your largest markets in Lat- in America? What factors make these markets attractive to your company? Abengoa has a strong presence in Argen- tina, Brazil, Chile, Mexico, Colombia, Peru, and Uruguay, even though Aben- goa has also developed projects in other countries in the region. At the moment, Abengoa´s largest markets are Brazil, Mexico and Peru, and according to the pipeline identified, these countries will continue being the most relevant mar- kets, even though others will also earn more importance. Regarding the fac- tors that make these markets attractive, I would highlight the political stability, the government´s commitment with the “Abengoa´s largest markets are Brazil, Mexico and Peru, and according to the pipeline identified, these countries will continue being the most relevant markets” ronment sector. Traditionally, EPC and concession business of transmission lines are the most relevant business in Latin America. Nowadays, generation busi- improvement of the population´s quality of life and economic standard as well as ease of doing business since, for example, there are no language barriers for us. Palmucho
24. Latin Infrastructure Quarterly24 Companies How does the company finance its La- tAm projects? As in other regions, Abengoa finances projects with its own equity as well as third parties equity. For the concessions- type business Abengoa gives a global solution for the customer where Aben- goa does the construction of the project, operates it and finds a financial solution and the costumer just pays a tariff for the output of the project. For these projects long-term finance is needed, where the recourse against Aben- goa is limited to the performance during the construction. The amount of this debt is around the 60-75% of the funds that are necessary for the construction of the proj- ect. The rest of the money comes from equity of Abengoa or/and other partners. With the tariff that is paid by the final cus- tomer, the debt is repaid and the share- holders obtain their return. The recurrent payment must be enough so that it covers all the project necessities and the spon- sors do not have to put additional fund after the construction. 4. Has the retreat of European banks as providers of long-term financing af- fected the company? Of course, the retreat of the European banks has affected the company, but in a minor percentage if we compare it with other companies. One of the main as- pects of Abengoa´s internationalization is its ability to finance the projects with local and international banks wherever the infrastructures are located. Besides, the kind of projects that Abengoa usually builds are very attractive for the com- mercial banks and even though they have restricted the limit of the amount that they can finance, they are still financing our projects. Local banks are very active and also, other financial institutions like multilaterals and ECA’s that in the past were not very competitive, are now very important actors and are helping Abengoa to find financial solutions for our projects. 5. What do you look for in project sponsors for your engineering and con- struction business and in partners for your concession-type infrastructures business? In both kind of activities, Abengoa looks for reliable consolidated partners with ex- perience in the business. In technological partners, we look for proven technology know-how with international scope. As for investing partners, experience in the sector is very welcome. “One of the main aspects of Abengoa´s internationalization is its ability to finance the projects with local and international banks wherever the infrastructures are located” ATE V LT 230 kV Londrina-Maringa
25. Latin Infrastructure Quarterly 25Companies Montes del Plata (Uruguay)
26. Latin Infrastructure Quarterly26 Companies M aría José Esterue- las Aguirre is an industrial engineer (Ingeniero Indus- trial Especialidad Eléctrica) from Universidad Pontificia de Comillas. She also holds a Mas- ters in Operational Manage- ment (Máster en Dirección de Operaciones) from Instituto de Empresa and has completed a program in General Manage- ment at IESE. She started at Abengoa in 1997 and, since then, has held different posi- tions in many of Abengoa’s cor- porations. She has held the title of Director of South America since June, 2011. 6. Can you describe two or three proj- ects in which you are currently work- ing on in Latin America? At the moment our main projects in Latin America are: 1. A high voltage direct current trans- mission line in Brazil, from Porto Velho to Araraquara, with a total length of 2.412 km at 600 kV DC. This project is a concession and the client is Aneel. The construction will be finished this year. 2. 300 MWe Cogeneration plant for Nuevo Pemex in Tabasco, Mexico. It is also a concession with a capacity of 800 tn/hour of steam. This project will be completed this year too. 3. The ATS project in Perú, consists of a 900 km 500 kv Transmission Line from Chilca (60 km south of Lima) to Moquegua. This transmission line will provide energy to five regions in the southern part of Peru and, there- fore, contribute to develop those ar- eas of such country. Abengoa will fi- nance, own operate and maintain the project for 30 years. The investment required is of around 500 million dol- lars and will operate by the fourth quarter of 2013. What are the main lessons learned from engaging in long-term projects in LatAm? There are two key elements that guaran- tee our success: 1. Adaptation to the local markets. 2. Development of human capital based on selection and training of local pro- fessionals. Is your leadership in solutions for sus- tainability something that the market values in Latin America? Or is Aben- goa involved in projects because of the vast experience in engineering and con- struction? Both. The sustainability, with its three main aspects, economic, social and environmen- tal, and the experience in engineering and construction, makes Abengoa the perfect partner for infrastructure development. LEAT AGECO Tranch
27. Latin Infrastructure Quarterly 27Company Profile
28. Latin Infrastructure Quarterly28 Institutions Can you describe the current political atmosphere and le- gal framework regarding having the private sector involved in the development and financing of infrastructure through Public-Private Partnerships in Uruguay? U ruguay has one of the most stable democracies in America and is considered the best democracy in South America according to the index of democracy in “The Economist Intelligence Unit”. It is also the second country with greater economic freedom according to the Heritage Foundation after Chile. In Uruguay there is a stable political system where State policies are developed on specific themes considered strategic. They are diagramed in consensus between the Government and the opposition and oriented to- wards the long term. If to this aspect we add on an independent judicial system and a strong tradition of fulfilling obligations and contracts even in the circumstances more pressing as during the crisis of the year 2002, we can say that our country is a good candidate for investing in long-term projects. Regarding the legal and institutional framework for the de- velopment of infrastructure, Uruguay was the Latin American country that ascended the most according to the general index of Infrascope 2012 for PPP development in infrastructure. This growth was mainly given by the implementation of a new regu- latory framework, the development of a institutional framework with the creation of a professionalized and specialized PPP unit Uruguay: the Corporación Nacional para el Desarrollo within the Ministry of Economy and Finance and the granting of new responsibilities to the Corporación Nacional para el Desar- rollo (CND). This context was generated by the legislative approval, in July 2011, of Law 18.786, or the law for private public partici- pation, and its subsequent regulation by the Executive branch. It gives a very complete and appropriate legal framework for the development of infrastructure in Uruguay through PPP contracts according to the best international practices. Thanks to this law any public administration can carry out PPP contracts entrusting a legal entity of the private sector with the construction, opera- tion, maintenance, design and/or financing of infrastructure for a certain time period. This legislation has as principles the transparency of informa- tion, the protection of the public interest, economic efficiency, proper distribution of risks, equanimity, not discrimination, pro- motion of competition, respect for labor rights, and protection of sustainable development, among others. In this context, what is the role of the National Corporation for Development (CND)? The CND acts as a concessionaire or fiduciary for public trans- port, energy, telecommunications or any other infrastructure projects that are for public use. For this purpose the CND can create or acquire corporations or participate in consortia and/ LIQ talks to Marcelo Pérez, Project Evaluation Manager
29. Latin Infrastructure Quarterly 29Institutions or trusts specialized in exploitation of granted concessions or projects. It can also advise the Executive branch in the identification, design, structuring, promotion, selection and procurement of PPP projects. In addition, the CND develops and promotes the implementation of PPP projects through the application of the best technical criteria and adherence to the principles and guide- lines contained in the law. In the current PPP projects, the CND has collaborated with various sectorial ministries in the structuring of projects. In this regard, Eligibility, Profile, Feasibility and Value for Money studies have been carried out, in addition to designing the bid- ding terms and contracts. Furthermore, the CND prepared technical guidelines that ap- ply to PPP projects through the preparation of guides of rec- ommended best practices, standardization of procedures, and preparation of manuals, models and tools that contribute to the design and execution of the concerned projects efficiently and effectively. What are some of the projects under the PPP model that the CND has worked on? In terms of infrastructure, our country has in first instance fo- cused to resolve two key aspects of our current public policy. Firstly improve the productivity of the logistics sector and there- fore the competitiveness of the country, and secondly collabo- rate in the strengthening of citizen security. In this sense, the first projects have been a corridor road of 170 kms and a center for the detention of 1,960 persons deprived of liberty. The road project involves expansion, modification of struc- tures and reconstruction of 170 kms of Routes 21 and 24 located in the west coast of Uruguay together with a project to bypass the city of Nueva Palmira (main bulk carrier port of the country). This city is located in an area that has strongly developed the grains and wood production both for export and for industrial production of cellulose. This development has generated an in- crease in truck traffic where these routes require a path of fast, efficient and safe exit to the scale of charges which are currently transported. The prison compound responds to a citizens’ need for greater security and the rehabilitation and re-education of persons de- prived of their liberty. The prison system in Uruguay is currently overpopulated and fails to fulfill the functions for which it was created: the deprivation of the liberty of offenders and their de- tention in a dignified manner that allows for their rehabilitation and personal development. This project engaged a space specifically for the entry of in- mates to the prison system where they are diagnosed and clas- sified according to their profile to determine their destiny. With the installation of these 1,960 places the objective is to eliminate overcrowding in the Montevideo metropolitan area allowing spaces for educational development, recreational areas and vis- its. It also provides for the management of the services of food and cleaning, laundry and commissary with the aim of improv- ing the environment for both inmates and guards and make the State specialize in providing only the services of health, educa- tion and safety of the premises. In addition to these two projects which are the most ad- vanced, six projects of roads, two railways and three projects to reform and improve areas of control in border crossings are in the preliminary stages. Integrated control areas projects consist of the installation of infrastructure necessary for the proper functioning of the Areas of Integrated Control of Fray Bentos, Paysandú and Chuy. It aims to make more agile the border crossing with Argentina and Brazil by minimizing waiting times and boosting controls ac- cording to what the MERCOSUR regulations stipulate. Regula- tions that Uruguay is currently failing to comply. Still on early stages we can also find the creation of a deep water port in La Paloma with direct access to the Atlantic Ocean for deep-water ships. How about the state-owned companies? In Article 3, the PPP law considers included in the term “Pub- lic administration”, the autonomous entities and decentralized services. Because State-owned companies have this legal form they are enabled to establish PPP contracts with private sector actors. Currently, the main infrastructure projects involve the State-owned power company UTE and the National Administra- tion of Fuel, Alcohol and Portland (Administración Nacional de Combustibles, Alcoholes y Portland – ANCAP). “The PPP law gives a very complete and appropriate legal framework for the development of infrastructure in Uruguay according to international best practices”
30. Latin Infrastructure Quarterly30 Institutions UTE is in process of completing the frequency converting for the electric interconnection with Brazil along with the es- tablishment of a 500 kilovolt line. The installation of a 500 MW combined cycle thermal power plant will also be awarded. In the field of energy distribution, UTE aims at reaching 100% of electricity supply in the rural areas. ANCAP has as objectives in 2013 the conclusion of a series of works such as a biodiesel plant in Montevideo, a plant for production of lime in Treinta y Tres, together with the beginning of the construction of a plant of cement in the same area. At the same time it has as an aim to finalize a non-sulfidizer plant to reduce the amount of sulfur in fuels allowing for the recovery of 30 tons/day of sulfur destined for the production of fertilizers. By the middle of the year and in conjunction with UTE, AN- CAP will also begin the process for the construction of a re- gasification plant. Moreover, ANCAP continues with the tasks of hydrocarbon exploration in the north of the country as well as through its maritime platform. ANCAP will invest approxi- mately USD 250 million in 2013. However, if we add private investments in investment projects promoted by ANCAP the figure reaches USD 1 billion. How do you promote Uruguay abroad and what level of in- terest is out there towards the country? Uruguay being a small country at the regional level should have as a base for its foundations its competitive advantages in opera- tion and not in economies of scale. In that case we must promote investment through active policies for the development of stra- tegic sectors. These active policies include the Law of Free Port whose re- gime transformed the port of Montevideo into a logistics center specialized in goods in transit and that positions itself as a re- gional hub. The Law of Free Zones allows industrial establish- ments and services with the guarantee of the non-imposition of taxes created or to be created. Uruguay Road Corporation (Corporación Vial del Uruguay – CVU) is a company wholly owned by CND which has more than 1,500 miles of roads under management. It seems like a successful venture, can you comment on the experience? CVU was created in 2002 in order to reconstruct, maintain, finance and operate a series of highways that needed State co-fi- nancing. Initially, it was expected from CND to sell shares of the CVU, but various authorities have expressed interest in keeping the ownership of the company. In my opinion, the latter has been a successful instrument to manage roads that originally were low in traffic, but had an important proportion of heavy traffic. However, the growth of recent years has led to change the sta- tus of such circuits, from low-traffic roads to middle, and where the proportion of trucks has been growing over time. The de- crease in variability in the traffic and the contemporary increase of transit as a result of economic growth, makes one think that at the end of the current lease, the possibility of concession to a private sector agent for many of such circuits should be evalu- ated. Also, some of the roads that are currently not in concession could change management mechanism from being completely in the public orbit to a scheme similar to the one of the CVU. “State-owned companies are enabled to establish PPP contracts with the private sector” M arcelo Pérez is an Econo- mist special- ized in Infra- structure and Transport Economics with particular emphasis on risk analysis, eligibility of PPP projects and analysis of value for money. Since 2006, he has been economic advisor of the Uruguay Road Corpo- ration. During the years 2008 and 2010, he worked as a specialist for the firm consultant CSI Engineers where he participated in studies on aspects related to the fixing of road toll rates and their impact on future revenues,economic efficiency,and feasibility. Since 2008,he has worked in projects related to are- as of Economy of Transport, Environment and Ener- gy, both in the academic and professional fields. He has performed consultancies for theWorld Bank,the IDB and ECLAC. Since 2010, he has been the Man- ager of Project Evaluation of the National Corpora- tion for Development. In this institution he has led the feasibility studies, eligibility and public private comparator in more than 15 infrastructure projects from different areas (roads, railways, hospitals and prisons). HeholdsaMaster’sDegreeinEconometricsfromthe University Torcuato Di Tella of Argentina, and speciali- zations in Financing of Infrastructure Equipment and Services of Fundación CEDDET in Madrid and Regula- tion of theTransport of the University ofValencia. He is a professor and researcher at the Faculty of Social Sciences and Management from the Univer- sidad ORT Uruguay, and a visiting professor teach- ing Transport Economics at the Master’s degree in Economics offered by the University of the Republic in Uruguay.
31. Latin Infrastructure Quarterly 31Projects What is your title and role at Interna- tional Finance Corporation (“IFC”)? I’m the Manager for IFCAdvisory Servic- es on PPPs (Public-Private Partnerships) for Latin America and the Caribbean (C3P). Our group advises governments at IFC Advisory Services on PPPs LIQ talks to Richard Cabello, Manager structuring and financing PPPs in emerg- ing markets in all infrastructure sectors, including social sectors (health and edu- cation). What is the geographical scope of your operations and what sub-sectors (ports, roads, hospitals, etc) is your team pre- pared to work in? the national or sub-national levels in the structuring, promotion and bidding pro- cess of infrastructure PPP projects. What makes IFC Advisory Services – Public Private Partnerships attractive to governments? What makes our services attractive is IFC’s vast international experience in “During project implementation, government officials also learn- by-doing when they interact with the IFC team”
32. Latin Infrastructure Quarterly32 Projects Our team is distributed in regional hubs: (i) Mexico, from where we cover Mexico and Central America; (ii) Co- lombia, to cover the Andean region; (iii) Trinidad, to service the Caribbean; and (iv) Brazil. We cover all typical infrastructure sec- tors: transport in all forms (ports, airports, roads, rail), energy (generation, including renewable energy, distribution, and trans- mission), water, telecoms, etc.; as well as social sectors (health and education). In addition, we are venturing into non- typical sectors: forest, irrigation, among others. How do you generate a project pipe- line? Do governments reach out to you or vice-versa? What criteria do you use to determine: (i) which govern- ment to advise and (ii) what project to work on? Our team interacts directly with the gov- ernments’ PPP units both ways, we visit them and they call us. Main criteria to se- lect our projects include: (i) government’s commitment to do PPPs, (ii) whether the project has a high development impact, (iii) whether the project is at the right stage of maturity, meaning whether the basic technical analysis has already been conducted (including cost-benefit analy- sis if possible), (iv) whether the project is in a pioneer sector, etc. What makes the public sector con- cerned from involving the private sec- tor in infrastructure development? And, what makes the private sector uncomfortable from involving in infra- structure development in certain juris- dictions? In my opinion the main concerns gov- ernments have are: (i) how to reconcile public interests with the private sector’s need for reasonable financial returns in a long term contract; and (ii) how to do transactions as quick as possible. The private sector is mainly interested in: (i) working in a stable political and economic environment, (ii) the project’s bankability, (iii) efficient and transparent selection process, (iv) a knowledgeable government counterpart for project su- pervision, among others. How do you finance your operations and how close do you work with the investment department of IFC, other multilaterals and commercial/invest- ment banks? IFC C3P charges retainer and success fees. The retainer is paid by government clients and success fees are paid by se- lected private sector bidder. We interact with potential financiers during due diligence to get a sense of po- tential financial conditions prevailing in the marketplace and during the promotion stage to support the marketing to spon- sors. This may include the IFC invest- ment department in which case we apply protocols to avoid any potential conflict of interest. How much of your work is capac- ity building and how much is project structuring? Regarding the former, how can you best improve the chances that the knowledge/know how passed on to public sector officials stays in the public sector? Knowledge sharing is one key compo- nent of our service, we participate and promote capacity building events with the World Bank Institute and other mul- tilaterals or national development banks like IADB, CABEI, CDB and BNDES. During the project implementation phase, government officials also learn-by-doing when they interact with the IFC team. In addition, we develop concession mod- els and standard transaction documents which governments could use in future transactions. If you had to point out three lessons learned from assisting governments in structuring projects, what would those be? Three main lessons for governments would be: (i) although speed is a high government priority, allocate sufficient resources (funds, staff) and time to proj- ect preparation, that includes all technical, legal, financial, environmental and social studies needed to properly structure the transaction. This will enable governments to take solid and credible transactions to the market; (ii) be ready to compete, everybody is knocking the doors of the same group of investors, therefore imple- ment a comprehensive promotion cam- paign; (iii) listen to the market, maintain open interaction with potential investors, market conditions change and you have to be able to adapt. “Allocate sufficient resources (funds, staff) and time to project preparation […] This will enable governments to take solid and credible transactions to the market”
33. Latin Infrastructure Quarterly 33Projects
34. Latin Infrastructure Quarterly34 Infrastructure Financing What is your current role at Odebrecht Engineering & Construction, how many people make up the team you lead and what is the geographical scope of your work? I am responsible for supporting our proj- ect directors in the development of fund- ing for their projects within Latin Amer- ica, excluding Brazil and Venezuela. I also have a coordinating role in terms of our relationship with international fi- nance institutions, such as the multilat- eral agencies, for the projects located in this region. As a decentralized and flat organization, most of the transactional work in Odebrecht is executed by the fi- nancial managers located at the project level. We are client oriented and in order to provide a better service we have to work very close to the client. However this decentralization, together with the geographical dispersion, also represents challenges for us. In order to overcome these, for the last few years we have been developing knowledge communi- ties, which are groups of highly special- ized professionals who form a forum on specific themes, such as sustainability and energy, for the exchange of ideas and solutions encountered in projects. These knowledge communities mitigate the loss of synergy caused by the physi- cal and cultural obstacles. Let’s dissect the LatAm region, which would you say are the markets Ode- brecht would like to expand? As the person in charge of securing the much needed long-term financing, what are your main concerns when exploring a new jurisdiction? We are in the majority of countries in Latin America and when looking for new markets we usually assess different as- pects at the country, project and sector levels. Let´s start with the relationship between the host country and Brazilian foreign policy. It is very important that the Brazilian Government has a solid re- lationship with the host country and our prospective government client. Among other factors, this facilitates the viabil- ity of export credit finance from Brazil, which is always a significant benefit for our clients. Secondly, the project has to be of national interest and a priority for Odebrecht: LIQ talks to Vinicio Fonseca, Director of Structured Finance at Odebrecht Engineering & Construction Project Financing in Latin America “It is very important that the Brazilian Government has a solid relationship with the host country and our prospective government client”
35. Latin Infrastructure Quarterly 35Infrastructure Financing the country, not only for a specific gov- ernment. This is fundamental, because most of these projects take several years to complete and often the later stages of construction take place under a new dif- ferent elected government. Finally, the projects have to be socially and environ- mentally sustainable, bringing benefits to the local community. For instance, proj- ects which satisfy the basic needs of the society such as energy, transportation, water and sanitation are the most appeal- ing in this regard. How about those markets in which Odebrecht has already worked and would like to consolidate its presence? From a finance perspective, what are the elements of a particular market “The project has to be of national interest and a priority for the country, not only for a specific government” that make long-term financing sources available? What makes long-term finance available is the perception of the financial commu- nity that the country and project risks are acceptable for a given rate of return. In addition, in case of local finance, a well- developed capital market and efficient regulatory framework are also an impor- Construction of Panama City Metro
36. Latin Infrastructure Quarterly36 tant factor. Most countries in Latin Amer- ica have proven to be resilient to recent financial crises, but still suffer from lack of capital for infrastructure finance. What services does the BNDES provide you in your LatAm projects? and services which are necessary for the construction of much needed infrastruc- ture in other countries, not only in LatAm but also around the world. It is a win-win situation for both sides. The client ben- efits from long-term finance in competi- tive terms and Brazil promote its export we subcontracted with 2,000 medium and small suppliers representing more than 250,000 jobs in Brazil. And with the fo- cus we have on supporting local people, with the payment of the local costs by the client, we generate thousands of jobs also in the communities which surround our The export division of BNDES (BNDES EXIM) plays a fundamental role in sup- porting the finance of Brazilian goods sector. And these exports benefit not only the main contractor, such as Odebrecht. For example, in 2012 through our exports projects. For instance, although are not a footwear manufacturer, at a given mo- ment in time Odebrecht I recall that we “In 2012 through our exports we subcontracted with 2,000 medium and small suppliers representing more than 250,000 jobs in Brazil” Infrastructure Financing UHE Chaglla – tunnel
37. Latin Infrastructure Quarterly 37 “I would like to see more cooperation between the main players in the financial markets, especially commercial banks and political risk insurers” were among the largest exporters of boots from Brazil! Which are the ECAs with which you have worked the most and what kind of services have they provided? In addition to BNDES EXIM we fre- quently work with Euler Hermes from Germany on the finance of the purchase of Tunnel Boring Machines for our proj- ects, such as metro and hydro plants, and with US EXIM for the purchase of other heavy construction plant and machinery. More recently we closed our first buyer credit transaction with US EXIM, under which they are financing the exports from our US trade company to a client in the Dominican Republic. So now Odebrecht is also financing exports from US in the same way we do from Brazil. The abil- ity to arrange long term finance for our projects is a very important feature of our service. What are your thoughts on project bonds? They are an interesting development that work very well for brownfield projects, those with a stable income stream. Green- field projects still represent a challenge for investors, because they are not often comfortable with the construction risks. In addition, bonds are also more exposed to systemic risks in the capital markets. So markets sometimes are closed even for good risks and irrespective of the under- lying asset. I would say that it is one more tool which is available for developers. Are there any financing mechanisms in the region that you would welcome? And, is there a financial instrument that you would like to see used more often? Why? I would like to see more cooperation be- tween the main players in the financial markets, especially commercial banks and political risk insurers. This has improved substantially in recent years, but there is much more to be done. For instance, in most markets in LatAm they will not go beyond 5 years, which may be not enough for large projects. As an example, despite financial crises, over the last 10 years we have arranged more than US$1 billion in finance from commercial banks for our clients, without any defaults. So, it is im- portant to have the right partners but re- cently it has been more difficult to obtain support from the banks. What do you think of the decision by the BRICS countries to create a devel- opment bank focused on infrastruc- ture? Is it needed? How may it affect our region? The finance of infrastructure is challeng- ing and any additional support is always welcomed. South-to-South cooperation has always been seen as a major devel- opmental factor for the region, and infra- structure plays a key role in this. So, yes, although still in its early stage, we see this is as an important instrument which will contribute positively to our region. “We frequently work with Euler Hermes from Germany on the finance of the purchase of Tunnel Boring Machines for our projects, such as metro and hydro plants, and with US EXIM for the purchase of other heavy construction plant and machinery” Infrastructure Financing
38. Latin Infrastructure Quarterly38 Institutions What is the history and purpose of the Center for Latin American Logistics Innovation (the “Center”)? T he Center for Latin American Logistics Innovation (CLI) was created in 2008 as the Latin American node of the Supply Chain and Logistics Excellence (SCALE) Network. The SCALE network itself was created by MIT’s Center for Transportation and Logistics, as a means to expand the reach and scope of logistics and sup- ply chain-related research, as well as to learn from practices around the world. The role of CLI as the Latin American node of the Network is to lead and engage in relevant research on the Logistics and Supply Chain for the region, and to share it and strengthen it through interaction with the other 3 members of the network: MIT CTL itself, the Zaragoza Logistics Center (ZLC) – the European Node, and the Malaysia Institute for Supply Chain Innovation (MISI), the Asian node of the network. Although it may seem as Latin America has little to offer in terms of logistics, the fact is that here we have developed practices tailored to our particular conditions that can contrib- ute greatly to the global knowledge pool of logistics and supply chain. In particular, peer to peer distribution networks have been developed more extensively in emerging economies to enhance and expand the reach of distribution networks without adding too much cost to the product, a concept that could find new uses and benefits in developed economies where large distribution networks already exist and dominate the market. CLI operates in three main lines. The first of them is educa- tion, with academic and executive courses aimed at profession- als that work in the logistics and supply chain management. The second line is research, which in the case of CLI means applied research, focused on identifying best practices or on developing new or better ways to perform logistics or supply chain manage- ment tasks. The third strand is outreach, which means liaising and interacting with leading companies to transfer the knowl- edge created within CLI and also identifying their challenges or opportunities in order to generate new research. What is your role there? My role within CLI is to research and further the ways in which public and private stakeholders can work closer together to achieve logistics and supply chain competitiveness goals. My research began on the divide that I perceived to exist between the public and private sector stakeholders that impact upon the performance of logistics and transport systems, having traced back the cause to a significant mismatch between the interests of three main groups: the private sector companies (shippers), private sector infrastructure and equipment producers, and pub- lic sector policy-makers. The public sector strives to design and implement policies that aim to satisfy a wide spectrum of private sector stakeholders. The shippers seek to optimize their distribu- tion network and improve their profits and normally care little for the impacts their actions may have on others. Finally, private sector infrastructure and equipment providers, seek normally to push for policies that will benefit more their particular lines of business. With these conflicting interests, it is seldom strange that policies, infrastructures and regulations fail to meet their desired outcomes, even if this means having to bail out infra- structure concessions that get into trouble after the traffic and revenue expectations fail to materialize. I have sought to approach these problems through complex and dynamic systems theories to analyze the issues and propose solutions to them. I have come to realize that acknowledging transport and logistics as complex systems does not mean “giv- LIQtalkstoAndrésBaquerooftheCenter forLatinAmericanLogisticsInnovation Logistics Infrastructure
39. Latin Infrastructure Quarterly 39Institutions ing up” on finding solutions, but actually, it is the opposite. Identifying the flows and variables and, more importantly, the feedback loops that drive these systems can help to find “sim- ple” and (relatively) cheap solutions. Solutions that, by target- ing key variables and using virtuous circle dynamics, achieve the objectives at a fraction of the cost and in a way that makes them more prone to be sustained over the long run. With this research I think I have become an “enlightened middleman” that will help to align the goals of the private and public sectors and, thinking more long term, even help to bridge the existing gap between them and help them work together. What is logistics infrastructure? Can you provide with some examples? From my personal experience I can say that there is not one unique scope or definition for infrastructure, and even less so for “logistics infrastructure”. Having made that clear, to me there are two main types of infrastructure: physical infrastruc- ture, and legal infrastructure. The physical infrastructure is made up of all those nodes and arcs that make up a logistics or transport network. Among these are ports, airports, train stations or terminals, roads, and rail- ways all of which tend to be developed by the public sector for wide use by the citizens or firms. The physical infrastructure also includes other more private elements such as warehouses, distribution centers, logistics platforms, and cross-docking cen- ters, that are built or adapted to the specifications or require- ments of specific clients or groups of clients. The legal infrastructure consists of all the laws that deter- mine the way in which commercial, trade or labor relationships are to be carried out, and also those that establish the ground rules for the provision of the physical infrastructure. Within the legal logistics infrastructure are bilateral or multilateral trade agreements, trade and commerce statutes, competent and timely justice services, and, also, the ground rules on how the physi- cal infrastructure can be provided or maintained to support the movement of the goods and services. My experience has led me to believe that both subtypes of infrastructure should allow, and even foster, research and devel- opment that increase the performance of transport and logistics systems and introduce new practices and technologies. Restrict- ing the participation of people or firms in trade, the provision or use of the physical infrastructure or in the creation of inde- pendent certification institutions will only hamper the “creative destruction” that is required to consolidate and renew the com- petitive basis of a country, region, city or firm. By this I am not calling for complete deregulation and laissez faire governments, but for a smarter approach that focuses more on key issues and the outcomes, which can only be done if it focuses on the inter- faces and interactions between the different systems and a long- term vision or goal of where all stakeholder wish to be in the future. Why is it important for governments to have a logistics in- frastructure agenda? Before discussing the importance of having a logistics infra- structure agenda, I wish to make a few remarks on the origins of that agenda. I stated before that the performance of the transport and logistics systems is the compound result of the performance of all of its elements, with the physical and legal infrastructures provided by the government being just some of the factors in- volved. Having the government come up with an agenda of its own will do no good if it clashes with the plans of the private sector. Therefore, the government’s logistics infrastructure agenda should come out as one of the results of a larger effort “We have developed practices tailored to our particular conditions that can contribute greatly to the global knowledge pool of logistics and supply chain” “With these conflicting interests, it is seldom strange that policies, infrastructures and regulations fail to meet their desired outcomes”
40. Latin Infrastructure Quarterly40 Institutions The Reventazón Project includes the construction of a 130 meter high dam, flooding of a 6.9 km2 reservoir and a 4.2 km river diversion between the dam and powerhouse. of building a common vision and goals between all logistics and transport stakeholders. Besides the ability to convey the vision and the long term goals to all stakeholders, I see two main areas where the public sector agenda has the greatest impacts. First, it has to confirm the engagement of the public sector with the common vision and state clearly which types of actions the public sector will pursue with regards to the provision of the appropriate physical and regulatory infrastructures, which, as I mentioned before, has more to do with creating the right en- vironment for experimentation and development, than with building warehouses or roads. The second issue has to do with the need to clearly set out the limit of their interven- tions, and stand by that limit, which should enable the private sector to begin to develop their own solutions. Any gray ar- eas may create areas of action into which no private stake- holder will want to go for fear of losing their investment or of spending large sums of money in infrastructures or services that will end up being provided by the public sector for the benefit of all. A couple of years ago one of the directors of a logistics- related company pointed out that current logistics businesses are capital intensive in terms of the facilities and equipment required to support the operation. The lack of government’s lo- gistics infrastructure agenda, or any ambiguities contained in it will de-incentivize investment and the logistics performance. The government’s agenda is, then, the basis of the competitive development of the sector, and has to be produced through prop- er analysis, discussion and consensus-building processes. How can such infrastructure be financed? Considering that form me there are two types on infrastructure I will discussed each one separately. Funding of logistics physi- cal infrastructure can resort to traditional means of government funding, project finance-type concession schemes based on fares or tariffs charged to the users or by the rent of commercial spaces in or around the infrastructure. These schemes have been used over many years and there are recommendations on what to do to reduce their risks and multiply the positive impacts. Even though the financing of the physical infrastructure can resort to traditional practices, I believe that innovation efforts should be geared towards developing new institutional arrange- ments that would allow that infrastructure to change and adapt in a more fluid way. The current schemes of government fund- ing or project finance-type concessions are too rigid to adapt to the changing needs of the social and economic activities. New schemes that maintain the flexibility in spite of the high capital costs of the physical infrastructure should be introduced to opti- mize the provision and use of the infrastructure. With respect to the regulatory infrastructure, I believe that a change is required from schemes in which the public sector and its consultants come up with the policies and standards, towards a more consensual approach, where the different stakeholders get the opportunity to participate and where the solutions are not defined by one stakeholder, but by many of them acting in conjunction. What are the main flaws of regulation affecting logistics in- frastructure in the main Latin American markets? Below I present the main issues with the regulation in Latin America that affect logistics practices. These are mainly based on my experience in Colombia, but can be extrapolated to other countries: There is little or no discussion or consensus between the pub- lic and private sectors before adopting new transport or logistics regulations. This practice may still work for other sectors where providers must satisfy a minimum quality or performance to all users, but in environments as diverse, interrelated and complex as transport and logistics, failing to consult and build consensus may lead to the adoption of regulation that turn out to provide the wrong kinds of incentives. Policies and regulations in Latin American countries are usu- ally introduced as means to “catch up” or adapt practices of more developed countries, instead of being used as tools to pro- mote new and distinctive capabilities that help to consolidate a competitive strength. These catch-up regulations tend to be too restrictive on what can and cannot be done, hampering the cre- ative destruction process that will build efficiency and competi- tiveness over the long run in the transport and logistics sector. Local economic development policies and land use regula- tions are forcing logistics infrastructures and services out of the cities as “undesirable” traffic congestion and pollution genera- tors. Instead of focusing on expelling these activities, which may actually end up causing more congestion and pollution, the regulation should be aiming to improve their environmental and operational performance by focusing, for example, on requir- ing maximum loading/unloading times, instead of complete the bans on cargo movements that are being sought on many cities. Please comment on the main research projects of the Center involving logistics infrastructure. The center has currently three main lines of research, all of which engage, in one way or another, logistics infrastructure. The main lines that have been pursued within the last few years are a study of the determinants of the location of regional distri- bution centers for multinational companies, the analysis of the food supply chain for Bogota, including the challenges faced by new logistics platforms to become part of the system, and also a review of some companies supply chain strategies and their impact on their networks. Besides the research lines, the Fundación LOGyCA, which operates within CLI, also provides services to study the viability and specifications of different types of transfer nodes such as logistics platforms, distribution centers and fluvial ports.
41. Latin Infrastructure Quarterly 41Regulation Market Context and Policy Framework TheEvolutionof theMexicanPublic PrivatePartnership: Eduardo Márquez Certucha As of January 17, 2012, the Federal Law of Public-Private Partnerships (Ley de Aso- ciaciones Público Privadas) (the “PPPLaw”) came into effect in Mexico. The PPPLaw was conceived as an obligated response to the need for a specific regulatory frame- work for public-private investments. Some of the PPP Law’s main objectives are to generate certainty, transparency, and efficiency in the public-private investment pro- cess as well as to allocate the risks of these projects between the parties; its result is to prepare an adequate climate for foreign and domestic investment in infrastructure projects. The following article will provide an overview of the evolution of public pri- vate partnerships (PPPs) in Mexico, as well as the current market context and policy framework in which the PPP Law was enacted.