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PPP in Chile The Toll Road Financing Experience. Jorge Domínguez Consultant, Financial Advisor. Establishing Public-Private Partnerships in Transport Sector in The Russian Federation Moscow, March 3rd 2005. The Chilean Concession Program. Origins and Objectives.

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ppp in chile the toll road financing experience

PPP in ChileThe Toll Road Financing Experience

Jorge Domínguez

Consultant, Financial Advisor

Establishing Public-Private Partnerships

in Transport Sector in The Russian Federation

Moscow, March 3rd 2005

the chilean concession program
The Chilean Concession Program

Origins and Objectives

  • Lack in infrastructure and shortage of public resources to make the investments
  • More than US$5 billion investment program required
  • The Chilean Government designed a mechanism that allows the participation of private sector in the construction, maintenance and operation of infrastructure
  • Three main objectives were:
    • Use private sector expertise and resources to develop and finance public works
    • Externalize construction and operation of the facilities, improving service level and security
    • Free public resources to focus in projects and programs with higher social priorities
  • Some projects (ones with less traffic or expected income) received a subsidy
the chilean concession program1
The Chilean Concession Program

Successful Awarding

  • The Chilean government has awarded in open bidding processes concessions for most of Route 5 which links the country from north to south (average stretch of 200 kms and a US$250 million investment) and 4 highways linking Santiago to the coast and to Argentina
  • Also were awarded 4 urban concessions in Santiago (average stretch of 30 kms and a US$400 million investment)
  • Most of the concessions have been awarded to international sponsors
  • Airports, water works, and jails have also been and are still being assigned under the concession mechanism
  • The Concessions Program has allowed to completely update the infrastructure of the country to a modern standard
financing needs
Financing needs

Leveraging the Sponsors’ Investment

  • Considering minimum equity requirements of 10 -15%, at least US$3.5 billion financing was required
  • Ideal financing should consider
    • long tenors consistent with life span of the concession
    • customized amortization schedule, allowing for interest capitalizacion and grace period
    • local currency, matching toll income with debt profile with no currency mismatch
    • fixed interest rate, mitigating economic cycle exposure
    • project risk, to be handled by specialized entity at minimum cost
    • limited recourse to the sponsors, increasing competition in concession awarding process and return on equity
available sources of financing
Available sources of financing

Debt market players’ limitations

  • International banks and fixed income investors
    • Not in local currency
  • Local Banks
    • floating rate, short term
  • Local institutional investors (pension funds and life insurance cos.)
    • Project risk
  • Local institutional investors were the best fit if project risk was eliminated or at least mitigated
available sources of financing1
Available sources of financing

Local Institutional Investors

  • Since 1981 the privately managed pension fund system (AFPs), based on individually funded pensions, gradually become a replacement of the State in the role of providing pensions under PAYG system. They monthly receive important resources from employees, and invest in capital markets
  • Currently, the AFP’s portfolio is composed by variable and fixed income instruments, with a total portfolio value of approximately US$58 billion, 67% of GDP
  • Life Insurance Companies receive retirement funds and provide annuities to retired people
  • They often select longer tenors in order to hedge their liabilities
  • Life Insurance Companies currently manage approximately US$15 billion, 17% of GDP.
structuring the financing
Structuring the financing

Solving the Project Risk dilemma

  • Sponsors and advisors focused in the search of players with capacity in understanding and absorbing project risk
  • As Chile’s sovereign rating reached a solid “A-” investment grade, monoline insurance companies became available to enhance the issuance of local securities providing their guarantee.
  • Monoline insurance companies provide a guarantee that covers the timely payment of 100% all future interest and capital on the financing
  • All parties involved: Sponsors, market regulators, monoline insurance companies and local long term investors worked a solution to transfering risks inherent to this financings to the best able to manage it
  • Main benefits of the structure:
    • Sponsors: access to the local long-term market, higher leverage, reduced risk and improved return on equity
    • Institutional Investors: a new class of securities with higher rating than the government and at higher spread.
    • Monoline Cos.: received significant compensation for their expertize in handling project risk compared with more developed markets.
development of infrastructure bonds
Development of infrastructure bonds

The long road to the market

  • July 2000 the 2nd
  • Infrastructure Bond
  • is issued
  • (Insurer: XL Capital):
  • Collipulli-Temuco

US$208 million

  • In November 1998
  • the first Infrastructure
  • Bond of Latin America
  • was issued
  • (US$150 million).
  • Chile was rated
  • “A-” opening the opportunity
  • for Monoline Insurers
  • to consider operations
  • in the country
  • 1st semester 2001 the 3rd
  • Infrastructure Bond
  • is issued (Insurer: XL Capital):
  • Chillán-Collipulli US$210 million
  • The first Concessions
  • awarded began looking
  • for long term financing.
  • The first was
  • Talca - Chillán
  • The Concessionaire iniciated the
  • structuring the of the financing.
  • conversations with the
  • consortium MBIA-AMBAC.

Due diligence of legal, regulatory and institutional frameworks well as political risk. Legal protection of private property and strength of concession contracts

Documentation drafted under local law, concession contract and capital market provisions

Regulators and rating agencies to approve the “100% coupon payment guarantee” concept

Tax and bureaucratic issues to be addressed

Institutional investors educated on benefits of the guarantee and that no project risk was passed on to them

  • Santiago-Valparaíso US$280 million

Insurers: IADB/FSA

  • Santiago San Antonio US$135 million

Insurer: FSA

Four urban toll roads US$500 million

rutas del pac fico case study
Rutas del Pacífico: case study

April 9: the Bond was placed

  • US$280 million

the largest bond placement in the local market.

  • Bond pricng:110 bps above government debt

Mid 2001: IDB (*) and FSA are hired

as insurers.

Financial advisor is hired

  • Insured bonds are chosen as

best solution

  • The search for an insurer


  • Size of financing made

desirable support from

multilateral agency

Sponsors begin by mid

1999 assessing the market for


  • The Concessionaire has

not decided yet on financing

  • Term Sheet Agreed
  • Beginning of the due diligence process
  • Beginning of the documentation process

The structuring process took 1 year.

Some major issues to solve were:

  • Issue Complementary Works were demanded by the MOP, making the financing needs larger.
  • Solution: optimization of

debt repayment profile

+additional guarantees.

  • Issue:The original traffic
  • study considered much higher
  • GDP growth, and traffic and lower evasion.
  • Solution: Adjustment of the financial

structure (required ratios, guarantees etc.)

to the new scenario.

  • Issue: The term of the concession is variable:
  • Solution: implementation of

a mechanism of mandatory prepayment to match


(*)IDB: Inter American Development Bank

long term toll road financing
Long Term Toll Road Financing

Basis for success

  • Strong legal, regulatory and institutional frameworks as well reduced political risk.
  • Legal protection of private property
  • Open and transparent bidding processes for concession awarding
  • Concession Sponsors with recognized technical reputation and strong financial backing
  • Concession contracts that can be legally enforced
  • Investment grade level rating for the country and local investment grade for the project ( sponsor support )
  • Increasing availability of local currency long term funding
  • Capacity to attract entities such as monoline insurers or multilateral organizations to take project risk and provide guarantee of timely payment of debt ( at least for initial debt issues )