LIQ Issue 5

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Latin Infrastructure Quarterly Latin Infrastructure Quarterly

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Infrastructure in Colombia: a multi-sector analysis

Read from professionals at Darby Private Equity, Agencia Nacional de Infraestructura, Banca de Inversi贸n Bancolombia, Ashmore Management Company, Acciona Infraestructuras, Dur谩n & Osorio Abogados, Inter-American Development Bank, and the Canada-Colombia Chamber of Commerce.

Infrastructure & security

The North American view: EDC & OPIC

REAL Infrastructure Partners

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Latin Infrastructure Quarterly

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Latin Infrastructure Quarterly

To Our Readers: Welcome to the 5th Issue of Latin Infrastructure Quarterly.

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would like to begin this letter by pointing out that it has been one year since the release of the first Issue of Latin Infrastructure Quarterly. It has been a very interesting journey so far. Thank you to everyone that helps out in this endeavor: Nate Suppaiah, Arman Srsa, Tiffany Joy Swenson, and Lakshmi Narayanan.

Thank you as well to all of our contributors and media partners.

This Issue covers primarily infrastructure finance and development in Colombia.

We have contacted and interviewed infrastructure practitioners from different sectors and put together a comprehensive report of one of the most active infrastructure markets in the region.

This Issue also contains an article that links infrastructure and physical security which is a topic that I have been meaning to cover for a while. We finally found an expert on the field that offered some analysis. We hope to keep bringing you analysis on this highly important matter. You will also find an interview to a VP of Export Development Canada and an article by professionals of the Overseas Private Investment Corporation.

There are a number of other great articles inside for you to enjoy.

Lastly, I would like to point out that I have been invited to speak about PPP project implementation in Latin America at the Second International Conference “Speed uPPP Ukraine” which will be held in Kiev on April 11 and 12 of next year. It is commendable how the sponsors of this international conference are eager to learn about the experience of other regions of the world such as Latin America, Western Europe, Asia, and North America.

Please do not hesitate to contact me at patricio@liquarterly.com with feedback on this Issue, questions, topics you would like to read about, events you would like to promote, and practitioners, companies or projects you would like see featured.

Best regards,

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Contributors Andrade Moreno, Luis Fernando Agencia Nacional de Infraestructura Cardyn, Jean Export Development Canada Castellanos, Jorge Darby Private Equity García, Juan Critical Infrastructure Consultant Giménez Mathus, Agustín FGM Lawyers Girardotti, Federico Faros Infrastructure Partners Harwood, Timothy Overseas Private Investment Corporation Kristin, Dacey Inter-American Development Bank Llamosas, Cecilia Vouga & Olmedo Abogados López, Susana REAL Infrastructure Partners Marcus, Sara Overseas Private Investment Corporation Mendes, André BNDES Ruiz-Mier Fernando International Finance Corporation Sáez Martínez, José Damián Acciona Sanchez Garcia, Carlos Durán & Osorio Abogados Serani, Jean Pierre Banca de Inversión Bancolombia

Patricio Abal.

Soto Franky, Camilo Valfinanzas Trevino, Andrés Canada-Colombia Chamber of Commerce Villaveces, Camilo Ashmore Management Company (Colombia) Vouga, Rodolfo Vouga & Olmedo Abogados Wilson, Josh Staff Writer

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Latin Infrastructure Quarterly

Sponsors

Contents

Contents Issue Focus: Infrastructure in Colombia: a multi-sector analysis Colombia: Infrastructure and Investment.............................................................6 Colombia’s mastermind of infrastructure development.......................................10 The role of investment banks in Colombian infrastructure development............14 The view from Canada........................................................................................18 Colombia: Insights on social infrastructure development...................................22 Public Private Partnerships: A New Concept for the Colombian Law.................26 Infrastructure and private equity in Colombia.....................................................31 Acciona Infraestructuras Colombia....................................................................34 Ashmore Colombia Infrastructure Fund.............................................................37

Sectors An Optimistic Outlook For Infrastructure, Transport And Logistics Services In Paraguay..............................................................................................................41 Social Responsibility and Infrastructure Development.......................................44 Bringing projects to market: the view from a private sector advisor and investor.................................................................................................................46 Real Infrastructure Capital Partners ...................................................................48 The Overseas Private Investment Corporation and LatAm..................................52 EDC - Canada’s export credit agency.................................................................54 Choosing the Right Security Provider.................................................................59 The New Renewable Energy Regulatory Framework of El Salvador.................62 Local Content in the Brazilian O&G sector.........................................................66

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Colombia:

Infrastructure and Investment

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olombia, the third most-populated country in Latin America and the second amongst Spanish-speaking countries throughout the world, is on path toward becoming one of the region’s most friendly destinations for foreign direct investment. At the same time, the emerging nation is at a competitive disadvantage with respect to its Andean neighbors due to a significant lack of adequate roads, highways, railroads, and quality ports. Thus, in Colombia, infrastructure presents both an obstacle and a real opportunity.

Colombia cannot capitalize on its immense potential without addressing its infrastructure problem. The United States Commercial service estimates that logistical operation costs account for nearly 18 percent of the total cost of each Colombian business. The country’s infrastructure ranked 85th out of 142 countries in the World Economic Forum’s Global Competitiveness Report 2011-2012. The quality of roads, railroad, port, and air transport infrastructure, ranked 108th, 99th, 109th, and 94th, respectively. According to that report, “inadequate supply of infrastructure” is the second most problematic factor for doing business in Colombia, behind only corruption. The problem is clear – Colombia suffers from

Josh Wilson, Staff Writer Colombia has appeared many times in previous issues of Latin Infrastructure Quarterly, most notably in the second and third editions, featuring the Colombian Infrastructure Chamber and the new Colombian Public-Private Partnership Law, respectively. The current issue revisits this emerging global player with a series of new takes on Colombian infrastructure development. This article takes aim at the current investment climate generally, focusing in particular on foreign direct investment. a significant infrastructure deficiency.

The remedy may be simple – foreign direct investment.

The Colombian government seems to agree. In 2011, it created the Colombian Infrastructure Agency (ANI) under the Ministry of Transportation to usher in a new era of infrastructure development.

By 2014, the government plans to employ more than USD 15 billion in investments on infrastructure projects and grant USD 26 billion in concessions for highways and railroads, according to GlobalTrade. net. For example, plans are underway to construct highways that will connect the major cities (Bogotá, Medellin, Cali, Barranquilla) to ports on both the Atlantic and Pacific Ocean. These projects will be

funded, in part, through concession contracts that will intimately involve the private sector. But concessions are only the beginning of the story, as this edition of LIQ will illustrate.

Foreign Direct Investment.

Recent endorsement of FDI is not a new phenomenon. The Colombian government has shown a commitment to economic liberalization since the 1990s, earning the country a reputation as a stable and market-friendly investment destination.

It has signed various International Investment Agreements and ratified a number of Free Trade Agreements. In the years since 2002, the trend has gathered momentum,

Institutions resulting in an “investment grade” rating by all three major credit rating agencies: Standard and Poor’s, Moody’s and Fitch.

Colombia’s FDI achievement in 2011 provides evidence of such momentum, as the country bounced back in the wake of the global economic crisis by setting a historic total of over USD 13 billion for the year.

The petroleum (“oil”) sector is the largest recipient of foreign direct investment in Colombia. In 2011, by the Colombian Central Bank’s numbers, FDI in the oil sector represented nearly 39 percent of all FDI. The mining sector came in second at just over 19 percent.

These relative proportions have remained fairly consistent over the last decade. But oil and mining are not the only sectors to receive FDI. Other notable sectors include commerce and hospitality (16%), and transportation and communication (13%), along with the sectors who received much less – manufacturing, utilities, financial, construction and agribusiness. The countries that have contributed most to Colombia’s FDI inflows from 2000-2011 were the United States, England, Spain, and Canada.

Outlook and Risks.

The general outlook for the Colombian

Foreign Direct Investment US$ Million Colombia Brazil Chile Peru Source: World Bank

Latin Infrastructure Quarterly economy is positive. GPD per capita nearly tripled in the years from 2000 to 2011, while inflation over the same period was reduced by two-thirds. The Economic Intel-

ligence Unit reports 5.9 percent GDP growth in 2011. However, the same group projects 4.3% average GDP growth in years 2012-20 and 3.1% in 2021-30. While this means that the Colombian economy would not continue to see the same robust growth it experienced

1990 500 989 661 41

1995 968 4,859 2,957 2,557

2000 2,436 32,779 4,860 810

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last year, all indications are that the overall business climate will continue to grow and improve steadily.

Political violence is on the decline as the government has made security a priority. Membership in illegal armed groups, such as the Revolutionary Armed Forces of Colombia (FARC), has steadily decreased. The International Institute for Management Development (IMD) ranks Colombia second in Latin America in personal security and adequate protection of private p r o p e r t y, behind only Chile. One can expect Colombia to remain secure and political violence to continue to decline.

However, to date, the Colombian government has failed to adequately address drug-trafficking and the organized crime that accompanies the trade.

The potential investor should be aware of the challenges presented by corruption.

According to the World Economic Forum’s Global Competitiveness Index (2011-12), corruption is the most problematic factor for doing business in Colombia. Transparency International ranked Colombia 80th out of 183 countries in its Corruption Perceptions Index 2011.

2005 10,252 15,066 6,984 2,579

2011 13,234 66,660 ---

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FDI Sector Comparison US$ Million 2006 Total FDI 6,656 Oil Sector 1,995 Non-Oil Sec4,661 tor (Subtotal)

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2007 9,049 3,333

2008 10,596 3,405

2009 7,137 2,428

2010 6,746 2,781

2011 13,297 5,125

5,716

7,192

4,709

3,965

8,173

Source: Central Bank of Colombia (Banco de la RepĂşblica de Colombia) * Note: There are minor discrepancies between the FDI data provided by the Central Bank and those provided by World Bank, as seen above.

As with other problems, the government has attempted to address the corruption issue. President Santos signed the Anti-Corruption Statute into law last year which aims to shore up many transparency and accountability dilemmas.

Judicial deficiencies also present cause for concern. Courts are underfunded and inefficient. Civil trials can be delayed for years. The Constitutional Court has considerable discretionary authority to rule on the actions of the executive. The Supreme Court and Constitutional Court, roughly coequal branches of the judicia-

ry, often find themselves at odds with one another. While the current administration seeks to reform the judicial system, any meaningful efforts have been thwarted.

The state of the judiciary presents particular difficulties for the investor when resolving commercial disputes, for example, when seeking to enforce a contract. Colombia ranks 149 out of 183 economies for the ease of that process, according to The World Bank International Finance Corporation economy profile on Colombia, Doing Business 2012.

Legal Framework.

The Colombian legal framework provides a number of protections and incentives for foreign investment. It is guided by a principle of equal treatment and universality, meaning that the law imposes neither discriminatory nor favorable conditions on foreign investors, and with a few exceptions, permits investment in all sectors of the economy. Essentially, foreign investment is permitted in all sectors except defense and national security and disposal of toxic waste. Only investment in mining

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and hydrocarbons, and the insurance of financial sectors, requires prior authorization by the Colombian government. But in all sectors, FDI will invite some restrictions particular to the investment activity, any number of which are too lengthy to adequately address here.

The primary foreign investment protections available are provided by legal stability contracts, international investment agreements, double taxation agreements, and various free trade agreements.

By 2014, the government plans to employ more than

USD

15 billion in

investments on infrastructure projects and grant

USD

26 billion in concessions for highways and railroads.

“Legal stability contracts” are offered to guarantee that the laws under which an investment is entered into will remain in effect over the life of the investment. In order to receive a legal stability contract, the minimum value of the investment must reach USD 1.2 million and the investor must pay a fee, determined by the

investment. In return, the laws applicable to the investment will remain in effect for a period of three to 20 years, based on the type and amount of the investment.

Incentive schemes also make up a key part of the Colombian legal framework for business. The “free trade zone (FTZ)” is a mechanism provided by the Colombian government to stimulate investment and domestic job production. These are specific geographic areas that enjoy a special tax and customs regime. Benefits of the FTZ include, but are not limited to, a 15 percent corporate profit tax and simplified customs procedures. Among the various requirements to qualify for a FTZ, an investment project must meet a specified minimum investment and create a minimum number of domestic jobs. As of last

year, 91 different FTZs account for USD 6 billion in investments and have created 43,355 Colombian jobs.

In summary, the Colombian government welcomes investment and has taken clear steps toward fostering a marketfriendly investment climate. The state of infrastructure in the country is such that it seems the next logical destination for significant foreign direct investment.

However, certain risks may continue to restrain Colombia’s ability to grow and compete.

At the price of sacrificing much detail, this article has attempted to cut a broad swath of the current state of the Colombian economy as it relates to investment.

For more information, please refer to the articles that follow.

Latin Infrastructure Quarterly

The Agencia Nacional de Infraestructura:

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Colombia’s mastermind of infrastructure development LIQ talks to Luis Fernando Andrade Moreno, President

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I went over the strategic plan for the years 2010-2014 that the Agencia Nacional de Infraestructura (“ANI”) put together and found it really informative. ANI’s goals are ambitious and the financial and human resources needed to achieve them are great. The strategic plan calls for private sector resources to complement the public sector. In what ways does the ANI interact with the private sector?

Some of the goals are that ANI is structuring and will award PPP contracts over the next two years in the amount of US$ 27 billion. The two most significant elements of the program are Road PPPs (US$ 20 billion) and Rail PPPs (US$ 6 billion).

The typical contract will have one year for pre-construction activities, 5 years for construction, and 15 years of operation and maintenance.

In terms of laws and regulations that protect investors, Colombia is widely recognized as an investor friendly environment. For example, Colombia is ranked by the Doing Business report of the World Bank as the 5th best country in the world in terms of Investor protection, and the best in Latin America.

Colombia also has a proven record applying the concession model. We have been structuring concessions for transportation infrastructure projects for 25 years.

During this period we have a robust legal system that offers clear rules to investors.

For example, we have developed an arbitration system to resolve conflicts that ensures objective and timely decisions.

In Colombia there are two entities which build and finance transportation infrastructure. One is ANI and the other INVIAS (in charge of public works -it co finances the roads with the governor of the department or the major of the city at stake).

Something that caught my attention is that the ANI expects to move forward with “structuring a new generation of concessions under a lessons learned framework” (… estructuración de una nueva generación de concesiones bajo un marco de lecciones aprendidas… página 10 del Plan Estratégico), what are the lessons learned?

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In the past, most of the risk was assumed by the government as well as the financing of the project. The government had a system of paying in advance through “anticipated payments” to the private concessionaire and with time there were some cases when the private would declare itself “without liquidity to continue the project” so the government would end up financing the private sector and the projects would take more time to be finished or not finished at all. The lesson learned here is that the government can find a solid private investor and partner who commits to build, finance and operate the road or project at stake and only after the project is operating does the government recognize and starts paying off the private investor through a system of infrastructure bonds* that can be negotiated in the capital markets. (*these bonds are being developed with the Ministry of Finance together with ANI).

How does the recently enacted PPP law favor the channeling of private sector financial and human resources for the modernization, construction, operation and maintenance of infrastructure assets?

The PPP law 1508/2012 and its decree 1467/2012 introduced a number of benefits that promote the participation of infrastructure funds for institutions whose investment had been relatively low in concessions.

The former law had two actors: the Government and the Engineering Companies, the new PPP law includes a third actor in a protagonist role which is the investors such as infrastructure funds and pension funds.

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The lesson learned here is that the government can find a solid private investor and partner who commits to build, finance and

operate the road or project at stake and only after the project is operating does the government recognize and starts paying off the private investor.

The new PPP law also has a new incentive for the private sector to present private construction initiatives (under the scheme Build, Operate, Maintenance and Transfer) for those projects that can be fully financed by a private proponent and do not require public funds. These can be presented to the ANI as “private initiatives” and the initial private proponent will have the right to improve the offer in case that throughout the selection process it doesn´t win. With these private initiatives, the ANI is aiming to cover the most beneficial and innovative proposals from the private sector.

The most important features of the new PPP law are the following:

In terms of laws and regulations that protect investors, Colombia is widely recognized as an investor friendly environment.

• •

• •

Incentives to private initiatives (unsolicited proposals) for projects that do not require government funding.

Introduction of a Pre-qualification phase to limit the number of competitors to those most qualified during the bidding process.

Introduction of service levels as criteria to recognize payment for the infrastructure.

Clarifications of regulations governing additions to contracts, including a limit of 20% during the life of the contract.

Within the ANI, there is a Vice-Presidency (Vicepresidencia de Planeación, Riesgo y Entorno) responsible for developing pre-feasibility studies and administering, evaluating and identifying risks of PPP projects. What sort of risk transfer are you planning for your PPPs? Given that much of the program is focused on economic infrastructure, do you plan to transfer volume/demand risk to the private sector?

The general criteria for risk transfer will be that risk should be borne by the party who is in the best position to manage it.

Accordingly, construction and availabil-

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Latin Infrastructure Quarterly

ity risks will be transferred to the concessionaire, except in complex works, such as long tunnels.

The Volume/Demand risk was mostly absorbed by the government in the last road PPPs - Ruta del Sol and Transversal de Las Americas. The government agreed to pay the shortfall, if any, relative to the initial revenue projections, at the end of the contract. The Concessionaires took the risk of the revenue distribution over time.

We will rely on the advice of our investment bankers as to whether we maintain this scheme in the new concessions.

Institutions Can you comment on the Fondo Financiero de Proyectos de Desarrollo (“Fonade”) as it seems to be one of the main sources of financing for road projects?

Fonade stands for Financial Projects´ Development Fund and it is an industrial - commercial financing company of the state attached to the National Planning Department. It was the only state company with judicial, technical and financial faculties to negotiate development proj-

ects and support their preparation phase.

Now we have two other funds such as the Calamity Fund and the Adaptation Fund - recently created especially for projects related to recovering damaged transportation infrastructure due to the strong winter season of the past two years.

These three funds cover the whole national territory through their lines of services which include project management, investment banking and project structuring, formulation and evaluation.

The new PPP law also has a new incentive for the private sector to present private construction initiatives for those projects that can be fully financed by a private proponent and do not require public funds.

Regarding “Force Majeure”, the government will retain only those risks that cannot be insured in the markets.

Pareira, Colombia

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How is your pipeline of projects fed?

The projects are prioritized in the National Development Plan (for a Presidential term – 4 years) and this Plan is constantly designed by all the planning offices of the ministries involved in each sector together with the National Planning Department (DNP).

After the President of the Republic takes office and the national budget is determined for each year, those projects that need to be financed through Public Private Partnerships are sent to be structured by the ANI. The ANI is also in charge of all the transportation sector concessions that are about to revert to the state, we structure them to put out to bid for another term or if it is the case we analyze whether an extension may be granted to the current Concessionaire.

Can you comment on particular projects in the port and airports sectors currently under study or being tendered?

We grant concessions to bidders who request the least financial assistance from the federal government to build, operate, and maintain new highways, ports, airports and railways. We also use Project Finance Initiatives with which the government grants a concession to a private company to design, finance, build, maintain, and operate a road, port or airport again awarding it to the bidder who requests the least amount of federal funding, and the government pays them an amount that includes the amortization of the investment plus the amount necessary for the maintenance of the road.

With respect to airports the concessions were formerly under the AeronĂĄutica Civil but with the new PPP law they are in the process of passing to the ANI.

Luis Fernando Andrade Moreno, is the President of the National Infrastructure Agency for Colombia (Agencia Nacional de Infraestructura) since August of 2011, appointed by President Juan Manuel Santos, after having presided successfully the consultancy Mckinsey & Company Colombia, the most important of the country, for almost 17 years. In that period, Mr Andrade advised the reorganization of the most important companies in the country. He has also been partner of Mckinsey & Company in Sao Paulo, Brazil, and associate consultant for the same firm in New York. His career includes also an opinion column on management and business reorganization for the magazine Dinero, the most important of Colombia on the issues of finance and business. He is an industrial engineer from the University of Florida, with an MBA from Wharton School of the University of Pennsylvania.

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Latin Infrastructure Quarterly

What’s your job as Vice-President of Origination at Banca de Inversión Bancolombia?

I lead the origination team in charge of getting mandates for M&A, Project, Corporate and Acquisition Finance, and Capital Markets. The Bancolombia´s investment bank division has a regional reach, covering deals in Colombia, Peru, Central America and the Caribbean.

Can you give us your opinion on the state of infrastructure investment in Colombia?

Colombia needs desperately to improve its infrastructure if it wants to be competitive in globalized economy. The most

Infrastructure Financing At Bancolombia´s investment banking division, over the years we have developed the expertise to advice, act as lead arrangers and bookrunners on a great amount of financing deals on infrastructure. We have the largest team in Colombia with the sophistication and technical knowledge to undertake any infrastructure deal. Also, having the balance support from Bancolombia, which is Colombia´s largest bank, gives us and our clients the certainty that we can deliver.

The reasons we see as competitive advantages over large international banks are: being close to our clients, understanding their needs and the local environment, flexibility and speed to execution (being able to reach financial closing before). However, given the

How do you see the MILA benefiting infrastructure financing? Is your Bank looking at infrastructure projects in Peru or Chile?

We believe that there is going to be a positive impact on the mid-term. The participation of the capital markets is critical because given the number of new projects needed to improve our infrastructure, the amount of funding they require and the tenors of the loans, local and regional banks will have to work together with institutional investors to find ways to allocate capital more efficiently. Having the MILA, with a more liquidity and a larger investor base will definitively be very important once the appropriate debt instruments are developed (in the case of Colombia).

The role of investment banks in Colombian LIQ talks to Jean Pierre Serani, infrastructure Managing Director at the

development critical problem is in our national and regional roads and public transportation on the main cities. But we also need large investments on ports and airports. The country needs to undertake large investments if we aim to catch up with other countries on the region such as Mexico and Chile.

The amount of work financing infrastructure development Banca de Inversión Bancolombia has done over the years is impressive, why would project sponsors choose a domestic investment bank over a major regional or international one? Please describe your competition in the fields of corporate finance and capital markets.

The fields in which we are focused are project finance, acquisition finance, restructuring, M&A, private equity and capital markets.

Investment Banking Division of Bancolombia.

size of some of the infrastructure deals in Latin America, sometimes we need to partner with some international banks, with which we have developed a close relationship.

What is your opinion on the public sector agencies/ministries in charge of bringing to market infrastructure projects? What things are they doing well and what things can be improved?

The reasons we see as competitive advantages over large international banks are: being close to our clients, understanding their needs and the local environment, flexibility and speed to execution.

Infrastructure Financing

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The participation of the capital markets is critical because given the number of new projects needed to improve our

infrastructure, the amount of funding they require and the tenors of the loans, local and regional banks will have to work together with institutional investors to find ways to allocate capital more efficiently.

The current government has been very keen in understanding how the infrastructure contracting could be improved and we expect to see the results on the next generation of concessions that are planned to be awarded on 2013.

The first step to improvement has to be taken by the government agencies (ANI) to develop contract terms that fit international standards on both technical and financial requirements for sponsor and contractors. Also the government needs to focus on two other issues: strengthen the other agencies like the ANLA (in charge of awarding environmental licenses) in order to add them more execution capac-

Medellin, Colombia

ity (budget, people); and to promote the development of a legal framework to expedite the acquisition of the required land rights needed to develop the projects.

Over the last five years, Banca de Inversi贸n Bancolombia has structured various syndicated loan transactions to finance infrastructure companies, were there common characteristics in those loans and were there foreign lenders participating?

All deals have been tailor made, so making comparisons is difficult. I could say that in the last years there has been a trend

to adopt international project finance standards for local deals. This is a process in which we are converging progressively. With this, we expect to have in the near future some kind of standardization on terms and documentation.

In Colombia, international banks are very active in deals that involve sectors that get income denominated in US dollars (ports, airports, energy). Projects in toll roads or public transportation have peso denominated income, so its financing is mostly provided by local banks or international banks with a local operation).

Banca de Inversi贸n Bancolombia has

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Latin Infrastructure Quarterly

Infrastructure Financing

In Colombia, international banks are very active in deals that involve sectors that get income denominated in airports, energy). also invested its own capital in operators of infrastructure assets, what are the main elements of an infrastructure asset operator that you consider when evaluating an investment? (for example: sponsor’s operating expertise and equity commitment,

US dollars (ports,

other members of the consortium, concession agreement, granting authority’s rights and obligations, permits, project’s main risk management provisions when it comes to construction and operation).

We have a merchant banking opera-

tion that has allocated a good portion of its portfolio (of close to USD300 million) in infrastructure assets. Being a financial investor the most important element besides the attractiveness of the asset is to find the right partner (usually an infrastructure manager or a construction company). This partner should provide the expertise as a sponsor and construction manager, and also it needs to share the same values and philosophy towards managing the asset, even though the roles and expectations are usually different.

Let’s now turn to the capital markets and discuss the interest from institutional investors for bonds of infrastructure related issuers, what were the recent issuances in which you participated?

So far, in Colombia there have not been local project bonds. Most of the experience comes from some foreign issuances to fund greenfield energy assets (thermal power plants) or local issuances from operating projects or infrastructure companies. Currently, in Colombia, the government is on the process of developing a new asset class to finance infrastructure.

This process is on early stage, and we expect to have the final instrument (with the input from all the parts: institutional investors, banks, sponsors and government) next year, when the new generation of concessions are to be awarded.

In those deals, were the institutional investors buying those bonds primarily domestic or is there interest from international investors as well?

Villa de Leiva, Boyaca, Colombia

Since the government is improving both the terms and requirements to award the

Infrastructure Financing next generation of concessions, and developing a new asset class to finance infrastructure, we hope that we will have the right framework to attract local and international institutional investors.

What do institutional investors look for in those bonds? (for example: rating, currency, interest rate, security package, applicable law, market in which the bonds are traded, particular covenants) During our conversations with local institutional investors about the characteristics of the new instrument that the government is designing, the main concern is how to address construction risk and availability payments from the government. There is still a long way of discussions, but we believe that instrument will need to incorporate credit enhancements such as the ones provided by monoliners, multilaterals or a government agency in order to mitigate these risks.

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Jean Pierre Serani is a Managing Director at the Investment Banking Division of Bancolombia since August 2011. In this position he is in charge of leading the origination team for M&A, Project, Corporate and Acquisition Finance, and Capital Markets.

The Investment bank has a regional reach, covering deals in Colombia, Peru, Central America and the Caribbean. Before becoming a Managing Director, Mr. Serani was a Director of Corporate Finance, Senior Associate and Associate at the Investment Banking Division of Bancolombia.

Prior to joining Bancolombia, Mr. Serani worked as a portfolio manager in charge of Corfinsura´s Colombian Treasury Bonds portfolio of over $200 million (Corfinsura was Colombia´s main Investment Bank and it was acquired by Bancolombia in 2004).

Mr. Serani received his undergraduate degree in Business from Universidad EAFIT and his MBA degree from Georgia Institute of Technology.

Latin Infrastructure Quarterly

Adrián Barrios of PwC talks to Andrés Trivino, President of the Canada-Colombia Chamber of Commerce

The view from Canada

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Institutions What would you tell an investor whose views are built based on the bad news that came from Colombia all through the 80’s and 90’s? Is Colombia 2012 a safe place to invest?

The media continues to portray the stereotype and fails to present the true picture of what really takes place in Colombia today. During the 1980s and 1990s Colombia was known for its drug cartels and the guerrilla conflict and it is true that many investors still continue to have this image in their heads.

What some investors have not realized is that Colombia has been changing; now the country is recognized by experts as one of the world’s most dynamic economies, with a robust democracy, healthy institutions, social progress and full respect for the rule of law.

The serious security problems we suffered are a thing of the past and now Bogota is considered safer than Washington.

Colombia’s has grown at a rapid pace and its current economic environment ranks as one the best countries for investment and is among the region’s best performers.

Historically, economic stability has been Colombia’s differentiating advantage when compared with other countries in Latin America. Inflation has been held within single digits (2.3% in 2010), we have not defaulted on our debt, exports have quadrupled over the last seven years and Foreign Direct Investment (FDI) has boomed since 2001. This latter growth was primarily originated by the expansion of the oil and gas industry in the country.

It is important to note that this growth will only be sustainable if Colombia builds the network of highways, railroads, airports and ports necessary to support the new activity. As a result, infrastructure will be one of the most important drivers to take Colombia to the next level.

The World Bank recognizes Colombia as one of the most business friendly environments in Latin America. Colombia has made important progress evolving its regulation meant to incent both foreign and domestic investment. Today, the country ranks first in Latin America in terms of investor protection and fifth in the world.

All three rating agencies have upgraded the country to investment grade.

Colombia has the potential to be one of Latin America’s great success stories.

Investors have to start seeing us like an emerging power with a diversified economy, with a growing middle class and a strong democratic government.

To conclude, I would tell an investor what executives of foreign companies with operations in Colombia have told me: go, visit the country and see yourself that now is the time to invest in Colombia.

Please tell us more about the CanadaColombia Chamber of Commerce.

What are its goals?

The Canada Colombia Chamber of Commerce is an independent non-profit organization established here in Canada with

Now the country is recognized by experts as one of the world’s most dynamic economies, with a

robust democracy, healthy institutions, social progress and full respect for the rule of law.

the purpose of fostering business relations between the Canadian and Colombian business communities.

Our main goal is to promote and facili-

Institutions tate investment and trade for and between members and support communication with industry and government organizations. Our objective is also to support social progress through programs aimed at helping Colombians in need. We pursue our objectives by developing and enhancing contacts, and making their voices heard through our events and publications.

Our events have brought together decision makers, high-level representatives from business, government and academia.

We also organize international missions, which are the ultimate vehicle to achieve results.

Our chamber keeps close ties with key stakeholders, primarily in Mining, Oil and Gas, and Infrastructure. We have also

Our top priority at this point is to promote

Colombian infrastructure projects to the

Canadian

business community. developed some connections with largescale finance and project management, engineering, professional services and sustainable construction.

Latin Infrastructure Quarterly Our top priority at this point is to promote Colombian infrastructure projects to the Canadian business community. We introduce investors interested in our country and assist them in obtaining appropriate information; making contact with government officials and local partners.

We do this either directly or through Colombia’s foreign investment promotion agency Proexport. We also work closely with the Department of Foreign Affairs and International Trade Canada.

We actively host and participate in various Infrastructure events and trade missions in Canada and Colombia. We are hosting an exclusive event in Toronto on November 28th with the newly created National Infrastructure Agency

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(ANI), responsible for packaging and promoting infrastructure projects to the private sector. This seminar will be an opportunity to hear firsthand the opportunities for private sector participation in the Colombian government’s ambitions infrastructure plan. During that week the ANI will also be meeting with key Canadian investors, hedge funds, pension funds, infrastructure companies, engineer companies, construction firms and services providers interested in learning in more detail about the recently launched 4th generation highway PPP projects and prequalification procedures, as well as the standardized PPP and infrastructure bond term sheets.

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Institutions

The government’s plan involves new inter-departmental highways, ports and airports as the primary element in the quest to make competitive.

Colombia more

We are also helping the Department of Foreign Affairs and International Trade (DFAIT) to promote the Infrastructure trade mission to Colombia, Peru and Panama with primary focus on energy, transportation and water. The mission will take place on November 11-16.

If you are interested in knowing more about our chamber, events, trade missions, services and how to become a member I encourage you to visit our website at www.canadacolombiachamber.org.

What are the main Canadian companies (e.g. mining) that currently invest in the region?

Colombia’s strengthening economy, has helped create ideal conditions for high and sustained growth, becoming a strategic destination for Canadian companies, especially in oil & gas, mining, manufacturing and financial services.

Many Canadian companies are currently active in Colombia such is the case of Talisman Energy, Pacific Rubiales, Petrominerales, Brookfield Asset Management,

SNC-Lavalin, Nexen, Scotiabank, Petrobank, Air Canada, Continental Gold, Bata Footwear, Kruger Paper, Enbridge, Presidents Choice, McCain Foods, LaSalle College, and Mcleod Dixon.

Canada’s FDI to Colombia is focused primarily on the extractive sectors. Colombia’s mining and energy sectors received about $12 billion in FDI in 2011, making it the largest FDI recipient country in Latin America as a proportion to its gross domestic product.

As well, many Colombian extractive companies are listed in Canadian Stock exchange. By the end of April, there were five dual listings between Toronto Stock Exchange and Bolsa de Valores de Colombia. There were 19 companies listed on Toronto Stock Exchange and 43 companies listed on TSX Venture Exchange with operations in Colombia.

Canadian companies are also investing significantly in other sectors such as financial agricultural, pulp and paper, printing, shoe manufacturing, plastics, education and forestry.

It is relevant to remember that infrastructure is one of the 5 key sectors for economic growth identified by strategy.

President Santos’

Are there international companies providing infrastructure services in Colombia? Which countries are currently represented?

Various international private equity firms have focused on Colombian infrastructure and opened operations in Bogota.

Brookfield is a good example as it has put together a $400M million infrastructure fund. By the way, this is the largest private equity and infrastructure fund ever raised in Colombia. Other international private equity funds active in Colombia are Ashmore, SEAF, Darby and the Swiss Investment Firm for Emerging Markets “SWIFEM”.

In 2011 SNC-Lavalin acquired Itansuca, a Colombian engineering firm focused on the energy sector. Odebrecht, form Brazil, is currently working on the construction and concession of the second sector of “Ruta del Sol”, a road that will effectively run from Bogotá to the Caribbean coast. Other important Infrastructure and Construction firms are Acciona from Spain, currently working on water sanitation and Camargo Correa, another Brazilian company also setting sights on our country.

Please tell us about infrastructure opportunities in Colombia. What are the current priorities for the Government?

During the past two decades Colombia failed to invest in Infrastructure, to the extent that investment in this sector accounted for only one per cent of GDP, which is much lower than the three per cent that is touted as the right percentage for developing countries. This said, is evident that there are plenty of opportunities in this sector.

Looking into where investment is likely to go, it is relevant to remember that infrastructure is one of the 5 key sectors for economic growth identified by President Santos’ strategy. The other four are housing, mining and energy, agriculture and innovation.

Improving the country’s weak transportation infrastructure is the governments top priority as the country enters into a new phase of international trade which demands more capacity. With 11 free trade agreements in effect, it is obvious that demand for better infrastructure is on the

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process. This is meant to create confidence and transparency for private-sector involvement.

Currently ANI is working together with the Colombian ministry of Finance creating a new bond instrument that will increase the market’s liquidity. Using these bonds pension funds will have access to investment in infrastructure projects.

Cartagena, Colombia

rise. The government has also set out four main directions for strategic planning in terms of infrastructure projects: (1) support for internationalization, and “economic locomotive” sectors; (2) regional connectivity; (3) adaptations for climate change; and (4) urban mobility.

Foreign investors from Canada and elsewhere are expected to play a significant role in upgrading Colombia’s outdated infrastructure, to support the increasing output from mines, oil wells, agribusinesses and other investments The government’s plan involves new inter-departmental highways, ports and airports as the primary element in the quest to make Colombia more competitive. Colombia is expected to invest approximately $55 billion in infrastructure over the next 10 years, which accounts for

significant additional support of approximately 30% of total investment from the private sector through PPP to procure infrastructure and private investment. By 2014, the government expects to invest US$17bn to complete the four-lane road network and 50 per cent of railways.

Opportunities exist for roads, railways, airports, water sanitation and power, among others. Colombia’s expanding oil and gas industry has created the need for new pipelines to transport the crude and sub-products to the ports.

I think it is relevant to say that our infrastructure sector is going through a transition period, founded on the creation of the National Infrastructure Agency (ANI), and the enactment of the Public– Private Association Law, and the changes in the rules for the infrastructure auction

Andres Trivino is the President of the Canada-Colombia Chamber of Commerce in Canada with a primary role of offering an independent voice to promote investment and trade between the two Countries. With more than 15 years of professional experience he worked for PwC Canada advising corporations in Canada, Colombia, Brazil, Mexico, Venezuela, Cuba and Dominican Republic. As part of the PwC Latin American Restructuring Group and the Deals and Consulting Group; he advised companies in Corporate Finance, Corporate Restructuring, Mergers and Acquisitions, financial modelling and business valuations. His experience comprises the mining, energy, financial services, telecom, entertainment, and infrastructure sectors. Andres can be reached at atrivino@canadacolombiachamber.org

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Insights on social infrastructure development

Colombia:

Can you briefly describe the IDB’s portfolio of social infrastructure projects in Colombia? Which are the main ones?

LIQ talks to Kristin Dacey, Senior Investment Officer at the Inter-American Development Bank

T

he IDB covers social infrastructure projects in all of Latin America and the Caribbean in both public and private sector sides. On the private sector side, we support health and education infrastructure including the construction or expansion of hospitals, clinics, schools, universities, and daycare centers. One example is the Centro Médico Puerta de Hierro in Mexico. IDB provided 12-year financing to help the company build two new hospitals, 40 beds each, in the central Pacific coast cities of Tepic and Colima. The IDB credits, which combine senior and subordinated loans, total $12 million, denominated in Mexican pesos. Another example is the Universidad Politécnica Salesiana, a socially inclusive Catholic university in Ecuador. IDB approved a $15 million loan to finance its expansion, including the construction of new buildings, purchase of equipment, and the creation of a student loan fund. We have identified interest in IDB financing the construction and/or expansion of several hospitals, clinics, schools and other education projects to support Colombia’s social infrastructure.

On the public sector side, the biggest education projects approved within the past 18 months are a $46 million loan to Colombia to reduce inequalities among schools located in different parts of the country; a $27 million loan for a program focused on early childhood learning in Paraguay; a $25 million loan also for early-stage learning in three provinces in Peru; and a $7 million financing for initiatives in Honduras to benefit schools serving the very poor. In the areas of social protection and health, a $66 million loan to Brazil will improve the Unified Social Assistance System, including programs to combat hunger; a $35 million program to construct and upgrade hospitals in the department of Potosí in Bolivia; and a $50 million loan to Panama aimed at reducing infant and maternal mortality and addressing chronic malnutrition and training physicians and nurses.

Moreover, the private and public arms of the bank work hand in hand to help

Infrastructure Financing governments develop effective privatepublic partnership frameworks that can help generate a strong private sector response and attract quality investors in the provision of high-quality services in our member countries.

Let start discussing the pre-investment phase, how is the Bank’s pipeline of projects fed? That is, who identifies possible projects: the Bank, the national government, and/or the sub-national governments?

The IDB has offices in every country in Latin America and the Caribbean, and uses this presence in the region to help originate the “pipeline” of projects proposed for future financing. On the public-sector side, priority areas are identified through the preparation of Country Strategies, publicly available documents prepared jointly by the Bank and borrowing-member country authorities at the beginning of their terms in office. Because the IDB works closely with the national and sub-national governments, we sometimes receive referrals from them for private sector deals. The IDB also has officers, like myself, who cover certain

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sectors and are continually in touch with local private sector players active in the social infrastructure space.

receive financing from the Bank? If so, in your opinion, how much politics influences the granting of said guarantee?

I assume the demand for projects is great, what is the Bank’s criteria, when evaluating different projects, to go for one over another (long-term average cost, NPV, IRR)?

Loans to sub-sovereign entities do not require a financial guarantee from the national government, but they do need their non-objection. In making loans to provincial, state or municipal governments without a sovereign guarantee, the Bank thereby assumes a degree of risk not associated with sovereign-guaranteed lending, and thus charges different rates of interest and develops terms different from those applicable to sovereign-guaranteed projects, on a case-by-case basis.

One of the main criteria we use to evaluate projects is the developmental impact of the project its alignment with the IDB’s goals. As part of a deliberate effort to address sustainability issues in both private and public sector projects and investments, the IDB focuses on supporting client companies as well as governments to better balance the financial, social, and environmental performance aspects of their projects and operations.

As noted above, project programming on the public-sector side is done in conjunction with governmental authorities.

Calculation of rates of return, both economic and financial, is always included as part of project appraisal and due diligence.

Do sub-national governments need a guarantee of the national government to

Lets now turn to the investment phase, how does local procurement change when a project is to be financed by the Bank?

The Bank ensures best practices are used in all of our projects, as reflected in the Bank´s procurement policies for good, civil works, and consulting services.

When Bank resources are used to finance a publicly administered bidding process, the Bank´s rules require that the competition be open to entities from all member

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Infrastructure Financing

On the public-sector side, priority areas are identified through the preparation of Country Strategies, publicly available documents prepared jointly by the

Bank and borrowing-member country authorities at the beginning of their terms in office.

Bucaramanga, Colombia

Infrastructure Financing countries, with local and international advertising requirements. The Bank reserves the right not to finance activities that do not adhere to Bank procurement policies.

How does the Bank monitor the procurement of projects?

The IDB is very active in the monitoring and evaluation of projects, principally through the Country Offices. Procurement plans and general and specific procurement notices are disclosed on the Bank´s website for all sovereign-guaranteed projects, as are contract award announcements.

Onto the operation phase, besides the financing of works, does the Bank participate in “capacity building” projects for the public sector officials at a national and sub-national level responsible for executing the projects financed by the Bank? If so, can you describe the results these projects have had so far?

Yes. The vast majority of Bank financed sovereign-guaranteed loan projects contain institutional capacity-building components, which are continuously monitored and evaluated throughout the implementation phase. Capacity-strengthening is also accomplished through technical assistance grants provided by the Bank, and through the innovative Social Entrepreneurship Program administered by the Multilateral Investment Fund, which combines grants and small-scale loans to non-governmental organizations, always including a capacitybuilding dimension.

In your opinion, what are the main lessons learned from developing social infrastructure in Colombia?

There is a great need for social infrastructure in Colombia with many projects suffering from lack of equity and/or sponsor support to get started. Many existing projects in the health space suffer from long accounts receivable cycles. Both of these aspects need to be mitigated carefully in structuring of the financing packages.

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When Bank resources are used to finance a publicly administered bidding process, the

Bank´s rules require that

the competition be open to entities from all member countries, with

local and international advertising requirements.

Do you see social infrastructure procurement and operation changing with the PPP law recently enacted?

Generally there is optimism. We have received a few calls to discuss ideas, which could be quite interesting. Colombia is a dynamic growing market that has attracted the attention of many investors.

It seems promising that the new law will allow more of the private capital to flow into much needed infrastructure projects.

The PPP law is very recent and some work still needs to be done with respect to the interpretation of certain elements, but we are hopeful that IDB’s work will support the creation of innovative approaches that align with the law and its objectives.

Kristin Dacey is a Senior Investment Officer originating social private sector projects, mainly in health and education, for the Structured and Corporate Finance Department of the Inter-American Development Bank (IDB). Previously, Kristin spent over 4 years syndicating IDB private sector loans covering financial markets, corporates, structured finance and the socioeconomic base of the pyramid. Prior to the IDB, Kristin spent almost 7 years at GE Capital in various roles, business lines in the US and Mexico. Kristin has a Masters in Global Management from Thunderbird, MBA from Arizona State, as well as a BS and BA from Virginia Tech.

Last year, Colombia was raised to investment grade, has this led the national and sub-national governments to turn to the capital markets to finance infrastructure works? If so, has this decreased the demand for Bank’s resources?

For social infrastructure, we have still seen robust demand. Many of the projects are too small, or not the right fit for capital markets. At the same time commercial banks can’t offer the tenors that make sense for social infrastructure projects. The IDB has worked hard across the region to identify the right mix of financing partners to achieve tenors and financing packages that promote social infrastructure investment projects.

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Although Colombia has a long history of infrastructure projects privately financed, the concept of Public Private Partnerships (PPPs) is completely new for its legal system.

Previous projects were developed in the country under the concession contract model, a legal institution taken from the French law in which the private part delivers a service on behalf of the State. In that kind of contracts, the private part is not meant to be a partner of the State, but its delegate.

Regulation

Public Private Partnerships:

A New Concept for the Colombian Law

Carlos Andrés Sánchez García Durán & Osorio Abogados

U

nder this model, the State remained as the last responsible for the public service delivered through the concession and therefore, Courts were always reluctant to accept risk allocation as described in contracts, making the State liable for what they called “unforeseeable risk”.

As a consequence, concession contracts were heavily controlled by the State, giving little freedom to the private party for developing new and more efficient ways to deliver infrastructure and public services. In fact, the concession model assumes that the State knows what it needs and how to do it, but prefers to rely on private efficiency executing the required tasks. Unfortunately, such an assumption is frequently far from reality.

In that context, Law 1508 is a breakthrough for Colombian infrastructure.

Learning from its own experience and considering international good practices,

the first article of the mentioned Law defined PPPs as follows: “Public Private Partnerships are an instrument for private capital participation, materialised in a contract between a public entity and a person or a private law corporation, in order to provide public infrastructure and the services related to it. It involves risk retention and transferring as well payment systems based on the availability and service level of the infrastructure provided or the service delivered.”

Based on that definition, it is possible to identify the following elements as essential for Colombian PPPs. Parts: Contract parties must be a public organisation and a private partner, and in consequence, unlike some European jurisdictions where public organisations can partner State owned corporations (e.g. Institutional PPPs under Spanish law), (Rebollo Fuente, 2009), Colombian

public organisations are not allowed partnering even with partially State-owned corporations even tough those were incorporated under private law. In that particular topic, both Constitutional Court (2007) and Council of State (2011) have been reiterative about the public nature of corporations with public shareholders, regardless the amount of the equity held by them.

Private Capital Participation: The fact that the private party is in charge of financing the whole project is almost unanimously considered as a key element of PPPs (United Nations, 2008, European Commission, 2005 and HM Treasure, 2003). The Colombian model does not accept either sharing equity between public and private partner –mixed equity corporations have their own legal framework and consequently are a different way of public-private cooperation– or soft loans or grants from the government, making

Regulation the private partner fully responsible for the project financing, hence transferring all financial risks to the private party.

Object: The object of Colombian PPPs must include both infrastructure and services provision. This legal framework does not replace the public procurement legal framework for building contracts or contracting-out specific services.

Payment Schemes: Availability payments are now the rule for Colombian PPPs, moving from traditional models where large lump sums or tolls or other fees where available for the private partner from the beginning of the contract.

This kind of payments may act as a powerful incentive for private value adding all through the contract, as well as developing more conservative capital structures beyond construction phase (Runde, 2010).

However, “availability payments” do not mean inflexible or not bankable contracts where a failure during operational phase will easily expose lenders to a default. On the contrary, Law 1508 underpins availability on “levels of service” and “quality standards” making possible to structure transactions in which a stable and secure stream of funds is unlocked to serve senior debt once the infrastructure is available after the construction phase (i.e. its levels of service and quality standards are measured and checked for the first time after its completion), while subsequent payments are only released if the private partner continues complying with the standards and levels defined in the contract. Such financial structure avoids volatile payments, reducing lender’s exposure to operating and demand risks, hence increasing project’s credit rate (Moody’s 2007) without renouncing to performance incentives, since the private partner depends on maintaining its levels of service and quality standards to obtain a return on its equity.

Risk Allocation: PPP contracts must be considered as a risk allocation tool. Parties are entitled to define who will bear economic consequences of specific risks associated to the project, using economic and rational criteria –a risk would be allocated to the part that better can manage it–- (European Commission, 2003). In that fashion, construction cost overruns, deadlines compliance, availability and

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Each partnership is almost unique due to the design, technology and project’s placement conditions, requiring a partner capable of the project financing

and operation, which is difficult to procure.

operational performance, are often transferred to the private sector that would ask a premium on its return for assuming those risks (Siemiatycki, 2010 and Benkovic et al, 2010). However, other risks such as political stability, civil war, property of the land and cultural heritage among others, are better managed by the public sector and transferring them to the private partner would increase dramatically the premium on the expected return.

The combination of the elements mentioned above give us other relevant characteristics of Colombian PPPs. Since they are developed on a contractual basis for a specific infrastructure and delivery of services related to it, PPPs will always be ad

hoc projects. Each partnership is almost unique due to the design, technology and project’s placement conditions, requiring a partner capable of the project financing and operation, which is difficult to procure. As a consequence, once the transaction is closed it might be very difficult –or very expensive– to find other private partner with similar characteristics, willing to take over the project if the selected partner fails delivering what is expected.

From the private partner perspective, the public organisation turns into “the only” client, since no other agent might be interested in the same project. It is a perfect situation for a “lock in” effect (Williamson, 1985; 53), thus for opportunistic be-

In that context, structuring strong and detailed contracts is an imperative for

Colombian public

organisations willing to embark in

PPP contracts. They will require technical, financial and legal advice and must not deny contracting experienced advisors.

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haviour.

Following Transaction Cost Economists, the best way for reducing opportunism is using a clear and well-specified contract. They argue that, within the limits of bounded rationality, managers (in our case, public organisations) should iden-

Regulation

tify the hazards arising from uncertainty, opportunism and asset-specification and craft complex contracts. Those contracts might define in detail the roles of each party, the expected outcomes and the way to measure them, the consequences for foreseeable contingencies and the

methodology for resolving unforeseeable outcomes (Poppo and Zenger, 2002 and Carson et al, 2006). The more detailed the contract, the less probable would be an opportunistic behaviour.

In that context, structuring strong and detailed contracts is an imperative for

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Colombian public organisations willing to embark in PPP contracts. They will require technical, financial and legal advice and must not deny contracting experienced advisors. But even more, they must take advantage of the new tools included in Law 1508 and developed by Decree 1467/12, such as prequalification process.

They are project finance

structures, since lenders have

“non recourse” or “very limited recourse” to sponsor’s assets or government

guaranties, making the payment scheme the only source

for debt payment.

That process, based on a shortlist of 2 to 6 companies and not even similar to the endless European competitive dialogue, allows public organisations maturing projects not only using a fluid dialog with the market, but also adding information to it, since additional studies can be carry out during the process at the expense of prequalified companies. This can be an interesting way of capturing innovation, reducing uncertainty and addressing budgetary restrictions at the same time.

We already highlighted the ad hoc nature of PPPs and its lock in effect. However, it is relevant to mention another effect that comes from the particular characteristics of these associations. They are

Antigua Escuela de Derecho. Universidad de Antioquia, Colombia

project finance structures, since lenders have “non recourse” or “very limited recourse” to sponsor’s assets or government guaranties, making the payment scheme the only source for debt payment. This particular characteristic makes lenders a really relevant group. In fact, if lenders do not consider the project viable it would be impossible to carry on just with sponsor’s equity, since the amount of money would be too high and risk exposure too broad.

Based on the relevance of lenders for PPPs success, scholars claimed PPPs must be structured as a safe transaction

for financial institutions (Kociemska, 2009) and we might add, considering current government plans and the size of Colombian financial sector, it must be a safe transaction for pension funds. That condition would only be obtained if the project meets the criteria of rating agencies for investment grade, thus some basic elements of credit rating must be considered (Moody’s, 2007, 2007b): • There would be a different credit rate for construction and operation phase.

• The transaction is described in the contract, hence is the contract struc-

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Carlos Andrés Sánchez García - LLB, Universidad de los Andes, Colombia (2000); LLM Telecommunications Law, Universidad Carlos III, Madrid, Spain (2003); Master in Business Administration MBA (Beta Gama Sigma Award), Durham Business School, UK (2011). Junior Partner at DURÁN & OSORIO (2011 – currently). Associate at DURÁN & OSORIO (May 2000 – 2010); as a member of Durán & Osorio, he has been member of several multidisciplinary teams appointed by the Colombian government or international agencies for structuring large investment projects and/or advising on relevant transactions, such as Nor Oriente Airports, El Dorado International Airport, and Transmilenio. He has also advised public and private organisations on telecommunications regulation, including the Ministry of Finance on the merger Colombia Telecomunicaciones – Telefónica Móviles, the Colombian Radio Spectrum Agency on spectrum pricing policy and several carriers. Lecturer of Telecommunications Law at Universidad de los Andes (2005 – 2010);

ture the most important element of any credit rating. In fact, the payment structure, force majeure and early termination clauses account for 65% of credit rating of a PPP project for its operational phase.

• Volatile payment structures that expose lenders to operational or demand risks, affect negatively the project’s credit rating.

• Early termination clauses may not punish the lenders.

Since the public organisation transfers

the construction risk to its private partner, as it is more capable to manage it, lenders would be keen to transfer that risk out of the borrower to the building contractor. A turnkey or EPC contract might be included as part of the structure, as well as counter-warranty requirements for that contractor.

Overall, “safe transactions” are not riskfree transactions, but those that allow lenders to know what to expect from the project and particularly to assess to what extend the projects cash flow is enough to repay debt.

As a conclusion, is possible to say that Colombian legal framework provides what is required to make PPP at an international level, boosting Colombian economy and increasing efficiency in public spending. It is up to Colombian authorities to define how to use the new set of tools, stepping apart of old structures and breaking paradigms of the early 20th century administrative law. It is the time for new contractual structures.

structure Provision and Project Finance, Cheltenham, Edward Elgar Publishing Limited.

Rebollo Fuente, Andrés (2009), Experiencia Española en Concesiones y Asociaciones Público Privadas, PIAPPEM – BID, retrieved 19th August 2012 from: http://idbdocs.iadb.org/wsdocs/getdocument. aspx?docnum=35822299

Bibliography Benković, Slađana. Milosavljević, Miloš. BarjaktarovićRakočević, Slađana (2010), private and public capital partnership in the financing of infrastructural projects, Megatrend Review; 2010, Vol. 7 Issue 2, p313-326.

Carson, Stephen J. Madhok, Anoop. Wu, Tao (2006), Uncertainty, opportunism, and governance: the effects of volatility and ambiguity on formal and relational contracting, Academy of Management Journal, Vol. 49, Issue. 5, p. 1058–1077.

Council of State, Advising and Civil Service Chamber, Concept 1815, Mayo 31st 2011, Councillor: José Enrique Arboleda Perdomo.

Constitutional Court, Decision C-691-07, Magistrate: Clara Inés Vargas European Commission, COM(2005) 569 final, Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions On Public-Private aPartnerships And Community Law on Public Procurement and Concessions.

Grimsey. Darrin, Lewis. Mervyn K. (2004), Public Private Partnerships The Worldwide Revolution in Infra-

HM Treasury (2003), PFI: Meeting The Investment Challenge, retrieved April 26th 2011 from http://webarchive.nationalarchives.gov.uk/20100407010852 Kociemska Hanna (2009), Public-private partnership project success circumstances, Journal of Modern Accounting and Auditing, Vol.6, No.11, p. 53-58.

Moody’s (2007), Rating Methodology: Construction Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects, retrieved 6th August 2012 from: http://www.moodys.com/research/ConstructionRisk-in-Privately-Financed-Public-InfrastructurePFIPPPP3-Projects--PBC_106407 Moody’s (2007b), Rating Methodology: Operating Risk in Privately-Financed Public Infrastructure (PFI/PPP/P3) Projects, retrieved 6th August 2012 from: http://www.moodys.com/research/Operating-Risk-in-Privately-FinancedPublic-Infrastructure-PFIPPPP3-Projects--PBC_106479 Poppo Laura and Zenger Tod (2002), Do formal contracts and relational governance function as substitutes or complements?, Strategic Management Journal, Vol. 23, p. 707–725

Runde, James. Offutt, J. Perry. Selinger, Stacie D. Bolton, Jennifer Sarah (2010), infrastructure publicprivate partnerships re-defined: an increased emphasis on “partnerships”, Journal of Applied Corporate Finance; Vol. 22 Issue 2, p. 69-73.

Siemiatycki, Matti (2010), delivering transportation infrastructure through public-private partnerships: Planning concerns, Journal of the American Planning Association, Vol. 76, No. 1, p. 43-58.

United Nations (2008), Guidebook On Promoting Good Governance In Public-Private Partnerships, retrieved 18th April 2011 from: http://www.unece.org/ceci/publications/ppp.pdf Williamson, Oliver E. (1985), The Economic Institutions of Capitalism, The Free Press, London.

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Infrastructure and private equity in Colombia What are Darby’s activities in Latin America at the moment and particularly in Colombia?

Darby has had a long history of involvement in Latin America and particularly in Colombia, dating back to its first PE fund in 1994. Currently, there are several funds in the investment phase in Latin America.

In addition, there have been several recent press releases detailing the successful exits from Darby Funds, including the sale of three Colombian investments: Petrosantander, TEBSA, and Avantel.

As a private equity firm, what are the main indicators of a country’s economy and financial markets that you evaluate? What is your reading of Colombia’s current indicators?

Our general considerations may be grouped in three categories: overall economic prospects, openness and fair treatment of private investors, and dynamic sectors requiring equity and mezzanine financing. Colombia ranks highly on these indicators, as evidenced by growing FDI inflows over the last few years, and the more recent interest

Most of the time we look for

projects rather than companies, and we evaluate them first on their sector, structure, and individual merits; complementarily, when

sponsors retain a role, we evaluate

their track record, governance, and operational abilities.

LIQ talks to Jorge Castellanos, Managing Director at Darby Private Equity

in Colombian PE investments, both from domestic investors and from abroad.

A few years ago, Darby launched an infrastructure fund together with Colpatria. What sub-sectors within the infrastructure sector have proven to be more appealing to the fund’s management?

Infrastructure investments in Colombia and the immediate region are the main focus, with a particular emphasis on transportation activities.

What are the main elements of an infrastructure asset operator that you consider when evaluating an investment? (for example: sponsor’s operating expertise and equity commitment, other members of the consortium, concession agreement, granting authority’s rights and obligations,

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Infrastructure Financing

Our preference is to invest in private equity or mezzanine structures, i.e. hybrid fixed income instruments with an equity exposure component.

Bogotรก cityscape

Infrastructure Financing permits, project’s main risk management provisions when it comes to construction and operation) Most of the time we look for projects rather than companies, and we evaluate them first on their sector, structure, and individual merits; complementarily, when sponsors retain a role, we evaluate their track record, governance, and operational abilities.

Do you consider both greenfield and brownfield projects?

Yes, we do look at both opportunities, but due to the long gestation period of infrastructure projects, our emphasis is on brownfield and greenfield projects approaching the end of construction.

Is it within the fund’s mandate to invest in debt instruments issued by operators or infrastructure related companies? If so, what do you look for in those bonds? (for example: rating, currency, interest rate, security package, applicable law, market in which the bonds are traded, particular covenants) Generally, our core objectives do not include listed bonds. Our preference is to invest in private equity or mezzanine structures, i.e. hybrid fixed income instruments with an equity exposure component.

What do institutional investors find attractive in an infrastructure fund? (for example: frequency distribution of returns, performance persistence

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Large Colombian institutional investors

33

–

private pension funds and

insurance companies- aim to replicate a broad range of economic activities in their portfolio.

of certain private equity firms, diversification benefits, volatility, long-term revenue streams) Institutional investors have different interests depending on the region and the period in question. Large Colombian institutional investors –private pension funds and insurance companies- aim to replicate a broad range of economic activities in their portfolio, like that of the entire economy. Some of this diversification can be attained through public securities, and in a few cases they may find

Jorge Castellanos, Managing Director, Darby Private Equity Mr. Castellanos runs a regional infrastructure fund (FINTRA), has worked as investment and commercial banker (CEO of Bancafé, Correval Investment Banking, JPMorgan, World Bank) and in public service (Director FOGAFIN, Banking Superintendent, Director Public Credit).

He led the resolution of the Colombian 1998 banking crisis; created the Colombian treasuries (TES), other bonds and derivatives and private equity funds, enacted financial regulations, restructured, turned around, and sold companies, and served in several boards of directors.

He holds PhD and MPhil degrees from Columbia University.

ways to invest in non-listed securities.

Lately they have looked to infrastructure funds to increase exposure in segments where public securities are not available, where analyzing them in house is not scale efficient, and where some aspects of the investment –e.g. governance or technology- require special expertise.

For example, with most of the Colombian pension funds´ investments in infrastructure concentrated in electricity, infrastructure funds offer a diversification into other category segments.

Projects

LIQ talks to José Damián Sáez Martínez, General Manager

Latin Infrastructure Quarterly

What is the history of Acciona in Colombia? Acciona is well known around the world for the development, production and management of renewable energy, water and infrastructure, in which of these sectors of the Colombian economy has Acciona sponsored projects?

Since the 1970’s Acciona has been a part of major engineering projects in Colombia. Worth highlighting are the Santa Rita, Río Grande II and El Guavio dams, and, in the field of mass transport, the Medellín metro.

Acciona considers three sectors to be strategic: Infrastructure, Water and Renewable Energy. Acciona has made a strong bet in the development of infrastructure and the whole water cycle in Colombia and we are waiting on a favorable regulatory framework in the field of non-conventional renewable energies such as wind and thermal solar, field in which Acciona is a world-wide leader.

Acciona Infraestructuras is currently building hydrocarbon transportation lines for TGI and Ecopetrol and Acciona Agua is part of the consortium that will build the Bello water treatment plant for EPM, which will be the largest in Colombia.

Acciona Infraestructuras Colombia

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What is your opinion on the strategic plan prepared by the Agencia Nacional de Infraestructura (ANI) for the 20102014?

The strategic plan currently being structured by the ANI will mark a milestone in the development of Colombian road and rail infrastructure. Not only because of investment levels envisioned but also because of the basic change that means treating infrastructure with a medium to long term vision.

While we acknowledge that given the magnitude of the project there is a chance of delays in the structuring phase and that social and environmental matters will have to be consider, at Acciona we believe that the ANI is laying a solid foundation to, once in for all, move Colombia forward in the field of infrastructure development.

Which of the projects listed in that strategic plan is Acciona considering/working on?

At Acciona Infraestructuras we are paying close attention to the results of the projects structuring currently going on. This structuring will determine under what model (traditional procurement or concession) future road and rail infrastructure will be developed. It should be noted that Acciona Infraestructuras is a world-wide leader in developing infrastructure under both models.

The medium to large sized projects and those that connect the main cities are the ones that are the most interesting for Acciona Infraestructuras.

4. What is your relationship with governmental authorities at a national and sub-national level?

Although Acciona has very important clients in the private sector, it is clear that for the kind of projects we develop, the public sector is of critical importance for our business. We work side by side with public sector authorities at every level of gov-

Projects ernment in more than 30 countries. In Colombia we have been following the evolution of important projects at the national, departmental and local levels.

Can you describe the agreement Acciona reached with Adif (Administrador de Infraestructuras Ferroviarias?

During the last decade, Spain has become a leader in rail infrastructure development, particularly in high-speed rail, with the AVE (Alta Velocidad EspaĂąola). This ambitious engineering project developed by Adif, the state-owned Spanish company, has had Acciona Infraestructuras as a leader role in project developing.

Both Adif and Acciona understand that they can contribute all the knowledge acquired to rail projects in Colombia. This is why Acciona Infraestructuras and Adif last year executed an agreement for the latter to provide Operating Technical Assistance to those rail projects that we develop in Colombia.

As a project sponsor which have been your main sources of finance in the Colombian market?

MedellĂ­n Metro, Colombia

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Acciona Infraestructuras is currently building hydrocarbon transportation lines for and

TGI

Ecopetrol and Acciona

Agua is part of the consortium that will build the Bello water treatment plant for EPM. The Colombian financial market is currently in an excellent position to finance infrastructure investments. This is why the local market has financed those projects currently being developed by Acciona.

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However, local capacity won’t be able to cope with the magnitude Infrastructure Plan currently being structured and that will begin being implemented in 2013 and so we will have to turn to the international markets: commercial banks, multilateral banks, infrastructure funds, etc. These players are following Colombia closely.

In my opinion, in order to mobilize debt and equity financing it is critical that the projects are properly structure and have balanced risk allocation.

In which ways do you work with the Colombian governmental agencies to minimize the environmental impact of the projects you sponsor?

More than one decade ago, Acciona adopted the motto: “Pioneers in Development and Sustainability”. This phrase, which validity is reinforced every day, is a cornerstone of our business.

This is why it is worth highlighting the recent success, when it comes to social and environmental matters, of the wind energy project in the Yucatán Peninsula (Mexico), developed by Acciona Energía. At the same time, in the projects we are currently developing in Colombia, we work together with the client and the respective governments to minimize the social and environmental impact and use of compensatory measures.

Projects

José Damián Sáez Martínez, General Manager of Acciona Infraestructuras Colombia, was born in Alicante (Spain). He is a Civil Engineer from the Universidad Politécnica de Valencia (Spain), a Master in Structures and Foundations from the l´Ecole de Ponts et Chaussées de Paris, a MBA from the Instituto de Empresa (Spain) and a Master in International Management (in company) from the IESE (Spain).

He has worked at Acciona Infraestructuras, S.A., since 1992. He has worked in different positions in the Basque Country, Canarias and Castilla- La Mancha in Spain. Since 2010 he is the General Manager of Acciona Infraestructuras in Colombia.

Infrastructure Financing

Latin Infrastructure Quarterly

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Ashmore Colombia Infrastructure Fund What are the main factors (economic, legal, institutional, financial) that have contributed to the current level of infrastructure development in Colombia?

It is important to differentiate sectors.

Colombia can be a model in the development of infrastructure in some sectors (like power generation, transmission and distribution) and at the same time Colombia can be a model of how not to develop other infrastructure sectors, particularly roads and land transportation.

Why have these sectors developed so differently? In my opinion, mainly because the regulation of the power sector was thought and enacted to attract investors that have the capital and the expertise to face the risks present in these activities. For example, at the end of last century, the demand for power in Colombia stopped growing and for a limited period of time capacity was higher than demand. The sector successfully ab-

LIQ talks to Camilo Villaveces, CEO of Ashmore Management Company

sorbed this situation, because the companies acting in the power sector were well capitalized companies that were prepared to absorb the shocks resulting from unexpected changes in the business cycle.

Consequently, a sector that for years was the number one contributor to the fiscal deficit of the country became a dynamic, well structured sector that does not consume fiscal resources and at the same time secures an efficient service to the Colombian population.

The success story of the power sector is totally different than the failure story of the road concession program, full of unfinished roads, court procedures, scandals and corruption. Why? In my opinion, because the toll road concession program has been carried out without the required capital. Because of ill structuring and also because of the violence that affected Colombia for many years, the concession

program was not able to attract investors with the capital required to absorb the risks involved in the business of constructing toll roads. Besides, ill structuring and even corruption affected the sector. Right now it´s clear that the road concession program has to be awarded to companies that have both the capital and the expertise to perform according to their contractual obligations.

What is your role in Ashmore Colombia Infrastructure Fund (the “Fund�)?

I am the CEO of Ashmore Management Company (Colombia), general partner of the Fund.

What kind of institutional investors have commitments in the Fund? Has the Fund reached its target of commitments?

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Latin Infrastructure Quarterly

Infrastructure Financing We obtained commitments from pension funds, insurance companies, multilateral agencies, governmental agencies, family offices, as well as seed capital from the Fund´s sponsors.

The Fund has reached its target and we are not doing any additional fundraising in the short term. We will do fund-raising again after we can show the market our results (the value of the Fund´s unit has increased in 2.5 years from COP 10,000 to more than COP 15,000) and that the Fund is operated in Colombia with world´s best practices.

We believe that being able to show the excellent track record we have will be the best way to launch new fund(s) in the near future, when we have invested the capital that we now have.

We obtained commitments from pension

funds, insurance companies,

multilateral agencies,

governmental

agencies, family

offices, as well as seed capital

Fund´s sponsors.

from the

What do institutional investors find attractive in an infrastructure fund? (for example: frequency distribution of returns, performance persistence of certain private equity firms, diversification benefits, volatility, long-term revenue streams)

Infrastructure Financing Basically, infrastructure is an asset class that provides low volatility and long term revenue streams, quite adequate to institutional investors that are growing significantly and do not want short term revenue streams. On the other hand, institutional investors that support the development of infrastructure protect themselves from the temptation of governments to force them to invest in infrastructure. In other words, if institutional investors voluntarily finance the development of much-needed infrastructure, they reduce the risk of being forced by the government to invest in infrastructure projects.

What have been your investments so far?

We have invested in power generation, logistics (ports and transportation) and telecom.

On the other hand, institutional investors that support the development of infrastructure protect themselves from the temptation of governments to force them to invest in

infrastructure.

What kind of sources (if any) of debt financing have the Fund managers used or intend to use in order to finance the investments?

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We have used the Colombian banking system, as well as multilaterals. In later stages of the projects, the capital markets are also an attractive alternative.

Do you seek control of assets?

Not necessarily. What we do need is a management team that has proven track record in the area and with their interests totally aligned with those of the Fund. If this requirement is fulfilled, we do not require control, but if we do not have control we do need minority protections that allow the Fund to exit in commercial terms and to control specific areas in which changes have to be done. In general, we prefer to team up with partners who know the business, and have shareholders agreements to protect the Fund´s position.

We have used the Colombian banking system, as well as

multilaterals.

In later stages

of the projects, capital markets is also an attractive alternative.

How do you envision possible exits?

In the case of finite projects, for example, concessions, they finish and there´s no exit as such; when we envision exit through private placements, we always have drag along and tag along rights that allow the Fund to exit when market conditions are adequate; finally, there are some projects that because of their characteristics provide the opportunity to exit through the public market.

Projects Camilo Villaveces received its rank of business administration in the degree Universidad de los Andes in Bogota and before holding the position of president in Ashmore Colombia, he was Co-president of Inverlink S.A., company of which is founding partner.

Mr. Villaveces initiated his professional race in 1979 like he is a credit officer in the Compañia Financiera Continental. In 1981 he created the Compañia Mercantil Financiera S.A., dedicated to the financing of durable consumer goods , in which he held the position of Executive President.

In 1984 the Bank of Colombia engages The First Boston Corporation (today Credit Suisse) to carry out the process of valuation and sale of the companies that were part of denominated Grupo Grancolombiano, at that time the more important and big industrial and financial group of the country, in the process that is recognized as initiating the industry of investment banking in Colombia. Mr. Villaveces was recruited and received practical training in The First Boston Corporation, and acted as a senior negotiator in several transactions, among them stands out the sale of a controlling participation in Cabot Colombiana S.A., Leasing de Colombia, Palmas Oleaginosas Bucarelia and Palmeras de la Costa S.A., and others.

In March of 1986, after of the nationalization of the Bank of Colombia, Mr. Villaveces, along with other executives, decides to create Inverlink, and worked since then in quality of Co-president. In this organization has had the opportunity to lead multiple valuation and buys and acquisition of companies in process different sectors.

Between the transactions led by Mr. Villaveces they are included: (i) creation and capitalization of the private sector of Electricaribe, Electrocosta and Transelca, companies that today hold the functions of Corelca and 9 distributing companies of the electrical energy Sector in the Atlantic coast (USD 1.235 million); (II) sale of Betania, Chivor, Termotasajero and Termocartagena (USD 1.173 million); (III) sale of 42% participation Promigas S.A. to Enron Corp. (USD 113 million); (IV) acquisition, many years later, in Promigas shares to Energy Prism the International and Corficolombiana (USD 510 million); (v) sale of 99% of the Bank of Colombia (USD 492m); (vi) sale of Network Multibanca Colpatria (Colpatria Bank) to General Electric (GE) in an operation in several stages (altogether, USD 700 million); (vii) sale of a participation shareholder of 49% in Electrical Company of Sochagota (USD 50 million); (viii) sale of a participation shareholder of 50% in TermoCandelaria S.A. (USD 50 million); (ix) sale of 100% of the actions of AFP Colpatria to BBVA Horizon (USD 62 million); (x) head of the advisory equipment of one of the greatest companies of distribution gas of the United States for the nonsuccessful acquisition of a Natural Gas participation E.S.P; (xi) financial adviser of ISA for the acquisition of selected assets of electrical transmission in Latin America; (xii) financial adviser of Bancolombia for a professional opinion (“fairness opinion”) respect to the fusion of Bancolombia, Conavi and Corfinsura; (xiii) financial adviser of Colpatria in the evaluation of potential an acquisition of Granahorrar, including the structuring of the supply and its financing, (xiv) financial adviser of Credit union in the emission and positioning of preferential actions in the local market of capitals (USD 130 million); (xv) estructurador of the process by which Telecom was eliminated and Colombia Telecomunicaciones S.A. was created. E.S.P., operation that is recognized national and internationally like “standard” in processes of reconstruction of state companies in badly been and, (xvi) financial adviser of Avianca in its bond emission with terms of 5, 7 and 10 years in the local market of capitals (USD 250 million), among others.

Latin Infrastructure Quarterly

Rodolfo Vouga and Cecilia Llamosas of Vouga & Olmedo Abogados

An Optimistic Outlook For Infrastructure, Transport And Logistics Services In Paraguay

Institutions

C

41

Located at an equidistant position from several of the main financial centres of the region (Sao Paulo, Buenos Aires, Santiago de Chile, Lima),Paraguay has a strategic location which makes it a strong candidate to develop into a services-based economy with a particular focus in services associated with transport and logistics.

onversely, being surrounded by land also represents a competitive disadvantage. It has been shown that landlocked economies’ competitiveness relies not only on the implementation of local infrastructure plans, but also tend to be heavily dependent on their neighbours’ interconnection capabilities.

Notwithstanding the hindrances its landlocked condition brings, it is ironically Paraguay’s geographic condition what makes the country the fittest territory to articulate commercial traffic and goods exchange between the Pacific and the Atlantic, as well as between the Northern and Southern regions of this part of the continent.

In order to fulfil this potential transport and logistics-hub role, specific studies have identified some conditions which need to be satisfied, namely: a strong and reliable connectivity network; availability of sufficient resources and adequate expertise to ensure the reliability of the network (ongoing maintenance), and; local policies oriented towards boosting transport and logistics services.

Strong and reliable connectivity network Adequate infrastructure is a necessary condition for connectivity. Even though the quality of infrastructure on itself cannot be technically considered as a non-tariff barrier to trade, in the context of a landlocked country it has been identified as a most-important barrier to trade. It has been shown that infrastructure explains 60% of transport costs for landlocked countries.

The main areas which need to be taken into account in order to enhance connectivity

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are: (i) dredging and signalling of navigable rivers and (ii) investment in rural roads and expansion of the road network.

Whereas air transport and railway transportation are also inadequate, the main inconveniences in terms of volume of trade involved as well as strategic importance stem from deficient fluvial-maritime and road transport infrastructure.

Dredging and signalling There is an overall deficit in the sustainability of navigation conditions: failure to maintain minimum fairway (depth and width), adequate signalling (use of beacons, lights) and a lack or deficiency of navigation control equipment.

As 80% of Paraguay’s foreign trade is transported through the water, effective dredging and signalling of the navigable rivers will cut transportation costs considerably. Moreover the effects and costs related with the landlocked nature of the country will be mitigated through an efficient use of the navigable rivers.

(For further reference on this issue please visit the prior publication of the authors at http://www.liquarterly.com/47/ projects/paraguay-the-hidrovia-on-theparaguay-river.html.)

Investment in rural roads and expansion of the road network Regarding road infrastructure, official data shows that the sum of the additional costs generated by road transport amount to around 20% of the amount of the total additional production costs in Paraguay.

These costs may be directly linked to the low quality of infrastructure, taking into account that only 7.3% of the 55,973 km of road network is paved.

Given the competitive disadvantage the country already suffers due to its landlocked condition, only a highly efficient road network can compensate the overrun caused by the latter condition.

Resources and expertise to ensure the reliability of transport networks (ongoing maintenance) The intervention of the private sector may play a major role in providing not only adequate expertise but also sufficient resources, innovation and efficiency in infrastructure investment.

During an interview with a local newspaper, the Minister of Public Works and

Institutions Communications (the “MOPC”), Enrique Salyn Buzarquis, admitted that public resources are not sufficient and that at least USD 2,500 million a year should be deployed on infrastructure investments in order to overcome the existing deficit situation.

On the same note, Minister Buzarquis announced that the Government is drafting a new bill for the concession of public works (the “Public Works Concession Bill” or the “Bill”). The Bill aims at creating a new business climate to attract private investment in infrastructure, and

Notwithstanding the hindrances its landlocked

condition brings, it is ironically

Paraguay’s

geographic condition what makes the country the fittest territory to articulate commercial traffic and goods exchange

Pacific and the Atlantic.

between the

at the same time allows a better complementarity of public and private capitals, remembering the many attempts to introduce private participation in public infrastructure works which have failed in the past, such as the case of the airport concession.

The Vice Minister for Transport also expressed that the goal of the Bill and of

the Government is to foster public-private partnerships (PPPs) for the development of new projects.

Among the future transport infrastructure projects are the building of around 180 new bridges and viaducts, the completion of the first stage of the Avenida Costanera (Riverside Avenue) and the beginning of its second stretch, as well as the Nu Guazu motorway and the Chaco aqueduct, to name a few.

Local policies oriented at boosting the development of Transport and Logistics Services Along with the announced Public Works Concessions Bill, the release of the Master Transport Plan (the “PMT”) is soon to take place. The PMT is the result of a joint investigation carried out by a Japanese consulting group and MOPC technicians, sponsored by the InterAmerican Development Bank (“IDB”).

The plan contains a series of specific infrastructure projects and best practices recommendations for the implementation of transport and logistics services plans and policies, and it also sets out a proposed Action and Investment Plan for the next 20 years.

Conclusion Paraguay possesses comparative advantages with respect to its neighbours as regards the capacity to articulate and mediate flows of commercial exchange in the southern cone sub-region. Topped with the advantage of its location are the low tax and labour costs the country is known for. These factors combined make Paraguay an ideal investment target.

In order for these advantages to come into play, regard must be had to the fact that Paraguay still needs an effective transport and logistics services planning in order to stand on an equal footing with its peers from the region on this regard, let alone stand out.

Promoting service levels equivalent to those of the region is of paramount importance as it will allow a better use of the emerging global nature of the services and manufacture network. This will signify an invaluable opportunity for Paraguay to turn into an active participant in the international supply and value added chain.

With a grain production export that puts

Institutions

Paraguay in the top charts of the world and even more optimistic projections for the coming years, it is an unavoidable duty of the Government to implement efficient logistics and transport policies, as well as to provide the means to set forth an adequate environment to foster the optimisation of costs and achieve better safety and service quality standards.

The competitiveness of the transport sector and foreign trade services is vital for any country to advance towards the improvement of performance and reduction of operating costs.

Paraguay must take advantage of its strategic potential and turn into a centre for transport and logistics services.

With the new Public Works Concession Bill underway and the launch of the investment master plans for transport and logistics services (PMT), there is no doubt this shift of Paraguay’s role in the region is on its way.

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

CECILIA LLAMOSAS –is a Paralegal at Vouga & Olmedo Abogados.

She is expected to obtain her law degree from at National University of Asunción, Paraguay / Katholieke Universiteit Leuven, Belgium this year.

She speaks Spanish, English, German and Dutch and is a member of the European Law Students Association and Erasmus Mundus Alumni. She is also a participant of the Roundtable on Renewable Energies of the Paraguayan Ministry of Industry and Commerce.

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Institutions

Social Responsibility and Infrastructure Development

LIQ talks to Fernando Ruiz-Mier, Senior Operations Officer at IFC

The Social Responsibility Forum for the Extractive Sectors has a preconference workshop that you will be leading and in the workshop’s agenda something caught my attention, a model to estimate the financial returns of community investments. This is a very interesting concept, how does it work?

The Sustainability Planning and Financial Valuation Tool (FV Tool) for the extractive industries generates reasonable net present value ranges on the return from community investments and calculates the financial value of risks mitigated through such activities. This value can take the form of either value protection (i.e. value of avoiding risks) or value creation (i.e. cash savings/productivity gains). The outputs will enable the justification and quantification of the business case for social investments, and provide a comparative analysis of social investment options.

The tool is grounded in the assumption that a company’s community investments can improve relationships between a company and community, which should reduce the likelihood of risks and as a result bring value back to the company.

This kind of information helps to justify and stabilize the annual budget that companies devote to sustainability efforts. It creates incentives, within companies, to invest in their communities.

At said Forum, you also intend to address the question of how can corporate social responsibility contribute to the impact royalties and taxes have on local communities, how do you think companies and local governments can work together?

Increasingly countries’ fiscal regimes mandate that a portion of the revenues generated by oil, gas, and mining projects, in the form of royalties and taxes, be transferred to sub-national governments (e.g. municipalities). Given that these revenues can be substantial, they constitute an important channel through which the presence of an extractive company can contribute to generate benefits for local communities, provided that they are well invested and respond to the needs of the local population, in an efficient and transparent manner. However, the potential benefits are not al-

ways realized because often local governments do not have the capacity to invest these revenues optimally, nor are there mechanisms for local communities to monitor investment activity and hold local authorities accountable. Extractive companies can, as part of their Corporate Social Responsibility program, engage with local governments helping them build the necessary capacity to effectively invest the revenues. They can also support initiatives of local civil society organizations to build their capacity to engage their local government and hold it accountable for the use of the revenues. In IFC’s experience, having companies and local governments work together in something as specific as ensuring that the available revenues are taken advantage of, not only helps deliver benefits to the population through increased investment, but also adds a dimension to the relationship between the local government and the company helping them know each other better and building trust.

How do you define “strategic community investment”?

For IFC, Strategic Community Investment (SCI) involves contributions or actions by companies that go beyond compliance with country requirements and the standards set by IFC. It aims to

Institutions

Latin Infrastructure Quarterly

address the local development needs and priorities in ways that are sustainable and that support the company’s business objectives.

Community investment programs are evolving as companies move away from philanthropic donations and reactive practices to more strategic ways of planning and delivering their programs. In line with this IFC places emphasis on viewing SCI through the lens of risks and opportunities, and on creating “shared value” by aligning business goals and competencies with the development priorities of local stakeholders. This includes a focus on building social capital and local ownership through multi-stakeholder processes; factoring sustainability and handover strategies into project design, and measuring and communicating results to optimize the business value derived from SCI.

promote local development. Our activities focus on: a) helping to ensure a community’s capacity to participate and benefit from large scale development projects; b) building the capacity of local government and communities to manage revenues; c) increasing local content in supply chains, and; d) disseminating good practices on community development. IFC implements SCI project in association with client companies and, when appropriate, involves local governments and other organizations. Occasionally, IFC also works at the sector level by sharing best practices with the industry and the national and municipal governments.

What kind of advisory work do you do in the infrastructure field?

IFC’s Advisory Services in Public Private Partnerships department (C3P) assists governments (national, state or municipal) in the structuring, promotion and bidding process of infrastructure projects under PPP schemes. It covers core infrastructure such as transport (airport, airlines, port, roads, railways), energy (generation, including renewable energy, distribution, transmission), water and sanitation and telecommunications as well as social infrastructure (health and education).

Does IFC advisory services in sustainable business work together with IFC investment services and/ or with government PPP agencies in the field of infrastructure?

IFC’s C3P conducts a comprehensive

Given that infrastructure projects generally have a large footprint and impact on surrounding communities SCI work s very relevant for them. IFC’s work on SCI focuses on increasing community investments which enhance social, environmental and, economic benefits where IFC has investment interests such as natural resources, agribusiness, forestry and infrastructure.

Advisory work in SCI involves helping IFC clients develop a strategic approach for community investment projects that are consistent with their business objectives (e.g. manage site-level social and environmentally induced risks) and

How do you work with infrastructure project sponsors to adopt internationally recognized environmental and social standards?

Extractive companies can, as part of their Corporate Social Responsibility program, engage with local governments helping them build the necessary capacity to

effectively invest the revenues.

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Fernando is the Regional Coordinator for Strategic Community Investment projects in Latin America and the Caribbean. He has been working on Strategic Community Investment projects in IFC for the last 5 years, and has led the development of the approach and methodology IFC applies in Revenue Management projects.

Fernando holds a Ph.D. degree in Economics from Purdue University. He has experience in consulting, the public sector, and academia. He held the position of Manager in Charge of Reviewing Operations at the Andean Development Corporation (CAF) and headed the consultancy practice at KPMG in Bolivia. His public sector experience includes serving as Vice-Minister of Social Policy and Investment in the Ministry of Human Development, as Vice-Minister of Public Investment and External Financing in the Ministry of Planning and as Vice-Minister for Monetary Policy in the Ministry of Finance, all in Bolivia. technical, financial and legal due diligence on the investment projects before taking them to market, including environmental and social studies under IFC standards, with the assistance of specialized external consultants. Once the private sector party is selected through a competitive process, the IFC investment department may provide financing to such selected sponsor following IFC protocols to avoid any potential conflict of interest and with the permission of the corresponding government client.

IFC financing will required compliance of IFC Environmental & Social standards.

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Infrastructure Financing

Bringing projects to market:

LIQ talks to Federico Girardotti of Faros Infrastructure Partners (“Faros”)

the view from a private sector advisor and investor

or does it require a lot of information exchange with potential bidders?

What kind of services does Faros provide and who are its main clients?

Faros Infrastructure Partners is a boutique asset management and investment firm focused on transportation and energy infrastructure, and ancillary revenues. We work with investors, project sponsors, private equity houses, infrastructure operators, funds, family offices, and financiers looking to make investments or acquisitions. We work through the life cycle of the project: due diligence process, bidding, financial closing, take over, asset management, refinancing/exit.

What is Faros’ experience in Latin American infrastructure development and finance?

Faros started as a European focused group but rapidly evolved incorporating the Americas to the scope. We have an office in the New York Area and an associated office in Mexico City in addition to our London office.

We have worked in the Americas from renewable energy in California, to toll roads in Mexico, to the recent airport privatization process in Brazil.

In Mexico we have advised a conglomerate in bidding for a toll road, and financing it after winning the tender. We have also looked into another toll road and have been involved in an airport project. We currently manage a commercial infrastructure network focused on ancillary revenues.

In Brazil we came in with a strategic investor to work in the recent airport privatization process. We expect to participate in the potential second round of airports.

Do governments in the LatAm region know what they want when they bring projects to the market

Our observation is that there is a good deal of information interchange with interested parties, but there is variability on a case by case basis. We have seen RFPs being designed and subsequently altered to fit the profiles of the most likely potential bidders. We should not forget that one of the greatest fears of the tendering authorities is to end up with no bidders. We have also been in processes where the government does not listen and ultimately makes mistakes that cost the failure of the project. There have been both happy and horror stories. In our experience in Latin America, governments have always been determined and industrious after making the decision to go ahead with a project. However, there seems to be an element of improvisation in many cases, and some degree of politically motivated moves.

Is there a clear idea among public sector officials about what governments can do to help (leaving subsidies aside) projects be “bankable”?

The short answer is generally not. In our experience, recent projects in Latin America have been designed to be bankable only through national development banks. No private bank could dare to bear the large financing and construction risks that some projects entail. Greenfield projects in general have been designed in a way that requires large initial capital expenditures with revenues too far in the future, in banking time scales. Other projects involving operating assets result more attractive to private banks, but winners tend to pay high multiples which can be difficult to distil into credible business plans. When markets are too hot infrastructure projects are often considered as an asset class similar to classic private equity, but they are not. Banks have picked this up from examples in other markets, like Europe.

Infrastructure Financing What is the public sector’s approach towards sharing risks with the private sector?

This is a complex issue. Ultimately everybody knows that if the venture fails, the big loser is always the public sector. Private parties have ways to cut losses and retreat, but the government is the one ending up with a dysfunctional, incomplete, or broken project. However, in Latin America the private party is always perceived to be bearing the highest risks. This is almost always due to weaknesses in the legal framework and distrust towards political systems that historically suffered wild swings from one side to the other in the political spectrum. It takes quite a lot of thinking for the public authority to design the right framework for each situation in order to share risks in a sensible way. In this field the public sectors in several countries of Latin America have made good progress. There are excellent examples in Chile where a relatively long history of stability

We have Americas

worked in the from renewable

California, to toll roads in Mexico, to the energy in

recent airport privatization process in

Brazil.

has derisked all types of PPP and concession projects.

Perú is also moving in the right direction. On the flip side, any country where contracts have been violated will have a hard time selling itself as a secure investment destination, at least in the medium term, no matter the efforts that the public sector makes to share risks.

Besides the technical and economic characteristics of the project, what are the institutional/legal elements that private sectors investor ponder when considering bidding for a project in our region?

In our recent experience in transportation deals, the key element has always been the tariff structure and regulation. For assets that are natural monopolies (or oligopolies) like toll roads and airports, a well laid off tariff system can define the success or failure of the PPP. This involves the setup of an independent regulator and the adoption of a sound tariff structure with a clear escalation method that can be unambiguously modelled. As fairly simple as it sounds, this is not always the case.

Latin Infrastructure Quarterly

47

Governments tend to overlook the importance of this factor, or believe that the attraction of some projects is beyond the details. Sadly, some investors run into the unclear tariff system pitfall and end up with underperforming assets.

What are the sectors that you have been analyzing in Brazil?

Most recently we have been focusing on the airport sector.

We have been fully involved in the Guarulhos, Viracopos, and Brasilia process and expect to participate in the next round if and when the government decides to go ahead.

We know that currently there is a great deal of discussion around the rights and wrongs stemming from the experience in the first round, and there is the expectation that some radical changes will be implemented in the privatization process.

Federico has over 15 years of experience in project development, financing and advisory functions in transport, energy and infrastructure in Europe and the Americas. With Faros, he is directly involved in the due diligence, analysis and development of business and investment plans for infrastructure transactions. He was part of the acquisition transition team at Belfast City Airport (where he also serves as a member of the Executive Committee) and co-led the development and implementation of the business plan (aviation, commercial, airside operations, land-side operations, organization, etc.) for the Sabiha Gökçen Airport in Turkey. He led the economic proposal for the Riviera Maya Airport in Mexico. He co-lead the due diligence team in the acquisition of AirMall (BAA USA). Prior to Faros he worked as a management consultant for BAA, in Project Finance for Repsol, and in strategic planning for BP. Federico has a Professional Industrial Engineering degree from UCA in Argentina and an MBA from Yale University.

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Latin Infrastructure Quarterly

Infrastructure Financing

Real Infrastructure Capital artners LIQ talks to Susana López, Owner and Partner Real Infrastructure Capital Partners LLC (“REAL”) has announced the first closing of its Latin Renewables Infrastructure Fund, LP with approximately US $50 million of commitments. The Fund will invest in utility-scale, renewable resource power generation - principally wind and hydro power - in Latin America, with an immediate focus on Central America. The target size of the fund is $150 - $200 million.

What is the background of the professionals that make up Real Infrastructure Capital Partners?

Our Managing Partners, Stephen Pearlman and Juan F. Paez have over 35 years of experience of investment, project development, and operational and financial management in the international energy and Private Equity business. The other two partners of the fund are Rodrigo Barfield and myself.

Stephen was President of the Americas Division of Globeleq, an acquirer, developer, owner and operator of electric power generation located in emerging markets countries. Stephen served on Globeleq’s Executive Committee, and was a board member of various operating subsidiaries. Prior to joining Globeleq, Stephen worked in a number of leading international and domestic power companies, including Suez, where he headed the North American Cogeneration business; Enron, where he headed the Integrated Projects business unit (large scale gas and power

projects) in the Southern Cone based in Buenos Aires and Sao Paulo; and PSEG Global, where he headed Latin American project development based in Buenos Aires. Stephen’s development and acquisition transactions exceed $1 billion of equity investment in transactions totalling more than $4.7 billion in value.

His power generation experience spans a

wide range of technologies including renewables: wind, hydro, geothermal, and biomass, as well the major competing technologies of natural gas, oil, coal and nuclear.

Juan was a Partner with New Yorkbased private equity investment firm Conduit Capital Partners LLC (Conduit).

For over ten years, and across three managed funds, he was responsible for managing and/or investing more than $420 million of equity investments in various energy-related assets in the Latin American and the Caribbean regions. Juan’s experience has involved all aspects of the private equity investment business in the power sector in Latin America, including

There are two aspects of our target countries’ economies that we closely watch and evaluate: from a microeconomic perspective, cost of energy and energy mix; from a macroeconomic standpoint, GDP and population growth.

Infrastructure Financing origination, investment, asset management and divestment of portfolio companies. His experience runs across all levels of ownership structures from minority interest to controlling positions. Juan brings to REAL in-depth operational and management expertise in various markets across the region and across different types of power generation technologies.

Additionally, He also brings extensive origination and investment experience as well as direct, recent experience with the regulatory dynamics and environment present in each market in the region, as well as extensive working relationship with different market participants that offers a unique source of deal origination.

Juan and I have very extensive experience working together as a cohesive investment team for many years. I worked as Vice President evaluating new investment opportunities for the Latin Power

Latin Infrastructure Quarterly infrastructure investments in Asia and the Middle East, specifically involved with investments in energy and oil and gas services companies. Previously, he was an Infrastructure Finance Specialist at the World Bank.

We each bring in a very complementary and comprehensive set of skills to the fund. Stephen’s extensive experience in the market affords REAL the wisdom of somebody who has navigated many business and economic cycles in Latin America, he has pretty much “seen it all”. Juan’s long experience both investing in and managing assets in the region, and working hand in hand with me, grants REAL the opportunity of bringing a solid team with extensive and successful experience collaborating jointly in the market, while Rodrigo’s experience establishing new funds and fundraising perfectly complements our investment know-how.

49

tive from a price standpoint against other forms of energy in order for the investment to be successful in the long run. The countries we target have such conditions, where high prices make renewable in most cases the low-cost energy provider and therefore requires no subsidies or futile governmental support that can be short lived as seen even in mature economies (see the example of Europe).

Additionally, electricity demand is always highly correlated to economic and population growth. Historically, in the target countries, electricity demand has grown at a faster pace than the countries’ economies, even during economic slowdowns. There is a large amount of investment directed towards manufacturing industries, commerce and the exploitation of natural resources and mining in the region, which are electricity intensive industries.

Furthermore, economic growth combined

There are two aspects of our target countries’ economies that we closely watch and evaluate: from a microeconomic perspective, cost of energy and energy mix; from a macroeconomic standpoint, GDP and population growth.

Funds at Conduit Capital Partners, where I evaluated and culminated investments in thermal, hydroelectric and other renewable power projects in Latin America and the Caribbean and was actively involved in the development and management of many of the Fund’s investments.

I have also collaborated extensively with Wolfensohn Capital Partners as an Investment Consultant evaluating opportunities in the Renewable Energy, Forestry and Green Chemistry sectors in global Emerging Markets.

As for Rodrigo, he was a Director of Investments with Middle East and Asia Capital Partners’ (“MEACP”) Asia Clean Energy Fund. Prior to MEACP, Mr. Barfield was a Deputy Director of Investments for Emerging Markets Partnership’s IDB Infrastructure Fund, covering

As a private equity fund manager, what are the main indicators of a country’s economy and financial markets that you evaluate?

There are two aspects of our target countries’ economies that we closely watch and evaluate: from a microeconomic perspective, cost of energy and energy mix; from a macroeconomic standpoint, GDP and population growth.

We at REAL believe in the evolution of energy matrix in emerging economies towards a strong component of renewables. Nonetheless, we question the long term sustainability of government subsidies and tax credits as mechanisms to substantiate the use of renewables over other conventional sources of electricity.

Renewable energy should be competi-

with sustained population growth and increase of middle class consumption drive electricity demand and investment.

What do institutional investors find attractive in an infrastructure fund? (for example: frequency distribution of returns, performance persistence of certain private equity firms, diversification benefits, volatility, long-term revenue streams) Our fund combines the best components of Infrastructure funds and of common Private Equity Funds. Our investments are similar to those of most Infrastructure funds in the sense that they provide long term revenue agreements, strong regulatory and contractual protections and commonly consists of USD denominated (on

50

Latin Infrastructure Quarterly

Infrastructure Financing

We question the long term sustainability of government subsidies and tax credits as mechanisms to substantiate the use of renewables over other conventional sources of electricity.

indexed) revenues streams. Nonetheless, they also give our investors an opportunity to tap into the growth of these up and coming economies as is the case with the typical emerging market Private Equity funds; in consequence, we believe our investors enjoy the best of both worlds, substantial yield and capital appreciation with a very protected downside scenario due to the contracted nature of the investments.

In what was a strong first closing, your Fund received capital commitments from institutional investors (IFC, DEG, FMO and SIFEM) in an amount close to US$ 50 million, what are the competitive advantages of Real Infrastructure Capital Partners?

Well, first and foremost, the skill set and extensive experience of our team with a proven track record in the business; secondly, but equally important, we are laser sharp focused on a very particular market and investment thesis. We target regions and countries in particular, with a strong demand, sound regulatory environments and with conditions that make renewable energy competitive even in the absence of any subsidies or indirect government support. We believe we were successful in attracting these prestigious and very demanding anchor investors because they felt our story, our strategy and our credentials were unique in the marketplace and as a team we were poised to seize the attractive opportunities present in our target countries.

Considering the Fund’s “immediate focus” in Central America, are you planning on raising funds from institutional investors from jurisdictions in that part of our region?

Our investment focus is regional and opportunistic in nature, so we will target those markets where we feel best fit our strategy; we are targeting institutional investors in countries that have a more developed pension and endowment system such as the United States, Europe, Australia and Asia. We are of course also targeting institutional investors in other countries in the Region, and we feel Central America is not yet ready for institutional investors to make these types of investments so we are talking with industrial groups and family offices in that part of the Region.

Will you consider both greenfield and brownfield projects?

Yes. As part of our investment strategy we have both the skill set and the willingness to enter into these types of investments so long as they meet our investment criteria.

What are the main elements of an infrastructure asset operator that you consider when evaluating an investment?

We look for long-term partnerships with local developers that are sound investors and know their local markets very well.

Among the factors considered when conducting a project valuation which are the ones you will scrutinize the most?

We look for how the investment fits the country where it is located across all factors, including from a technical, commercial and environmental and social points of view. We feel every investment made needs to have a balanced overall risk return profile.

Going back to the Fund’s “immediate focus” in Central America, does the lack of comparables in some of the jurisdictions that are part of our region affect your valuation processes when considering an investment, during the life of the investment and when exiting it?

The countries we target have such conditions, where high prices make renewable in most cases the lowcost energy provider and therefore requires no subsidies or futile governmental support that can be short lived as seen even in mature economies.

Infrastructure Financing Comparables are no longer as difficult as they once were; given our team’s extensive experience, we have been able to lead many exits that have set many firsts in the region. Of course, valuations are highly dependent on economic cycles, of which there have been many in Latin America; that is the reason why we want to ensure that even during economic downturns, our assets will still produce attractive yield.

Do you see margins improving due to new developments in the technology that goes into these projects?

More than improving margins, we have seen a significant improvement in the competitiveness of the renewable technologies versus other forms of energy, and we expect this trend to continue; for instance, solar power will be at some not very distant future competitive on its own, while today is still heavily reliant on subsidies and therefore not our investment focus. Also the participation of new market entrants in the engineering and, in particular, in the equipment manufacturing sector should benefit the competitiveness of the technologies as well as the pricing.

Will you consider co-investments?

Absolutely. Many of our investors are already expressing their strong interest in co-investment. And we certainly welcome the opportunity to collaborate with investors that can move rapidly to analyze opportunities and commit capital required to take advantage of opportunities as they present themselves.

Considering that the “Fund will take equity stakes in generation assets of various stages of development”, what is your policy towards construction risk?

We will take such risk while participating with experienced and credit-worthy contractors capable of fulfilling their contractual obligations.

Is there a secondary market of equity stakes in generation assets in Latin America?

Latin Infrastructure Quarterly

51

We believe our investors enjoy the best of both worlds, substantial yield and capital appreciation with a very protected downside scenario due to the contracted nature of the investments.

Yes there is; transactions happen all the time with assets in all stages of development and in commercial operations.

There are different players in the market place seeking different types of risk profiles. As you know Latin America

presents a very attractive opportunity for different types of investors. We expect that such secondary market will continue evolving and increasing during the life of our fund.

Susana López is an Owner and Partner of REAL. Prior to joining the REAL team, Susana worked as Vice President evaluating new investment opportunities for the Latin Power Funds at Conduit Capital Partners, where she evaluated and culminated investments in thermal, hydroelectric and other Renewable Power projects in Latin America and the Caribbean and was actively involved in the development and management of many of the Fund’s investments. She has also collaborated extensively with Wolfensohn Capital Partners as an Investment Consultant evaluating opportunities in the Renewable Energy, Forestry and Green Chemistry sectors in global Emerging Markets. Prior to her investment career, she served as Director of International Finance for CIEE (Council on International Educational Exchange), the leading U.S. non-governmental international education organization, and as Finance and Administration Director for World Monuments Fund, a private, nonprofit organization dedicated to the preservation of endangered architectural and cultural sites around the world.

She also has extensive experience as Project Manager for information systems development.

Susana holds a B.S. in Business Management and Administration from IFE (Universidad Autónoma de Madrid), Spain, and an M.B.A. degree with a major in Finance from Columbia Business School in New York. Miss López has lived and worked in Spain, the U.K and the U.S.A., is a native Spanish speaker and fluent in English and Portuguese.

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Latin Infrastructure Quarterly

Infrastructure Financing

The Overseas Private Investment Corporation and LatAm Infrastructure

By Timothy Harwood, with contributions from Sara Marcus Infrastructure investment and development finance often go hand in hand in Latin America, where the need for modern roads, updated ports and airports, and state-ofthe-art energy sources begs the involvement of the private sector. The Overseas Private Investment Corporation (OPIC), the U.S. Government’s development finance institution, is uniquely situated to help American businesses invest in projects in Latin America, working in partnership with local companies.

S

ince it was founded in 1971, OPIC has helped encourage the flow of private capital into regions where the private sector either lacks the confidence to invest or is unable to find sources of funding locally, even where genuine investment opportunities await. OPIC supports these projects with direct loans and loan guaranties – often with longer terms than are available through private lenders – as

well as political risk insurance, and support for private equity investment funds.

The resulting projects provide important developmental benefits for host countries, and in the process help American companies – particularly small businesses – to expand into new markets. It’s a virtuous cycle that benefits all involved.

In Latin America, growth prospects are promising, but the region needs to address its lack of infrastructure in order to reach

its potential. World Bank data show that only 22 percent of roads in Latin America and the Caribbean were paved in 2009, compared with 62 percent in East Asia, and 87 percent in Europe. Budget constraints have limited the ability of Latin American governments to invest in their roads, ports and airports: public investment in infrastructure fell from 4.5 percent of GDP in the mid-1980s to just 1.5 percent in the 1990s, with no significant rise since.

The absence of public investment creates both opportunity and demand for the private sector. A 2011 World Economic Forum report stated that Brazil, Chile, Colombia, Peru and Mexico were among the most attractive regions in the world in terms of their private infrastructure investment climate. The study measured factors such as regulatory framework, institutional framework, fiscal sustainability, political risk, macroeconomic indicators, and the return on factors of production.

Yet in the wake of the financial crisis, American companies are exercising great caution in their investments. Although Latin America may look good on paper, investors are still hesitant to expand their businesses abroad. This is in part due to the persistent reluctance of private banks to finance projects in the region. Despite

Infrastructure Financing vast improvements in regulatory frameworks and economic indicators, Latin American countries are still deemed risky.

This is where OPIC steps in. By providing long-term financing where it is otherwise not available and executing successful deals, the agency plays a valuable demonstration role for subsequent investors, showing them that they too can realize positive returns. So as capital begins to flow, OPIC not only contributes to the development of Latin American economies but also raises investor confidence in the region.

OPIC has invested more than $27.2 billion in 1,332 projects in Latin America since 1974. Latin America is OPIC’s largest regional concentration, making up 23 percent of its current $14.5 billion portfolio, and its projects span all manner of infrastructure, including housing, energy, transportation, and telecommunications, among others.

In January 2011, OPIC approved a $55 million loan to finance the expansion of Costa Rica’s Juan Santamaría International Airport. The loan is enabling a consortium led by HAS Development Corporation (HASDC), a Texas nonprofit corporation and an affiliate of the Houston Airport System, to expand and modernize the major Central American transportation hub. “Airports are important assets for economic development in emerging markets, providing connectivity to greater regions, and spurring growth,” said OPIC President and CEO Elizabeth Littlefield. “This expansion project will enable Costa Rica’s international airport to accommodate greater traffic and thereby support growth in sectors like tourism and manufacturing.”

Ecuador can also look forward to the opening of an OPIC-supported airport this coming February in its capital city, Quito. The existing airport, Mariscal Sucre International Airport, is located in the center of the city surrounded by mountains, which restricts aircraft approach and take-off paths. The new airport will be expanded and modernized and have a more practical location, on a plateau outside the city where it will be able to accommodate more air traffic. This upgrade will help elevate Quito’s status as Ecuador’s mainland center for tourism.

Greg Huang, Vice President of Fi-

Latin Infrastructure Quarterly nance at ADC&HAS Airports Worldwide (ADC&HAS), the development, operations and investment subsidiary company of HASDC, believes the investment environment is improving in many Latin American countries, although OPIC’s support is still an important asset. After working in Costa Rica and Ecuador, HASDC and ADC&HAS are enthusiastic about expanding its presence in the region. With OPIC, “you have the U.S. gov-

By providing long-term financing where it is otherwise not available and executing successful

deals,

OPIC

plays a valuable demonstration role for subsequent investors,

showing them that they too can realize positive returns.

ernment behind you when it comes to negotiations with your counter-party, which for us are foreign governments,” Huang said. He also noted that OPIC’s development mandate differentiates it from com-

53

mercial banks. OPIC reviews all projects to ensure they meet agency requirements regarding the protection of the environment, social impacts, health and safety, which are aligned with the standards of international finance organizations such as the World Bank and International Finance Corporation.

New OPIC focus: renewable energy As OPIC looks to expand its portfolio in Latin America, the agency is moving beyond traditional infrastructure projects into the renewable energy sector.

In June 2011, OPIC approved $123 million in financing for the construction of two 20-megawatt solar power plants in Peru, the first large-scale solar project in the country. The project is being sponsored by Assured Guaranty Municipal Corp., a New York-based public finance and infrastructure subsidiary of Assured Guaranty Ltd. Peru has some of the highest solar energy levels in the world, yet only 30 percent of the country’s rural residents have access to electricity. This OPIC project seeks to harness the country’s solar potential to help transition Peru to a lower-carbon economy while increasing energy access among its rural poor. In June 2012, OPIC approved a second loan of $185 million for the construction of two more 20-megawatt solar plants in Peru. The loan will allow Conduit Capital Partners, a private equity investment firm, to finance the construction and operation of the Tacna and Panamericana solar energy plants in rural Peru. The two investments in solar energy reflect OPIC’s global priority to expand the renewable resource sector; in 2011, OPIC tripled its financial commitment to renewable energy projects worldwide.

Latin America can look forward to a period of economic growth as it continues to improve its investment climate, and even more so as it develops its roads, airports, and other infrastructure fundamentals. OPIC, with its innovative financial tools and its longstanding mission to address the world’s toughest development challenges, is here to help.

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Latin Infrastructure Quarterly

Infrastructure Financing

EDC - Canada’s export credit agency LIQ talks to Jean Cardyn, Regional Vice President, South America, Canadian companies understand that the potential for business growth today is higher in emerging markets than in the most industrialized ones. And while the neighbouring U.S. remains Canada’s main trading partner, in recent years Canadian companies have been increasing their focus on those faster growing economies -- many countries in Latin America (LatAm) being prime examples.

T

he Canadian construction industry, for one, which represents around 12% of Canada’s GDP and has traditionally focused on the domestic market (and to

some extent the U.S.), is showing interest in Latin America, both for construction and concession projects. Indeed, Canada is known for the quality of its infrastructure, and has leading edge expertise in

such areas as power generation, water/ wastewater technology, engineering, healthcare, highways, airports, related equipment manufacturing and supply, concessions and related investments.

Export Development Canada (EDC), Canada’s export credit agency, has representatives in seven Latin American regions (out of 16 around the world). They can help Canadian businesses and their trading partners access practical financing and risk management solutions to facilitate, expand and create new trade between Canada and many Latin American countries.

Latin America is quite a volatile region from an economic, political and institutional perspective; what are the main concerns Canadian companies have when considering doing business there?

Canadian exporters and investors doing business in LatAm share similar concerns

Infrastructure Financing as those from other countries doing business overseas. These include being able to familiarize themselves with the local business environment and practices, cultural differences, and concerns about the stability of the economic and political environments, including reliable legal and regulatory frameworks and institutions.

They also seek sound labour laws, avail-

Canada is known

Latin Infrastructure Quarterly Canadian companies’ participation in infrastructure projects will often involve the supply of equipment and services on sub-contracting opportunities with local or foreign companies.

Canadians see a growing number of Latin American countries, large and small, that have strong economies, political stability and reliable legal, regulatory and institutional environments, along with solid growth in recent years. All these elements are driving Canadian companies to look for opportunities in Latin America.

for the quality of

its infrastructure, and has leading edge expertise in such areas as

power generation, water/wastewater technology,

engineering, healthcare,

highways, airports, related equipment manufacturing and

supply, concessions and related

investments. ability of qualified manpower, competitive costs, reliable infrastructure and market access, transparency, sound corporate social responsibility practices and availability of reliable partners.

Canadian companies also want assurance that their contract structures and customers will be financially sound. Contract awards for infrastructure can take a long time, and competition can be challenging.

Above: A major highway in Rio de Janeiro, Brazil Below: A modern regional Chilean Hospital

55

In EDC’s website, under “commonly searched countries” we found listed Brazil, Mexico and Peru; what are some of the key opportunities and activities of Canadian firms in these and other markets?

Canadians are known to be very active in mining and oil and gas in Latin America, but they are also very much present in other sectors, such as information and communications technology (ICT), resources, transportation, and infrastructure, includ-

56

Latin Infrastructure Quarterly

ing power generation and transmission lines. For example, EDC has many clients in the infrastructure sector, such as equipment suppliers and service providers. The most important Canadian engineering firms are well established in various countries in Latin America; they have often started in the mining sector, then expanded into infrastructure.

Many countries in Latin America have large infrastructure deficits that create bottlenecks to growth, and which they are addressing. Countries like Colombia, Brazil, Mexico and Peru have announced large infrastructure investment plans that should create better conditions for sustainable development, and this means opportunities for Canadian exporters and investors. For example, Colombia recently announced a $100 billion infrastructure investment plan to help the economy achieve its target of sustainable 6% annual growth. Likewise, Chile announced it will tender for the construction of a number of hospitals on a concession basis.

And Brazil has indicated that 5,700 km of roads and 5,000 km of railway lines will be opened to the private sector as concessions (many more are expected soon). As well, Mexico’s National Infrastructure Program identifies over 300 infrastructure projects in multiple sectors representing over $300 billion, to be financed using Public-Private Partnerships (PPP), with significant Mexican public sector investment. The list goes on, including in countries like Uruguay.

Most of these countries have regulatory frameworks to facilitate infrastructure development based on PPP conces-

Infrastructure Financing

The most important Canadian engineering firms are well established in various countries in

they have often started in the

mining sector, then expanded into infrastructure.

sion models. A study commissioned by the Multilateral Investment Fund (Member of the IDB Group) shows that countries like Chile, Brazil, Peru, Mexico and Colombia present the best environment for PPPs, and have the best institutional frameworks among LatAm countries.

Canada is today one of the most respected countries in the world in successfully implementing PPP projects. Our experience with this model began in the early nineties, and many projects have been completed at the municipal, provincial and national level. There are now more than 150 PPP projects at various stages in Canada, mostly in the health and transportation sectors. Our clients are bringing this experience to LatAm. What are the usual types of solutions (insurance, financing, bonding and guarantees) that you provide to Canadian companies investing in or exporting to those countries?

Canadian companies’ participation in infrastructure projects will often involve the supply of equipment

and services on sub-contracting opportunities with local or foreign companies.

Latin America;

EDC assists Canadian exporters and investors in LatAm through a broad range of financing and risk management services, including project finance. Our solutions can be made available not only to Canadian exporters and investors, but also to foreign buyers, and to Canadian, international and local financial institutions. Broadly speaking, our toolkit includes financing, credit and political risk insurance, loan guarantees, bonding, and other risk mitigating products. Some 45% of our business volume in Latin America last year was done using our Accounts Receivable Insurance program.

Often more than one EDC product will be involved in a single project or transaction. An advantage EDC offers is being able to provide all these services under one roof, as well as working closely with private and public financial institutions to deliver the best solution to the client.

Another thing that differentiates EDC from other financial institutions is our strong focus on helping local buyers familiarize themselves with Canadian capabilities. For this, we leverage the financing relationships we develop with local companies, and organize market and matchmaking missions where likeminded Canadian and local companies get to know each other. This helps them identify new trade opportunities and has been important to grow Canadian business with key buyers in different LatAm markets. Our clients’ total business in Latin America (exports and investments) in 2011, using EDC’s services, exceeded CAD10 billion.

Where local legislation permits, we may provide reinsurance to local surety

Infrastructure Financing firms to facilitate bonds for infrastructure contracts that include procurement from Canadian companies. We are now working to make this solution available in certain markets in Latin America.

Do those solutions vary among said LatAm countries?

The mix of solutions available to our exporters and investors varies from one transaction to another, reflecting local market conditions and client needs. For example, some markets are very liquid and do not require bilateral financing, or the buyer prefers to meet its financing needs through the capital market as opposed to bilateral sources. Our main concentration of financing is in the key LatAm markets, such as Mexico, Brazil and Chile. In these regions, Canadian companies see little political risk, and therefore often do not seek our political risk insurance (PRI); by contrast, PRI is sometimes sought by financial institutions in the region who want to expand their business above their country or obligor risk limits. We are also proactive in various other LatAm countries, such as Peru, Colombia, Panama, and Dominican Republic, to name a few.

Let’s now expand on Canadian companies’ participation in infrastructure development and other projects in LatAm; can you describe your project finance services?

Some two thirds of EDC’s financing last year went towards projects in Latin America. Our Project Finance team has been actively engaged for the benefit of Canadian exporters and investors in multiple sectors throughout the region.

EDC seeks early engagement on project finance projects, so that we can identify the level of Canadian involvement, and participate in early discussions on project scope, and sizing and structuring of the financing plan. Notable features of our project finance program include: • •

Full lead arranging capabilities and track record in multiple sectors; Committed, reliable partner bridging agency and commercial sources of debt financing;

Latin Infrastructure Quarterly • • • •

Large underwriting capacity, responsive and commercially focused; Complementary PRI products, such as PRI for bank debt and non-honouring of sovereign obligations; Strong CSR credentials and environmental and social review standards and bench-strength; and Selectively filling agency roles (technical, environmental and social) in lender groups.

Broadly speaking, our toolkit

includes financing, credit and political risk insurance,

loan guarantees,

bonding, and other risk mitigating

products.

Some

45% of our

business volume in

Latin America

last year was done using our

Accounts

Receivable

Insurance program.

Can you comment on one or two infrastructure projects in Latin America in which EDC participated?

EDC has provided project finance support on many infrastructure projects worldwide, especially in the following fields: power sector (including thermal, hydro, some renewable energy projects and transmission lines), mining, desalination

57

plants, rail transportation, bulk and container port terminals, highways, airports, training centers and hospitals, among other social infrastructure. In LatAm (including Caribbean), EDC has provided project finance for airports and hospitals, as well as a gold mine.

In addition to project finance, EDC can provide corporate loans for a local buyer’s general Canadian procurement, and for specific projects. We have provided asset acquisition financing to Canadian investors in LatAm too. One such example was in Brazil where we provided a loan for the acquisition of a hydro plant. In Colombia, we have done some reserves-based lending (oil & gas sector), and are looking to get involved in more traditional infrastructure opportunities.

What is your relationship with regional and local development banks in Latin America? What kind of work do you do together with them?

We have worked with multilateral banks active in LatAm, including IDB and IFC, and are presently pursuing transactions in Brazil, Chile, Mexico Central America and the Caribbean region. We have protocols in place with the IFC and CAF, and have a close relationship with IDB, focused on identifying opportunities for joint support. We have also worked closely with the Mexican-owned Infrastructure bank (Banobras).

Multilaterals bring additional financial capacity to the market to attract other lenders and fill market gaps. The best opportunities are on the project finance front where there is the need and potential for risk sharing. Some industries, such as clean technologies, encounter challenges such as the need for longer loan tenors.

This type of industry is a natural fit for multilateral banks as they have more appetite for longer tenors than commercial ones. Another area of increasing interest is broadband infrastructure (ICT), which, by extending it to remote communities, can bring or improve services not readily available, such as new banking and healthcare services.

In February 2012, EDC signed a master cooperation agreement with IFC to identify projects and initiatives for collaboration and risk sharing, and for streamlining

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Latin Infrastructure Quarterly

the lending process. IFC and EDC have seen a deepening in their relationship, especially in Latin America, including projects in Mexico, Guyana and Chile.

EDC also supported the IDB’s recently launched Broadband Initiative, which highlighted the importance of broadband to development, while identifying the major impediments to its proliferation in Latin America. EDC facilitated the participation of Canadian companies in consultations, ensuring that state-of-theart Canadian broadband solutions and approaches to the policy and regulatory environment were shared with key policy makers. We also see opportunities for partnership on small cleantech project transactions with the Investment InterAmerican Corporation (IIC), a member of the IDB group.

Another area of potential cooperation is through the Canadian Climate Fund for the Private Sector in the Americas in which Canada has committed $250 million. This fund, managed by the IDB, aims to promote private sector investment in climate change mitigation and adaptation. We see an opportunity for Canadian companies to tap into this fund to invest in cleantech projects in Latin America and the Caribbean.

Do you participate in syndications with development and/or commercial banks?

EDC has worked well with international banks, LatAm-based financial institutions and development banks. EDC seeks partnership opportunities and ways to leverage experienced PF institutions -- complementing each others’ services to help develop and structure viable financing solutions. As such, we have participated in a number of syndications in Latin America in the past. EDC, for example, is an active participant in the Mexican syndication market, and we can act as Mandated Lead Arranger. We have been involved in recent syndications for AMX, PEMEX, CFE, Metalsa, and one for an offshore platform. EDC also partnered with the IFC in bank syndicated facilities for mobile telecom projects in Panama and Honduras.

Infrastructure Financing Mr. Cardyn joined Export Development Canada (EDC) in 1979 and has held several leadership positions in the organization in the areas of lending, insurance, bonding, international relations, policy, and business development.

From 1986 to 1991 he managed EDC’s lending programs for South East Asia, the Middle East, and East Africa. In 1991 he became Manager of Medium Term Insurance, Eastern Canada, and in 1995 he was appointed Chief Underwriter, Contract Insurance and Bonding. From 2003 to 2009 he assumed the role of Director, Policy and International Relations, and in December 2009 he was appointed Regional Vice President for South America in EDC’s International Business Development Group, based in Sao Paulo, where he moved in June 2010.

From 2003 to 2007, he was a member of the Management Committee of the Berne Union, the leading international association of private and public export credit insurers. He is currently a member of the Board of Directors of the Câmara de Comércio Brasil-Canadá.

Mr. Cardyn graduated from Bishop’s University (Québec) with an HonoursDegree in Business Administration. He is fluent in French, English, Spanish, and Portuguese.

EDC is Canada’s export credit agency, offering innovative commercial solutions to help Canadian exporters and investors expand their international business. EDC’s knowledge and partnerships are used by more than 7,700 Canadian companies and their global customers in up to 200 markets worldwide each year.

EDC is financially self-sustaining and a recognized leader in financial reporting and economic analysis.

For more information on Canadian companies and EDC’s involvement in infrastructure in LatAm, visit: www. canadiansatwork.ca and www.edc. ca/infrastructure. To find out more about what EDC can do for you in Latin America, please do not hesitate to contact a representative in one of the various offices across Latin America at: http://www.edc.ca/EN/about-us/ contact-us/Pages/default.aspx

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Professional security services can act as a counter-balance to the growing menace of crime against critical infrastructure. If properly run security can work effectively alongside, both law enforcement and the military to secure valuable markets and assets.

What to Look For

Choosing the Right Security Provider

W

ith the implementation of the United States-Colombia Trade Promotion Agreement (TPA) on May 15, 2012, Colombia joins the list of other Latin American countries such as Costa Rica, the Dominican Republic, El Salvador, Guatemala, Honduras, and Nicaragua as growing and important export markets to the United States. Panama hopes to join said list as it is still in the process of working on gaining trade agreement status with the United States. What does this mean? As these countries continue to export millions of dollars worth of goods to the United States they will have to look harder at increasing their security postures at maritime ports, terminals, company facilities, and warehouses.

Security is a necessary evil that many companies do not like to pay too much for. Security programs do not produce anything, especially profits. It is a bottom-line expenditure that frequently is taken for granted until something happens.

Throughout Latin America, countries are enduring guerilla insurgencies, narco-terrorism, and increasing transnational gang violence. Criminal organizations look for every opportunity to exploit, and extort companies out of millions of dollars worth of goods and services. Police forces in many Latin American countries are overwhelmed, under-equipped, under-funded, and ill-trained to deal with the realities and scale of criminal / terrorists activities.

Latin Infrastructure Quarterly

The first question to ask is, “what do I look for in a security company�? Like everything else you start by looking for reputable companies with track records of good customer service and performance.

Conduct some benchmarking of other companies similar to yours that employ contract security providers. Create a list of who is considered the best and start ranking them, just like you would when interviewing candidates for an employment position. Contact their clients and request some information on customer satisfaction, pricing, and performance.

Once you do this set up a meeting with the perspective security providers.

Hiring Practices

The most important aspect of whether you are going to get good service is by assessing hiring practices. By this I mean look at a security company(s) core values and see if they recruit and perform to those standards. It is not difficult to see and hear news reports of companies that

Juan Garcia is an expert in physical security planning, security force training and operations, threat analysis & vulnerability assessments, and protective strategies.

Puerto Santa Marta Colombia

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Security is a necessary evil that many companies do not like to pay too much for.

Security programs do not produce anything. It is a bottom-line expenditure that frequently is taken for granted until something happens.

are alleged of employing questionable hiring practices in order to meet contractual obligations. It recently happened to a global security giant in preparations for the 2012 London Olympics.

Background Checks / Exams When it comes to hiring a security candidate the top consideration should be honesty and trustworthiness. First, is the company set up to conduct viable background checks starting with police checks, and not only within the applicant’s current address, but going back 5 to 7 years of residences? Second, does the company(s) check for valid addresses, birth certificates, diplomas, and court papers? Third, does the company(s) conduct any kind of reading, writing, and math exams to gauge basic educational abilities?

Finally, does the company(s) conduct any

type of psychological and medical examinations.? These are four key areas to asses when looking to upgrade or start a security program. If the right people are not selected you are already fighting a losing battle. To find quality people the proper vetting process must be in place.

Training So how do we measure performance? It is a two-fold answer, one is training, and the other is supervisory oversight, which will be addressed later. After the right person is hired, training that officer to perform to the highest standard is critical.

In crisis situations people will fall back on their training. Military personnel are trained to muscle memory, they continually train to retain that muscle memory.

Security personnel should be no different, they are the first line of defense and

Global trading partners want to be reassured that their goods are reaching their destinations, and that products are leaving safely and intact.

The only

way to help guarantee that this occurs is by having and maintaining a robust security program that evolves with changing times.

that defense is either going to hold up or crumble. Evaluate several areas; 1. the depth of initial training 2. continual training programs and frequency 3. instructor certifications When it comes to the training instructors it is not enough to verify certifications, but how current are the training qualifications. It does you no good to have a training instructor that has nice certifications that are 5 to 10 years old. Instructors should undergo retraining at a minimum every three years to maintain their skill-sets. Also consider training facilities and training aids, are they up to date and professionally kept.

Supervisory Oversight If training is the first element in performance the second is effective supervisory oversight. Are the officers being held to the standards and contractual obligations that you are paying for? Supervisors need to be selected for their applicable experience in managing people and programs, higher education, and professional backgrounds. They also need to be continually developed to ensure proper adherence to policies and procedures. Retired military and law enforcement personnel make very good security supervisors due to their vast experiences, and training.

Don’t forget in order to get qualified and professional supervisors the pay-rate has to be in-line with the responsibilities.

Job Tasks Now that you are moving closer to meeting your security needs with the right provider what are the job competencies that you want the officers to perform? Are your security needs for basic roving patrol duties, entry control personnel / material / vehicle searches, fixed observation posts, and safety; or more in-depth security force operations? Establishing jobtask criteria and expectations is crucial to meeting performance standards, and sustaining those standards. Determining correct job-tasks will go a long way in determining the annual operating budget.

Performance indicators can be utilized to

Projects determine gaps in security performance once job-tasks are defined, clearly understood, and agreed upon. By maintaining a smooth operating security program, other factors such as attrition will be reduced.

With continual and steady tenure valuable experience will be retained. Cohesion and familiarity with operating processes will be stronger.

Summary Latin American countries such as Mexico, Brazil, and Colombia are, or are becoming major trading partners with the United States and globally. The natural resources within Latin America are immense and still largely untapped to its full potential. Global trading partners want to be reassured that their goods are reaching their destinations, and that products are leaving safely and intact. The only way to help guarantee that this occurs is by having and maintaining a robust security program that evolves with changing times. It starts with;

Logistics inspection, Costa Rica

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Juan Garcia is a veteran with more than 28 years of tactical and security force experience, both in the military and civilian realm. Mr. Garcia currently works within the critical infrastructure field. He is subject matter expert in physical security planning, security force training and operations, threat analysis & vulnerability assessments, and protective strategies. Mr. Garcia can be reached at garciajag@hotmail.com.

1. hiring the right company and people 2. training them correctly to their job-tasks 3. providing competent and professional supervisory oversight.

It does not matter if you contract out security services, or develop your own in-house program, the principals mentioned still apply. This is just a quick snap shot at considerations when starting or upgrading your program. There are many other considerations but following these simple principles will go a long way to protecting your business

interests. Economic times are challenging, by being a smarter shopper you can still get a quality and competent product. Too many times what people see are sloppy and ill-trained security officers. There is no way that law enforcement and/or military forces throughout Latin America are going to defeat criminal activity all by themselves. The answer is to augment protective services with quality and professionally trained security officers.

This will provide greater defense-indepth that any adversary will find hard to penetrate and overcome. Security is your responsibility.

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Latin Infrastructure Quarterly

The New Renewable Energy Regulatory Framework of El Salvador

By Agustin Giménez Mathus

N

otwithstanding the existence of an open electricity generation market and the implementation of fiscal incentives and soft loan programs, clean energy projects have been unable to capture El Salvador renewable energy potential. This article summarizes the new renewable energy regulatory framework that the Government of El Salvador has approved this year to develop distributed generation and non-conventional technologies, addressing the binding constraints that are lagging clean energy projects behind. Based on a renewable standard portfolio model, the new regulatory framework set technology oriented energy auctions used to allocate long term power purchase agreements to attract new non-conventional electricity generation projects connected to the public utilities distribution grid.

Market reform and renewables As most countries in Central America, at the end of the 1990’s El Salvador liberalized and opened up its electricity sector moving away from a vertically integrated monopoly structure, opening the

Regulation segments of generation, transmission, distribution and supply to competition. Taking advantage of the low oil prices of these days, the new private agents developed mostly conventional fossil-fuel thermal plants. But when oil prices began to climb in the past decade, the country began to experience firsthand the impact of higher tariffs on rate payers, particularly the poor, while at the same time grappled with the challenge of covering the costs of fossil generation, leading to a significant financial burden for the government.

Not only energy costs were heading up, but also the liberalized market was finding increasing barriers to develop new generation projects in a context of increasing demand – renewables or thermal fossil. The second half of the 2000’s started a policy shift towards, on one hand, market stabilization and investment attraction based on a long term market contract development.

The regulatory framework introduced long-term contract auctions allocated by the distributors to procure new generation capacity in which all technologies compete under the same bidding process. On the other hand, the new policy introduced fiscal incentives and soft loan programs to promote clean energy projects. In addition, the National Energy Council of El Salvador was created in 2006 embracing as one of its key objectives shifting electricity generation towards renewable sources.

Show me the cash flow Fiscal incentives and soft loans proved to be per se insufficient to level the playing field with the fossil fuel power plants and attract new clean energy projects. Although energy auctions of long term power purchase agreements are a powerful tool to

Based on a renewable standard portfolio model, the new regulatory framework set technology oriented energy auctions used to allocate long term power purchase agreements

to attract new non-conventional electricity generation projects connected to the public utilities distribution grid.

develop new generation projects, non-conventional renewable technologies face additional constraints that impede them fairly participating and taking advantage of this framework. First, most of these technologies – such as wind, solar and small hydro plants – cannot provide firm capacity as required by these power purchase contracts. Second, some technologies costs are still

Regulation above grid parity. Notwithstanding generation costs in El Salvador are high by international standards, and clean technologies are gradually getting more efficient, their costs are still higher than thermal generation costs, depending significantly on the type of technology. Finally, the energy auctions are restricted to the wholesale market participants, barring the entrance of small scale projects below five megawatts of capacity.

International experience shows that renewable energy projects face multiple technical, legal and financial barriers. In the case of El Salvador, our assessment shows that the key binding constraint was the lack of a regulatory framework that allows the renewable projects to take advantage of the energy auctions in place to allocate long term electricity contracts that support the new investments. Once the long term contracts provide a stable revenue stream to the projects, the developers can knock on the doors of the bankers, and then take advantage of the soft loan programs and fiscal incentives available.

Dedicated renewable energy auctions In Latin America, auctions have proven to be an alternative to the traditional administratively set feed-in tariffs that have been responsible for the installation of thousands of megawatts of renewable forms of energy mostly in Europe. The leading countries in renewable energy promotion in the region are using auctions to fostering competition, pushing prices down in the entire supply chain, and therefore reducing tariffs to end-users, making the whole process more sustainable. The basic concept behind El Salvador new regulatory framework is establishing dedicated renewable energy auctions, within the existing larger framework of decentralized long term contracts bidding processes managed by the distributors with regulatory oversight.

Although the regulatory framework does not impose a mandatory renewable portfolio standard to the distributors, the National Energy Council will establish periodically national renewable energy consumption objectives that the distributors would have to contribute to reach, proposing to the Regulator the portion of their future contracts that will be allocated to clean energy projects through dedicated auctions.

The dedicated renewable energy auctions could be technology specific or open the competition to different clean energy technologies under the same bidding process. To address technical limitations, simplified non-firm contracts are envisioned, oriented to projects under 20 megawatts of installed generation capacity connected directly to the distribution grid. In this sense, the regulatory framework is combining renewable energy promotion within a distributed generation policy.

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To address the challenge posed by the small projects that may perceive the auctions as a transaction cost barrier too difficult to overcome, the regulatory framework contemplates a special mechanism that mimics a FIT model. Energy auctions should reserve a special energy block to be allocated afterwards to small projects and auto-producers under the same tariff resulting from the auction.

Concluding thoughts Different from many other consulting experiences, this project went a long way from diagnosis and regulatory design to sectoral and Government approval and now is heading to the implementation field, with the first clean energy auctions round foreseen for the end of this year.

We took four key lessons learned from this process: A stakeholder’s analysis is a key requirement to develop a successful implementation strategy. Although many times some stakeholders analysis are subjacent or implicit behind the policy design decisions made, an explicit and methodologically consistent stakeholder analysis provides strategic clarity to the policy cycle and priorities setting.

Implementation requires a solid alliance between the policy and the regulatory authority, supported by a clear participation channel for the rest of the key stakeholders. Implementing a renewable energy regulatory framework involves concerted actions of multiple stakeholders coming from the public and private sectors. One single entity, working under a conventional hierarchical structure, cannot handle the whole formulation, approval, implementation and monitoring processes. The stakeholders’ analysis showed from the beginning that without a strong alliance between the energy policy agency and the independent regulatory authority, the process will be doomed to failure. The use of an Advisory Council to support the task force integrating the two agencies was effective to provide a transparent participation channel with the key stakeholders.

The formulation process is as important as its output. An Advisory Council was created from the outset, following up on the formulation process, which facilitates the project ownership and works as a continuous reality check of the proposals. Keeping some key stakeholders outside the Advisory Council during formulation was later paid with long review and negotiation processes during approval.

Preparing the approval and implementation processes could be as important as the quality of policy design. In the policy cycle there is always a tension between process and policy design.

Usually policy design gets most of the policymakers’ attention, leaving the process management as an afterthought. A key success factor in this project was the attention and resources placed in organizing the approval and implementation processes. Al-

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Regulation

Regulation

though in this type of policy initiatives, implementation is not a lineal or coherent process but fragmented and hard to predict, paying more attention to the policy design could not solve the challenges of an effective management process.

The author likes to specially thank the contribution of Mr. David J. Angelo, a bright summer intern law student from University of San Francisco that joined the FGM team this year.

In January, 2011, the National Energy Commission of El Salvador (CNE) contracted Mr. Agustin Gimenez and Ms. Lilia Perrone for the Development of a regulatory framework for the promotion of clean power projects, focused on renewable distributed generation. The study was financed by the Energy and Environment Partnership with Central America, Central America Integration System (AEA- SICA, in Spanish). In September, 2011, the Inter-American Development Bank (IDB) contracted Mr. Gimenez Mathus to assist CNE with the implementation of the regulatory framework developed. The regulatory framework was passed as Decree 80 of April 17th, 2012. CNE and the Electricity Regulatory Agency (SIGET) are planning to launch the first energy auction for clean energy projects at the end of 2012.

Once the long term contracts provide a stable revenue stream to the projects, the developers can knock on the doors of the

bankers, and then take advantage of the soft loan programs and fiscal incentives available.

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Agustín Giménez Mathus is a lawyer expert in governance and regulation of the energy sector.

Since 1997, he has consulted widely in the public and private sectors in fourteen different countries of Latin America, Africa and Eastern Europe, undertaking a broad variety of consulting assignments involving private sector development, energy sector governance and regulation, industry restructuring design, regional markets integration, organizational design and institutional development, strategic policy planning, renewable energy promotion, drafting of laws, contracts and regulatory frameworks, and public programs development. Mr. Giménez holds a Master in Public Administration degree from Harvard University, with a concentration on regulation and industrial analysis and a Master’s degree in European Union Law from Universidad Autónoma de Madrid, Spain.

He is currently partner at FGM – a boutique law firm at the intersection of investment legal services and infrastructure regulation – and professor at the Center for Energy Regulation (CEARE) of Universidad de Buenos Aires.

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Latin Infrastructure Quarterly

Local Content in the Brazilian O&G sector

LIQ talks to AndrĂŠ Pompeo do Amaral Mendes, Manager of Supply Chain of Oil and Gas Department of Brazilian National Development Bank (BNDES)

Regulation How developed is the local supply chain of equipment and services in the oil & gas industry?

Today one of the major challenges in Brazil is to develop a competitive supply chain of goods and services in the oil and gas (O&G) sector. It is necessary to have huge demand for goods and services in this segment to develop a competitive supply chain. Due to the discovery of presalt reserves in the Brazilian coast, the demand for goods and services of supply chain will jump to another level in the future. Thereby, it will allow economies of scale, which is a necessary condition to justify the development of a competitive supply chain in the country. Additionally, several institutional measures are being undertaken in order to accelerate the growth of this industry, such as the local content policy in the concession of contracts for exploration and production of oil and natural gas according to the regulatory agency (ANP). The main goal is not to develop an expensive supply chain in the country, but certainly it is to develop a competitive domestic supply chain with the global market.

What are the main obstacles affecting its development?

Obstacles are nothing more than challenges to overcome. Nowadays, there are many challenges. The good news is that all challenges can be overcome with time. Clearly not all will be defeated in the short run simultaneously, and some will only be resolved in the medium and long term. Development is dynamic and not static. Not being able to overcome a particular challenge today, does not mean that we will not be able to overcome it tomorrow. Nowadays, the main challenges for developing a competitive chain of goods and services are: skilled labor, cost of capital, an appreciated exchange rate, low productivity for some segments of the chain, and technological advances to some other chain segments. The chain is quite heterogeneous, so not all of the aforementioned factors affect all segments of the O&G chain of goods and services in Brazil.

Regulation How does this affect the productivity of the oil & gas industry?

Those challenges affect the competitiveness of the domestic supply chain, especially in a short term, but we can work to surmount them over time. Nowadays there are several actions implemented to overcome them. Besides, when measuring productivity in U.S. dollars, we have

to pay attention to a small detail. This measure is very sensitive to the exchange rate. Nowadays, the devaluation of the dollar and the euro, due to American and European banking crises, has undermined the international competitiveness of industries of some countries such as Brazil, which have their currencies appreciated against the dollar and the euro, thereby affecting their “productivity” in foreign currency. On the other hand, regardless of the exchange rate, the goal is to develop

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a competitive industry of high-tech goods and services in a medium and long term.

Thus, using appropriate processes, technology and sufficient scale to justify that, we will have an internationally competitive chain of high production in a satisfactory term. Moreover, the O&G supply chain should not be simply turned to the domestic market, but also to the foreign market in a medium and long term.

of installed production capacity, working capital, acquisition of technology and investments in research and development into new products and processes. In addition, BNDES conducted a cooperation agreement with Petrobras and FINEP (Financiadora de Estudos e Projetos) to launch a specific program - INOVA PETRO - to develop new products for O&G sector, especially those focused on the

How is the BNDES helping to further develop the local supply chain?

challenges to develop the fields of pre-salt in ultra-deep waters.

The BNDES has elaborated a financing program specifically for the O&G supply chain of goods and services. This program is called BNDES P&G, which has reduced the financial cost, furthered the access to credit and begun accepting contracts for delivery of goods and services as collateral. The BNDES P&G finances the construction of new plants, expansion

Has the BNDES had to deal with Brazilian companies using cheaper imported goods and claiming to sell local content?

Historically BNDES has financed only​​ goods and services made ​​in Brazil. The BNDES has always had a structure that checks whether a good is manufactured

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Regulation

Regulation in the country or not. All loans are accompanied financially, physically and audited, so that there is no misuse under the financing contract. Therefore identifying whether a good is really domestic or not is not new to the BNDES. Moreover, in the current days in the O&G sector, the regulatory agency ANP requires the submission of a certificate issued by a local content independent certifier. So today it is quite easy to identify if a good is actually domestic or not. It is worth noting that the methodology to quantify the percentage of local content used by ANP (Agência Nacional do Petróleo, Gás Natural e Biocombustíveis) was based on the methodology of BNDES. What are international companies and export credit agencies doing to deal with local content requirements?

Latin Infrastructure Quarterly

Due to the discovery of pre-salt reserves in the Brazilian coast, the demand for goods and services of supply chain will jump to another level in the future.

Thereby, it will allow economies of scale, which is a necessary condition to justify the development of a

competitive supply chain in the country.

productivity for some

tract, will have to comply with the agreed minimum local content, otherwise they will be fined by said regulatory agency.

We are talking about a minimum local content and not 100% local content. Of course, to explore and develop an oil field is not possible to have 100% local content in a globalized world, nor is it the goal of local content policy. So there is plenty of room for foreign goods and services, and are sorely needed. Thus, the export credit agencies can fund these foreign imported goods and services for the exploration, development, and production of oil and gas fields in Brazil.

Besides, the oil price in the current level enables any investment in oil production in Brazil. In this scenario investments in offshore oil production will continue to exist even with the local content policy. Additionally, it should be emphasized that international companies are taking actions to develop local suppliers, which did not occur before.

and technological

How are the Federal government and Petrobras incentivizing the development of a local supply chain?

The domestic or foreign operators of oil and gas sign a contract with the regula-

Nowadays, the main challenges for developing a competitive chain of

goods and services are: skilled labor, cost of

capital, an appreciated exchange rate, low

segments of the chain,

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The federal government through its institutions has been carrying out various actions in recent years to develop a local O&G supply chain. Some examples of these actions can be cited: local content policy, qualification of skilled manpower by PROMINP, financing by BNDES, INOVA PETRO Program for innovative products and processes for the development of pre-salt reserves and others actions. In the specific case of Petrobras, since the early 2000s the company has begun to direct the purchase of goods and services locally, in the cases they have existed in the domestic market at competitive prices. Later, with local content commitments made ​​ in the concession contracts with ANP, Petrobras standardized some platform projects to enable the achievement of long-term contracts for the purchase of certain goods. Thus, allowing economies of scale for local industry and attracting foreign companies to the country. As an example of this action, we can cite the installation of a turbo generators assembly plant of Rolls Royce with 50% local content in the medium term in Brazil.

advances to some other chain segments.

tory agency of O&G (ANP) to explore and produce oil and gas in Brazil. This contract has a minimum local content requirement. Therefore, all companies, that have accepted the conditions of the con-

André Pompeo do Amaral Mendes is currently Manager of Supply Chain of Oil and Gas Department of Brazilian National Development Bank (BNDES). He has been at BNDES for 5 years. Before BNDES he worked at Petrobras for 7 years. In Petrobras André was a Business Consultant in Strategy Department. André is an economist graduate at PUC-RJ and has a Master degree in economics and MBA degree in finance at IBMEC-RJ.

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Latin Infrastructure Quarterly

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Members of the HFA also serve the community at large

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Latin Infrastructure internationalQuarterly conference on public2ND EDITION public-private partnerships in Ukraine

Regulation

It is already the second edition of "Speed uppp ppp Ukraine" - an international conference devoted to the development of PPPs in Ukraine and organized by the most PPP-experienced organizations in the region - the Ukrainian PPP Development Support Center and the Polish Institute for PPP. The honorary patronage over the event is held by 4 Ukrainian institutions: ⇒ ⇒ ⇒ ⇒

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"Speed uppp ppp Ukraine" is a perfect combination of knowledge & know-how transfer, market intelligence and business networking with the most acknowledged decision makers and individuals form the PPP industry representing both the public administration as well as private companies: i.e. high rank government officials, heads of local governments, mayors, investors, all sort of advisors and experts, bankers and financiers, developers, infrastructure operators, the building industry and many many more - mainly at the very senior management level (CEO's, CFO's, managing directors, senior managers).

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