Argentina courts infra investors
March 7, 2018 |
Argentina wants to attract international investors with a massive PPP program. Developers and banks say they are interested, but the jury is still out whether the country is back on good terms.
When Argentina launched an ambitious public-private partnership (PPP) program, complete with an estimated $26.5 billion in investments, it equipped the projects with an extensive set of guarantees and other measures to reduce risks, looking to assuage the fears of international investors who have not touched Argentine assets for years.
The first results will come in April, when the government names the winners of the opening round of highway concessions. If the program lives up to the early promises, the government will follow with roughly another 60 projects in transportation, energy, mining, communications, healthcare and education.
The first highway PPPs — six 15-year contracts for more than 2,600 kilometers of road — involve some $8.06 billion in investments, with $6.04 billion during a four-year construction stage and another $2.02 billion during operations. The next two rounds of the highway PPP program, which could come to market before the end of the year, will require more than $16.7 billion in investments, according to government estimates.
This amount of money is not available in the local market, sources says, so developers will have to turn to international investors to get the funds they need. The first round of highway auctions aims to establish Argentina as a viable destination for infrastructure investors from all over the world and create a context for future PPP projects.
“We want to minimize the wait-and-see strategy adopted by some players,” says José Morea, the undersecretary of PPPs at the finance ministry. “We have adopted a system where a large amount of risks is mitigated by the state in the first round to boost competition. In the following rounds, however, a larger share of risks will remain with the private sector through the provision of fewer incentives. Those who do not participate in the first round will necessarily see lower returns in the second or third ones.”
To get to the second or third rounds, however, the first round needs to be a success and bring back some of the international investors who have stayed away from Argentina. The administration of President Mauricio Macri has tried to assure investors that their PPP investments are now safe in Argentina. Under the PPP law passed in 2016, the first year of Macri’s term, the government cannot cancel contracts without a legally valid reason. And to settle disputes, the law bypasses the overloaded local courts and sends the opposing sides to a technical board or even international arbitration.
“There was an urgent need for Argentina to have a regulatory framework for PPPs that was approved by Congress because the two previous attempts to introduce them by presidential decree did not deliver good results,” Marcos Patrón Costas and María Morena del Río, partners at the Allende & Brea law firm in Buenos Aires, said in an email.
Best PPP practices
Argentina’s PPP law borrowed from legislation in other countries, including Brazil, Chile and Peru, and tried to create a legal framework that put experienced infrastructure developers and financiers at ease. “Investors do not need to become experts in Argentine public works to understand the risks that they are taking,” the lawyers say.
The PPP law also stipulates that the government, not the developers, will handle the rights of way and other land use agreements. The law allows creditors to take over a project if the sponsors fail to pay their debts but it also entitles developers to receive compensation for canceled projects, even if the cancelation is their own fault.
But the financial guarantees provided by the government stand out as the most convincing arguments that Argentina’s infrastructure sector is open to outside investors. The government has addressed foreign-exchange risks, for example, by making availability payments in US dollars, rather than Argentine pesos. It has also promised to make top-up payments if toll revenues do not meet projections.
“The system manages to mitigate many of the risks that are typical to infrastructure projects,” says Gonzalo Álvarez-Cañedo, the co-head of capital markets at the Buenos Aires-based investment bank Puente. “One obvious outcome should be lower financing costs for PPPs.”
During each month of construction, the government will issue certificates, called ARAIs, tallying how much work has been completed and assigning a value in dollars. Every three months, the government will issue other certificates, known as títulos de pagos por inversión, or TPIs, which will state how much money the developer stands to receive, based on the percentage of work that has been completed. Project sponsors will be able to cash the dollar-denominated TPIs twice a year.
If a toll road PPP opens to traffic but revenues fall short of expectations, the project sponsor can receive availability payments called títulos de pagos por disponibilidad, or TPDs.
The government will fund the availability payments with revenues from a gasoline tax and other toll roads but it could also use money from the Treasury if it must. Project sponsors can use TPIs and TPDs as collateral to raise financing in the international bond market. The certificates come with sovereign guarantees, but it is unclear if international bond buyers want them in their portfolios.
“Once the first projects are adjudicated, we will be able to know what structures the sponsors will chose to raise funding for the projects,” says Candela Macchi, a director at S&P Global Ratings in Buenos Aires.
According to sources, companies from China, France, Italy, Peru and the United States, along with some of Argentina’s largest construction companies, have all expressed interest in the toll road PPPs. Some firms are forming consortiums to bid on the projects, and many large foreign banks are getting ready to propose different financing structures.
Just the same, the jury is still out whether Argentina is back on good terms with international investors.
“Although the structure of Argentina’s PPP program mirrors that of other successful PPP models in the region, securing financing for infrastructure projects in Argentina will not be without its challenges,” the law firm Mayer Brown said in a note to clients. “Unlike Peru, where local pension funds are significant investors in that country’s infrastructure projects, Argentina does not have an established local investor base, which means that financing will need to come primarily from international investors who may still be hesitant to take on Argentine risk despite the PPP program’s structure.”
The government needs a positive market response to the first toll road PPPs to move ahead with the other projects in the pipeline. Morea lists the Red de Expresos Regionales, or RER, a planned mass transit system in Buenos Aires that will connect the city’s main rail stations through 16 kilometers of tunnels and a central terminal at a cost of $4 billion to $5 billion. He also mentions plans to install new street lighting systems first in 11 cities and then, if successful, across the country.
Likewise, the federal government’s PPP program could spread to other levels of government, particularly the provinces, Morea says. “We are working with provincial governments to help them implement their own PPP legislation,” he says.
Argentina’s next task, however, is to make sure the new PPP rules stick around for the long run, even if Macri does not win reelection in 2019.
“The biggest hurdle in Argentina is the construction of a framework for the rule of law,” says Jerónimo Lau Alberdi, an infrastructure specialist at the Buenos Aires law firm Cassagne Abogados. “It is necessary that investors know the level of respect for the law, for contract terms and for legal decisions, and that investors have confidence that, if they face any trouble, it can be quickly solved through arbitration and not by a local judge.” LF