As I discussed in my previous post, Patricio Mansilla of Chemonics International has explained to me that Chile has been at the forefront of innovation in the design of PPPs. The government has experimented with a bidding mechanism for PPPs based on the Least Present Value of Revenues (LPVR). The innovative feature of the LPVR approach is that contracts always have a variable term date, in contrast to normal PPPs, which have an end date set in advance. Considering the number of comments generated by the previous post, I thought I would provide a bit more detail on the benefits of this approach, plus a few examples of how LPVR PPPs work in practice.
First, the advantages of this approach over fixed term bidding concessions, as I see them:
- The LPVR is concessionaire friendly, which allows for many bidders on each deal. Lack of bidders is a problem on some PPP deals in Latin America.
- Another advantage of the LPVR approach is that it is easy to enforce compared to normal fixed-term contracts, which are exposed to renegotiation risks that sometimes can threaten the solvency of the consortium and thus the project as a whole.
- The government’s only burden to enforce the concession is to closely monitor the concessionaire’s operational cash-flow revenue. There is still a need to verify solvency and overall performance and maintenance of the project itself, but those can be achieved under much less pressure. After all, these burdens are mitigated by the concessionaire’s interest in recovering its investment. There is no chance for extra profit, and delays only postpone revenue recognition.
How does this compare to a typical fixed-term PPP? In regular projects concessionaires are pressed to meet lending deadlines under penalty of renegotiation and risk of defaulting on loans. Hence, sometimes a contract comes close to its end date, and tariff revenues have not been earned to cover the concessionaire’s cost. If the concessionaire’s full cost is not met, then there is a risk that maintenance will lag, or legal disputes over tariffs might mount in court and administrative venues. In the LPVR model, lenders are fully aware that a given revenue flow from tolls might take a few months or a couple of years longer than originally imagined. Lenders factor a small premium into the contract to deal with this time volatility.
So it all sounds nice in theory. Does it work in practice? Let me give you two examples from Chile that demonstrate the concrete advantages of the LPVR approach.
Road: Santiago Viña del Mar-CH 68
In 1998 the concessionaire Rutas Del Pacífico offered the Chilean government US$381 million to construct toll roads and was awarded the concession over three other bidders (after an extra one was disqualified): Securitas (US$389 million), Autopistas de Peaje (US$442 million) and Cicasa Chile (US$452 million).
The basic project entails major improvements and extension of 130 Km. of roads, and to build from scratch three new tunnels. The concession had a reference period of 25 years, which could be shortened if the concessionaire earned the LPVR cost plus a pre-established profit in less than 25 years. Conversely, if at 25 years the concessionaire still has not met its targets, the contract term date is extended automatically until it gets the total amount of the LPVR (in this case US$381 million).
This was the first time that a minimum demand guarantee was offered separately in Chile, at an extra cost to the concessionaires. This guarantee was actually only chosen by two candidates. It seems to demonstrate how sure investors were of the deal. The winning bidder offered a present value rate of discount that would be negative, according to estimates by the Ministry of Public Works. The Ministry probably set the risk premium too high, underestimating the efficacy of the LPVR model itself.
The deal was considered Latin America transport deal of the year in 2002 by Project Finance Magazine.
Airports: Iquique and Puerto Montt
Iquique airport in the north of Chile and Puerto Montt in the south were both procured in 2008. And both were procured through an LPVR bidding mechanism. However, there is one key difference with the road concession I just described: the roads rely on tolls to pay the concessionaires, while the airports whereas airports depend on tariffs per air passenger.
In the case of Iquique the maximum LPVR established by the government was around US$19.426.000 and the winner (Arrigoni-Sifon-Tecas) offered US$12.737.000 under strong competition (5 bidders). In the case of Puerto Montt, the ceiling was set at US$23.700.000 and the winner was ACC-Icafal-Vecta with a bid of US$15.337.000. There was an astounding 6 bidders contesting for this deal, which is far more than the usual competition for a deal in Latin-American PPP market.
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