New PPP opportunities arise in Argentina

The project involves the construction of a number of highways and safe routes located all around the country, in 3 different stages. It seeks to (i) improve urban centres; (ii) promote the development of different regions by reducing logistics costs and enhancing connectivity; (iii) create job opportunities; (iv) improve safety for users; and (v) save on travelling costs and fuel consumption for users; among others.

Anyone interested in bidding in the first stage of the PPP project has until 30 March 2018 to request further information or clarification in connection with the project. Bids must be submitted on or before 3 April 2018.

Projects considered for the first stage

The first stage, called "PPP Vial Etapa 1" consists of 6 different projects, which, based on the information provided by the Ministries of Finance and Transport, have the following characteristics:

• CORREDOR VIAL A

• CORREDOR VIAL B

• CORREDOR VIAL C

• CORREDOR VIAL E

• CORREDOR VIAL F

• CORREDOR VIAL SUR

Relevant Timeline

The timeline established for this first stage of the plan is set out to be the following:

Source: https://www.minfinanzas.gob.ar/uppp/docs/Cronograma_20180124.jpg at 28.02.2018

Contract Highlights

Among the many relevant issues to be considered regarding the process and the project, we can highlight the following:

Term of the contract

The term of the PPP Contract to build, operate and maintain the relevant routes and highways will be 15 years, with the option to extend it for an additional year. Within that term, the contract considers an average term of 4 years for the execution of the main works.

Guarantees

The PPP Contractor will be required to provide guarantees through either (i) cash, a letter of credit or a bank guarantee (each considered an on-demand performance guarantee) or (ii) surety performance bonds ("seguro de caución"). The guarantees to be provided will be:

1. Tender Maintenance Guarantee ("Garantía de Mantenimiento de la Oferta")
2. Financial Closing Guarantee ("Garantía de Cierre Financiero") equal to 2% of the investment payments estimated for the principal works.
3. Performance Guarantee ("Garantía de Ejecución de las Obras"), equal to 3% of the investment payments estimated for the principal works. In the event of executing obligatory or voluntary complementary works, the constructor will have to provide the corresponding guarantees for up to 5% of the investment payments considered for each.
4. Performance of Principal Services ("Garantía de Servicios Principales") equal to 3% of the investment payments estimated for the principal works.

Compensation structure during construction

The draft PPP contract provides for a compensation structure in which a Transportation Infrastructure Trust (the so-called "Fideicomiso de Infraestructura del Transporte") will during the construction phase issue payment certificates on a quarterly basis, based on the degree of progress towards the completion of construction and operation progress of the respective projects in accordance with the milestones set in the contract (the so-called "Títulos de Pago por Inversión" or "TPI"). Each TPI will entitle the holder to receive 20 semiannual payments in US dollars, on May 15 and November 15 of each calendar year. A key element of the TPIs, which will be subject to Argentinian law, is that they will be issued in USD, will be irrevocable and freely transferable, and are hence a useful tool to either collateralise a project finance of be securitised. Thus permitting the PPP Contractor to collateralize and securitize cash flows in connection with the financing of the project.

The type of TPI received will depend on the type of performance guarantee provided by the relevant contractor. If the PPP Contractor guarantees its obligations through an on-demand performance guarantee, it will receive TPIs that are unconditional and not subject to any deductions (“Fixed TPIs”). On the other hand, if the PPP Contractor provides surety performance bonds it will receive a combination of Fixed TPIs, for 85% of the value of the completed work, and TPIs that are conditional and subject to certain deductions (“Variable TPIs”), for 15% of the value of the completed work. The type of performance guarantee provided by a bidder might, therefore, affect the sizing of debt and might lead to a bespoke tranching of the bonds if revenues are securitised.

Compensation structure during operation

Additionally, once the infrastructure is in operation, the PPP Contractor will be permitted to generate toll revenues and additional revenue from the leasing of service areas and the provision of ancillary services. A key element will be the analysis made by a bidder as to the amount of these revenues, since if the conclusions are that traffic will be insufficient to generate such revenue the bidder may request in its bid to receive availability payments by way of transferable certificates ("Títulos de Pago por Disponibilidad" or "TPDs") which will be very similar in nature to TPIs but will be issued in Argentinian pesos.

Funding for payments

The risk of insufficiency of the compensation will be mitigated by the commitment of the Argentine government to make a contingent contribution if the amounts deposited in the Infrastructure Trust are not sufficient to fulfill the Trust’s obligations under the relevant certificates, with the relevant contribution being set out in the national budget law for the relevant year. It will be key for bidders and potential financing providers to get comfortable with (i) the lack of loopholes in the undertaking of the Argentinian Government to bridge any funding gap of the Infrastructure Fund; and with (ii) the direct recourse the PPP Contractor would have vis-à-vis the Government (and the ability to assign it).

It is further worth considering that the Infrastructure Trust proposed under the Argentine program contemplates the creation and funding of a reserve account (for one year of expected TPI payments), funded with tax revenues and the part of user revenues exceeding the agreed revenue.

Other instruments for financial equilibrium

The tender process and the PPP Contract have considered certain instruments to facilitate financing. For example, as part of the offer, each interested PPP Contractor may be able to choose to celebrate a currency collar, which will be valid for the whole construction period, aiming to set a reference exchange rate between the USD and the Argentinian peso with a range of variation of maximum 10%. Also, it allocates land acquisition risks and the identification of environmental risks to the authority; references to a rebalancing of financial equilibrium of the contract following material events; creditor step-in rights; creditors' consent for certain actions of the PPP Contractor; among others.

Payments on termination

If the PPP Contract is terminated early, the PPP Contractor will be entitled to receive payments for any completed work, even if they have not been recognized under a TPI or a ARAI (monthly certificate of acknowledgement of percentage of works performed and their value in US dollars which serves as a basis for the subsequent issuance of the TPI), net of any penalties and fines owed by the PPP Contractor, as well as amounts required to bring construction or maintenance levels to the level it would have reached if the contract had not been terminated. If the PPP Contractor owes any amount and has not paid them in advance, they shall be deducted from any on-demand performance guarantees, or deducted from payments of any variable TPIs, if no on-demand guarantees have been granted. Fixed TPIs will not be affected.

International arbitration

In the event of any disputes, or if the Infrastructure Trust is not able to meet the payment obligations, the PPP Contractor may recourse to international arbitration against the Argentine government.

To access the relevant documents of the bidding process, please access http://ppp.vialidad.gob.ar/documentacion-licitatoria-2/