Connections Transport & ICT 96251 Advance Funding for Infrastructure PPPs Cautions from Two Road Projects in Peru Michel Kerf Public private partnerships (PPPs) for infrastructure $826 million projects require substantial initial funding that Capital raised in the private operators in developing countries can international financial rarely obtain in the domestic market. In 2005, markets in 2005–06 in the context of two important road projects, by concessionaires the government of Peru introduced a financial for two road innovation with two goals: improve the access of projects in Peru the projects’ concessionaires to the international financial markets and book government support as an operating expense rather than debt. The innovations offered distinct advantages to the concessionaires while imposing a significant burden on the government, which has since stopped using them. Nonetheless, the new approach can still be useful in carefully limited instances to help solve the funding problem. Public Financing for Transport PPPs— and a large portion of IIRSA Sur, connecting Peru and Brazil.1 To increase the attractiveness of these the PAO projects to the private sector and also reduce their Structural reforms initiated in Peru in the early impact on the public debt, the government took 1990’s led to a period of sustained economic a new approach that would (1) give the projects’ growth in which the government turned to PPPs to private partners greater access to the financial mar- generate investments in its airports, sea terminals, kets and (2) account for government obligations and roads. The government provided financial sup- as operating expenses rather than as increases in port to the PPPs using, among other instruments, sovereign debt. Annual Payments for Works, or PAOs (Pago Anual Instead of providing a stream of payments at the por Obras). The PAO is a government obligation end of a project, the government split the road proj- that, upon successful completion of the project, it ects into sections. Satisfactory completion of a seg- will make a fixed number of equal annual payments ment had to be certified by a government regulator, to the concessionaire to cover construction costs. after which the concessionaire received the right to PAOs were considered to be sovereign debt. a stream of annual payments for that segment. The Innovation—the Unconditional That right to a payment stream was satisfied with a series of government obligations called Certificates CRPAO of Recognition of Rights of Annual Payment for In 2005, the government awarded PPP contracts Works, or CRPAOs (Certificados de Reconocimien- for two key road projects—IIRSA Norte, linking the to de Derechos del Pago Anual por Obras,). coastal and Amazonian ports in the north of Peru; 1 Neither project involved World Bank financing. MARCH 2015 NOTE10 Critical Features of the CRPAOs approval could not be overturned by any subsequent discovery of flaws in performance). The CRPAO payment obligation was crafted with four characteristics designed to facilitate market ac- For the government, the CRPAOs were supposed to cess: they were transferable, unconditional, equal in confer two distinct benefits: (1) generate more com- rank to any other similar government obligation, and petition among bidders for PPP projects by making subject to cross-default. it easier for private parties to reach financial closure and (2) enable the government to provide financial First, the CRPAOs were freely transferrable, allowing support to PPPs without adding to the national debt. the concessionaire to sell them or issue securities backed by the payment rights embodied in them. In the case of the IIRSA Norte, the CRPAOs had no Thus, as work on the road projects moved forward, effect on the bidding because they were fashioned CRPAOs gave the concessionaire access to private during negotiations with the winning bidder. But they sector funds required to finance additional sections helped the winner mobilize full financing even before of the project and thereby reduced the initial amount the start of construction, backing the issuance of $213 of capital that the concessionaire needed to raise. million of obligations on the New York stock exchange. In the subsequent case of the IIRSA Sur, the number Second, the payment rights embodied in the of bids did not appreciably increase, but the CRPAOs CRPAOs were unconditional—for example, they did enabled the winning bidder to raise $613 million. not depend on construction of further sections of the project, and they were not affected by any sub- The effort to use the CRPAOs to shield the govern- sequent discovery of a deficiency in the completed ment’s debt did not succeed. In the course of its section. In short, once it issued a CRPAO, the govern- Article IV consultation with Peru in 2006, the Inter- ment could not contest it. national Monetary Fund found that the CRPAOs were debt instruments. The government then refrained Third, the CRPAO’s claim on the government was from using CRPAOs on any other projects because of equal in rank with that of any other CRPAO or similar the priority it assigned to reducing public debt. instruments. Therefore, if the government issued a similar instrument but with stronger payment rights, those rights would also apply to all previously issued Lessons Learned CRPAOs. The financial power generated by the CRPAOs came Fourth, CRPAOs were subject to cross-default: if the at the cost of heightening the construction risks government defaulted on any CRPAO, the breach borne by the government. In addition, use of the would be considered a default on all other CRPAOs CRPAOs for some projects might have made other (although payments could not be accelerated be- projects less attractive for private operators given yond the fiscal year of the default). the CRPAOs’ strong payment and cross-default pro- visions. Finally, use of the CRPAOs could not avoid The CRPAOs were also crafted with the objective adding to the national debt. of shielding the government’s credit rating: the two road concession agreements defined the CRPAOs as The misallocation of construction risks is argu- current expenses of the government’s budget and ably the most important drawback of the CRPAOs. specified that they were not a sovereign debt of the Because of it, CRPAOs should be used only in rather Republic of Peru. limited, well-circumscribed circumstances, for example when local financial markets are undevel- Effects of the Innovation oped, and mobilizing the required financing might prove particularly challenging because government The CRPAOs provided clear advantages to the commitments lack credibility with private investors. private concessionaires: much less need for initial The CRPAOs should thus be only a temporary device financing, strong payment guarantees, and reduced used to establish or re-establish confidence, not a risk arising from nonperformance (the regulator’s permanent measure. Connections is a weekly series of knowledge notes from the World Bank Group’s Transport & Information and Communication Technology (ICT) Global Practice. Covering projects, experiences, and front-line developments, the series is produced by Nancy Vandycke, Shokraneh Minovi, and Adam Diehl and edited by Gregg Forte. The notes are available at http://www.worldbank.org/transport/connections MARCH 2015 NOTE 10