Eight consortiums – Abertis/Goldman Sachs Infrastructure, CCR, Grupo ODINSA, Interplan-Grodco-Consorcio Remix Development, Itinere/Citi Infrastructure, JP Morgan Infrastructure, Morgan Stanley Infrastructure/OHL and Road Development of Puerto Rico (ICEIN/CONCAY) – submitted statements of qualification for the 50-year lease of the PR-22 and PR-5 toll roads on the island. That list has since been whittled down to a shortlist of four – Abertis/ Goldman Sachs, CCR, Itinere/Citi and OHL/Morgan Stanley – and CCR has since joined the Itinere/Citi consortium.

But the bids are an impressive response to the first concession to come from the Puerto Rico PPP Authority (PRPPPA). David Alvarez, executive director of the authority, says it expects to receive proposals for the highways by 18 May.

The water and school concessions have received an equal­ly impressive response. 13 consortiums responded to the request for qualifications (RFQ) for a $300 million, 15-year finance-implement-maintain automated water metering pro­ject and 29 five-year design-build-finance-maintain school contracts, worth roughly $250 million, have already been signed. The PRPPPA shortlisted AAIC (ACEA/IBM/Citi/ ARAD), Aguas Borinquen (Acueducto/ESP/Miya Sarl), Con­sorcio Canal Extensia/Inassa, Empresas Publicas de Medel­lin ESP, Paragon Project Resources, Proactiva Medio Am­biente, Suez Environment North America/Agbar for the water concession and plans to release the request for pro­pos­als (RFP) this month (April).

Local firms, including Pyra­mids Architects, Omega Engi­neer­ing and Grupo del Mar Builders, have won contracts for 49 schools, which are bun­dled in packages of one to four, and the authority intends to award another 50 by the end of the second quarter.

The success of Puerto Rico’s programme is surprising. The sale or lease of public assets has raised significant public outcry elsewhere in the US, which resulted in some being pulled from the market. The most prominent example is the $12.8 billion Pennsylvania Turnpike in 2008 but municipal parking meter privatisations in Los Angeles and Pittsburgh were also cancelled by local city councils last year. Yet, in Puerto Rico there has been little or no outcry and the deals have proceeded almost unhindered, except for some delays attributed to negotiations between bidders and the authority.

“Puerto Rico has been able to depoliticise the process by doing projects across the board,” says DJ Gribbin, mana­ging director at Macquarie Capital, which is advising the authority on some of its concession. Gribbin highlights the PRPPA’s broad slate of concessions. “This gives bidders some certainty that they’re not going to end up in a Pennsylvania Turnpike-type of situation.” He adds that the island has one of the better PPP laws in the US.

Details remain scarce about the exact structure of the concessions. The authority has declined to release the draft RFP for any of the projects but discussions with various parties involved in the process have revealed that at least the road and airport transactions are structured in a similar fashion to previous deals in the US.

Roads: Feasibility and defeasing

The PR-22 and PR-6 toll roads stretch 90.1km through the suburbs of capital San Juan and across the north side of the island to Arecibo. PRPPPA dubs the former, which runs 83.7km from San Juan to Arecibo, the “central artery” of the Puerto Rican transport network, while the latter is a 6.4km urban road connecting the centre of San Juan to the suburb of Bayamon. PR-22 generated $85 million in revenue and PR-5 $4.2 million in 2009. Revenue grew at a compounded annual growth rate of 5.2% and 7.7%, re­spectively, between 2005 and 2009. The Puerto Rico High­ways and Transportation Authority (PRHTA) is a joint grantor with the PRPPPA.

The brownfield concession is structured along the lines of past US toll road privatisations. One adviser on the transaction says it is “very similar” to that of the Chicago Skyway, Indiana Toll Road and Pennsylvania Turnpike deals. For potential sponsors this means a debt defeasance hurdle after which they have free and clear title to toll revenues, full traffic risk, limits on toll increases and specified maintenance and capacity expansion and improvement metrics.

A banker who has looked at the draft RFP goes into fur­ther detail: “The big risks are revenue, enforcement, exist­ing employees, the level of operations and maintenance that must be maintained, capital expenditures and how the roads will be returned at the end of the concession.” But the main point that kept coming up in discussions of the concession is the level of debt a concessionaire must defease in order to gain free and clear title to the roads.

PRHTA financed the construction of and improvements to PR-22 and PR-S with a combination of general Highway Revenue Bonds and Transportation Revenue Bonds. Neither road used any project-specific or non-recourse project fin­anc­ing. This lack of easily identifiable debt has made deter­min­ing the amount of debt against the roads the “main issue” ac­cor­ding to one lawyer advising on the deal. The hurdle has since been set at a little over $600 million and a full RFP is expect­ed shortly. The highways authority had $1.66 billion in out­stand­ing Highway Revenue Bonds and $4.66 billion in Trans­portation Revenue Bonds outstanding as of 30 April 2010.

Alvarez says that the qualified consortiums were satisfied with the PRPPPA’s procedure to isolate the debt from the PRHTA’s bonds and that was certified by the US Internal Revenue Service. Another sticking point is the amount of capital improvements a concessionaire will be required to make in the road. It is not yet clear what this number will be but Alvarez says it will only include improvements to the roads, not capacity increases.

Investors’ financing plans for the concession are still in their early stages. Lenders only first joined sponsors in meetings with the grantor in March but most sources expect the deal to be financed with conventional project debt. One New York-based banker confirms that Abertis/Goldman Sachs is exploring a syndicated loan. Other options that have been discussed include a US Department of Trans­portation TIFIA loan, private activity bonds (PABs) or a tax-exempt loan from the Government Development Bank for Puerto Rico’s AFICA tax-exempt loan programme. How­ever, PABs and AFICA cannot be used for brownfield assets and TIFIA has only been deployed once in connection to a brownfield asset, Transurban’s purchase of the Poca­hontas Parkway, which also included a small capacity expansion.

All of PR-5 and the majority of PR-22 are four lanes wide except in sections of San Juan where the latter widens to as much as 12 lanes. PR-2, an at-grade free local road with signalled intersections, runs parallel to PR-22, but trips take on average 45 minutes longer than on the toll road. Allen & Overy is global legal counsel and Pietrantoni, Mendez and Alvarez is local counsel, while URS is technical adviser.

Schools and water

Puerto Rico’s school and water concessions are structured differently to the roads. Both include availability-based pay­ment mechanisms and greenfield construction risk.

The PRPPPA and the Puerto Rico Infrastructure Financ­ing Authority (AFI) will repay winners of the school concessions through a combination of design, milestone and avail­ability payments. The government intends to issue an Ameri­can Re­covery and Reinvestment Act (ARRA) quali­fied school Con­struction Bond to finance the concessions. Sponsors will in turn take on construction and Government of Puerto Rico risk. In a positive signal to investors, Standard & Poor’s upgraded the Commonwealth of Puerto Rico’s general obligation rating to BBB from BBB- in March. Fitch rates the territory BBB+ and Moody’s A3. The maintenance contracts for each pack­age of schools can be renewed annually after year five. The limited size and risk transfer on the schools have limited their appeal to local players, say foreign sponsors who looked at the projects.

The PRPPPA and Puerto Rico Aqueduct and Sewer Auth­ority (PRASA) will repay the concessionaire through a com­bination of milestone, substantial completion and per­formance-based payments though Alvarez says the exact structure has not been determined. However, he was hesi­tant to specify the risks of the concession, saying that the grantors were meeting with bidders to discuss these topics, among others, in March. PRASA expects will increase the amount of revenue it generates on water it produces to rough­ly $15 million annually.

Fielding Nair International and UNIPRO are technical advisers to the grantors on the school concessions. For the water project, MP Engineers of Puerto Rico and Malcolm Pirnie are financial and procurement advisers, and Pietrantoni Mendez & Alvarez and Cancio, Covas & Santiago are joint legal counsel.

Airport and beyond

Concessions of San Juan’s Luis Munoz Marin International Airport and a new natural gas-fired power plant have yet to enter procurement. The airport is arguably attracting the most interest because, if the PRPPPA and Puerto Rico Ports Authority (PRPA) succeed in closing a deal, it would be the only fully-concessioned commercial airport in the US. Details of the power plant have yet to be released.

A long-term concession of Luis Munoz Marin is unlikely to resemble the unsuccessful Midway Airport deal in 2009. An adviser to the authority says the grantor’s objective is for a private concessionaire to improve service at the airport, while in Chicago it was to maintain existing service levels or face penalties. They cite the nearly 25% decline in passenger numbers, from 5.3 million to 4.09 million between 2005 to 2009, as an example. The US Federal Aviation Administration’s airport privatisation pilot programme, in which the Puerto Rican facility holds one of the medium-sized airport slots, requires the approval of at least 65% of a field’s com­mercial and cargo airline tenants in order for a deal to proceed. This, says the adviser, makes the concession unique because no one airline operates a majority of service at Luis Munoz Marin. American Airlines, which carried 46% of passenger traffic in 2009, is the largest carrier at the airport.

“The airport concession is not solely a monetisation trans­action,” says the adviser. “It’s about the benefits of private operation. Transferring risk over the long-term and attract­ing additional traffic are critically important.”

A PRPPPA desirability and convenience report outlined a possible structure for the airport concession last year. In exchange for an upfront payment, a private operator would take over day-to-day operations, current and future capital investment ($89.6 million in capital projects through 2014 are outlined), and be expected to find ways to generate new income and improve financial management at the airfield. In return, it would be able to collect all revenue generated by the airport except for any FAA-approved passenger facility charges that have been used to fund specific projects.

Alvarez says the authority and airlines are currently in an advanced phase of negotiations and that it is targeting a second quarter RFQ release. Fraport, the operator of Frank­furt International Airport, has already expressed in­terest in leasing Luis Munoz Marin. Credit Suisse is finan­cial adviser to the grantor, Mayer Brown US legal counsel, Pietrantoni, Mendez & Alvarez local counsel and LeighFisher technical adviser.

One complaint voiced about the Puerto Rican pro­gramme is the speed at which it is progressing. Originally the PRPPPA planned to close both the road and water meter deals during the first quarter, a goal that has passed. But in terms of risk allocation and deal structure, almost everyone – from sponsors to lenders and advisers – appears satisfied with the concessions, or at least happy with the authority’s willingness to work with private investors to reach mutually suitable terms.