PPP Promise Finally Making Progress


BMI View : Since establishing an agency for public-private partnerships in 2011, Guatemala has made little progress on promises of projects. However, developments are now taking place, with news that the government is planning to launch its first concession - for Line 1 of the Guatemala City passenger railway - in 2014. This project will be a key gauge of investor interest in the country, and the Central America region as a whole, where high risks, vulnerable and weak economies and political complexities are major deterrents for investors.

Guatemala established the council for the development of Infrastructure Partnerships (Conadie) in November 2011. Within Conadie, an agency responsible for designing and evaluating public-praite partnership (PPP) projects, called Anadie, was created to oversee the implementation of PPPs. With PPP legislation in place and an agency which enables progress to be made without going through inefficient government processes, this development was a strong start. However, things had stalled from there on, and although a number of projects were lined up as possible PPPs and funding allocated in the 2012 budget, no projects moved forward.

This could change with Guatemala announcing the tender for its first PPP project, Line 1 of the Guatemala City passenger railway. The tender for the project's technical, financial and legal studies are due to be released in 2013, with a view to launch the concession tender itself in the second half of 2014, according to comments made to Bnamericas by Anadie director Julio Estrada.

The 30km railway line will run from the north to the south of Guatemala City, along the route of an existing railway which has been out of service for decades. A pre-feasibility study has already been carried out with Spain's national rail company Renfe, indicating that we could see Spanish interest in the tender.

The project is estimated to cost between US$80mn and US$120mn. The majority of financing is to come from the private sector, with the private operator generating revenues from ticket sales. Anadie has calculated ridership of 70,000 passengers per day in order to make the venture profitable and is planning to set a minimum revenue guarantee, which will alleviate much of the demand risk. Currently, 270,000 people per day travel by bus along the route of the rail line. Given that the introduction of the railway would shorten the two and half hour bus journey to just 25 minutes, we anticipate strong demand for its service.

This project will be a key test towards investor demand for frontier market PPPs. As contract opportunities for this type of project have dried up in Europe, the region's majors are seeking opportunities elsewhere. However, committing long term to a frontier market is risky, and bidders on this project will be making a bet on political stability and economic growth in Guatemala. Given Guatemala's complex and inefficient political system, high levels of poverty and weak near-term economic growth rates, the country definitely presents high risks.

Risks Focused On The Earlier Stages
Guatemala Project Finance Ratings

Having said that, based on our Project Finance Ratings, which assess the risks to raising and repaying infrastructure financing over the lifecycle of a project, we actually see the biggest risks during the financing and construction phases. Indeed, raising financing will be a key concern and will likely require an investment guarantee, similar to the one secured from the World Bank's Multi-Lateral Guarantee Agency (MIGA) by Panama for the Panama City metro project. At the construction phase, costs could be a concern, particularly with regards to labour and raw materials related costs.

We believe that progress made by Line 1 of the railway will set a precedent for the planned concession of Line 2, which will cross the city from east to west. With no existing railway in place, this second phase will cost much higher. It is estimated to cost US$400mn, factoring in the cost of securing right of way, land acquisition and compensation.

This article is tagged to:
Sector: Infrastructure
Geography: Guatemala

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