The birth of project finance in Uruguay
Fernando Jimenez de Arechaga (Jr)
Jiménez de Aréchaga Viana & Brause
Montevideo
Fernando Jimenez de Arechaga (Jr) (Bio)
Since 2004 Uruguay's GDP has presented a robust growth that continues to outperform expectations. This has been based on: (i) sound macroeconomic policies consistently applied by governments of different ideological orientations; (ii) soaring commodity prices that boosted exports; (iii) low interest rates that produced a surge in capital inflows; and (iv) increases in employment and real salaries that stimulated consumption in the domestic market.
This positive outlook has led market participants to believe that Uruguay will shortly reclaim the investment grade status it lost in 2002 amid the worst economic and financial crisis in its history. However, in order to produce a definitive take-off for the economy and achieve sustainable growth, the country must overcome two of the binding constraints on its economic development: lack of infrastructure and an overwhelming dependence on imported energy resources.
The incumbent government appears determined to remove these bottlenecks in the economy. It has highlighted infrastructure development as one of its priorities and has stressed the importance of enhancing the country's energy resources to reduce the dependence on imported oil and gas.
Public-private partnerships
The policy tool by which the government expects to bring about infrastructure development is through Public-Private Partnerships (PPPs). In this regard, and since the government lacks the resources to provide the infrastructure needed by the country, it has submitted to Congress a comprehensive legal framework for the incorporation of private capital in infrastructure projects, a piece of legislation which is expected to be approved shortly with the support of all the political parties. Numerous projects for transport infrastructure (rehabilitation and revamping of railroads and highways, construction of deep-water ports), social infrastructure (school, hospitals) and touristic infrastructure (fair and convention centers and leisure ports) await for the enactment of this landmark legislation.
On the energy side, the government has adopted strong policy incentives to encourage the development of renewable energy resources in the country (wind, solar energy, biomass), and has launched PPP projects for the construction and operation of Eolic parks. In the oil and gas sector it has awarded offshore and onshore exploration and production permits in order to harness recent potential hydrocarbon discoveries. It is also launching an international bidding procedure, together with the government of Argentina, for the construction and operation of a $300 million LNG (Liquid Natural Gas) regasification plant, and another international bidding procedure for the construction of a 400 MW combined cycle power station that will work with natural gas from the LNG regasification terminal, as well as with heavy fuel oils.
The main implication of this boom in infrastructure and energy projects for the legal and financial community in the country is the naissance of project finance, an area of practice which is still incipient in Uruguay. Local sponsors and lenders, government officials and financial and legal advisors will all have to make the path by walking through this novel era of project finance for the country.
New legislation
The proposed legislation for PPPs under study by Congress intends to strike a balance between the public interest involved by these infrastructure projects and the private interest associated with obtaining bankable projects.
To assure bankability of the projects, the proposal provides for the efficient identification and allocation of risk and for the creation of sustainable revenue streams that enable debt service for lenders and equity returns for sponsors. In this regard, the statute limits the risk of material adverse state action by placing certain limits on the state's ability to unilaterally amend or terminate the concession agreements (including a requirement to compensate the contractor), and by requiring renegotiation in cases of state action that affects the project's economics, as well as in cases of force majeure (acts of God).
Furthermore, the PPPs statute addresses another basic concern of lenders in project finance, which is their ability to obtain security over project assets. The law enshrines the possibility of acquiring security interests over cash flow generated by the project, of creating collateral trusts with the project's assets, and of creating any other permitted security interest under applicable law. It also provides for the creation of security interests over the contractor's concession rights and regulates the enforcement of such security, basically through a public auction where the authorised bidders will be able to purchase the rights under the agreement and continue with performance thereof. The proceeds of the public auction will be applied to debt service.
Conclusion
As with any new experience, there are uncertainties looming in the air. Some commentators maintain that the legislation does not go far enough in protecting lender's rights, while others say that it does not go far enough in protecting public interest. Doubts have also been raised over the length of the bureaucratic procedures foreseen in the legislation. But critiques aside, the PPPs legislation sets the stage for infrastructure development in a country which desperately needs it, and lays the foundation for the birth of project finance in Uruguay.