Morales & Besa partners Carlos Silva and Myriam Barahona discuss their roles advising the sponsors on the Arturo Merino Benitez Airport expansion in Chile and trends in energy and infrastructure in the country with Rani Mehta

How did your firm come to represent the Nuevo Pudahuel consortium on the project?

Silva: We were contacted by Vinci. They know our firm because of our experience in the PPP sector, and we were recommended by Goldman Sachs in the beginning.

Could you summarise your role on the project?

Silva: This project is a PPP. It’s a concession of the Santiago airport, a public airport, which is a concession previously granted to another entity many years ago, and that concession expired in 2015. A year before that, the government started the process for granting a new concession to continue operation of the airport and also for constructing a new terminal in the airport. There was a bidding process for the new concession agreement which was very competitive, and the major international and local actors participated in the process. We had to analyse the concession contract and the document, and comprehend and analyse the legal risks of the project in order to prepare the bid. We advised the consortium in that process, which took about a year until the offer was filed and presented. That was the first phase.

In the second phase, we helped the consortium and the company to finalise the bidding process in terms of incorporating the concessionaire entity. We also advised the consortium in terms of finalising the major project contracts such as the EPC and other agreements related to the operation of the airport. We worked on the financing of the project which was closed in July 2016. Now we’ll continue advising the consortium and the company on all issues, primarily with the financing agreements and the concession agreements.

What motivated the expansion of the airport?

Silva: We need to increase the capacity of the airport. The previous terminal was contracted in 1998, and Chile has grown a lot since then, and we definitely need a new terminal.

Why did the client use a dual currency financing?

Silva: That was one of the characteristics of the transaction that is not very common. Normally financings are either in foreign or local currency. Generally, PPP projects in Chile, such as hospitals, draw all their income in pesos, so the financing is also in pesos. In this case, the airport has two main sources of income. One is boarding fees that all passengers must pay for using the facilities and these are in US dollars for international flights.

The other main income is in pesos. Were global firms involved in the project?

Silva: There were many firms involved. Since the main financing agreement was governed by New York law, the law firms that were in charge of loan agreements were New York law firms. Since there were two French sponsors and one Italian sponsor, we needed to coordinate legal issues with Italian counsel and French counsel. There were also some agreements under UK law, so some UK law firms were involved.

How does advising a foreign consortium or developer compare to advising a local one?

Barahona: The main difference is that you have to educate them a lot with respect to the peculiarities of Chilean law and also with respect to the documents.

Silva: From a legal perspective, it’s much more challenging advising foreign entities. You have to explain the whole system to a foreign client. Some members of the consortium hadn’t been in Chile, so we had to work to explain the regulatory framework, the risks and how the authorities work. And these clients are very sophisticated and ask a lot of questions because they want to understand everything and be fully aware of all the risks. At the end of the day you have to cover many aspects of the law not only financing and contractual, but environmental, regulatory, foreign investment, and tax.

What trends have you noticed generally in the energy and infrastructure sectors?

Silva: To start with the infrastructure sector, Chile has had a lot of developments in infrastructure in the 90s and during the first five years of the 2000s. We didn’t have the infrastructure at the time, so we had a lot of projects then. These were the first generation of PPP projects. One issue that we’re facing is that we need more infrastructure. The infrastructure created 15 or 20 years ago has to be renovated or expanded. We’re also seeing concession agreements that are expiring, and therefore we’re seeing newer bidding processes for new concession agreements [like] the Santiago Airport (mainly toll roads and tunnels). In the near future we’ll probably see new ports and expand that sector of the country.

Additionally, the mining industry needs more water. It’s located in the north of Chile where there’s a desert, so they are facing a water issue. The mining industry is involved in a process which involves the construction of plants in the coast to bring water from the sea up to mountains where the mines are located. Right now there is a process in the bidding phase, a BOT agreement which would involve the construction and operation of a plant and a pipeline to provide water to Codelco’s mining operations, the state-owned copper mining company.

Barahona: We just had a bidding process for regulated clients in the energy sector that also had really low prices. We will have to see how these projects will be financed. The prices of the energy are dropping, which is good for customers but raises some issues for the bankability of the projects.

Silva: In the energy field we have seen PPA with distribution companies that have been awarded at a very low price and the bidders who won these bids probably will face problems to finance these projects. They will need to add some foreign companies with the financial strength or strength other than pure construction or energy abilities to finance the projects.

In terms of PPP projects, I think we have a very mature industry in which there are a lot of projects in the operational phase. We are seeing some M&A activity in the industry. Some actors mostly in construction are selling their stake in these kind of projects. We are participating in some M&A transactions. We continue to see this type of activity happening in the energy sector too but for different reasons. There are some developers in the energy sector who have been facing serious financial distress. They have started reorganisation processes worldwide which have involved the sale of some projects in Chile.

What changes do you expect to see in the legal market? Will there be more Spanish firms?

Silva: There are two major Spanish law firms, Garrigues and Uría Menéndez. They have different approaches but both are here and we’ll probably have others soon. For Spanish firms, it makes sense to come here. Their clients have a lot of activity in Latin America. And the legal work has been reduced in Spain because of the economy. Most of these companies have entered a global reorganization process and probably now they have more businesses outside than inside Spain. Additionally, within Spain there are many firms from the UK and also from the US that are competitive.

For those reasons, it makes sense for some Spanish firms to step into Latin America. For some local firms, it might be a good opportunity to be part of a network driven by a Spanish firm but for these other firms who have a broad client base around the world and relationships with firms in New York, Europe and other countries, I don’t know how much sense it makes. If you choose an alliance or a combination with a Spanish firm, you risk losing your other connections.

We’ll have to see what will happen in Chile. If you look at the Mexican legal market, foreign firms have been there for 10 years or more and now you see that they compete with very good local firms. They are both competing and both very successful. I believe there are opportunities for both models in Chile. 

FURTHER INFORMATION

Arturo Merino Benitez Airport expansion

This deal record is from IFLR1000 Deal Data.