CAN COSTA RICA FINISH MODERNIZING ITS AIRPORT?

UNCLAS SAN JOSE 000703 SIPDIS SENSITIVE DEPT FOR WHA/CEN JVANTRUMP, EEB/TRA/AN TROCHE, DHUTCHENS, EEB/IFD/ODF DOT FOR BRIAN HEDBERG TREASURY FOR DVONKOCH, HTETHER, BGRAY, AND SHOCHMAN E.O. 12958: N/A TAGS: ECON EAIR EFIN EIND EINV PREL PGOV CS SUBJECT: CAN COSTA RICA FINISH MODERNIZING ITS AIRPORT? REF: San Jose 686 ¶1. SUMMARY (U) Modernization of Costa Rica's main international airport, San Jose's Juan Santamaria, stalled for over five years as a result of contract disagreements between the GOCR and the operator/developer Alterra. Realizing that an acceptable solution would be impossible to reach, Alterra shareholders and the debt holder, an International Finance Corporation (IFC)-led ten bank syndicate, decided to sell the equity and debt to Airport Development Corporation/Houston Airport Systems (ADC/HAS, a U.S., Canadian, and Brazilian consortium). After protracted due diligence and negotiations, two key developments led to ADC/HAS finally assuming airport-development operations: (1) the GOCR approved the equity sale in May 2009 and (2) ADC/HAS and the IFC-led bank syndicate agreed to purchase terms for the debt in July 2009. However, the lengthy process and multiple near-collapses highlighted the many weaknesses in the Costa Rican concessions system, the Costa Rican propensity for hyper-legalism, and a general reluctance to bring projects to closure due to a Costa Rican penchant for seeking a consensus-based, "perfect" solution. End Summary. -------------- IT BEGAN WAY BACK WHEN. . . -------------- ¶2. (U) Ten years ago, in July 1999, the GOCR awarded a 20-year joint project (gestion interesada in Spanish) for the management, operation, maintenance, renovation, and expansion of Juan Santamaria International Airport (SJO) in Alajuela -- the country's largest airport serving four million people annually. The "joint project" was awarded by GOCR's Technical Counsel on Civil Aviation (CETAC) in July 1999 and confirmed by the Contraloria (a GAO-like entity with Comptroller responsibilities which reports to the Legislative Assembly) in November 1999 to a joint venture referred to as "Alterra" which comprised of Alterra, a division of the U.S. construction firm Bechtel (42.5 percent shareholder of the concession),and three other companies (Singapore Changi Airport Enterprise Ltd with 42.5 percent, TBI (a Spanish firm) with 10 percent and Soloman Aizenman (a Costa Rican firm) with 5 percent.) ¶3. (U) For Costa Rica, a "joint project" differs from a true concession in two major ways. First, with a joint project, the GOCR is still the legal service provider. With a concession, the private company is the service provider. Second, in a joint project, user fees flow to a trust fund and are then divided between the GOCR and the private company. In a concession, all user fees go directly to the private company. -------------- BIG PLANS, BUT. . . -------------- ¶4. (U) Alterra launched its management of SJO (San Jose's three character airport identifier) operations in May 2001. The initial plan included an expenditure of USD 120 million for the renovation and expansion of the runways, passenger terminal, taxiways, and aircraft hangars to be completed by August 2004. The IFC and a consortium of ten private banks provided financing of USD 80 million (USD 25 million from IFC and USD 55 million from the bank consortium). ¶5. (U) Alterra managed day-to-day airport operations and the construction contract for two years until 2003 when disagreements between GOCR and Alterra over construction change orders surfaced and caused a complete halt in construction. The Contraloria ordered Alterra to restart construction in 2005. Alterra resumed construction but this turn of events was the beginning of what would become a slow, twisting transition to a different operator/developer. -------------- ALTERRA BOWS OUT, MERCIFULLY -------------- ¶6. (SBU) The situation continued to deteriorate until August 2006 when the Contraloria hastened the collapse of the contract by (1) not agreeing on a tariff schedule for producing cash flow and debt service payments to the IFC and (2) not acknowledging the change in development costs over time due to cost increases of basic materials. From June 2006 to December 2007, Alterra was unable to make payments to the IFC and accumulated USD 24 million in arrears. Throughout this time period, Alterra, the GOCR, and the IFC attempted to reconcile differences caused by the Contraloria's decision, but to no avail. ¶7. (SBU) The Alterra shareholders, the IFC, and the ten banks finally decided to release a request for proposals (RFP) jointly to find a new airport operator to buy the Alterra debt and takeover the project. They received three proposals and selected ADC/HAS. The purchase of the debt by ADC/HAS then had to be approved by CETAC and the Contraloria. -------------- ENTER ADC/HAS -------------- ADC/HAS, a U.S., Canadian, and Brazilian consortium is comprised of: -- Airport Development Corporation: A Canadian company which operates the Toronto and Budapest, Hungary airports; -- Houston Airport Systems: A U.S. company which operates the three airports in Houston; and -- Andrade Gutierrez Concesiones (AGC): A Brazilian company which has constructed or currently operates airports in Brazil and the Caribbean as well as highways, water systems, and an electrical grid. ¶8. (SBU) Airport Development Corporation and Houston Airport Systems together have 50 percent of the concession, with AGC possessing the remaining 50 percent. This same consortium operates Quito, Ecuador's existing international airport and is developing Quito's new airport. Houston Airport Systems belongs to the consortium that won the USD 60 million concession for Costa Rica's other international airport in the northwestern city of Liberia. ADC/HAS shared with us that tying up Costa Rica's two main international airports along with its position in Quito are key elements of a Latin American expansion strategy. -------------- MEMO TO ADC/HAS: "DO YOU REALLY WANT TO JOIN THE FRAY?" -------------- ¶9. (U) After multiple rounds of negotiation, ADC/HAS and the IFC plus its ten-bank syndicate agreed to a memorandum of understanding (MOU) in principle, which was signed on March 20, 2009. Meanwhile, the Contraloria demanded a new "remediation plan" from the current operator, Alterra, claiming that the plan it approved in October 2008 (reflecting an ADC/HAS purchase backed with JP Morgan debt financing which collapsed) was invalid. ADC/HAS submitted this plan on March 12, 2009. Just as importantly, the GOCR and IFC agreed to go to contract termination on the existing Alterra contract on February 15. Thus, as ADC/HAS mobilized its efforts to move forward, the existing Alterra contract required a formalized and concurrent termination process. Both were proceeding during February through July. ¶10. (U) Due to delays in the GOCR's consideration of ADC/HAS's proposal and the financial crisis in the United States, the planned JP Morgan financing for ADC/HAS's bid fell through. In response, ADC/HAS developed a two-phase financing plan. For phases I and II of airport construction, ADC/HAS will provide internal financing of USD 42 million based on shareholder equity which has IFC approval. ADC/HAS will also try to secure Overseas Private Investment Corporation (OPIC) and IDB financing of USD 100 million. OPIC is considering providing USD 70 million while the IDB plans to provide the remaining USD 30 million. ¶11. (SBU) The Contraloria issued a letter to the Ministry of Public Works and Transportation (MOPT) on April 2 outlining 15 remaining questions on the ADC/HAS remediation plan. Attached to this letter was a request from the Citizen Action Party (PAC-the most leftist of the main line political parties) objecting to the concession of the airport for several reasons: -- ADC/HAS does not have sufficient experience; and -- without secured funding for all four phases of the project, it would be irresponsible for GOCR to award the concession. -------------- IS THE END WITHIN GRASP? -------------- ¶12. (SBU) On May 28, the Contraloria approved the contract for the transfer of shares from Alterra to ADC/HAS. After years of drama and speculation, there finally appeared to be a path forward for new management of airport operations and to finish the expansion project started in 2001. Now, the last major hurdle required ADC/HAS and the IFC-led banking syndicate to agree on debt purchase terms. The closing was planned for July 1 (mandated by the Contraloria). Due to an impasse at the "11th hour" on June 30, negotiations not only stopped but seemed to have collapsed. However, ADC/HAS succeeded in resurrecting the process without a formal extension of the July 1 deadline from the GOCR. Fortunately, the MOPT demonstrated flexibility on "stretching" the deadline as the Contraloria refused to grant an extension. Through a creative approach to finessing the deadline, the negotiators continued, unabated, and reached an agreement on July 20. In total, ADC/HAS and the IFC-bank syndicate worked for 33 straight days. ¶13. (SBU) Alterra, the airport operator/developer prior to July 20, incurred the debt as part of its oft-stalled and ultimately failed deal to redevelop the airport. The negotiations hammered out a price on the existing debt held by the banks and deadlines for ADC/HAS to assume the debt. We understand that the IFC and its banks discounted the debt by 50 percent. While ADC/HAS has assumed operations and construction at the airport, there are still two remaining pieces to the puzzle: (1) ADC/HAS needs to finalize a special tax vehicle, and (2) ADC/HAS needs to secure debt financing with OPIC and the IDB. -------------- COMMENT -------------- ¶14. (SBU) This saga has lived through four governments, three Contralorias, and eight Ministers of Public Works and Transportation. The Alterra case highlights the many weaknesses of the current concession system, the judicial system, and the lack of professional competence and understanding within the GOCR on the financing of major infrastructure projects. The GOCR's poor (and highly visible) track record with Alterra and the IFC could possibly jeopardize the level of interest by other companies willing to invest in Costa Rican infrastructure projects. In fact, Costa Rica has seen only one bidder on many of its concession projects. According to our contacts in the private sector, complicated requests for proposal (RFPs) and strict requirements deter potential bidders. ¶15. (SBU) The GOCR recognizes many of their limitations in awarding concessions and, fortunately, the USG has been able to offer assistance. The US Department of Treasury - Office of Technical Assistance (OTA) is partnering with the Chilean Ministry of Public Works to offer technical assistance to the Costa Rican concessions process under the Infrastructure Finance Experts Corps Program. Costa Rica is the first country to receive this assistance under "pilot program" status. OTA and their Chilean counterparts have decided to focus on the Liberia airport concession for which construction should be completed by June 2010 (see reftel). BRENNAN