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.

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IT BEGAN WAY BACK WHEN. . .
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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.

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BIG PLANS, BUT. . .
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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.

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ALTERRA BOWS OUT, MERCIFULLY
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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.

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ENTER ADC/HAS
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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.

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MEMO TO ADC/HAS: "DO YOU REALLY WANT
TO JOIN THE FRAY?"
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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.

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IS THE END WITHIN GRASP?
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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.

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COMMENT
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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