Best Practices in PPP Financing Latin America - e-Institute - World ...

Day 1 - FOURTH SESSION
Lincoln Flor pointed out that the financial crisis had a negative
impact in terms of costs and availability of financing, and the
implication was a higher cost of capital and greater profitability
demanded by shareholders. Consequently a reduction in the
number of profitable projects was witnessed. The crisis also
had a negative impact on economic activity, generating a lower
demand for public services (energy, water, transportation, etc.).
Another risk is the competition (fair or unfair) that can
generate a new, avaibable infrastructure. In order to mitigate
these risks, some countries in Latin America and the Caribbean
have implemented “explicit guarantees, contractual or nonfinancial
guarantees”, which generated strong incentives for
PPP financing or project bankability. Additionally, during the
crisis, non-financial guarantees (guaranteed minimum income)
were the first line of defense for infrastructure bonds, as well
as for the pension system in Chile.
Flor mentioned that this type of guarantee creates contingent
liabilities as counterparts and should be appropriately
regulated and managed (through rules and transparency) in
order to avoid fiscal problems. In this regard, some countries
have regulated a fiscal cap (regarding GDP) associated with
these liabilities. In Flor’s opinion, non-financial guarantees are
more demanded than financial ones.
Another type of non-financial guarantee is the Present Value
of Incomes. The main characteristic of this mechanism is that
the Concession term is variable. If effective demand is larger
than expected demand, then the concession will be terminated
before the term established under the Agreement. If the
expected demand is less, the opposite happens, in that the
term of the Concession is automatically extended.
Finally, an alternative mechanism for risk mitigation is the
clause of economic and financial equilibrium. This mechanism
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