Adrián Garza
Vice President and Senior Analyst
Moody’s Investor Services
View from the Top

Tackling Risk Allocation in Infrastructure Projects

Thu, 11/01/2018 - 15:35

Q: How does the allocation of risk change from a PPP to a purely private or purely public infrastructure project?
A: The spirit of a PPP project is to allocate risks based on the ability of each party to assume that risk. Some projects are suited to a PPP, while others may have a public policy nature. For example, the construction of gas pipelines in the south is required to develop the region but it might not make sense for a private entity to invest without the involvement of the government. There is also a significant gray area in which some of the risks and benefits of a project fall under the remit of both the public and private sectors and clearly the government can profit from partnering with private companies that are good at constructing, operating or executing a project, which is not the expertise of the authorities. On the other hand, the private sector may need support with rights of way, the utility of relocation or handling unforeseen risks, which are better suited to the government. Projects that have this combination of characteristics are ideal for PPPs and can benefit from this scheme for their execution and financing.
When banks see that all the pieces are in the right place, they may be more willing to finance these projects. There are also new financing schemes emerging that are similar to equity. For example, in the energy market, CFE introduced the Fibra E, a partnership in which the rights to collect from transmission assets were sold. The asset itself was not transferred but the revenues were. This allowed CFE to partner with private investors without selling its assets, at the same time avoiding taking on debt while giving the private sector a window to invest in the energy sector. Fibra E is an alternative that adds to the options available in the energy sector.
Q: What mechanisms are being used abroad that Mexico could implement to further bridge its infrastructure gap?
A: I am convinced that the underlying project is the most important element and the financing will come if it is strong and it is economically sound. The circumstances of different countries drive them to find different mechanisms to support projects. Mexico has a very strong track record in developing infrastructure via the private sector, with toll-road concessions, power projects, gas pipelines and airports.
A trend we are seeing in countries such as Peru and Argentina is a PPP in which the government pays back the capital investment with certificates that provide a revenue stream in the future. Basically, these are deferred payments that are unconditional obligations from the government. This allows Peruvian companies to access financing in the international markets. Also, these payments are made in US dollars, eliminating currency risk for international institutional investors. Because they have a strong revenue source from the Government of Peru, sponsors can issue debt backed by these obligations that is paid off as collections from the government occur, moving away from the usual project finance debt risks that typically is dependent on operations and construction. Despite the success this scheme is enjoying in Peru and is being developed in Argentina, I do not think Mexico needs it as the country has a very strong track record and efficient local markets with Afores investing in local projects.
Q: What are Moody’s market expectations for the next 15 years?
A: The trend is to move less toward quantity of projects and increasingly to focus on larger developments such as NAIM and the Mexico City-Toluca Interurban Train. In Mexico, we foresee a lot of activity around the energy sector as a result of the Energy Reform: electricity, pipelines, storage and other related projects. I think that Moody’s Investor Services will continue to participate in pipelines and generation projects, as we expect 80 percent of the investment on the electricity industry – out of a total of US$80 billion in the next 15 years — will be in this sector, especially between transmission, distribution and generation. We rate many of the sponsors of these companies and remain close to the market. For example, we rate CFE and any other company in the energy industry that trades on the Mexican Stock Exchange, like IEnova and TransCanada, among other major players.