Ecuador's plans to strengthen project structuring to attract private investment

Bnamericas Published: Tuesday, December 13, 2022

Ecuador’s President Guillermo Lasso, who took office in May 2021, aspires to close his term in 2025 with more concessions awarded to the private sector for various infrastructure projects.

The goal is to go from the current 17% to 40% of private participation in terms of operating the state road network and it includes several projects considered high priority for the government, including the Quito-Guayaquil and Guayaquil-Cuenca highways, as well as the south road junction or the south viaduct of Guayaquil.

The transport and public works ministry (MTOP) and the public-private partnerships department are working on the modernization of the project structuring system, with a view to attracting investment to develop the initiatives.

Work is also underway to strengthen MTOP and on a new toll policy.

The Lasso government's concession plan also includes some airports and a port.

BNamericas talked with transport and public works minister Darío Herrera about the current state of infrastructure in the South American nation, the main problems and the plans to finalize project tenders.

BNamericas: What is the situation regarding infrastructure in Ecuador at the moment, where are the biggest weaknesses and in what areas is foreign investment needed?

Herrera: In Ecuador we have a state road network of around 10,290km, of which sections accounting for 16% need urgent attention, where you have to travel with caution because there are areas damaged and a lack of signage, among other problems.

Of the state road network, 17% or 1,758 km, are currently under concessions awarded to public or private players. The vast majority are in good condition, especially the sections concessioned to private companies, which is around 900km. There are also sections in fair condition and that require certain preventive work, but, ultimately, compared to other countries in the region, it’s good infrastructure or better than that of other nations.

We have two concessions totaling 309km that are under legal analysis: Santo Domingo–Esmeraldas (a US$100mn project), and Buena Fe-Jujan (a US$288mn project).

The government of President Guillermo Lasso seeks to tender 1,649.9km of roads.

The objective of the president and our government is first of all to increase the awards to the private sector from the current 17% to 40%, with contracts signed until May 2025.

BNamericas: What does the legal analysis of the two routes consist of?

Herrera: Santo Domingo-Esmeraldas was awarded in 2014, but the contract was never signed.

We have an opportunity there and we have an investor, but obviously eight years have passed and the conditions of that concession in 2014 were different, as were the laws. You have to do the legal analysis to see if it’s feasible or not to finally sign the contract.

With the Buena Fe-Jujan road, the issue is more administrative. The project is ready to be awarded and this has not happened because all the documentation and the process were guided by decree 582 on public-private collaboration and now decree 1,190, which regulates public-private partnerships, is in force.

It was a mistake of past administrations and I would say also by the winning company, which ignored a specific requirement of the new decree that indicates that any project that was in the process of being awarded would have to comply with the rules of that new regulation, especially from the point of view of fiscal support and risk studies, which have to be submitted for review by the finance ministry.

This study is essential so that there are no surprises in the sustainability of the projects.

BNamericas: How is the analysis going to resolve these two issues?

Herrera: I have requested the final report to make a decision and determine if these projects can be saved or if they have to be put out to tender again. In the case of another tender, it would be done more quickly because only certain studies will have to be updated.

BNamericas: Unlike countries like Colombia or Chile, Ecuador does not have a strong institutional framework. Isn't the goal of increasing private participation to 40% too ambitious?

Herrera: Creating a strong and independent institutional framework, strengthening the transport and public works ministry is the main tool to attract the necessary investment.

My predecessor, Marcelo Cabrera, started the process, but he had many issues to resolve. In the four months that I’ve been in office, we’ve made the necessary changes to normalize the existing concessions, which includes the toll policy that we’re preparing, so the contracts have been tweaked and economic balances have been restored and the appropriate financial flows for each one of them ensure that tolls are linked to the reality of each project.

BNamericas: What does the toll policy aim to do?

Herrera: We can't think that the current rate of US$1 for every 50km of concessioned road works throughout the country and on all roads.

There are roads that, due to their complexity and their investment, would have to pay a higher toll and there are others that would have to pay a lower toll, but that is determined by the investment and operating costs of each project and the internal rate of return.

What is being discussed is the internal rate of return, which has to do with the number of vehicles that use the road.

We’re strengthening our institutional framework to provide clear rules, a field where fair play prevails and arouses investor interest in future tenders.

Only in new projects we’re talking about US$4.21bn: US$2.23bn in capex and US$1.98bn in opex in 12 projects, some large and others small.

Others can be added to those 12 projects. For example, I have not done such a detailed analysis of stretches of the coastal road.

Of those 12 projects, President Lasso has prioritized five, which doesn’t mean that others will not be done.

The prioritized projects are the Guayaquil-Machala road; the Quito-Guayaquil highway; the Guayaquil-Cuenca highway; the Manta-Quevedo highway; and the Cruce Sur road system, known as the Viaducto Sur de Guayaquil, which includes the fifth bridge to the port of Guayaquil.

BNamericas: What does tweaking the Guayaquil-Machala highway refer to?

Herrera: To rehabilitate, normalize and even offset certain political issues.

The Guayaquil-Machala highway has three concessionaires: the Guayaquil-Naranjal section was awarded to the autonomous provincial government of Guayas and that works well.

From Naranjal to Tenguel, which is 45km, with capex of US$111mn, it is concessioned to Sudinco, a company that recently opened a toll plaza, and had an investment period of five years. We have agreed with this company to shorten the investment time to 2.5 years, so we can complete the entire investment by May 2025, when President Lasso's term ends. That obviously requires a little more sacrifice for state resources.

The Tenguel-Río 7-Huaquillas section, 113km long with capex of US$441mn, is concessioned to the company Consur.

That section has had problems due to political considerations and regular toll collection has not been allowed.

I have promised the president to fix this political issue and we already have more than 12 institutions: chambers, unions, etc, that are very strong in the province of El Oro, which in the coming days will formally support the restart of the works, which should also be completed in 2025.

We seek to avoid all these types of problems with correctly structured processes, with a strong institutional framework of the ministry, which adds robustness to the structures.

We cannot continue increasing road concessions just to have more problems.

The delegations in the transportation ministry were managed very loosely, with very few people, always depending heavily on the concessionaire that provided the information, without adequate control.

At least 20 or 25 people are needed for each section under concession to be able to carry out periodic reviews of the performance, of the investments they’re making, of the supervision, of the control of work and that has not happened in the last 20, 30 years.

BNamericas: What progress has been made on the Cruce Sur project?

Herrera: For this project we already have a roadmap that involves a government-to-government agreement with Canada.

The agreement for the start of the prefeasibility studies has been signed with the Canadian Commercial Corporation, a public company that will invest in the prefeasibility studies.

Subsequently, the feasibility will include the community engagement process and preparation of bidding rules, among other aspects.

Then it will be decided whether the Canadian government finances the work with its own funds or provides a guarantee that will support loans from multilaterals to be able to build the project, in a scheme similar to the one used to build Quito airport.

The prefeasibility should be ready by mid-2023, and the feasibility by the end of that year.

It is yet to be determined whether the Canadian government will send a list of construction companies. They would be very reputable companies.

The idea is that this government can sign the contract and lay the first stone. Being a government-to-government issue, the processes are accelerated.

BNamericas: In addition to the highways, are there plans for other concessions?

Herrera: We’re resuming with Korea Airports Corporation the government-to-government delegation process of the Manta airport. We’re working on the terms of reference to delegate the Port of Esmeraldas to the private sector and we’re also receiving private initiatives.

So far we have received two but I cannot give the names of the companies.

I’ve been mandated to concession airports, including San Cristóbal (Galápagos), and less attractive airports for flights such as the Santa Rosa airport and Esmeraldas within packages that will seek to concession busy routes and others with less air traffic, which will go hand in hand with an update of the civil aviation law as well as a codification and update of the ports law.

We must update the regulations so that they adjust to the modernity of the logistics, port and air travel world.

There is also a very important project, although it requires little investment, US$18mn of capex and US$12mn of opex, which is the installation of at least 17 weighbridges with new technology, to prevent overweight vehicles from damaging the roads.

BNamericas: Next year only studies are going to be put out to tender, no projects?

Herrera: That's right: prefeasibility and feasibility studies.

Applying good structuring processes, we should be awarding tenders in the first quarter of 2024. It would be very rushed to do it before.

In relation to the Guayaquil-Quito and Guayaquil-Cuenca highways, since they are prioritized works, we’re looking for government-to-government schemes.

In fact, the Canadian government does not rule out interest in the Guayaquil-Quito highway, with a construction company that it has in mind.

Additionally, I have held meetings with officials from the Kotra agency from South Korea, who told us that the Korea Expressway Corporation (KEC), which manages the entire state highway network of that country, is very interested in the Guayaquil-Quito highway.

They also want to be part of a government-to-government scheme.

Ecuador has begun negotiations for the signing of a free trade agreement with South Korea. There are many very interesting synergies that are happening around these projects.

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