VZCZCXYZ0000
RR RUEHWEB

DE RUEHSJ #0497/01 1681235
ZNR UUUUU ZZH
R 171235Z JUN 09
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC 0930
INFO RUEHZA/WHA CENTRAL AMERICAN COLLECTIVE
RUEHSG/AMEMBASSY SANTIAGO 0461
RUEATRS/DEPT OF TREASURY WASHINGTON DC

UNCLAS SAN JOSE 000497 
 
SIPDIS 
 
DEPT FOR WHA/CEN, WHA/EPSC:MROONEY AND AWONG, EEB/IFD/ODF 
TREASURY FOR LMCDONALD, DVKOCH, AND SSENICH 
 
E.O. 12958: N/A 
TAGS: ECON EFIN EINV PGOV PREL CS CI
SUBJECT:  U.S.-CHILEAN JOINT INFRASTRUCTURE ASSISTANCE LAUNCHES IN 
COSTA RICA 
 
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SUMMARY 
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¶1.  From May 18-21, a Treasury Department team from the Office of 
Technical Assistance (OTA) met with Costa Rican government leaders 
and private sector officials to consider how to meet Costa Rica's 
national infrastructure challenges.  The meetings represented the 
first step of Treasury's and the Government of Chile's (GOC) joint 
Infrastructure Finance Experts Corps (IFEC) project, which aims to 
bring expert advice on financing, tendering, managing, and operating 
infrastructure projects with an emphasis on public-private 
partnerships (PPP).  The two parties chose Costa Rica as a pilot 
country for the project in late 2008.  Three weeks after the OTA 
team visit, a Chilean delegation -- plus two OTA Advisors -- 
conducted a two-day trip featuring meetings and a successful 
half-day seminar on infrastructure PPPs. 
 
¶2.  After the week of OTA meetings, three areas for framing a 
working relationship between the OTA, the GOC, and the GOCR emerged: 
 (1) identification of specific projects for OTA and GOC assistance 
and delineation of specific roles for the OTA and the GOC; (2) 
strengthening the work of the GOCR's Council of Concessions, a 
multi-ministerial body charged with decision-making on 
infrastructure projects; and (3) promoting the success of 
concessions in Costa Rica, a country struggling to make strides in 
implementing successful concession-driven infrastructure projects. 
This "first draft" of work areas for the IFEC project in Costa Rica 
will likely be revised as the initiative evolves.  As a backdrop for 
next steps, the Chilean seminar underscored key elements for 
successful PPPs including legislative and contract flexibility, 
dispute resolution, and liberating public resources.  The OTA 
anticipates a second visit with the Chileans in July to advance the 
IFEC project.  This unusual tri-national effort may prove to be an 
important catalyst for developing Costa Rica's creaky 
infrastructure.  END SUMMARY. 
 
--------------------------------------------- -- 
ACT ONE, SCENE ONE (THE OTA VISIT): THE PLAYERS 
--------------------------------------------- -- 
 
¶3.  OTA Advisors Harry Tether and Barry Gray traveled to Costa Rica 
for four days of meetings commencing on May 18.  Treasury Deputy 
Assistant Secretary Larry McDonald joined for part of the visit. 
The OTA team met with a wide variety of players in Costa Rican 
infrastructure, including: 
 
-- Guillermo Zuniga Chaves, Minister of Finance (Hacienda), Jose 
Adrian Vargas, Treasurer, Juan Carlos Pacheco, Director, and Melvin 
Quiros, Deputy Director, Public Credit, Hacienda; 
 
-- Javier Cascante, Director, Superindentency of Pensions (SUPEN); 
 
-- Ronald Vargas, Banco Nacional; 
 
-- Jose Luis Valenciano (PLN), National Assembly member and Chairman 
of the Finance Committee; 
 
-- Rocio Aguilar, Contraloria (Comptroller) of the GOCR; 
 
-- Guillermo Matamoros, Vice Minister of Concessions, and Pedro Luis 
Castro, Vice Minister, MOPT Ministry of Public Works and 
Transportation (MOPT); 
 
-- Luis Gamboa (Vedova & Obando), President, and Lynda Solar, 
Executive Director, Costa Rican-American Chamber of Commerce 
(AmCham); 
 
-- Charles Spalding (Trelex), Alonso Arroyo (KPMG), Jose Antonio 
Munoz (Arias and Munoz), and William Merrigan (P&G), Board Members, 
AmCham; 
 
-- Jeff Scheferman, President/CEO, and Greg Huang, Vice President of 
Finance, ADC/HAS (a U.S.-Canadian-Brazilian consortium vying to 
purchase the operating and development rights to the San Jose 
airport); 
 
-- Eduardo Sibaja, Minister of Economy, Industry, and Commerce 
(MEIC); 
 
-- Ambassador Gonzalo Mendoza Negri and Esteban Cordova Tapia, 
International Cooperation Counselor, Embassy of Chile; 
 
-- Mariela Diaz, Director, and Cecilia Montero, Manager, ProChile; 
 
-- Carlos Jaraquemada Valle, Administrative and Finance Director, 
Antonio Alonso Jimenez, Project Director, Autopistas del Sol (a 
 
Spanish-led consortium constructing and operating a highway 
concession in San Jose); 
 
-- Pedro Pablo Quiros, Chief Executive Officer, Instituto de 
Costariccense Electricidad (ICE), the national electric and 
telecommunications authority, 
 
-- Rodolfo Lizano Rojas, Legal Director, AyA (the national water 
authority); and 
 
-- Fernando Quevado, Country Representative, InterAmerican 
Development Bank. 
 
------------------------------------------- 
ACT ONE, SCENE ONE HIGHLIGHTS I:  THUMBS UP 
------------------------------------------- 
 
¶4.  MEIC Minister Sibaja concisely summarized the GOCR's challenge 
with infrastructure:  "We need to do concessions as we do not have 
the resources in the government to fund infrastructure 
improvements."  The Minister noted the need to highlight concession 
success given Costa Rica's history of failing to implement 
concession projects without legal wrangling and/or a breakdown in 
project execution.  Though Costa has two successful concessions -- 
Puerto Caldera (the country's secondary port located on the 
Pacific), and the newly-expanded San Jose-Caldera highway (a work in 
progress) -- the general populace believes that concessions are a 
troubled, if not doomed, process, based on experiences with the San 
Jose airport, the Limon-Moin port, and a planned prison 
privatization.  Also, there is lingering suspicion, fueled by 
opponents and especially the public sector unions, that concessions 
represent a "give-away" of valuable public assets to the private 
sector. 
 
¶5.  MOPT Vice Minister Matamoros welcomed the proposed IFEC process 
by stating, "We (GOCR) need you to start yesterday."  Matamoros also 
made several observations about the concession process in Costa Rica 
touching on the lack of expert capacity and problems with acquiring 
materials; the grating differences between the operating speed of 
the Costa Rican system (slow) and concessionaires (fast); the 
potential of using bond funds for financing projects; and the need 
for a better expropriation law for purchasing land.  The meetings 
with Autopistas del Sol (the Caldera highway concessionaire) and 
ADC/HAS (poised to take over the languishing San Jose airport 
project on July 1) confirmed many of the Vice Minister's 
observations. 
 
¶6.  Minister Zuniga emphasized, as did DAS Treasury McDonald, Costa 
Rica's need to follow the route of concessions, address the sluggish 
pace of project implementation, find solutions to inter-governmental 
coordination (including with the legislature and the Comptroller), 
and improve ministerial capacity to evaluate projects.  The Minister 
expounded on the special challenges of the Council of Concessions, a 
GOCR "inter-ministerial" board comprised of the Ministers of MOPT, 
Hacienda and Planning; the President of the Central Bank; and the 
Technical Society (private sector representatives).  Participation 
at Council meetings is erratic and there is scant lead time for 
ministers to assess projects in advance. 
 
--------------------------------------------- 
ACT ONE, SCENE ONE HIGHLIGHTS II:  CHALLENGES 
--------------------------------------------- 
 
¶7.  Comptroller Aguilar occupies a controversial post in Costa Rica 
as her office has grown into an increasingly (and perhaps overly) 
powerful body in recent years.  Appointed by the National Assembly, 
the Comptroller 
can both forecast a project's viability and later audit the same 
project, but without responsibility of having to answer to the 
(in)accuracy of the original forecast.  That responsibility lies 
with the "sponsoring" ministry, which in turn seeks to avoid 
problems by deferring to the Comptroller's Office from the outset. 
As other public officials told OTA and the Chileans, the Comptroller 
thus accumulates decision-making authority for ministries by 
default, since mid-level staffs willingly defer decisions to the 
Comptroller to avoid responsibility for their own decisions (and 
possible legal action against them). 
 
¶8.  Thus, the Comptroller operates as a shadow of the executive and 
legislative branches, using its resident expertise in law, 
engineering, auditing, finance, and public administration to 
"legally" second guess either or both on decisions.  Yet, the 
Comptroller does not desire its now-elevated profile.  Aguilar noted 
that the Comptroller might be subject to "less criticism" if its 
function were more operational and less focused on the evaluation of 
program results. 
 
¶9.  Chilean Ambassador Mendoza voiced his exasperation with 
governmental progress in Costa Rica, using both the CAFTA saga and 
concessions as "poster child" examples.  The Ambassador urged the 
participants in IFEC to promote and publicize positive 
infrastructure news.  A similar challenge existed in Chile, he 
explained, but the GOC steadfastly changed prevailing public opinion 
through skillful public relations and successful project execution. 
 
 
--------------------------------------------- 
ACT ONE, SCENE ONE HIGHLIGHTS III:  FINANCING 
--------------------------------------------- 
 
¶10.  Ronald Vargas, Banco Nacional's (BNCR) investment bank 
director, described the "fidiecomiso," or trust structure, for 
creating public-private partnerships.  For each project, BNCR 
establishes a trust, which issues bonds on the local market, 
purchases land, hires contractors, and constructs the capital asset. 
 The trust then leases the asset to a government agency.  Once the 
trust pays the bondholders, BNCR will dissolve the trust and 
transfer the asset to an agency.  As examples, Vargas cited two 
successful power plant projects:  Penas Blancas (USD 70 million), 
near the Nicaraguan border, and Cariblanco (USD 170 million), in the 
mountains northeast of San Jose. Both were built for the state-owned 
Electrical Institute (ICE).  The limited local capital market and 
the Comptroller's initial skepticism towards the trust framework 
represented two major challenges, however.  Vargas believes that 
project success established the credibility of the concept and 
demonstrated how future projects can clear approval hurdles. (To 
date, BNCR has financed four projects with the "fidiecomiso" scheme 
valued at USD 295 million and has new project approvals valued at 
USD 470 million). 
 
¶11.  SUPEN Director Cascante indicated that the Costa Rican capital 
market can absorb future bond offerings.  He supports the Pension 
Funds' use of bonds issued by infrastructure trusts, underscoring 
the Funds' growing financing potential manifested by annual 
increases of USD 200-250 million.  Pension funds can invest heavily 
in trusts pioneered by BNCR's Ronald Vargas because those projects 
are classified as "private" -- even though they finance 
infrastructure that will become public once the trust pays off the 
bonds.  Costa Rican law limits the pension funds to invest 60 
percent of their funds in GOCR bonds.  There is no similar limit for 
private bonds. 
 
--------------------------------------------- ------ 
ACT ONE, SCENE TWO (THE CHILEAN VISIT): THE PLAYERS 
--------------------------------------------- ------ 
 
¶12.  Representatives from the GOC visited Costa Rica June 8-9 for 
meetings and a half-day seminar.  Treasury OTA Advisors Steven 
Hochman and Jeanine Corvetto participated in both the meetings and 
the seminar.  Hosted by the Chilean Embassy and ProChile (a GOC 
trade promotion agency), the Chilean Delegation included the 
following: 
 
-- Juan Eduardo Saldivia, Subsecretario, Ministerio de Obras 
Publicas (MOP); 
 
-- Leonel Vivallos, Coordinador de Concessiones, MOP; 
 
-- Ivan Martens, Agencia de Cooperacion Internacional de Chile; and 
 
 
-- Javier Hurtado, Director, Camara de la Construccion Chile. 
 
As with the TREAS OTA team in May, the Chilean delegation and OTA 
Advisors met VM Matamoros and Comptroller Aguilar.  Additional 
officials included Hacienda Vice Minister Jenny Phillips, Director 
Randall Murillo and some ten members of the Chamber of Construction, 
a Board member of the Council of Concessions, and a mayor of a city 
adjacent to San Jose. 
 
--------------------------------------------- ---- 
ACT ONE, SCENE TWO HIGHLIGHTS I:  SEMINAR SUCCESS 
--------------------------------------------- ---- 
 
¶13.  At the June 9 seminar, the Chilean delegation highlighted for 
the 70-member audience Chile's impressive PPP accomplishments across 
a diverse range of projects, including highways, airports, stadiums, 
prisons, public buildings, and intermodal transfer stations.  Key 
recommendations included legislative and contract flexibility, 
guaranteed financing, practical regulations, creditor protection, 
agreement on risk assignment, and a dispute resolution process. 
Repeatedly, the delegation stressed the concession advantage as 
increasing competiveness and productivity, liberating public 
resources (for social investment), and spurring private sector 
 
innovation.  Under the rubric of IFEC, the Chileans want to make a 
difference and project their success elsewhere in the Americas. 
 
¶14.  The OTA Advisors presented both the advantages and 
disadvantages of PPPs when compared to traditional approaches while 
noting how PPPs are an important additional tool for developing 
infrastructure.  They also noted the importance of achieving an 
appropriate allocation of risk between the public and private 
partners when creating a PPP. 
 
--------------------------------------------- 
ACT ONE, SCENE TWO HIGHLIGHTS II:  CHALLENGES 
--------------------------------------------- 
 
¶15.  In meetings with the Comptroller and the GOC, the two OTA 
Advisors concluded that the Comptroller's Office takes a more 
skeptical view of the concessions/PPP approach than does the Finance 
Ministry, a possible source of friction as the IFEC initiative 
develops.  Also, in the mayoral meeting, we learned that the 
municipal sector sorely lacks the resources for infrastructure 
development and thus welcomes the PPP approach as an opportunity to 
bolster public services. 
 
----------------------------------- 
ACT ONE, BOTH SCENES: THE PRODUCERS 
----------------------------------- 
 
¶16.  Treasury OTA found supporting funds for the OTA's participation 
in IFEC within Treasury.  The Chileans dedicated funds to support 
their part of the program, independent of U.S. funds.  In 
anticipation of the project moving forward, the Chileans started 
working with VM Matamoros well in advance of the OTA visit to Costa 
Rica. 
 
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COMMENTS 
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¶17.  The OTA team and the Embassy identified three near- term issues 
for future meetings and work:  (1) collaborating with the GOCR to 
select specific IFEC project(s) and define specific areas of focus 
for the IEFC team; (2) increasing the effectiveness of the Council 
of Concessions; and (3) publicizing concession and public-private 
partnership successes.  The Chilean emphasis on how to structure 
successful PPPs, while acknowledging problems, can provide vital, 
practical, and experience-based assistance to the GOCR and its 
turgid legal and governing system.  The generally positive GOCR view 
of Chile as a model to emulate in many areas may also help. 
 
¶18.  On the other hand, the messy business of inter-ministerial and 
inter-agency coordination in Costa Rica -- with the Comptroller's 
Office in a pivotal and disproportionately powerful position -- 
remains an exogenous drag on any public works project, with or 
without PPPs.  Throw in the Comptroller's protracted and excessively 
deliberative due diligence, which is compounded by Costa Rica's 
hyper-legalism and penchant for "perfect consensus," and systemic 
solutions become daunting and elusive.  Nevertheless, we view IFEC 
as one promising solution to Costa Rica's infrastructure woes. 
 
CIANCHETTE