VZCZCXYZ0001
RR RUEHWEB

DE RUEHSJ #0703/01 2311227
ZNR UUUUU ZZH
R 191227Z AUG 09
FM AMEMBASSY SAN JOSE
TO RUEHC/SECSTATE WASHDC 1131
RUEHBR/AMEMBASSY BRASILIA 0837
RUEHOT/AMEMBASSY OTTAWA 0606
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

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. 
 
--------------------------- 
IT BEGAN WAY BACK WHEN. . . 
--------------------------- 
 
¶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. 
 
------------------- 
BIG PLANS, BUT. . . 
------------------- 
 
¶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. 
 
---------------------------- 
ALTERRA BOWS OUT, MERCIFULLY 
---------------------------- 
 
¶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. 
 
------------- 
ENTER ADC/HAS 
------------- 
 
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. 
 
-------------------------------------- 
MEMO TO ADC/HAS:  "DO YOU REALLY WANT 
TO JOIN THE FRAY?" 
-------------------------------------- 
 
¶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. 
 
------------------------ 
IS THE END WITHIN GRASP? 
------------------------ 
¶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. 
 
------- 
COMMENT 
------- 
 
¶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