José R. Gómez Oriol
Future of franchise for infrastructure works in Venezuela
etween 1980 and 1983, Venezuelan Ministry of
Transportation and Communication decided to contract a team of Lawyers, Engineers
and Economists to make a study of European experiences in the development of
highways through a franchise system. At the same time a legal document was being
prepared to support future development of a similar system, adaptable to the present
Venezuela. Visits were made to the main countries which had major success under the
same system. Among them were Italy, France and Spain. The experiences of Portugal,
Argentina and Ireland were also studied. Based on this study, a plan to establish a
Decree was prepared, which after various modifications, was finally approved by
Congress on August 32nd, 1993 and entered into effect on January 1st, 1994.
Venezuela then was economically stable, it was a time of high petroleum income
and its mining and petroleum industries were now owned by state. Even though a
devaluation process had begun, this was thought to be only transitory. On the other
hand, the term "franchise" was compared to the old petroleum franchises and those of
ports and railways which had left a bad impression on the minds of the
Venezuelans.
Because of this, Congress made sure that their intervention was not always
guaranteed by pushing for the approval of the Franchise Decree, of the contract, of the
increase in support and of all other aspects of vital importance. The law also forecasted
the intervention and approval of Congress for all these aspects. As a result of the
intervention of Congress the law became inoperative.
On August 29th, 1994 the regulations for the new law that reinforces the other
was approved. However, the Venezuela that emerged from the devaluation seemed too
weak for this law to be applied.
As the system was conceived based on European experiences, an approval was
expected from the state in order to guarantee the credits. Additionally, some type of
exchange guarantee or an indexation system tied to the devaluation was necessary. This
would allow clear rules for the purpose of the Capital coming from investors and
International Financiers who would invest in the system.
With the problem of the huge external debt, the approval of the state was not
viable, now that Venezuela had entered into a phase of different changes that was not
very clear on the international scene, the consequences of which we all know
today.
For this reason, the possibility existed of using the same law to grant maintenance
franchises for highways already constructed. This was how the technical and financial
aspects of these highways was studied, considering as viable almost all and in particular
regional highways of downtown Caracas, the Caracas system was as follows: (Caracas
- La Guaira, Caracas - Guarenas and the outlines of the city) including the bridge over
the lake, (Rafael Urdaneta). The regulations of the law were approved on March 28th,
1985. However, for political reasons, this maintenance system was not applied to the
streets and as a result today, we grope through the increasing maintenance problems
and complete deterioration that is evident on most of our highways.
In May of 1991, a team from the MTC traveled to Mexico to study the successful
experiences of this country, which had started with an innovating franchise system in
1988. Full use was made of the unused construction area and a great part of the internal
liquidity, consequence of the continuous devaluation of the Mexican currency. On the
other hand, the newly state owned bank allowed the Mexican Government to approve
of the program, this in turn stimulated a study of this new possibility in the interest of
Venezuela, taking into consideration the existing similarities of the two countries.
In April of 1994, President Rafael Caldera declared a new law for the franchise
of public works and National Public Services. This new law simplified the whole
franchise process and placed it in the hands of the Government. It also activated and
renovated the system in the light of new international experiences and made it
extensible to any type of public work and franchise system in Venezuela.
Following is a brief summary of the history of Mexico and France on the subject
of franchise. These two countries were chosen for being the first representatives of this
practice, and as a result of their relative success and experiences gained in the area. Also
for being the perfect representatives of a long European experience in the franchise
system.
MEXICO:
Faced with the perspective of insufficient public resources and based on the
Political Constitution of the United Mexican States, that in its Article 25 and 28
establish the participation of the private and public sectors to impel priority areas of
development and to forecast that the state would, in the case of general interest,
franchise the lending of public service or the exploitation or use of property owned by
the Federation, as well as to advocate the participation of the private and public sectors
on the subject of road infrastructure. The law of general road communication grants the
government of the country, through the Secretary of Communication and Transport,
the command to grant Mexicans and existing companies in accordance with the Mexican
Legislation, the construction, exploitation and conservation of roads and bridges. As a
result, the Mexican Federal Government advocated a program to build more than 6.000
kilometers of new highways, most of which has four lanes. This was clearly ratified in
the national development plan for the period 1989-1994.
The Mexican system initially forecasts that the franchises would have a maximum
term of 20 years and the tariff level should ensure the recuperation of all costs and
expenses without breaching of the law. Once the summons of the process was published
by the Secretary of Transportation and Communication, all relevant information on the
contest was put to the disposition of all interested parties.
This included the general bid requirements, the requirements to operate the
franchise, the title of the project, the fiscal regime and the technical and standard rules
of the project.
In the case of the Mexicans, a totally different case from other European
countries which granted the franchise to the person who initially proposed the lowest
tariff, the fundamental award criterion among various participants consisted in the
granting of the franchise to the bidder who in least term restore the work of the nation.
This goes to say that the initial amount is included by the Mexican State in its technical
and standard norms of the project.
Initially, and to better the flow of money for the franchise, high tariffs were
forecasted, but based on a percentage of the costs of alternative routes. These high rates
allowed relatively short franchise periods on most of the franchise routes, as the
Mexican state guarantees economic stability of the franchise through flexibility in the
term. Actually, most of the franchises are being restructured to longer terms since the
elasticity of the demand and the high rates did not motivate the use of the franchise
routes.
Financing:
To meet the requirements of investment in the constructions of highways, a
mechanism that integrates the private sector through the construction industry was
advocated in Mexico. This was done by the public investor through the participation in
stock markets, National and International Banks, The Federal Government, States and
Municipals as well as investors and foreign creditors. All these bodies were structure
around the fideicommissum figure.
There are two different phases in the franchise process: that of construction and
that of operation and maintenance. The first phase is more risky in terms of execution
and cost, as it the more difficult to finance. The second phase depends on a certain
amount of demand and a cash flow which could place it on both national and
international markets.
Based on this experience, the financial leaders of Mexico proposed that the
construction companies contributed most of the possible capital and possible financing,
this would be between 40 to 60% of the total investment during the construction phase
in order to then gain the respective refinancing through the emission of titles
(infrastructure bonus) duly authorized by the Stock Commission of Mexico and
administrated by the Fideicommissum as soon as the operation gets started. The rest of
the financing was done by government, state owned companies and National Financial
Organizations.
Particularly, in the case of Mexico, the existence of CAPUFE (Institution of
Federal Streets and Bridges), played a fundamental role, this handled the collection of
taxes, the operation and maintenance of all the national highways and bridges reversible
on the administration. This institution participated with as much as 25% of the total
investment in fideicommissum, with reasonable terms of interests. All this information
is included in the terms of the bid.
Due to the success in the development of Mexican highways through this system,
and even though there were problems of terms and tariffs that had motivated
refinancing of most of the franchises, the system demonstrated that it could be applied
to many other developing aspects of infrastructure where the concept BOT (Built,
Operate, Transfer) works perfectly. For example, in the construction if aqueducts for
dams, treatment plants and water distribution system, ports and airports, generation
plants for Hydraulic and Thermoelectric power. etc.
Actually, Mexico has an extensive line of highways, bridges and other work of
infrastructure, constructed through a franchise system. These routes are highly
sub-used. It is said that the present value of all the highways projected for a period of
franchise only covers 50% of the value of the credit and obligations of the system. This
has put a series of difficulties on the nation's finances. Solutions are sought to lengthen
terms, reduce tariffs and to refinance. The present system facing difficulties are being
studied.
Definitely, The system of least term has not succeeded and long term grants are
again being studied through competitions and grant to the person who charges the least
fees as in the case of Europe.
FRANCE:
The topic of grant for the development of infrastructure in France, comes from
the epoch of Luis XIV. However, the potentials of this system, particularly in the
development of highways through franchise is relatively new. This started in 1950 where
three periods are identified:
1955 - 1969 The government established (FSIR) where a percentage of the
gasoline taxes went towards construction. Because of the pressure received from the
competitors to place their bids, mixed franchises were allowed. (This was denominated
SEMCAs) for the development of highways. The state owned most of the
franchise.
These franchises normally cover short distances (50 to 70 Kms) except for two
stretches of roads built in 1963 of 130 and 160 Kms. This highway stretches from Paris
to Lyon.
1970 - 1981: The government freed the process and this was privatized to
strengthen it and to give more autonomy to SEMCAs and also to allow competition
from private companies.
To give an idea of how the financing was structured, the first private company of
that period, COFIROUTE, was capitalized with 10% of the total investment. The other
10% was placed by the state as a prepayment, a 65% through guaranteed loans with the
approval of the state, and the other 15% through loans without guarantee. The fees
were set between these ranges and based on the agreement of the franchise. This
determined that the fees should be set by the Ministry of Finance. This is actually in
effect.
1980 - 1996: At the beginning of the 80's, the cash flow for franchise loans
suffered from a petroleum crisis. The state nationalized 3 of the 4 private concessionaire
companies and according to the agreement of the contract compensated the investors.
A Fund dedicated to construction was then founded. This was denominated FSGT
(Special Fund for Public Works) through which the development of the system was able
to continue.
Actually, the franchise system of highways in France functions by sectors, dividing
the country in region for each franchise group. As there are works in high demand with
its term of concession already expired, a cash flow is generated to compensate fees and
help in the development of new routes.
As the grants are sectorized, each concessionaire group counts on a variety of
routes already under construction, this allows a compensatory process.
France actually has more than 8.300 Kms. of highways for which by 1993 there
were 5.832 Kms. (675 Kms. in construction ) granted.
The French experience in franchise is much more extensive, one of the most
important works of worldwide engineering like the tunnel under the Mancha canal,
recently concluded, was given in franchise to a British-French consortium, exclusively
for a period of 50 years.
Additionally, France has a lot of franchise experience in the building of public car
parks, aqueducts, bridges, trains and rapid transport system, ports and airports,
communication system, high potency power plants and in other aspects of urban
development.
VENEZUELA: FUTURE POTENTIALS
The system in Venezuela is of great importance at the highest political level so
much so that the President of the Republic named an Advising Committee and a
Coordinator for the purpose of this new law. The plan is included in the government's
program of economic stability and recuperation, recently denominated Agenda
Venezuela. This is classified as a priority due to its active development concept.
The Ministers of Infrastructure and Finance, The Venezuelan Investment Fund,
Congress, The Central Bank, Federal Cameras, other local Stock Markets, The
Construction Camera, The Engineering College and other related groups are taking
part in this process.
The problem we are faced with since 1994 in the development of this program in
Venezuela is tied to two fundamental aspects:
The first is that there was no kind of Fund to pay the necessary pre-investment
expenses such as technical studies, economics, lawyers and financial advisors who
worked on the project, or for anything that was needed in each particular process.
The second had to do with paradigm. The political aspects of the country was not
accustomed to the handling of their infrastructure projects through franchises.
It was with the help of this new law, approved in 1994 that we are learning to
make the system viable to substantially handle all the franchise process, by handing over
most of the responsibility to the government.
This new Organic Law allows a greater command of the Republic for the
necessary credits as indicated in its Article # 46 of this Law: "The support could be of
up to 75% of the total investment, through direct approval of the government and up
to 15% additional with the approval of Congress, it also allows the possible resolution
of legal controversies through settlement in its Article # 44 and 45 of this law in order
to strengthen the development of franchise.
Additionally, it defines in its Article # 13 and 14 the term of the Decentralization
Law, Delimitation and Transfer of Competency of Public Authority, and in its Article
# 2 defines what is National Public Works as construction in which National Public
Funds is necessary.
It has been the opinion of the Presidential Franchise Committee, that a fund
should be formed in Venezuela, one similar to the French Fund FSGT, which could be
denominated "Franchise Fund". Its original objective would be to give the necessary
financial aid to the pre-investment process, using a system of collection on the highways.
Posterior to this, this Fund could serve as compensation to give continuity to the system
and balance the toll tariffs, making it more accessible to the general public.
In Venezuela, we actually have three passenger terminals granted by the Ministry
of Urban Development (MINDUR), A very important franchise granted through public
bid on December 28th 1995 by the MTC for the construction of a viaduct and also for
the maintenance of the Caracas - La Guaira highway. The formal contract is now in
process. The MTC is also undergoing a process of studying of the oriental highway
"Romulo Betancourt", on the stretch Petare - Tapipa, and also on a shorter stretch. This
project will be granted to the company with the best bid. This particular project is to
correct various dangerous curves which have taken many lives in the past. Also included
in the MTC's plans are many other highways, bridges and transportation projects that
are under study. These are either partially constructed or to be constructed, and they
will be marketed depending on the progress of the bidding process.
Corporación Venezolana de Guayana (CVG) and the MTC are working on
another construction process for a new bridge over the Orinoco river located in the city
of Puerto Ordaz, this includes an interconnection system and a railroad up to a very
deep water deposit in the golf of Cariaco. It is convenient to comment at this stage that
up to the present date more than 90 local and international companies have visited the
information room that the CVG installed for this purpose, where information on the
two franchises are put to the attention of the interested parties. This important
engineering project will attract an investment of up to 10.000.000.000 Bolivars. It is also
convenient to add that there is another franchise in study for up to 2000 taxis for
Caracas.
The International Airport Institution of Maiquetía is studying the franchise of
a four star hotel for the airport, as well as the franchise of service.
MARNR is studying the possibility of franchising aqueducts, which could be a
very complex subject both for legal as well as political reasons, as the distribution of
water is a very ineffective in the Municipals. This is actually delegated to state owned
companies who set very distinctive rates to the real cost of the operation and for the
recuperation of the investment was made. The privatization of the Guaira Port is also
undergoing study, this is being done in collaboration with FIV.
It is opportune to comment that it is time for a change of mentality from the
political view point as there are financial problems in the application of this system and
these will not be solved unless this mental change occur.
The construction of highways in the past had been a mechanism for the
distribution of the high petroleum income. This was done using quotations and this was
not a very healthy scheme as it used to attract multiple interest in the construction as
well as in the recollection of the toll. This has been an impediment to the progress of
this system as even now we still continue to pay outstanding interest.
Venezuela is begging for a change in the mentality of our Politicians. It is only
through franchise that perhaps we could find our way. The efficiency that the franchise
system has demonstrated internationally to create infrastructure, should serve for us as
an example so that we could successfully get started with our own process.
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