The Inter-American Development Bank (IADB) has announced the approval of a partial guarantee for a local currency bond to be issued by Sociedad Concesionaria Costanera Norte SA, a single-purpose company dedicated to implementing an urban toll road concession in the city of Santiago de Chile.

The Costanera Norte project consists of the creation of a high-speed urban toll road network crossing metropolitan Santiago from east to west. Users of the system will be tolled through the use of a free-flow electronic system that will allow toll collection to take place without the delays and safety hazards created by traditional toll booth facilities. The Costanera Norte project will be one of four urban expressway networks in Santiago that will create the first “smart” toll road system of its kind in Latin America and the Caribbean .

The concession company will perform a series of complex capital investments in exchange for the right to charge a vehicle toll during a 30-year period. The majority of the works are located on the Oriente-Poniente section that extends 30.4km and runs along the north coast of the Rio Mapocho with an extensive number of bridges, over and under-passes and a 4km “cut-and-cover” tunnel. The project also consists of the upgrade of 7.4km on John F Kennedy Avenue and the upgrade and expansion of a 4.3km extension to Route 68. Once constructed, the Costanera Norte system will help reduce traffic congestion, air pollution and noise, as well as reduce commuting time for users throughout the metropolitan area.

The sponsors of the project are Impregilo of Italy and two Chilean companies: Empresa Constructora Tecsa and Empresa Constructora Fe Grande. The total cost of the project is estimated at the equivalent of US$442.2mn and the bond issue at US$240.1mn.

The IADB provides a financial guarantee equivalent to US$75mn of principal and interest due under the bonds. Ambac, a AAA-rated monoline insurer, will be the co-guarantor of the bonds. Financial guarantees organised by the IADB will cover up to US$240.1mn of bond issue.

The IADB-backed guarantee covers 40 semi-annual (20 years) payments of principal and interest under the bonds. In 2002, the IADB structured and closed a financial guarantee for another Chilean concession company for a similar bond issue to finance the construction and rehabilitation of the Santiago-Valparaiso-Vi ía del Mar toll road.

According to project team leader Philippe Birebent, “the well developed capital market in Chile creates an opportunity for the IADB to provide credit enhancements that will enable domestic savings held by pension funds and insurance companies to be invested in their own country’s infrastructure projects.”

In addition, says Birebent: “As tolls are denominated and collected in local currency, the application of this guarantee instrument permits a local currency financing that offers a natural hedge to foreign exchange risks associated with traditional dollar-based financing.”