How Panama's PPP law will boost road infrastructure

Panama opened bids for revamping the eastern Pan-American highway, the country's first public-private partnership developed under a law approved in 2019. Additional PPP contracts are planned and tenders will be launched before the 2024 general elections.

BNamericas talked to Panamanian public works minister Rafael Sabonge about the opportunities opening up in the Central American country's infrastructure sector.

BNamericas: Why has road infrastructure deteriorated so much in Panama?

Sabonge: There has definitely been a budget issue as a result of the pandemic. During 2020 and 2021, our government's priorities were maintaining social peace and making sure all Panamanians were healthy. Obviously, available resources were devoted in large part to these goals.

On the other hand, quarantine-related shutdowns caused a significant economic slowdown. Our 2020 GDP decreased by over 18%. We overcame budgetary restrictions by taking out projects with financing, and that's why we now see much more road construction and rehabilitation across the country.

BNamericas: What are the most urgent infrastructure needs?

Sabonge: That’s difficult to answer because we have more than 16,000km of roads and, although Panama is advancing and records significant economic growth, we are a developing country. Resources are not unlimited, but there are many needs. So we tried to prioritize roads and infrastructure in remote regions that require roads for social reasons.

It is difficult to answer because as we cover priorities, new ones appear, but we believe that with the PPP law and the highway program, we’ll work on 2,000km of roads, used by around 80% of our vehicle fleet.

I think that by gradually changing the way we execute these projects, we will cover a little more.

BNamericas: And what are the public works ministry’s priorities?

Sabonge: Our action plan involves three phases: First it was continuing projects we inherited and launch others under the same modality as those previously carried out in our country. That phase is over.

Second was launching tenders and carry out 28 works under a new modality with financing included, that is, with a financial structure that generated good cash flow for contractors and that could be executed according to schedule. Tenders for these projects have been launched, and they are being carried out with investments of around US$1.16bn.

Third is bidding through PPPs, with a law that was approved [in September 2019 and took effect] in December 2020.

BNamericas: How many contracts related to this law is the ministry working on?

Sabonge: We are structuring 10 contracts with multilaterals that are advising. One of those contracts relates to the eastern Pan-American highway. We concluded the public act for that first public-private partnership contract. It is for the rehabilitation and maintenance of 246km of the main road that links to Darién province and involves estimated private investment of US$283mn, and it has been structured with the International Finance Corporation.

It required … a 963-page feasibility study and 1,433 questions from the private sector were answered. First, 14 companies participated in the prequalification stage and in the public meeting four very solid companies participated: Prodemex, Strabag, Intervial Chile and China Harbor Engineering Company.

BNamericas: Why weren’t PPPs used earlier?

Sabonge: I think there has been some political will to approve a PPP law because the first thing was to generate regulations that would allow us to have a new, modern law, and that would obviously incorporate many sectors of civil society and the government, as well as trade groups.

We achieved a law that drastically improved transparency and private investment – according to data from the Inter-American Development Bank. 

Getting to where we are today took a long time because we had to make sure that the structured projects were bankable. They must also be structured from the socio-environmental point of view – our projects are carbon negative – and from the legal point of view. These are new specifications and contract models, which have about 16 standards that concessionaires must comply with.

The whole process, although it is long, is very important because it assures us and private entities that the playing field is level and the risk distributed fairly.

Credit: BNamericas

BNamericas: How attractive is road infrastructure for foreign investors considering the current economic conditions?

Sabonge: We participated in the Global Infrastructure Facility advisory council in Washington D.C., along with investment, commercial and multilateral banks, and they all showed great interest in our highway program because it is also government supported.

Panama is one of four countries which has maintained investment grade in the region. It has among the lowest inflation in the world: below 3% last year. We register double-digit growth, over 10%, and a dollarized economy. In other words, the investments made in our country are safe.

BNamericas: Besides the budget, what other challenges does the ministry face?

Sabonge: They relate to the needs of the over 16,000km of roads. We must be able to prioritize at the national level. From a political perspective, it is not easy to make decisions to affect, for example, over 2,000km of roads under the public works and PPP modalities, but this is still only a fraction of all the roads.

Obviously, some projects will be left out, and this is among the most complicated parts of this job, but we try to do it in a way that benefits the greatest number of Panamanians.

BNamericas: How is work on the fourth bridge across the Panama Canal advancing?

Sabonge: Well, a tender was launched but without a financial structure. This was important for our management, since we tried to ensure that financial structures generate stability and that projects are not delayed due to the lack of cash flow.

The fourth bridge underwent major restructuring because it originally involved almost US$1.5bn but its scope was reduced to around US$200mn. The new financial structure is now supported by banks Santander and Mizuho and Panama’s Banistmo. [This structure] ensures that the project can be executed according to the new schedule. Works should start in August.

BNamericas: What other tenders are planned?

Sabonge: Right now we are prequalifying the second PPP with the receipt of documents. The public meeting will take place in September. It is the western Pan-American highway, for which we estimate private investment of US$300mn.

Works involve 206km between La Chorrera’s El Espino and Santiago de Veraguas, our country’s busiest road. It is crucial for logistics and tourism.

Subsequently, we should launch a tender for the Centenario highway, another PPP that includes expansion and maintenance of 46km and involves US$147mn.

Finally, we should launch a tender for the Costanera highway, a 52km toll road with capex of over US$600mn.

BNamericas: What will be this administration’s road infrastructure legacy?

Sabonge: Our projects have social value, and we will have carried them out based on three pillars: One, projects to improve urban mobility, roads with sidewalks, bicycle lanes, parking lots, in some cases with exclusive lanes for buses. This wasn’t common in the ministry’s previous administration.

The second pillar relates to projects for the productive sector and to improve agricultural productivity and logistics.

Third are projects with an impact in regions, with the potential to spur tourism. Our projects are focused on the human being and we try to make that the hallmark of our management.

BNamericas: How can you ensure the continuity of projects this administration has started?

Sabonge: In the PPP program, we have ensured transparency. That is why we have involved multilateral organizations in the structuring. We are working with the International Finance Corporation, with the IDB, with Latin American development bank CAF, and with the Central American Bank for Economic Integration.

This cooperation shields these projects since we are receiving international support. We think the program will continue, but it is also a state program, not a government one, and a new way in which paradigms are broken in terms of how our country's roads are being maintained.

We are sure that the government that follows will continue it.