Here comes the private sector.

Puerto Rico is looking for bidders in a potential 50-year concession agreement for its busiest toll road — Route 22 ­— and is trying to update its water and sewer system via private investment rather than selling municipal bonds.

The two initiatives are at the heart of the commonwealth’s goal of reducing bond and note issuance and replacing them with funds from the private sector.

The Puerto Rico Public-Private Partnership Authority released its first-ever request for qualifications to bidders Tuesday afternoon. Responses to the Route 22 RFQ are due July 29 and submissions regarding water and sewer infrastructure upgrades are due the following day.

Macquarie Capital Inc. is serving as financial adviser for the toll road plan. Malcolm Pirnie Inc. is the financial adviser for the water and sewer initiative.

With both RFQs, the authority will select a shortlist of qualified bidders who may then participate in a request for proposals process. David Alvarez, executive director of the PPPA, said the tentative time line to announce selected companies is mid-August, with the authority releasing RFPs a few weeks later.

The Puerto Rico Highways and Transportation Authority, which oversees Route 22, could gain an upfront payment for the toll road in a concession contract and place 50 years of maintenance and operating costs onto a company or consortium.

Instead of the Puerto Rico Aqueduct and Sewer Authority selling debt to upgrade its system to reduce water leakage and faulty metering, potential contractors could finance and implement those improvements in return for a portion of anticipated new revenue.

The Route 22 proposal includes the 52-mile toll road along with a shorter, four-mile toll road — called Route 5. It’s connected to Route 22 and runs through the San Juan area and further south through Bayamon.

Route 22 is an east-west roadway that extends through the island’s northern region.

The bonds outstanding on the entities would be paid down from a potential up-front payment. Alvarez said the authority has a preliminary estimate of what that outstanding debt amount is, but declined to release it.

“We don’t want to provide any information that would hurt the government in a procurement process,” Alvarez said. “We’re not providing any more information than what we need to provide to have a solid competitive process in the procurement.”

The transportation authority, which oversees routes 22, 66, and 52, has approximately $7 billion of total outstanding debt.

The RFQ states that the forthcoming RFP will include a detailed concession agreement, which will include the rights and obligations of the concessionaire, a comprehensive maintenance manual and operating standards, a toll schedule that stipulates how tolls will be set, and a list of required capital expenditures.

The authority will review the financial capabilities of bidders in order to pay acquisition proceeds and maintain and improve the toll roads for 50 years. Other factors include a firm’s experience with toll road operation and maintenance, safety needs, and environmental issues.

The tight credit market poses a challenge to prospective concessionaires. Alvarez and his team have already constructed the toll road plan to accommodate such issues by separating Route 22 and the island’s second-busiest toll road, Route 52, which runs from San Juan to Ponce.

Route 52 will have its own RFQ process beginning later this year, Alvarez said. He expressed confidence that sufficient demand exists to carry out a successful long-term lease agreement, noting that the size of the projects was determined after discussions with potential participants.

“The RFQs just reflect what we believe the market is able to deliver at this point.” he said. “Obviously, reality is reality. When we have the actual submittals, we’ll know how much the market is able to provide, but everything is based on the signals and messages from the market soundings.”

The tollways, which already use electronic tolling, could provide an investment opportunity for the private sector as the island’s ratio of vehicles per capita is higher than that of the continental U.S., according to the RFQ.

“At more than 0.60 vehicle density, Puerto Rico ranks in the top three globally and has continued to grow,” the RFQ reads.

The current toll rate on Route 22 ranges from $3.25 to $3.75. The transportation authority collected $85.1 million of toll revenue in 85 million traffic transactions in fiscal 2009, according to the RFQ. The five-year compound annual revenue growth rate is 5.2%.

Tolls on Route 5 cost 50 cents. The roadway generated $4.2 million of toll revenue in 8 million traffic transactions in fiscal 2009. The five-year compound annual revenue growth rate is 7.7%.

Tolls on both roadways were last increased Sept. 1, 2005.

In looking at the P3 water project, PRASA aims to reduce the amount of water it produces that does not generate revenue due to leakages, outdated meters, and illegal hook-ups. During the past six years, an average of 60% of water production has not produced revenue. PRASA is the island’s sole water and sewer provider, servicing approximately four million residents and five million visitors annually.

“The amount of lost water for PRASA has always been an issue for them, so if they could really bring that down, that would definitely be very beneficial,” said Moody’s Investors Service analyst ­Emily Raimes. “I don’t know how much of a credit rating impact it would have. We would have to take a look.”

The water initiative includes one or more companies implementing technical upgrades and infrastructure improvements to reduce lost water and maintain those rehabilitations. Private companies would be paid from the new revenue. This allows the system to avoid issuing bonds for such improvements.

“Through the implementation of PPP contracts, the authority expects to secure substantial technological advancement benefits for PRASA while, at the same time, increasing PRASA’s revenues and improving customer satisfaction,” the RFQ reads.

Bidders must have a single project guarantor with a net worth of at least $100 million. Companies are also required to secure a letter of credit for anticipated projects.

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