Latin Finance - March/April 2011 - 42

peru project finance

Make it Rain
by Jef Cozza s agribusiness expands to meet rapidly growing world food demand, Peru is positioning to ride the trend. The government is helping to backstop financing for a new agricultural project that will turn 43,500 hectares of desert into arable farmland. The Olmos Project will cost over $500 million, with water delivery to the Lambayeque region expected to begin by March 2013. Financing for the project will be guaranteed by the Peruvian government but serviced using future cashflows from selling water to the companies farming the land. This model may pave the way for similar irrigation projects elsewhere in LatAm. Peru’s northern coastline may provide a particularly attractive opportunity for farmers. “The Peruvian coast can be seen as a great, natural greenhouse,” says Peruvian agribusiness expert Fernando Cillóniz, president and general manager of inform@cción, a Peruvian economic think tank specializing in the agricultural sector. “We don’t have the same extreme temperatures of winter and summer as other latitudes do.” Agricultural exports totaled $3.0 billion for the first 11 months of 2010, a 30.2% increase over the $2.3 billion generated for the corresponding period in 2009, according to Peru’s ministry of agriculture. Climatic conditions give Peru an opportunity to vie with Chile for a piece of the global agricultural market. “Peru is beginning to muscle its way into the markets by leveraging its advantages in available land, cheap labor, better weather and closer proximity to North America,” says José Pablo Gutiérrez, partner with IB Partners. The regional financial advisory firm is responsible for structuring the Olmos financing. Attempting to fully leverage Peru’s advantages presents its own series of

Odebrecht is using an auction structure to bring privatepublic financing to a Peruvian infrastructure project. The financing format may be used elsewhere in LatAm.

Turning desert into arable farmland: the Olmos project opens up Peru’s coast challenges. Although the western part of the fertile Amazon Basin falls within Peru’s borders, access to the coast is blocked by the Andean mountain range. Areas closest to the seaports, and therefore best suited to exporting agricultural goods abroad, are also some of the driest. Irrigating the drier lands of the coastal desert west of the Andes is not easy. Despite a temperate climate and success for nearby agricultural projects such as Cerro Prieto and Jayanca, regions like Lambayeque need an irrigation system to turn desert into arable land. That is why in 2004, the Peruvian government awarded a concession to Odebrecht subsidiary Concesionaria Trasvace Olmos to build a 21km pipeline, known as the Olmos Trans-Andean pipeline. The tunnel will go through the Andes, bringing 500 billion gallons of water annually from the Huancabamba River on the eastern side of the Andes to drought-ridden areas in the west. Attempts to build a similar tunnel go back at least as far as the 1950s, according to the Robbins Company, the tunnel drilling firm supplying the boring machine for the project. Peru’s government finally awarded the concession to bore a tunnel in 2004, with drilling beginning in March 2007. IB Partners expects the tunnel to be completed by the first quarter of 2012. Drilling a path is just the first step in a multi-stage process. Once the tunnel, and a 44 million cubic meter dam, are completed, a complex irrigation system must be built in order to distribute water to 43,500 hectares of land. According to Gutiérrez, it was Odebrecht, not the Peruvian government, which pitched the idea of a public-private partnership for the second stage of the

42 LatinFinance

March/April 2011

Latin Finance - March/April 2011

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