1993.

Argentina, the losers of the last World Cup.

They are pros in Economics.

This is why they signed a 30-year PPP with a nine-year business plan.

What can get wrong?

Nobody knew it was nine years.

That was the problem.

Or at least, one of them.

The project was Aguas Argentinas.

At the time, it was the largest water concession in the world.

You know… Argentinos tend to exaggerate… a little bit… specially in front of the referee…

More than eight million customers.

Thirty years.

Serious international sponsors.

Serious multilateral lenders.

Serious financial models.

And one wonderfully modest assumption:

One Argentine peso would remain worth one US dollar.

Forever.

And you know… currencies are famously obedient infrastructure assets.

Look.

The model was elegant.

Customers paid their water bills in pesos.

The tariff regime was linked to the dollar.

Much of the financing was denominated in dollars.

And, by law, one peso equalled one dollar.

Thirty-year concession.

One-for-one exchange rate.

Again…

What could possibly go wrong?

Please stop laughing.

Messi deserves some respect…

This was Financial Close.

As long as the currency peg survived, the spreadsheets looked beautiful.

As usual…

But spreadsheets have one design flaw.

They cannot see the country burning outside the window.

Then came 2001.

Argentina entered a devastating recession.

The government defaulted.

The currency peg collapsed.

The peso lost roughly 75% of its value.

GDP fell by around 11% in 2002.

And the government froze water tariffs at their pre-devaluation peso level.

In dollar terms, project revenues fell off a cliff.

The dollar-denominated debt did not…

Debt is traditional that way.

The project suddenly had local-currency revenue, hard-currency obligations and eight million customers who were not particularly enthusiastic about a fourfold increase in their water bills.

Strange people…. These Argentinos…

Or course, they are very creative… especially crying of fake pain in front of the referee…

So, the government could not accept the politically necessary tariff increase.

The concessionaire could not service its debt and fund investment without it.

The lenders could not convert dollars into positive thinking.

So everyone started renegotiating.

This is PPP language for:

“The model is dead, but we have not agreed who will pay for the funeral.”

The government thought risk transfer meant the problem had left the building.

The investors thought the tariff formula was an FX hedge.

The lenders thought the law would behave like a currency swap.

All three discovered the same thing:

A law is not a hedge when the law itself can change.

Especially in serious countries like Argentina.

Everyone had a contract.

Nobody had a Plan B for the country.

After years of negotiations, Argentina terminated the concession in 2006.

The dispute continued.

And continued.

And continued.

Like when Messi dives in the box, waiting for the referee to award a penalty…

In 2015, an arbitration tribunal awarded the foreign shareholders US$405 million plus interest.

The concession spent thirteen years delivering water.

The dispute spent twelve years delivering legal fees.

To be fair, the lawyers achieved excellent availability.

Now, the lesson.

Lesson 1:

You can’t predict the next sovereign crisis.

But… If you can do it, stop reading PPP newsletters and start a hedge fund.

Lesson 2:

A PPP does not operate inside a financial model.

It operates inside an economy.

If you don’t have a macroeconomic strategy.

You have faith.

PPP Rule #37: Never build a 30-year contract on an economic assumption nobody can control.

If you would prefer not to learn economics through a sovereign default, a tariff freeze and twelve years of arbitration, here is the medicine I recommend:

Possible side effect: asking uncomfortable questions before Financial Close.

Use this information at your own risk.

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