Join the conversation:

Latam: Filling the infrastructure financing gap

Latam: Filling the infrastructure financing gap

Posted by Juan Gavasa on March 29, 2014

This year did not start well for some of Latin America’s most talked about infrastructure projects.

The Panamanian government was embroiled in a contract dispute over the $5bn canal expansion, pushing back the completion date; Brazil earned a stiff reprimand from the world soccer federation, FIFA, over delays completing stadiums for the upcoming World Cup competition; and tenders for more than $10bn in transportation infrastructure in Peru were delayed to give potential investors more time to consider bids.

These issues reveal just part of the scope and challenges Latin America faces to improve infrastructure if it is going to continue growing and remain competitive in the coming decades. 

The investment numbers are staggering in small and large countries alike, with trillions of dollars expected in the next decade. The Development Bank of Latin America (CAF) reported that infrastructure investment between 2008 and 2011 was $440bn. Most of this went to transportation projects. 

That amount will be dwarfed in the coming years if Brazil and Mexico, the region’s powerhouses, follow through on ambitious infrastructure projects. Brazil’s plans

include nearly $900bn in infrastructure for the rest of the decade, with a large chunk of that in energy, while Mexico foresees investment of $300bn in infrastructure projects in the coming four years. 

And it is needed. While Brazil is among the world’s top 10 economies, it ranks 114 out of 148 nations in the World Economic Forum’s (WEF) 2013 Global Competitiveness Report. Mexico does much better but is still low, ranked at 66.

All the major economies in the region (with the exception of Chile, ranked 45th by the WEF) fare poorly when it comes to infrastructure: Argentina places 120, while Colombia is at 117, Peru at 101 and Venezuela at 137.

Glaucia Galp, senior director and head of Latin America project finance at Fitch Ratings in Sâo Paulo, says it is common knowledge that the region’s infrastructure deficit is enormous, and the majority of countries have made closing the gap a priority “because it improves competitiveness and has a virtuous effect on growth, generating a positive impact on the sustainability of the economy”.

TOUGH FINANCING COURSE

The traditional method for financing has been loans from multilaterals or international tenders to attract capital for infrastructure projects. This has been the case for energy and transportation, including airports, highways, ports and roads. It has never been easy. 

In Peru, for example, 32 out of 50 contracts for oil/gas exploration are currently covered by force majeure clauses, in some cases a result of local opposition to drilling, but more often than not the problem has been with the slow pace of approving permits. 

In the power sector, Alejandro Ormeño, general manager of Norway’s SN Power in Peru, says getting a hydroelectric project off the ground requires no less than 120 permits from a myriad of ministries, agencies and local authorities. His firm is completing the 168MW Cheves hydroelectric plant.

Gonzalo Priale, head of an association of private companies invested in public services (AFIN), claims it takes an average of 75 months for projects to go from planning to operation. “The government has taken steps to reduce bureaucracy, but it is still cumbersome. Investment will only happen if the state is more aggressive in providing the right conditions,” he says.

AFIN calculates that Peru’s infrastructure deficit tops $80bn, with the largest gaps in energy, transportation and sanitation (water/waste disposal). The investment promotion agency hopes to sign contracts for close to $15bn this year, including $6bn for the second line of the metro in the capital city, Lima, and a $4bn natural gas pipeline. Both tenders had been scheduled for February, but were pushed back a few months.

In Colombia, while capital has flowed into certain infrastructure sectors, primarily oil/gas and electricity, administrations for the past decade have identified the massive gap in transportation infrastructure as a primary bottleneck for economic growth, including the country’s capacity to take advantage of new conditions for exports provided by free trade agreements with the US and the European Union.  

ON THE ROAD

Jorge Castellanos, an independent analyst who worked for many years with Darby until recently, says Colombia has been successful in attracting investment in a number of areas, but transportation is not one of them. He does, nevertheless, believe that this is going to change.

“There has been almost no private investment in highways in Colombia for the past few years. The government recognised that there was a serious problem, redesigned the model and prepared an ambitious plan. I think there will be a change starting this year,” he says. 

Juan Savino, director of research at the Latin American Private Equity & Venture Capital Association (LAVCA), says private equity firms have identified opportunities in Colombia to fill the infrastructure gap. “We saw an important increase in Colombia last year in oil and gas, and there are indications that it will continue in other sectors.”

LAVCA reported a record number of infrastructure deals in the region last year, with private equity firms investing more than $3.5bn, up from $1.7bn invested in 2012 and $3.3bn in 2011. The largest single investment was Advent International’s $1.1bn for a minority stake in Colombia’s Ocensa’s oil pipeline.

“The growth Latin American countries have experienced in recent years has put the spotlight on infrastructure needs, generating opportunities for private equity funds to fill the gap,” says Savino.

The Colombian government at the end of 2013 listed 32 closed private equity funds and another 15 raising capital for a total slightly above $4bn. Of these funds, 26% is for infrastructure.

Savino and Galp say the key points are not only good projects, but guaranteeing regulatory and legal frameworks, including dispute settlement mechanisms, and robust contracts. They said that most countries are already moving strongly in this direction.  

 

Link To Full Article: 

Facebook comments



Monthly newsletter featuring articles hand picked by our country managers from the best content across PanamericanWorld.



Monthly newsletter featuring articles hand picked by our country managers from the best content across the Caribbean Region on PanamericanWorld.

PANAMERICANWORLD COUNTRIES