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Infrastructure finance: High wire act

Sep 1, 2013

That private sector involvement is vital for the development of infrastructure in Latin America is no secret. But enticing it has proved one of the region’s enduring challenges. By Karen Schwartz

The simple cost of getting exports to port and onto a ship can make a crucial difference to a country’s competitiveness. It’s a problem that’s not lost on many Latin nations, where authorities are painfully aware how decrepit infrastructure remains one of the main impediments to the sustainable growth of their economies.

Colombia is one such country; it has for years pondered a range of options to improve its infrastructure. In mid-2013 it announced plans to privatize a power company, to raise cash to pay for better transport links. The move followed the setting up of a national development bank aimed at better deploying much needed financial resources, while also promoting a road building effort unprecedented in its scale.

The trick, finance minister Mauricio Cárdenas told LatinFinance, lies in balancing private and public participation. "The government’s money is going to work as a lever in order to bring in more private investment," he said of the development bank. "We want to make sure infrastructure development is not constrained by limitations on the part of commercial banks to extend long-term loans."

Across Latin America, governments are grappling with similar issues. Ports, bridges, railways and pipelines may be dreary. But they are vital for Latin America’s sparkling growth to continue. Policymakers understand that, but must find the best way to mix public and private sector financing for infrastructure.

Private investors want stability, not just in a country, but also in its rules. That is especially true for projects with long tenors. Countries with more stable regulations and investment frameworks – such as Chile, Colombia and Mexico – have been successful in welcoming investors. The choices these and other countries make about private and public investment based on their own social parameters go beyond the politics of their next elections and will frame their investment environments for the long-run.

"Ultimately, each country will see what works and as you see throughout the region, it’s not one size fits all," says Gabriel Goldschmidt, senior manager for infrastructure in LatAm at the International Finance Corporation. "Different countries manage this continuum of public and private investment in different ways, and different ways can work."

Security and stability

Financing infrastructure in Latin America has evolved significantly over the past 25 years. Take the Antamina project finance loan, signed in 1999. The Peruvian copper and zinc mine raised $1.32 billion from 23 lenders – but to get done, the deal also brought in eight political risk insurers and guarantors.

The following year, an Ecuadoran pipeline signed a $900 million project loan. Coming soon after the sovereign’s default, the introduction of the dollar, and a military coup attempt, the package was an effort. Contracts known as "hell or high water", ship-or-pay agreements helped the deal succeed. Under those contracts, the shippers taking the oil from the end of the pipeline agreed to pay for it, at a set rate – regardless of whether the project was expropriated, or even completed.

Today, the challenges are vastly different. In the wake of the 2008 and subsequent eurozone crises, many commercial banks cut lending in LatAm. Development banks and other public agencies stepped in, structuring far beyond previous transaction volumes, says Jean-Marc Aboussouan, chief of the Inter-American Development Bank’s infrastructure division.

Regional banks such as Colombia’s Bancolombia and Brazil’s Itaú started to take a bigger role, he says, as did BNDES, the Brazilian development bank. But the sheer size of Latin America’s infrastructure needs means that investment must come from a wider range of sources than bank lending.

Indeed, today, a growing array of projects are bond-funded: project bond sales picked up in 2011 and 2012 and are poised to keep advancing, says Taisa Markus, a partner at law firm Paul Hastings. LatAm’s first wind energy bonds – $298.7 million of notes for Acciona’s Oaxaca II and IV units – were sold in 2012.

Mexico has pushed infrastructure for some time, privatizing telecommunications, ports, airports and rail in the 1990s to bring in commercial investment. The spur continues today. Enrique Peña Nieto’s administration unveiled in 2013 a push for transport and communications infrastructure, and has laid out reforms to the energy sector.

"Looking at the next 10 years, one of the biggest stories could be the liberalization of the Mexican oil and gas sector," says Isaac Deutsch, managing director and co-head of specialized finance at Sumitomo Mitsui Banking Corporation.

Investors’ high confidence in Mexico’s economy allows for infrastructure funding innovations. In May 2013, Mexican toll road Red de Carreteras de Occidente sold the first peso-denominated project bond internationally, raising 7.5 billion pesos ($603 million).

Internationally placed local currency infrastructure notes have also emerged from Brazil, where the 2014 World Cup and 2016 Olympics have pushed the government to make an extra drive to attract infrastructure investment. Again a toll road operator was the first to make a splash. Concessionária Auto Raposo Tavares (CART) sold the first large infrastructure debenture overseas in December 2102, a 750 million real ($357 million) issue.

A tax change in mid-2013, affording all Brazilian debt issues the benefits once exclusive to infrastructure debentures, looked set to make CART a rare deal, however. And BNDES remains a central source of funding, although some question how long it can keep up the pace as amid continuing heavy infrastructure needs.

That is not to say Brazil has neglected infrastructure financing. The privatization of its electric and telecom firms in the late 1990s was designed to open the industries to private capital and investment.

It passed public-private partnership laws in 2006 – where funding comes from a mix of government and private sector money – in another turning point for the country’s infrastructure development. And in 2010, then-president Luiz Inácio Lula da Silva launched a $526 billion investment plan targeting energy, transportation and ports, among other sectors.

Creative solutions

Peru, as with other countries, has struggled with social unrest over the development of some of its big infrastructure projects, notably in the mining sector. But public-private partnerships in transportation, energy, water and waste sectors are of growing appeal to investors.

In 2006 and 2007, authorities devised a creative solution to finance a large-scale road concession projects, using government-issued certificates called Certificados de Reconocimiento del Pago Anual de Obras (CRPAO) to take out bank debt. The fact investors were taking on sovereign risk made them comfortable on financing the highway development.

A capital markets reform bill in the works and new regulations to speed up infrastructure projects are among the measures policymakers hope will keep growth high.

As countries across Latin America search for the best way to entice private infrastructure investment, Colombia is scrutinizing a broad range of possibilities. Investors are waiting to see the details on the country’s fourth generation (4G) road concessions. The package, of unprecedented size, covers around 30 projects under a public-private partnership program of around $20 billion.

Its history marked by financial malaise and terrorism, Colombia has also struggled with a complex geography that hinders easy transport, particularly by rail.

Under Juan Manuel Santos, the president, the country has intensified a push to increase competitiveness by improving the transport networks. "What this government did well is they planned for the long run," says Juan Pablo Acosta, financing products manager at Bancolombia. "The idea is that the next government can continue that plan." LF

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