Brookfield's Almeida says conflicting regulations frustrate infrastructure investors
March 27, 2019 |
Infrastructure is a long-term investment that needs predictability and stability, says the head of Brookfield Asset Management's infrastructure business in Latin America
When it comes to infrastructure in Latin America, few investors play a bigger or more influential role than Brookfield Asset Management. Founded in 1899 to operate street car lines in São Paulo and Rio de Janeiro and help develop Brazil’s first electrical utility, Toronto-based Brookfield has more than a century of history building Latin America’s infrastructure.
During that time, the private equity group, with global assets of $330 billion, has coped with changing governments and volatile economies. Just as challenging has often been an unfriendly environment for investors, where the rules keep changing and corruption undermines returns.
It’s the latter obstacles that must be addressed by Latin American governments if they hope to attract the kind of private capital needed to fix the region’s fractured infrastructure, says Marcos Almeida, who oversees Brookfield’s infrastructure business in Latin America. “As infrastructure is a long-term investment, investors require regulatory milestones that bring predictability and stability. If you do not diminish regulatory risks, the likelihood of the investment will reduce or the demand for returns will increase significantly,” he says.
Almeida complains of a bureaucratic maze with conflicting regulations. “In Brazil, there is a mix. Depending on the sector, it may be under federal, state and municipal regulations. So, there I would have to go one by one to explain my case,” says Almeida. For example, in many countries in the region, including Brazil, water and sanitation utilities are regulated by local governments. “The risks of municipal regulations are greater than the state ones, and the state ones are bigger than the federal ones.”
In October 2016, Brookfield’s privateequity arm agreed to pay $768 million to buy a 70 % stake in Odebrecht Ambiental, a water and sewage utility serving 15 million people in 180 Brazilian cities. It now must deal with 180 local laws and regulations that drive up costs, according to Almeida.
Regulation also has a positive impact on asset prices as investors seek predictability because infrastructure projects are long-term investments, Almeida says. That’s why investors are willing to pay more for assets in Chile, which has strong and independent regulatory agencies with professional staffs that respond quickly to investor concerns, he says.
Almeida also worries that too many infrastructure projects in the region are influenced by political considerations rather than economic realities. “It does not make sense to expand a railroad if it won’t attract more cargo, because otherwise this situation will not be sustainable,” he says.
Looking ahead, Almeida expects a friendlier environment for investors, noting that Colombia, even Argentina with its fiscal challenges, are seeking greater cooperation with the private sector. He is especially keen on Brazil, where right-wing President Jair Bolsonaro took power with a pro-business policy. As the region’s biggest economy with the largest land mass, Brazil’s water sanitation, railroad and gas pipeline projects have great potential, he says. Brookfield has a heavy exposure in Brazil, where Almeida oversees 32 billion reais ($8.7 billion) in assets that include a 2,048-kilometer (1,272 miles) gas pipeline and 8,000 kilometers of railroads. Brookfield’s Latin American portfolio also includes energy businesses in Colombia and roads in Chile and Peru.
The corruption scandal uncovered by Operation Car Wash, which implicated the state-controlled oil giant Petrobras and the nation’s biggest construction companies, has also improved prospects for investors, Almeida says. Construction companies had been the country’s biggest infrastructure investors. But after being implicated in bribery and kickback schemes, many have refrained from bidding on new contracts, which has lowered premiums and attracted more investment funds.
“For construction companies, the investment return was not necessarily linked or only linked to the project itself, but to how much money they could make building it,” says Almeida. “Now an investor bids for a concession project based on its return forecasts, and not because it expects to obtain a return by unlawful means at some point later.”
Latin America’s currency swings remain an issue for foreign investors, says Almeida. While most of the projects have a cost linked to the U.S. dollar, they generate revenues in local currencies. But Almeida believes investors have enough mechanisms to mitigate these risks, with currency hedges or negotiating currency insurance supported by multilateral agencies or banks.