Infrastructure investors see a bigger emphasis on renewables in the years ahead
March 27, 2019
Governments must preserve attractive fundamentals and investor-friendly policies to attract capital
The decision by Mexican President Andrés Manuel López Obrador to cancel the $13-billion Mexico City airport project was an initial shock to investors, sparking concerns that the important role of the private sector in infrastructure development wasn’t fully appreciated. But López Obrador’s subsequent willingness to reach a settlement with holders of the airport’s $6 billion in bonds seems to have calmed investors — for the moment.
Despite such fits and starts, Latin America’s infrastructure procurement programs have largely been successful over the past decade. The region’s strong economic growth, coupled with growing demand for infrastructure improvements, have provided a wide menu of potential projects.
Public-private partnerships (PPP) have emerged as a distinct asset class in Latin America and the Caribbean. “In 2009 infrastructure only really existed as an asset class in Chile,” says Pablo Lutereau, managing director and head of infrastructure for Latin America at S&P Global in Buenos Aires, adding that Mexico and Peru had only hesitantly started to establish themselves as healthy infrastructure markets beginning in 2007.
While investors have found the fundamentals appealing, they’ve also been compensated with higher yields for the added risk in the region. This has been a huge attraction for investors at a time when easy monetary policies have depressed yields elsewhere, especially in Europe.
Infrastructure funds and private placement investors are increasingly demonstrating a willingness to make large investments in infrastructure, notes Gianluca Bacchiocchi, a partner at Clifford Chance, who has advised governments, borrowers and lenders on infrastructure financing. Optimists point to this as a sign of maturity.
The challenge for governments in 2019 and beyond is to preserve attractive fundamentals and investor-friendly practices. And they will have to achieve this in the face of potential political instability, volatility in commodities prices and challenging debt market conditions.
That’s no easy task given unforseen developments like the Operation Car Wash scandal. It led to intense lender scrutiny of corruption-tainted financings for upstream oil and gas infrastructure in Brazil. It also engulfed Peru’s government and several high-profile infrastructure projects, including the $5 billion Gasoducto Sur Peruano pipeline project, as well as Odebrecht’s concessions in Colombia. “Odebrecht had fundamental impacts on most markets — it wasn’t a blip,” observes Gabriel Goldschmidt, the director for Latin America and the Caribbean at the International Finance Corporation (IFC). “Now there’s a focus on transparency, as well as on what happens to all parties if there is a corruption issue.”
When it comes to individual countries, the outlook is mixed. In Brazil, investors were encouraged that traffic levels on toll roads had started to recover after steep declines during the recent recession, though that recovery stalled in 2018, according to data from Fitch Ratings. And President Jair Bolsonaro is looking to make a fresh push in infrastructure procurement, including a new round of regional airport auctions.
Colombia’s president, Ivan Duque Marquez, has promised to bring the country’s outstanding 4G road projects to completion, despite the program’s challenges. “Colombia took a deep look at the model and there is a deliberate, long-term vision in place,” says Goldschmidt.
In Mexico, energy reform has yet to lead to large-scale investment in upstream oil and gas. Power generation projects have been more successful. UK-based emerging markets investor Actis recently closed on the acquisition and $860 million refinancing of Cometa Energia, formerly InterGen’s conventional portfolio. Developers such as Engie, Canadian Solar, Cobra and Sempra have all brought project financings to market.
Across the region renewables will continue to attract attention. Brazil continues to spur wind development. So far, national and local development banks have been active lenders. Installed capacity increased from 398MW in 2008 to 12,294MW in 2017, according to the International Renewable Energy Agency.
Governments are increasingly unwilling to offer long-term fixed price contracts to get capacity built. Chile’s first wind financing in 2009 was unusual in lacking any long-term contract to sell power to a utility. This has now also become common practice in Mexico and Colombia, which has recently launched a renewable program, notes the IFC’s Goldschmidt.
“Latin America was not a first mover” when it comes to renewables, observes Goldschmidt. “But that had its advantages, particularly when technology moved down the cost curve. The US and Europe tried it out and Latin America reaped the benefit.”