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LAVCA in the News

LATIN AMERICA: Filling the Infrastructure Financing Gap

31 March 2014

(Emerging Markets) Latin America’s investment needs are vast. The hunt is on to find the financing to match.

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”.


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.


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.


New avenues for funding infrastructures continue to appear.

Infrastructure facilities created by private pension funds (AFPs) are a growing source of financing in a number of countries, particularly in the Andean region. Peru’s AFPs have invested in energy, transportation and sanitation projects and are looking for more.

The Peruvian government has also made major efforts in the past 18 months to secure investment through public-private partnerships (PPP) and a plan that allows companies to invest in public works in lieu of taxes. PPPs accounted for $5bn in infrastructure investment commitments in 2013, up four times from the previous year, and more than $100m was secured from 10 companies that will invest a percentage of their tax payments directly in infrastructure projects.

China’s government has also become an important source of capital, mainly through loans, for infrastructure projects. Ecuador has been a key recipient, with China’s government providing money for power and transportation projects. Chinese companies are also involved in mining projects and oil and gas infrastructure.

Mexico is looking at a different kind of relationship with China, potentially creating a joint fund for infrastructure investment. The local media reported that the fund, which is under negotiation, could be around $2.5bn. A major jump in investment in Mexico, including infrastructure, is anticipated as the reforms undertaken by president Enrique Peña Nieto are implemented.

One outstanding project is the proposed inter-oceanic canal through Panama, which was granted in concession to Chinese businessman Wang Jing. The cost is estimated at anywhere between $40bn and $60bn, making it the largest individual project undertaken in Latin America. The final decision on construction is expected midway through this year, but there is growing concern over the environmental impact and, in some sectors, the role of the Chinese government in the project.

Savino says two new trends are emerging in the region, including multi-sector funds looking at infrastructure projects and broader emerging markets funds looking at options for investment in Latin America.

“The appetite for international and local investment funds is there, and if we look at the amounts raised in 2011 and 2012, we should see important amounts of capital deployed in 2014–15,” he adds.