Latin America: In-depth: The rising tide of LatAm water PPPs

03 October 2018 - 12:00 am UTC

Despite enormous water demand across Latin America, private investment into the sector has been slow and patchy. Can Blackrock’s immiment financing of the Rosarito desalination plant in Mexico provide a template for investors looking at the region, asks Tiziana Barghini

The Rosarito Beach Water Plant is going to be one of the largest desalination plants in Latin America. Its second phase is targeting 100 million gallon of water per day and would become one of the largest in the Western Hemisphere.

Its sponsors, Consolidated Water Co subsidiary NCS Agua, Suez Medio Ambiente Mexico and BlackRock Mexico Infrastructura II are currently weeks away from financial close for the circa USD 490m project. The plan is to start construction early next year, with the time to completion expected to be three years. Once built, it will supply 50 million gallon of drinkable water per day to the population of Tijuana, Mexicali and Rosarito in Mexico’s Baja California.

The 37-years, DBFOM concession will provide an arid region mostly reliant on the distant Colorado River with a cheaper fresh water alternative at a time when climate change is making water a scarcer resource.

“Worried by the lack of water supply, we had to find solutions and we figured out that desalination was the best option given our access to seawater,” Ricardo Cisneros Rodriguez, director of the State Water Commission of Baja California told Inframation.

The case for desalination, in Mexico and Latin America, is clear: fresh water is raw and needs to go through a depuration process before supplying it to final consumers, while desalination plants offer ready-to-drink water at competitive prices. Yet, according to Cisneros, it is too early to have precise cost comparisons.

Mexican wave
Last year the Mexican state of Baja California inaugurated its first seawater plant owned by GS Inima (16m gallons per day) while a second smaller plant (5.7m gallons per day) in San Quintin is under construction. NCS is also working on a smaller desalination plant in Cabo San Lucas, in South Baja California State.

Rosarito’s second phase, initially scheduled to be ready for 2024, will rely on growing demand in the region. “This will depend on the future water consumption and we will reconsider once the first part is completed,” says Cisneros, highlighting a general demand for more desalination plants in the region.

The current financing for phase one comprises 20% equity for a total USD 491m cost, split between 25%, 20% and 55% respectively for NSC Agua, Suez Medio Ambiente Mexico and BlackRock. Suez has an option to sell to BlackRock its 20% in the consortium. BlackRock Mexico did not respond to a request for comment.

“We are currently working on the structuring of Rosarito’s project and fully committed to achieve financial close before the end of the year. We will evaluate at a later stage the opportunity to exercise the 20% option we have,” said Ana Giros, CEO of SUEZ America Latina.

The remaining 80% will be funded with a USD 380m loan, says Milton Rubio Diaz, director at Agua de Rosarito, the special purpose company formed to own the project.

Lenders include Banorte, Banobras, Banco Nacional Financiera (Nafin), and there is interest from American Development Bank and Sumitomo. The North American Development bank (NADB), a multilateral institution financing environmental infrastructure along the US-Mexican border created by NAFTA in 1994 and earlier tipped as taking part into the loan says that it is only involved as an advisor.

Ocean desalination is a relatively new in Baja California and investors in the region will be watching the financing process and structure closely.

“We have been financing water projects since inception, and that was usually surface water or wastewater treatment,” says Alex Hinojosa, NADB managing director, highlighting the company’s participation into the other two desalination plants in Baja California: Ensenada and San Quintin. “But we never worked before on a new supply source such as desalinised ocean water. This is the first time we are financing these types of projects.”

As well as its size, Rosarito is also interesting because, earlier this year, the project attracted the world’s largest asset manager BlackRock, which also an option to raise its interest in the project from 55% to 75% through Suez’s share. As well as in the case of other utilities, water services can provide a stable flow of income, given consumption is steady and tariffs are regulated. 

The number of water projects in Mexico has multiplied in recent years, and the contract structure of the deals made it an attractive space, says Aisen Cruz Carbajal at commercial bank Banorte in Mexico City. 

“The truth is that water projects have prices that are becoming very interesting. In the recent past, the majority of water projects were done with direct revenue paying services and these created a lot of interest”, Cruz said.

Details of the financing of the Rosarito project are not yet completely disclosed. It was originally awarded in August 2016 and dragged for a while pending some authorizations, including a guarantee from the state of Baja California, which imposed a 2% payroll-tax to pay for its development. This will make the loan and ultimately the project cheaper.

“The learning curve for the state and other participants into this PPP made the process slower. Its sheer size also added complexity and time,” said Rubio.

Regional leakage
Applying the lessons of Rosarito outside Mexico might be difficult though.

Projects such as the USD 256m, 30-year DFBOM project for the Peruvian Lake Titicaca wastewater treatment plant, initially presented as a private initiative by Acciona Agua and ACS, are among the latest to attract interest from private investors.

But across other parts Latin America there is a wide variety of deeply different projects – some are simple concessions, other PPPs and others consultancy and advisory opportunities or EPC deals.

The key element for infrastructure investors is the concession of public guarantees, as in the case of Rosarito. But it is also worth paying attention to the bigger procurement picture, say those in the sector. 

“EPCs or operations contracts are complementary to the concessions,” says Luis de Lopez, international director for water company Aqualia. In March, Australian Infrastructure fund IFM purchased 49% of Aqualia from FCC and the company has been slowly expanding on the continent.

“Aqualia is only a recent arrival in Latin America because for years FCC was in a partnership with Veolia, in Proactiva,” says de Lopez. “Since Proactiva was sold to Veolia in 2013, a new market opened up for us. We grew in the region via solutions for us atypical as EPC, DBO and BOTs.” Aqualia is currently involved in a water treatment plant PTAR in El Salitre in Bogota worth USD 430m based on a DBO contract.

“We are mostly interested in the investment activity,” says De Lopez. “Differently from others we think that we have the know-how for the design and operation of plants and for structuring long-term investment contracts in an efficient way.”

Other interested investors, many historically present in the Gulf countries of Qatar, Kuwait and Bahrain, include Fisia Italimpianti, the water branch of Italy’s Salini Impregilo. “We have seen that there is a very interesting potential market in Latin America with important water projects, in particular in wastewater,” says Fisia Italiampianti managing director Silvio Oliva

“We have been following Latin America in the last two years and half and we want to build up on the Salini Impregilo presence in the region. We have an office in Buenos Aires and we are considering opening one in Bogota and perhaps in Brazil. These are the three countries that we consider more interesting.”

The company is involved in Colombia’s Santamarta water supply and sewer system – a project to solve water shortage in the city of Santa Marta, benefiting nearby municipalities and taking water from the Magdalena River, is complex with a long pipeline, treatment plant and integrated plants.

“We are not manager but more EPC and this is not a project we feel at ease with, but how Santamarta will be carried out will define also the other projects in Colombia, like the Canoas Wastewater Treatment Plant in the Municipality of Soacha. “In general, we are used to countries where these projects evolve more quickly. Latin America seems slower than other regions,” says OIiva.

Other companies with a strong, historical presence in the region, like water group GS Inima, part of the Korean conglomerate GS, are looking at the possibility of expanding via acquisitions.

“In Latin America GS Inima has operations in Chile, Brazil, and México. It is also actively looking at opportunities in Colombia and Perú,” says David Gonzalez Martinez, director of concessions and internal development. GS Inima has been operating in Chile for 20 years and in Mexico in the last 10-12 years, he says.

 “In Brazil we bid for three large assets two or three months ago and we are expecting the result,” said Martinez. He would not elaborate further on the projects. “GS Inima also bid in Chile for more assets. Chile and Brazil are our first target. They are two stable countries and offer medium-large projects for USD 20-30m up where we like to be involved”.

Credit guarantees
According to Ignacio Lopez-Mier, director of development for Latin America at Acciona Agua, public credit guarantees supporting loans are key to make water projects a success.

“The public guarantee mechanisms aren’t working properly in every Latin American country to ensure that they have a more defined PPP project pipeline. Perhaps the most consolidated market when it comes to PPPs is Peru, whereas in other countries the guarantee mechanisms currently in places don’t provide international investors with enough certainty to invest” said Lopez-Mier. “The guarantee mechanisms and the regulation of water resources are interlinked. Regulations help investors decide whether a project is attractive. The combination of both factors makes a project bankable.”

With so many local water projects supported by states and municipalities, it is becoming increasingly difficult to secure these guarantees. This has been the case in Brazil.

“Our past experience as a private operator has not been always successful because of the lack of legislation,” says Ana Giros, CEO of Suez America Latina. “Indeed, in Brazil Suez had concessions in Manaus and Limeira and had to leave in the early 2000s because there were no guarantees and rules agreement. This situation changed in 2007, with the institution of the new regulatory framework.”

Suez’s concession contract in Cartagena, Colombia has been a more positive example in the LatAm region, she says. It relies on a mixed-ownership company created in 1995 between Suez and the Cartagena municipality to manage water and sanitation services. The USD 350m investment plan, implemented between 1995 and 2015, allowed sewage collection service coverage to extend from 61 to 94% of the population while modern operation models helped bring water loss in the network down from around 70 to 30%.

Latin America’s political landscape is slowly moving towards a more pro-private approach. Giros points to Mexico, Colombia and Chile as three countries where the political landscape has been changing. “Political and economic stability will be key drivers of a supportive business environment. Long-term legislation on PPP happening in the different countries will also be key,” she says.

But progress may be slow, as authorities try to shake off bad memories of past water PPP experiences, many of which created a high degree of suspicion. Among the worst were those in the 1990s.

“There were many cases, especially in Argentina,” says World Bank practice manager for Latin America and the Caribbean Rita Cestti, “which did not bring the benefits that were expected. In most cases it was not a bad transaction but there was a lack of other conditions such as the lack of good regulators, a good contract or good terms in a contract.”

In Bolivia’s Chochabamba, the experience was so bad it resulted in social protests called “the war of water”. Yet, in the same country “you have Santa Cruz that also brought in the private sector and it was successful,” says Cestti.

Demand drivers
Increasing demand for drinking water in all countries will drive PPP legislation further, no matter the pace. 

 “The level of investment that is needed… is huge – six to ten times what the public sector is investing at the moment,” says Cestti. New types of private financing might include microfinance, vendor/supplier finance, commercial bank loans and bonds among others, she adds.

The estimated cost for reaching universal access to safely managed water supply and sanitation in the Latin America and the Caribbean region is about USD 19bn per year. The World Bank has a portfolio of 22 active projects for USD 3.05bn in commitments and plans to add on average 0.5bn per year.

However, not all plants are easy to bring to market and transform into revenue-generating realities. This is a field which requires, more than any other infrastructural project, social involvement and responsibility, say those in the sector. And most agree that the political and financial uncertainty in most countries has delayed projects to date.

Argentina’s sub-secretariat of water resources, a division of the Ministry of Interior, Public Work and Housing, is working on the procurement of two irrigation projects: the USD 245m Meseta Intermedia in Chubut and the USD 111m Mari Menuco in Neuquen. These are only two of a much larger group of around 38 projects announced in 2017 but details for most of these projects are still to be defined and timings remain uncertain.

For investors like Suez, active in the region for decades, patience could pay off. Present in Latin America for 80 years, the focus, it says, always comes back to water scarcity for the wider continent and how private investors will help handle with the challenge.

“We see a global trend of environmental concerns, to face water scarcity, resilience or climate change consequences. Water use and re-use, desalination as well as groundwater reinjection, are key topics for the region and Suez is actively working to help public authorities and major industries to assess the impact of these changes, to come and find appropriate integrated solutions,” says Giro at the company. “The role of private operators will be fundamental to implement innovative solutions without deteriorating public indebtedness.”

Read more

water PPP