More and more international investors are looking at Latin America, a latecomer to the privately financed infrastructure space, as a new market for infrastructure investment, but this means that competition is increasing. Jonathan Carmody investigates the conditions that are attracting foreign investors and the strategies they are using.
In the last five years, the governments of Latin American countries have been opening up their infrastructure to private investment. This includes Mexico, where constitutional reforms have opened up the oil and gas market to private investment, and Colombia, which has bold plans to tender 8,000km of greenfield highway PPPs worth over USD 25bn.
Brazil’s Crescer infrastructure program involves the procurement of 145 projects across the transport, energy and environmental sectors, while Argentina’s RenovAr renewable energy auctions have awarded hundreds of World Bank-guaranteed PPA contracts to renewable energy developers since its first auction in July 2016.
These initiatives have spurred the interest of international investors globally as local capital markets cannot cover the costs of Latin American governments’ ambitious development plans. This has led foreign investors to take diverse approaches to entering these markets.
Investment and procurement
In 2007, foreign sponsors participated in nine infrastructure deals with a combined value of USD 5.85bn, according to Inframation Deals. By 2016 that number had increased to a peak of 76 deals across the region worth a combined USD 35.06bn. That trend is set to continue with 71 deals involving foreign sponsors having concluded by the end of 2017.
Largest transactions featuring foreign investors in Latin America 2013-2017
|Project||Year||Type||Country||Subsector||Investors||Size (USD m)|
|Nova Transportadora do Sudeste (90% stake acquisition)||2017||Brownfield||Colombia||Energy transmission||Brookfield Infrastructure Partners/China Investment Corporation/Government of Singapore Investment Corporation||5.2bn|
|Isagen (100% acquisition)||2016||Brownfield||Colombia||Energy generation||Brookfield Infrastructure Partners||3.8bn|
|Lima Subway Line 2 PPP||2015||Greenfield||Peru||Light rail||Cosapi/Ansaldo Breda/Ansaldo STS/FCC Construcción/Grupo ACS/Salini Impregilo||5.84bn|
|Galeao International Airport PPP||2014||Greenfield||Brazil||Airports||Changi Airports International/Infraero/Odebrecht TransPort||2.11bn|
|Cochrane 532MW Coal-fired power plant||2013||Greenfield||Chile||Energy generation||AES Gener/Mitsubishi||1.35bn|
Source: Inframation Deals
Juan Carlos Machorro, a partner in law firm Santamarina & Steta’s, notes that in recent years there has been an “important shift” in relation to private sector infrastructure investment in Mexico.
Machorro points to the reforms President Enrique Peña Nieto has made over the six years of his presidency as evidence that regulatory and political climates in Latin America are becoming more stable.
“All Mexican governments have to publish a national development plan that provides details on necessary investments and protects infrastructure development plans,” he says.
“These reforms shield projects against future governments that might want to come in and change existing plans,” he added.
International investors have been finding opportunities in Mexico after the government released a raft of procurement opportunities, including many PPP projects, as the falling price of oil hit government coffers. These include the country’s energy commission (CFE)’s greenfield pipeline tenders which have seen the CFE award 15 contracts for around USD 10.5bn between December 2013 and today.
Countries like Mexico, Chile, Peru and Argentina have also conducted renewable energy capacity auctions in recent years to diversify their energy matrixes and work towards ambitious climate change targets.
Mexico’s and Argentina’s auctions stand out as brand new markets for investors. For example, Mexico’s constitutional reforms of 2012 explicitly permitted private investment in the energy sector, effectively ending state-owned PEMEX’s monopoly. This reform has allowed private investors to invest for the first time in energy generation and midstream projects contracted to the country’s energy commission, the CFE, and for the first-time next year Mexico will tender a private transmission line worth USD 1.1bn in capex.
Argentina’s auctions have awarded 69 PPA contracts for new capacity through three auctions to date, but local and international investors are competing for very limited sources of financing as many investors still shy away from a country with such a poor recent credit history and a low sovereign debt rating.
Increasing institutional stability in the region and higher standards are also helping change the perception that Latin America is a riskier place to invest, according to Dale Burgess, head of infrastructure for Latin America at the Ontario Teachers’ Pension Plan (OTPP).
“OTPP has been encouraged by local governments establishing a formal agenda for what they’re trying to achieve. And governments actively promoting foreign direct investment in infrastructure through investor days and through the support they provide foreign investors, also helps minimize the risk,” he says.
Canadian pension funds have been leading the charge in Latin America for many years.
With the USD 1.75bn investment in 100% of Chilean transmission company Transelec in 2006, Canadian pension funds got their first taste of Latin American infrastructure investing. The Nueva Transelec S.A. consortium, which included Public Sector Pension Investment Board (PSP Investments), Brookfield Asset Management, Canada Pension Plan Investment Board (CPPIB) and British Columbia Investment Management Corporation (bcIMC), acquired the transmission company from Hydro-Quebec International and the International Finance Corporation (IFC). Investors have continued their surge into these markets in recent years.
PSP Investments’ director of infrastructure Gabriel Damiani points out that that PSP has found value in the region by utilizing platform companies to provide them with the flexibility they need to participate in the Latin American market.
PSP and OTPP are 50-50 shareholders in renewable energy developer Cubico and PSP is also 100% owner of highway investor ROADIS, which holds 1,610km of assets in Brazil, India, Mexico, Spain and the United States.
Roadis was originally a co-investment with international infrastructure developer Isolux Corsan to acquire and develop highway assets, but the Spanish company’s deteriorating financial situation provided the opportunity for PSP to take full ownership of the investment company.
“Platform investments are ideally suited to gaining and managing our exposure in Latin America,” Damiani says. “Our investments in platform companies have accelerated our learning curve as a company looking at the region.” He also added that the vehicles allow investors to deploy capital in smaller equity checks compared to what PSP would do for a direct investment.
Cubico recently financed the vehicle’s first plants in Mexico –– the Solem I & II 290MW solar PV plants and the El Mezquite 250MW wind farm –– all of which Cubico won at Mexico’s second long-term energy tender of September 2016. This saw the country award a total 2,871MW of capacity worth USD 4bn in investment.
Jean-Bastien Auger, senior director of infrastructure investments at PSP Investments says that: “while PSP Infrastructure generally considers large direct investments, [our] platforms focusing on airports, roads and renewable energy actively target smaller transactions.
“Through our platforms, we have established a local presence which facilitates the interactions with local stakeholders and provides very beneficial insights on the market landscape.”
International players other than Canadian pension funds have also been prominent in Latin America in recent years. UK investor Actis announced its plans as early as September 2014 to participate in Mexican renewables projects and subsequently won several projects at the auctions, with the company financing a 600MW portfolio for USD 450m in August 2017.
UK infrastructure fund InfraRed also signed a joint-venture agreement with Mexican investment bank Invex to participate in renewables developments in July 2017, making a first investment in a USD 34.5m solar portfolio alongside its new partner.
Caisse de dépôt et placement du Québec (CDPQ) also took advantage of the Mexican auctions through a new partnership it has developed over the last three years with a local fund manager.
Italy’s Enel in October 2017 sold an 80% stake in a Mexican renewable energy portfolio to CDPQ and investment fund CKD Infraestructura México (CKDIM), a local development capital fund designed to permit indirect investment in infrastructure and real estate by Mexican pension funds (AFOREs).
The investors will acquire stakes in a newly-created Mexican holding company that owns eight solar and wind assets with a total capacity of 1.7 GW, freeing up Enel’s capital to fund future renewables projects in the country, like the four new wind farms that won PPA agreements at Mexico’s third renewable energy auction in November 2017.
CDPQ had previously teamed up with CKDIM on the greenfield telecoms deal Red Compartida in consortium with Morgan Stanley. It did the same on the Enel renewables portfolio and in the acquisition of stakes in local distressed developer Empresas ICA’s highway assets.
Through the Operadora de Vias Terrestres (OVT) vehicle, Empresas ICA sold 49% stakes in four road projects to CDPQ, who then sold 49% of that stake to the CKDIM fund. ICA retained 51% control of the assets and committed to offering stakes in future highway projects to the vehicle.
Major Spanish developer OHL, which has extensive assets in Latin America, has also reorganized in the face of financial turbulence, agreeing to sell its international concessions unit and its Mexican subsidiary OHL Mexico to Australia’s IFM Investors.
These transactions demonstrate the willingness of international investors to step into existing concessions with proven returns in new markets and free up both local and international corporates for restructurings and capital reallocations.
Corruption and opportunities
Another area in which investors are finding opportunities is on the back of scandals and corruption in the region.
The Lava Jato (Operation Carwash) scandal, which implicated Brazil’s national oil and gas company Petrobras, as well as numerous Brazilian construction companies in continent-wide corruption allegations, has had a radical impact on infrastructure procurement.
Brazilian developer Odebrecht has been forced to sell stakes in infrastructure projects in which it formed part of the consortium.
Odebrecht’s cancelled Ruta del Sol Sector II highway concession and the Magdalena River Rehabilitation concession in Colombia are among a number of projects which market participants say could present new opportunities for foreign investors as well as the USD 7bn Southern Gas Pipeline (GSP) in Peru.
Investors will be able to enter these partly completed projects through upcoming tenders, but Canadian investor Brookfield has taken advantage of the developer’s demise to acquire a slew of assets.
Brookfield declined to comment on its investment plans but has since January 2015 spent more than USD 6bn on other acquisitions in Brazil, Peru, and Colombia.
Odebrecht’s corruption scandal which, rather than hamper investment in the region, has only made it easier for foreign capital to gain a foothold in the infrastructure market. It has allowed Brookfield to acquire stakes in the Rutas de Lima highway concession and the Olmos irrigation project in Peru and a 70% stake in the company’s Brazilian water arm Odebrecht Ambiental, the company’s first incursion into environmental infrastructure.
Other developers like Brazil’s OAS have had to sacrifice assets to survive, and the company is attempting to sell its 24.4% stake in infrastructure developer Invepar.
However, despite Invepar’s attractive portfolio, which includes Brazil’s main airport Guarulhos in São Paulo, and the discounted price of the asset, investors have been reluctant to buy OAS’ stakes. This is because of uncertainties in local regulations regarding companies involved in the Lava Jato probe.
Chinese capital is also increasingly targeting Latin American assets. Companies such as HNA Infrastructure Company, China Three Gorges (CTG) and China State Power Investment Corporation (SPIC) have investigated major acquisitions to expand their presence in the region.
HNA was bidding on Odebrecht’s Rio Galeão airport stake (60%), but has now been replaced by Singapore’s Changi, and CTG is attempting to acquire the Brazilian firm’s Chaglla 456MW hydro facility. SPIC acquired IFM Investors’ renewables developer Pacific Hydro, as well as a group of hydroelectric plants in Brazil from local developer Cemig and state-owned Electrobras.
2018 will be a test of how genuine Latin American governments’ commitment to their infrastructure programs are. Presidential elections in Brazil, Chile, Colombia and Mexico could see ideologically different governments come to power, which could put to the test the solidity of measures to ensure that auctions, procurements and privatizations announced by previous governments are carried to their conclusion.
With increasing numbers of foreign investors entering the region in search of opportunities finding a local partner could be key for many investors. Successful partnerships, such as CDPQ’s association with CKD IM in Mexico, and the Canadian pension funds’ willingness to co-invest in projects and platform companies, demonstrates that strength in numbers can provide comfort for investors far from home.
Corruption scandals such as Lava Jato and the weak economic performance of local and international concessionaires such as ICA and OHL will only provide opportunities for acquisitions for so long. However, the pipeline might stretch for a couple more years as Brazil rebalances the books and the scandal-hit developers like Odebrecht complete the last of their asset sales.
The energy and renewables sectors are providing opportunities for investors because of the stable and established regulatory frameworks for these assets. However, competition for contracts and assets could drive down returns as has been demonstrated by the region’s recent energy auctions. Prices have reached record lows for energy PPAs in Mexico, Chile and Argentina and developers have found that their projected margins are making project finance much harder to come by.