A New Era of Infrastructure Finance

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Several countries blazed the trail for public private partnerships (PPPs) in Latin America as governments sought ways to bolster investment in basic infrastructure without burdening government balance sheets.Finance

Since Chile and Brazil pioneered concession highways in the late 1990s, PPPs have grown in popularity with twenty countries across the region using the mechanism to a greater or lesser extent while some of the original projects, such as Santiago’s international airport and certain Chilean highways, are now being expanded under second generation concessions.Finance

Prior to the Covid-19 pandemic, infrastructure investment was recovering strongly from the slowdown that had been triggered by the slump in commodity prices and the impact of the Lava Jato and Odebrecht corruption scandals on investor confidence. According to a study by Credit Agricole, issuances of project bonds in the region rose from US$3.4 billion in 2015 and US$5.1 billion in 2016 to a record US$12.3 billion in 2018 and US$10.3 billion in 2019.Finance

Post-pandemic, the good news for Latin America is that investors are champing at the bit to invest the region’s infrastructure. “We are seeing a lot of interest…Many sponsors have finished their projects, cashed out and now are ready to invest again,” says Jorge Di Terlizzi, an infrastructure and projects lawyer at Philippi Prietocarrizosa Ferrero DU & Uría’s Bogota office.Finance

Recent tenders in Colombia have attracted as many as seven proposals suggesting a healthy level of competition.

Financing of infrastructure has grown more sophisticated, moving beyond the traditional project finance model to multisource financing which combines loans from commercial banks with capital markets while pension funds, insurance companies and investment banks are entering the sector in search of greater yields.

Tighter restrictions on commercial banks keeping long-term infrastructure loans on their books (as more countries adopt the Basel III banking regulations) mean that banks will increasingly use miniperm loans to finance projects through construction after which they can be refinanced, predicts Jessica Springsteen, a lawyer specializing in infrastructure in Latin America at Clifford Chance.

However, the sector faces significant challenges, some that predate the pandemic and some newer ones. The surge in global inflation is making it harder for governments, lenders and building companies to assess risk, especially during the construction period. Asphalt prices in the region have risen by almost 60% over the last twelve months, causing headaches for roadbuilders. As central banks around the world have hiked interest rates to contain rising inflation, financing costs have risen significantly.

“Capital markets are dead for now, both locally and internationally,” said Clifford Chance’s Springsteen. This will require alternative investors, including pension funds, insurance companies and investment banks to play a greater role, she says, pointing to a recent investment in Uruguayan rail by German insurance giant Allianz.

But some projects may suffer delays as markets adjust. In February, the Brazilian government was forced to suspend a tender for the US$1.2 billion BR-381 highway concession due to lack of investor interest. When markets stabilize again, the increased spread between interest rates in emerging and developed markets could generate greater interest among foreign lenders to support projects in the region.

Another challenge is the politics in the region where the pendulum has swung back towards left-leaning administrations. Elections in Mexico (2018), Argentina (2019), Peru (2021), Chile (2021) and Colombia (2022) have all led to governments with more a skeptical view of private business.

Interventions in major infrastructure projects have become more common. In 2018, Mexican president Andres Lopez Obrador halted construction of a new US$13.0 billion international airport for Mexico City even after it was a third built. The following year, Argentina’s President Alberto Fernández annulled highway maintenance contracts worth US$1.73 billion awarded in the country’s first ever PPP tender.

“Their whole view is that they are very wary of the private sector,” explains Springsteen.

There is concern about the possible effect of Chile’s proposed new constitution on property rights, including compensation for expropriated assets, and the politicization of the fees paid for basic services, including fuel prices, energy bills and road tolls.

Meanwhile, investors are waiting to see what stance Colombian president-elect Gustavo Petro, who is to be sworn in August 7, will take on Colombia’s US$12.3 billion 5G portfolio of road, rail, and river projects. Although infrastructure did not feature heavily in Petro’s campaign, plans to hike taxes on the wealthy and halt oil and gas exploration have worried the private sector.

“He has promised macroeconomic decisions which could generate a lot of nervousness among investors,” says PPU’s Di Terlizzi.