Infrastructure in Latin America: impacts of the elections

Industry players analyze the scenario for investments in the region, where several countries have elected new governments.

March 6, 2019Infrastructure

Infrastructure sector players and specialists have been closely monitoring recent federal administration changes in Latin American countries – as is the case of Brazil, Mexico and Colombia. However, such changes are not necessarily a preponderant or limiting factor in new private investment analyses in the region – even turns to the left, as in Mexico, may represent opportunities.

This is what the first report of the ‘Infrastructure in Latin America’ series, produced by the GRI Hub team in early 2019, identifies based on interviews with market players and specialists. In all of the series’ stories, the focus is on the main challenges faced to attract investments and promote new projects in the industry in the region.

Beyond the political cycle

Considering that 2018 was a year of great volatility in Latin America and around the world, Bernardo Serafim, head for Latin America Development at Vinci Concessions and managing director of the group for Colombia, believes that 2019 will be a year of many opportunities for the private initiative. “We are optimistic and are still working on new projects [in the region],” he says.

Nevertheless, he does acknowledge that the elections brought about great changes. “In Colombia, the choice was for continuity, but Mexico turned to leftism, with some extremism. Meanwhile, in Peru, although the election is not recent, Congress is not allowing the current president to work.”

“Of course, change and relationships with governments are important, but these are two of several criteria taken into account in a long-term contract. Our investments are for 30 years; therefore, on average, we go through six to eight administrations,” notes Serafim.

In the same direction, Egis Projects also has a vision that goes beyond a single administrative period. “It is clear that political conditions are considered as part of the the [project’s] risk analysis and we will be attentive to the infrastructure plans announced by the recently elected administrations in Latin American countries,” says Agathe Vigne, the company's Business Development manager for Latin America. However, as a long-term investor and operator, Egis Projects believes that we must also answer other questions: is there a good balance of risk between the public and private sector? Does the project make sense and is there an operational or technical complexity where we can bring value? Can the project be financed and how do our partners (financial, industrial) value it? These are crucial questions for starting new proposals.

Mexican instability

The extremism the Vinci Concessions executive mentions can be exemplified by the recent cancellation of the New Mexico International Airport (Naim), which envisaged the construction of an ambitious international terminal in the city of Texcoco estimated at about $13 billion and started in the administration of the predecessor, Enrique Peña Nieto. According to official data, at the time, the mega work got underway, 305 national and international companies were participating in the construction.

The current Mexican president, Andrés Manuel López Obrador (AMLO), had already been pointing to the redirection since the election campaign. The interruption was announced after a popular consultation made before he took office, in October 2018. Most (69.95%) of the participating citizens opted, alternatively, for the expansion of the Santa Lucia military base, representing savings of $5 billion compared to the new terminal.

“The Naim case raised many doubts about the country’s stability and concerning the guarantee that investments will be protected,” says Serafim.

“Investors have one eye on the present and the other on the future. If they look at the present, they will weigh attractiveness versus the regulatory framework. When looking down the road, they will measure the continuity risk and, if this is positive, they will not invest in the present or increase the short-term internal rate of return,” adds Paulo Resende, coordinator of the Center for Logistics, Supply Chain, and Infrastructure at the Fundação Dom Cabral  (FDC), in Brazil.

On the other hand, as Vinci Concessions itself points out, even this scenario might add attractiveness. “We might see groups interested in divesting, and this might bring opportunities for those who want to enter the country, which remains important,” says Serafim.

"We are currently working on several projects in Mexico, mainly in highway operation and improvement and in the public transport segment,” says Agathe Vigne, who keeps the country among Egis’ priorities in the region.

Prospects and setbacks

Among the new management projects that may be of interest to companies in the industry are the Maya Train, one of the AMLO flags and which aims to interconnect the main Mayan archaeological centers. The government says construction is expected to take about four years to be completed, at a cost of $6 billion to $8 billion.

Publicly, the Mexican leader has already signaled to the private initiative. “Since [public resources] will not suffice, we will summon partnerships with the private initiative, so it will be a mixed investment – public and private,” he said.

However, another project that would have involved the private initiative was canceled in January. Bidding for two high-voltage direct-current transmission networks, considered the most important in the country’s power sector and with investments expected to add up to around $3.3 billion (from Tehuantepec to the central region of Mexican territory, and the interconnection of Baja California to the rest of the country) was canceled. The ventures were expected to be carried out through public-private partnerships (PPPs).

“It is not yet possible to know what will happen in President Obrador’s administration, but perhaps we are experiencing a certain regression,” analyzes Joísa Dutra, director of the Infrastructure Regulation Center at Fundação Getúlio Vargas (FGV/Ceri), in Brazil, and former head of the Brazilian National Electric Power Agency (Aneel, the acronym in Portuguese).

The expert points out that such a situation might be positive for Brazil. By drawing a parallel between the two economies and analyzing competition for private capital, the current context would be the opposite of what happened years ago during the regional pre-salt race. “[At that time] the opening and the reforms that were being implemented in Mexico attracted a lot of international attention and affected Brazilian competitiveness, which was still in the midst of indecision,” he recalls.

“We are moving the other way now. There are still a few issues to understand about how the [Brazilian Jair] Bolsonaro administration will act; however, from the infrastructure sector’s viewpoint, what I see is a very clear move towards privatization and divestment, which will represent the pursuit of gains in efficiency and to attract private capital,” adds the expert.

Brazil: Towards greater private participation

Led by Bolsonaro since January 1, Brazil has intensified the agenda of economic liberalization and opening up to greater private participation in the infrastructure sector and has announced new concessions and projects. The current federal administration’s strategy includes state-owned company privatizations, extending incentivized debentures to corporations, public asset concessions, and new PPPs.

As GRI Hub articles have already pointed out, the concessions planned for 2019, especially for the transportation and logistics segment, tend to be attractive to domestic and foreign investors. With the new configuration of Congress, facing the current moment of the Country, it is also believed that progress will be made in priority agendas aimed to unlock the infrastructure sector.

To Paulo Resende, the challenge is to establish an environment that encourages such contributions. “If the current administration is able to create a moment of acceleration, it will enable a long-term investment cycle. I believe this administration has all possibilities, and the first steps taken already move in that direction,” he points out.

A sample of what lies ahead is expected to be the round of airport concessions. The auction of the three airport blocks – made up of 12 terminals and divided by region – is scheduled for the 15th, and there is great expectation surrounding it. “There is interest, and we are monitoring this,” says the Vinci Concessions executive, without going into details.

Perspectives in Colombia

A nation that has remained attractive is Colombia. With its recent entry into the Organization for Economic Cooperation and Development (OECD) and the election of the neoliberal Iván Duque, the country is the third most competitive in the world in terms of regulation for funding infrastructure works through PPPs, trailing only the United Kingdom and Australia. The data are in a World Bank report released in 2018.

Soon after taking over the Casa de Nariño, Duque also introduced an innovation by starting to shape his 2018-2022 National Development Plan, the theme of a GRI Club Infra meeting in Bogotá last January. In October, he launched a portal for the civil society to participate actively in the process, with proposals aimed at the country’s growth. Among the initiatives logged on the platform, there are urban mobility, urban infrastructure, and power projects, for example.

Considered a good political articulator, the Colombian leader has been working on unlocking the infrastructure sector. In early February, when presenting his National Development Plan (PND, the acronym in Spanish), he set out to break records on the most diverse fronts.

In the meantime, the intention to extend port concession terms to 80 years was announced. With the inclusion of an article in the current law, the proposal of the Minister of Transport, Angela María Orozco, aims to free up projects in the sector. A contract is currently signed for a 20-year term, and may be extended by another 20.

“Obviously, each project is unique, and we need to analyze and set limits, balancing the necessary investments and costs in the period, but this is a very healthy initiative,” says Bernardo Serafim.

To Agathe Vigne, initiatives such as the National Infrastructure Agency (ANI) also help identify projects and direct investments. In the country, the company has been monitoring, with particular interest, the secondary highway and airport market and potential PPPs, which are expected to be announced this year.

Maurício Ossa, president of the Colombian outfit Odinsa, had already pointed this perspective out before the elections. In an interview granted to GRI Magazine, he said that both the creation of the ANI and the regulation of the Infrastructure Act, in addition to the installation of the Vice Ministry of Infrastructure, represented “significant progress in regulatory issues, so that a political change will not affect the sector’s perspectives.”

Chile, Peru and Argentina

At the La Moneda Palace, Sebastián Piñera has been maintaining Chile’s stability announcing cessions to the private initiative in the country, such as the second concession of Ruta 5 Tramo Talca-Chillán and the bid for Ruta 5 Tramo Los Vilos-La Serena + Conurbación.

In Peru, president Martín Vizcarra seeks to bring more transparency to the sector and cleanse the nation’s image, following the case involving Odebrecht, which caused the fall of then-president Pedro Pablo Kuczynski in the first half of 2018. In fact, the activities of the General Comptroller of the Republic, one of the aspects industry players see as essential, were the subject of the first exclusive GRI Club Infra meeting in Lima in 2019.

“We have projects in Chile, Peru, Colombia, Brazil, and in the Dominican Republic. Therefore, there is a commitment to these countries,” confirms Vinci’s Bernardo Serafim, who emphasizes that he is aware of future opportunities in these countries.

In the electoral calendar, there is also the future of Argentina and how the market will keep pace with this new electoral race; however, it still seems to be too early to place any bets. The leader of that country will be defined on October 27.


By Estela Takada

Infra Latin America GRI 2019

Challenges in Latin America and how to overcome gaps for infrastructure development in the region are topics of the Infra Latin America GRI, which is scheduled for May 16 and 17 at The Roosevelt Hotel, in New York.

The 4th edition of the event will bring more than ten discussion rooms to address strategic, country-specific topics and issues related to the region as a whole. The post-election landscape and policy changes brought about by new federal administrations in key countries are on the agenda, available here.