Latin Feel

The Inter-American Development Bank’s David Bloomgarden and Paulo Martelli, of the Inter-American Investment Corporation, discuss Latin America

How do you see the role of the Inter-American Development Bank (IDB) developing regarding P3s in Latin America over the coming years?

Sustainable infrastructure is a priority area of the IDB Group. The region’s investment in infrastructure averaged 2.4% between 1992 and 2013. Infrastructure investment in other regions was higher than in Latin America and the Caribbean: 8.5% in China, 5% in Japan and India, and about 4% in other industrial countries.

Latin America and the Caribbean is underinvesting in infrastructure. We estimate that the region needs to invest at least 5% of GDP in infrastructure for a prolonged period of time. The IDB Group will support this growth in investment by supporting appropriate enabling environments and investment in public and private sector infrastructure. As noted by IDB President Luis Moreno and economist Nicholas Stern, the world needs to move toward “smart” infrastructure: low-carbon, climate-resilient transport and infrastructure as the best route to reducing poverty and promoting economic growth. The IDB Group can play a leading role in the region in promoting and financing smart infrastructure.

The two global agreements that underlie the international community’s commitment to this transition are the UN’s sustainable development goals (SDGs) and the Paris climate accords that aim to reconcile improving human welfare with the impact of climate change. Given the time it takes to plan, finance and build basic infrastructure, our decisions today and in the next few years will impact our ability to meet the Paris goals and fulfill the SDGs.

In recent years, countries such as Colombia, Peru and Chile have increased the number of P3 projects. Do you think that the rest of Latin America should make stronger commitments with this model?

Public investment alone will not be able to increase the stock and quality of infrastructure to adequate levels. Latin America and the Caribbean (LAC) will need to increase private investment in infrastructure.

It should be noted that LAC has been the leader among developing regions in private investment in infrastructure. From 1990 to 2013, the private sector invested US$680bn in LAC, about 30% more than in the high-growth Asian economies.

We expect that private involvement will continue to be a priority for most countries in the region to meet their infrastructure needs, the degree to which in large part depends on how much investment can be delivered by the public sector.

A recent example in Colombia is the Eastern Perimeter Highway in Cundinamarca, one of the first P3s awarded by the government of Colombia under its Fourth Generation (4G) Road Concessions program. The Inter-American Investment Corporation (IIC), on behalf of the IDB Group, led the financial structuring of the project, contributing a $156m loan and mobilizing co-financing from by Corpbanca Bank, Bancolombia and Financiera de Desarrollo Nacional totalling $290m combined.

The Private Participation in Infrastructure (PPI) database shows P3 investment fell from $69.6bn in 2014 to $35.2bn in 2015, representing a 49% year-over-year decline. This is due mainly to fewer PPI deals in Brazil because of the end of an infrastructure boom for the World Cup and Olympics, as well as the economic slowdown in 2015. Other countries swelled by 37% year-over-year — 76% above the five-year average ($17.4bn).

Countries including Colombia, Peru, Chile, Costa Rica, Jamaica, and Uruguay all increased their P3 activity compared to the previous year.

What are the existing and ongoing barriers to investment in the region, and how can they be overcome?

To reach a higher level of private investment, the region needs to strengthen the regulatory and institutional capacity to create a pipeline with well-prepared projects. In addition, the region needs to develop infrastructure as an asset class to channel local currency private savings to infrastructure.

To help develop infrastructure as an asset class that would be funded in local currency, the IIC recently launched the Brazilian Reais Local Currency Initiative, which enables the IIC to provide long-term local currency loans to clients in Brazilian Reais. The initiative was launched with the $94m loan to Aegea Saneamento e Participações, a water and wastewater concessionaire. Given the success of this initiative, the IIC is exploring providing long-term financing in other currencies, such as the Mexican Peso.

Which countries do you think will be most involved in P3s over the coming 12 months and why?

The economic downturn has and will affect the supply of bankable projects that come to market. However, this will eventually turn around as countries with P3 programs launch projects. As in the past, the largest markets will continue to be Brazil and Mexico but we can expect other markets to also expand such as Argentina and even smaller markets in Central America and the Caribbean, all of which have taken initiatives recently including new laws to promote the expansion of PPPs.

In the Southern Cone, Paraguay has recently completed the bidding process for its Ruta II and Ruta VII road P3s, under the auspices of a P3 passed in 2013. This is a really important milestone for Paraguay as a country.

Which sectors are most in need of investment, and why?

Basic infrastructure is vital for development growth. Energy and transport have been the sectors receiving most P3 investment and will likely continue in the future. However, new sectors such as health and urban innovation in transport are promising sectors for the future.

What more needs to be done to improve the delivery of P3 projects?

We can identify the following needs to improve P3s in the region: build institutional and technical capacity in governments to plan, design and oversee P3s; create appropriate enabling environments including local capital markets to mobilize finance; and ensure that the government accounts for any fiscal requirements for both direct and contingent liabilities. These are the areas where the Bank Group can advise and provide support to the region.

It should be noted that construction costs are on average only about 6%-18% of infrastructure costs. The remaining lifetime asset costs are accounted for engineering studies, operations, annual and capital maintenance and decommissioning. Governments must improve their ability to plan, finance and maintain infrastructure.

In order to increase the ability to develop more P3 projects, the IDB will continue to support institutional capacity of governments to plan, implement and supervise infrastructure P3s that can be maintained over time, and provide efficient and effective services. Governments will need to continue to work on improving their institutional frameworks, funding, managing fiscal risks, and to ensure transparency and disclosure to ensure stakeholders understand the costs and benefits and scope of PPP contracts.

How can international investors get more involved in the Latin American market?

International institutional investors can be more involved in the region through dialog with the IDB Group, which can range from a discussion on potential transactions with sector specialists, through to the purchase of a participation in some of the loans that the IIC provides in the region.

Another key area of growth in the region is through local investment. Foreign currency financing is part of the solution but not always possible or desirable. Infrastructure is an asset well suited for long-term investors, such as pension funds in the region. We should be seeking to increase their involvement to help reduce the infrastructure gap.

For example, Colonia Arias, a Uruguayan windfarm project financed by the IIC, recently attracted institutional and retail investors through a financial structure featuring an initial public offering on the Montevideo Stock Exchange. Pension funds and individuals jumped at this uncommon opportunity that allowed Uruguayans to own a piece of their own energy generation. This is unique in the Southern Cone and we are optimistic we will see more in the near future.

What work is the IDB doing to help develop P3 programs?

The Ninth General Capital Increase allowed the IDB to significantly increase sovereign lending volume on a permanent basis, which can help the IDB support infrastructure.

The recent consolidation and recapitalization of the IIC also allows the IDB Group to work with public and private sector clients to make projects bankable.

A recent example is the IIC-led $117.7m loan provided to Providencia Solar, which is the first utility-scale solar power project in El Salvador. To make the financing viable, the IDB Group mobilized its private sector financing team with its public sector energy experts to work with the sponsor and government regulator to make the contractual structure bankable. After the transaction closed, the work on the contractual structure was recognized by the regulator and was subsequently used as the basis for the upcoming renewable energy tender in El Salvador, which has seen tremendous interest from developers.

Moreover, knowledge and innovation in this space continues to play a critical role in unlocking investment in P3s. In this regard, the IDB will continue to provide advice, technical assistance and share knowledge on best practices, for example, developing a Massive Open Online Couse (MOOC) on P3s in Spanish to make quality and useful knowledge more accessible.