Latin America is living through turbulent times. Over the past year, the South American continent has been hit by political uncertainty, corruption and natural disasters. Even by the region's troubled past, the scale of the challenges it faces following huge storms, major earthquakes and a corruption scandal that has already toppled several top politicians is perhaps unprecedented.
However, countries like Mexico, Chile and Peru are proving that their legal frameworks are strong enough to resist these shocks and keep innovating. As a result, infrastructure projects keep arising. Key to this progress is that governments are trying to find new formulas to seduce the private sector.
In Mexico, for example, the government has officially launched Special Economic Zones (SEZs) and the authorities are actively accepting unsolicited proposals from companies interested in investing in the municipalities of Lázaro Cardenas, Coatzacoalcos and Puerto Chiapas.
The SEZ program has two goals: first to regenerate and financially reactivate areas that have been historically marginalized. The second aim is to develop frameworks that are attractive enough for the private sector to invest in areas they previously would not have considered target destinations.
“The clarity of the regulatory frameworks is the key to open investors’ appetite in any sector and especially in infrastructure, which is normally publicly owned,” explains Ignacio García de Presno, leading partner at KPMG's Mexico infrastructure advisory. “Clarity is the key to encourage any private investment and that is precisely what we are doing with SEZs, with a very good administrative and taxation clarity for the private sector to invest where it is not investing today.”
The three municipalities chosen as the pilots in the SEZ program are located in large port areas in the south of the country. The Mexican government is hopeful that the SEZ initiative can kickstart investment in historically underdeveloped areas that have greater levels of poverty than the rest of the country. Through the SEZs, it is hoped that the areas can reach the same pace of growth and economic development as the rest of the country.
“These three new economic development zones will seek to encourage investment in all directions for the services sector, to develop trade, to generate industry and also to develop infrastructure,” García de Presno explains.
Within the SEZ areas, private companies will find fiscal incentives such as a 100% discount on income tax during the first 10 years of operation and the following five fiscal years will only require a payment of 50% of taxes.
“Some of the benefits will be both fiscal and labor, special customs regime, an agile regulatory framework, first level infrastructure, support programs (human capital, financing, innovation) as well as incentives and preferential conditions,” according to the federal Secretariat of Communications and Transportation (SCT).
An investment of $5.3bn is expected from private industry over the next two to three years. The pipeline, which is still to be tendered, will include 53 projects in transport and logistics; 31 projects for water; and 17 in the energy sector.
The private sector is expected to support 63% of the investment. It is anticipated that this pipeline will run for at least the next 20 years. As projects are planned for the long term, experts are advising patience.
“We believe that the SEZs will be a new economic engine of development and we hope that the expected effect will emerge,” says García de Presno. “But it is necessary to emphasize that this will not be immediate but will evolve and gain speed with time.”
The SEZ model has already been used in other countries – most notably in China, India and Russia – and that is why experts believe that this type of initiative could easily be exported and integrated into other Latin American countries as a short-term measure to tackle historical lags in productivity.
However, for the quickest and most successful impact, experts suggest that legal frameworks will need to be standardized between the different countries. The belief is that, if such standardization could be achieved, it would allow investors to view the region as one homogenous opportunity, rather than different countries with different regimes providing a range of barriers to entry. As an example, the first P3 project was launched in Chile as far back as 1992, whereas Paraguay's first P3 project was launched in 2015.
As part of this effort to build an intercontinental framework, Mexico, Chile, Peru and Colombia have been working together in the Pacific Alliance, a coalition that seeks larger economic and financial integration for the development of the service sector. The organization aims to promote inter-regional investment, thereby improving the bankability of infrastructure projects through greater availability of foreign capital. Both the SEZ program and the Pacific Alliance initiative are expected to boost development and infrastructure, albeit that they are coming at the problems from different angles.
“The Pacific Alliance is focused on improving the service sector which, indirectly, will require improving infrastructure,” says García de Presno. “While SEZs seek to lay the groundwork for investors to invest where today it is not economically attractive to do so. These are two different logics but it is intended to obtain the same result, which is development.”
According to the Inter-American Development Bank (IDB), the Pacific Alliance is expected to become one of the most successful economic blocs in the region. However, it has been noted that a lack of infrastructure could cause severe delays in these aspirations – demonstrating just how important it will be for these countries to work together to tackle their backlogs.
And that is recognized by officials, with the alliance agreement encouraging new construction that would create transport infrastructure that is of the same level as Europe and Asia. To do so, the alliance intends to set up a fund together with the IDB and the Development Bank of Latin America to finance infrastructure projects, with investments to come from private entities and institutions from both within the bloc and globally.
Plenty of the details are yet to be ironed out. For example, how investors will be matched to projects; the type of corporate governance the fund will have; and each Pacific Alliance country’s share in it.
Nonetheless, authorities have already estimated that the initiative may mobilize over $100bn, based on the value of the portfolio of mega-projects that requires funding.
Peru recently launched an infrastructure fund through its Pension Fund Administrators, which aims to provide up to $1bn ready to invest in infrastructure projects within the country.
As the region gears up for more international investment, this shows investors that Peru is serious about transforming its infrastructure.
This fund, the Pacific Alliance and the SEZs are all examples of how Latin America is seeking to develop an environment for investment, so that it is able to compete at the same level as other economic giants across the world. And it is worth remembering that despite these efforts, Latin America still as a whole invests just 3% of GDP in infrastructure, whereas the Asian giants are investing 10%.
What will be critical to Latin America's success, however, will be the pipeline of projects. “Generally, all initiatives have been welcomed by the private sector, nationally, and internationally,” says Alejandro Baquero, executive director of transaction advisory services at EY Colombia.
“However, a wholehearted embrace of these models will depend on the implementation of actual projects, as well as further outreach and communication of these models among relevant stakeholders.”