On Your Marks

Historical underinvestment in infrastructure is being addressed in Uruguay, but Marina Formoso looks at whether the country is trying to do too much, too soon

Countries across Latin America are suffering a financial crisis of one form or another at present. Despite – or, in some cases, perhaps, because of – this spreading downturn, many countries in this region are investing strongly in P3s.

Perhaps the most prominent example of this approach over recent years has been Colombia, with its 4G road plan being used as a tool to galvanize the entire country. Now, though, there’s another country joining that group, with work being carried out slowly but steadily: Uruguay. The country could well become a go-to destination for P3 investors in the coming years.

“Uruguay is going through uncertain times like the rest of Latin America,” says Gonzalo Bava, chief financial officer of Banco Santander in Uruguay, “but has great financial strength, international credibility and a strong institutional framework.”

For many years, Uruguay had stopped investing in infrastructure, with the exception of renewable energy. In 2016, Uruguay will be the country with the highest percentage of wind power in the region, with more than 500 turbines across the country.

However, while its renewables sector has gone from strength to strength, the country has until recently neglected to care for roads and ports. Experts suggest that if the country does not react in time, it could have a significant impact on its ability to compete with neighboring economies. For while the infrastructure has remained stagnant in recent years, the country’s population, industry and trade have continued to grow.

Despite the region’s recent slowdown, Uruguay has performed well in the past decade. In the last 10 years it is estimated that the country has increased its GDP by 5% per year, compared to an average of around 2% annually in the previous years. In particular, the transport of goods has surged. Figures show that lorry traffic on some roads increased by 325% between 2005 and 2010, leaving ports and roads overcrowded and in bad condition.

Given this situation, in July 2011, the Uruguayan parliament approved the implementation of a P3 law – with 100% of representatives voting in favor of the plans, giving the P3 concept broad political backing. As part of the legislation, a P3 unit was set up, linked to the Ministry of Economy.

The unit is composed of five economists, and was launched with four P3 pilot projects. These are: the penitentiary centre of Punta de Rieles; highways 21 and 24; the ‘Museum of Time’ science museum; and a railway project between Algorta and Fray Bentos.

Since then, the country has already signed its first P3 project: the prison complex of Punta de Rieles, which went from studies being undertaken in 2012 to being awarded to the Teyma and Goddard Group in early July this year. Financial close was reached in the same month. Meanwhile, its highways 21 & 24 project was awarded to the Sacyr-Grinor team in November, with financial close anticipated soon after.

The signing of the first deal should give encouragement to international investors, and companies looking at Uruguay will have seen plenty of promising signs in the procurement.

“For us it is an honor to be participating in the first P3s in its history,” says Bava, with Santander having provided debt on the prison deal.

Furthermore, Uruguay has the support of a number of major financial organizations, from the likes of JP Morgan to the Bank of Development of Latin America (CAF) and the World Bank. The latter has already shown interest in supporting the highways 21 and 24 project.

Daniel Alberto, an economist at the World Bank, points to Uruguay’s relative financial solvency and relative strength compared to some of its neighbors as another promising attraction for investors. “Uruguay has always stood out as stable and sustainable,” he says.

But it is not simply the four pilot projects that Uruguay is working on. Emboldened by the progress of the first of these deals, the country has recently launched much more ambitious plans, adding a wide range of schemes to the agenda. In July, president Tabare Vazquez announced plans for infrastructure investment amounting to $12bn, of which about 34% would be delivered through P3 and private initiative projects.

The program is extensive, and will cover energy, roads, ports, rail, social infrastructure, water  and sanitation.

Meanwhile, education minister María Julia Muñoz announced a plan to build or upgrade nearly 100 schools. In social infrastructure more broadly, Uruguay has a pipeline worth $400m of P3 projects for schools and hospitals.

Prior to these announcements, Uruguay has developed P3 projects efficiently, but with a focus on only a small number of deals at a time. Bringing through such a large body of deals simultaneously represents a significant step up in the scale of ambition and in the investment needed to match these aims.

“The projects must be planned over the longterm and look for financing methods in highways and schools,” says Alberto.

He recognizes that Uruguay is very new in this area, but may be able to benefit from the growing expertise in its neighboring Latin American countries. “There is a lot of experience in LatAm. The region has examples of project finance that work well,” he adds.

Uruguay has certainly done its homework in preparing the way, having looked at the UK, Australia, Canada and Spain, and its regulation framework has been analyzed by international experts.

Gonzalo Secco, partner at law firm Ferrere, based in Montevideo, suggests a balance needs to be struck here for small countries like Uruguay, which are always going to struggle to grab the attention of the market ahead of larger countries.

“On the one hand we must not overwhelm governments or companies, but in turn Uruguay as a small country has to call the attention of large enterprises,” he explains. “Without an attractive pipeline no company would move a finger.”

Alberto argues that the plans may be more of a wishlist than a proper pipeline. “Governments always announce ambitious portfolios and recognize that not all investments will perform,” he suggests.

However, he’s confident that the government will handle the program properly. “The risk is always there, but Uruguay projects come out slowly and we see no risk of overloading,” he says.

Having started out on its P3 journey, Uruguay has also been learning lessons along the way. From his experience with the prison project, Bava believes that project timelines are a matter to be considered. “We have learned a lot from this experience as well as the Uruguay P3 unit. The times for studies of planning, risk mitigation and regulatory approval are key.”

Silvina Paniza, director of the P3 Unit, explains that a lot of effort has been put into developing an improved system to make the process more straightforward and enable the authority to cope with a larger pipeline of deals. “Until now we had no time schedule,” she explains. “This is an aspect on which we are already working.”

Secco warns that one potential obstacle is the convoluted nature of the Uruguayan P3 law. “Uruguay’s P3 law could have done with less regulation, but the whole parliament decided on it because it believed it was the best option. This regulation is extensive and quite convoluted but within its framework can work well.”