A comparative view on the approach to ESG in PPP financing for roads in Latin America

April 2022  |  SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2022 Issue

While the road concessions pipeline in Latin America is extremely dynamic, concerns often arise among developers, lenders and investors when it comes to ensuring the sustainability of these complex projects. Large toll roads generally become a key axis of development and may impact on the environment and local territories where communities benefit from increased economic opportunities and improved road safety. Therefore, a detailed environmental impact assessment study should be undertaken during the early stage of the project to outline the related risks and determine how they can be properly addressed in compliance with international standards, such as International Finance Corporation (IFC) environmental, social and corporate governance (ESG) performance requirements.

So, how can developers embed an ESG approach from the beginning of the project? What is the best possible split of responsibility between the public and private sectors in the Latin American context? How can the entry of global infrastructure developers, investors and banks change the rules of the game and bring ESG innovations as a key objective in countries where, until now, the focus was on developing infrastructure only for the purposes of financial returns?

The role of developers

Developers have a key role to play in applying international ESG standards, from structuring and designing projects to implementing specific solutions identified under the Environmental and Social Action Plan and the Environmental and Social Management System, including the disclosure and reporting process.

When international developers entered the Colombian road market, local players benefitted from their partners’ experience in these matters, gaining comfort and knowledge on how to structure and implement sustainable infrastructure. Ruta del Cacao and Autopistas al Mar 1 are good examples of this evolution, with the participation of international engineering, procurement and construction (EPC) companies also attracting international investors that demanded higher standards than those required in concession contracts.

The initial experience of how ESG risks can be managed in Latin America presents a good sign for future sustainable projects.

Energy efficiency is another great example of a win-win solution, where both the shareholders and all stakeholders have something to gain. Nevertheless, what happens when the trade-off is not so straightforward and ESG decisions affect short-term profits?

Developers with ESG DNA have the ability to understand international performance standards and apply them to each phase of the project. For instance, out of the 29 toll roads tendered under the fourth generation of concessions programmes in Colombia, 19 were impacted by 438 archaeological findings. Trade-offs had to be found, in conjunction with the authorities, to ensure the project’s viability without destroying the cultural heritage of the affected regions.

Developers have a leading role in pushing for higher ESG standards in road concessions. Indeed, they are strongly integrated with local communities and have the capacity to find innovative solutions. It is also crucial for the construction industry to uphold these standards to win the war for talent, motivate the next generation and recruit a diversified workforce.

The role of governments

Public entities have a leading role in imposing the right standards and regulations to ensure project sustainability. For each concession or public-private partnership (PPP) project in Latin America, the public grantor now systematically includes ESG guidelines or minimum environmental and social requirements as standard.

Nonetheless, these criteria are more or less demanding, depending on the intervention of local and international development banks involved in the project. The IFC has been very active in structuring toll road projects in the region and successfully influenced the fourth generation of concessions in Colombia and the Sao Paulo toll road programme in Brazil, including considerations on climate change resilience and innovative mobility proposals. For example, the Litoral Paulista toll road will be equipped with 72km of bike paths and special toll tariffs for residents and frequent users from the area to broaden acceptance of the project.

Local development banks, such as Banco Nacional de Obras y Servicios (Banobras) in Mexico, Financiera de Desarrollo Nacional (FDN) in Colombia and Banco Nacional do Desenvolvimento Economico e Social (BNDES) in Brazil, are also key players that participate in project preparation and place ESG requirements at the heart of their criteria when financing infrastructure projects in the region. They have strong influence as they sometimes act as the grantor (Banobras) or lender, with attractive financing conditions. BNDES recently obtained the highest ESG rating (A1+) from Vigeo Eiris, a leading agency in the sector.

Another good example is the state of Minas Gerais’ Belo Horizonte ring road project, which includes minimum ESG guidelines for the future concession holder. That covers planning and design, as well as construction and operation and maintenance (O&M) phases. In the guidelines, the grantor applies local and international metrics with a clear focus on attracting investors, both in the debt and the capital markets.

The role of investors

Finally, investor stewardship is the key to raising ESG standards in the region. In effect, the recent entry of large international funds into Colombia dramatically shifted the ESG approach on fourth and fifth generation projects.

For example, John Laing recently invested in Ruta del Cacao, a 236km highway, and one of the fund’s first decisions was to name an ESG manager to the board. This ensures that knowledge, targets and priorities trickle down to operational levels. BlackRock’s commitment to the net-zero transition also sets an example to consider the long-term impact and purpose of any investment.

Institutional investors are conscious that commitment to ESG standards is a shield that protects their investment now and in the future. In Colombia’s Pacifico 3 project, thanks to the quick implementation of a remediation plan after one of the company’s partners was investigated for corruption, the project’s rating was preserved and could continue.

Latin America is on the path to implementing successful and innovative ESG solutions to keep building road infrastructure, linking territories and promoting economic and social equality. Open dialogue between public, private and financing institutions is crucial to adapt and make the necessary trade-offs to manipulate the benefits of each project.

 

Agathe Vigne is director of investment and new services for Latin America at Egis Group. She can be contacted on +55 11 97094 2885 or by email: agathe.vigne@egis-group.com.

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BY

Agathe Vigne

Egis Group

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