Economic stimulus through PPPs in Latin America: a post-crisis solution?

April 2021  | SPECIAL REPORT: INFRASTRUCTURE & PROJECT FINANCE

Financier Worldwide Magazine

April 2021 Issue

The global health crisis caused by coronavirus (COVID-19) hit the infrastructure sector hard, with a sudden halt in investment and privatisation programmes in 2020. Concessionaires have shifted their focus to contract renegotiation and rebalancing while delaying their capital expenditure (capex) investment programmes. Governments have struggled to bring short-term economic relief to the population, leaving aside larger, long-term development projects.

This situation is not sustainable, particularly in Latin America where the infrastructure gap has a direct impact on growth and industrial development. In July 2020, Fitch pointed out that “infrastructure development will emerge as a key focus of policymakers as a means to boost employment and support economic recovery”.

Though local governments’ public finances deteriorated in 2020, infrastructure needs remain more acute than ever, particularly in Latin America. Over the next two years, stimulating the economy will necessarily require an increase in privatisations and public-private partnership (PPP) programmes in the region.

With a reduction in the number of players capable of carrying out these complex and capital-intensive projects, several countries are scrambling to structure projects that are more ambitious and attractive to institutional and industrial investors. We adopt a comparative approach to Mexico, Colombia and Brazil’s PPP opportunities and attractiveness in an uncertain environment.

Brazil: an ambitious response

Brazil has paid a high price in the health crisis and is still struggling with a disastrous second wave of the pandemic, reaching over 10 million registered cases and 200, 000 deceased since February last year.

It is also the most active country in the region to structure and launch public-private partnership (PPP) initiatives, in order to fuel the economy and attract foreign investment. Federal and local authorities have announced a large, multi-sector pipeline with a strong will to develop roads, airports, ports and urban infrastructure.

At a federal level, Programa de Parcerias de Investimentos (PPI), the federal entity in charge of promoting PPP projects, has announced 171 projects and started this year with a focus on revitalising ports and launching an innovative scheme to develop toll roads based on the lowest tariff for users. BR-153 is the first to be auctioned under this criteria, which highlights the government’s willingness to improve infrastructure quality but also its accessibility and competitiveness. The government is also moving forward with privatising regional airports, with a large tender for three blocks due in April 2021, betting on local tourism and freight development in the coming years.

Brazilian local authorities are also very active. States like Sao Paulo, Bahia, Parana and Minas Gerais have announced ambitious road PPP development programmes (all valued at over $1bn each) for the coming years. In all of these cases, the aspiration is not only to improve the infrastructure itself but also to give users the best value for money, improving the service while offering the lowest possible tariffs to reinforce competitiveness. These projects are especially attractive for investors as they have been designed together with local and international development banks, including the Brazilian Development Bank (BNDES), the Bank of Northeast (BNB) and the International Finance Corporation (IFC).

Though building heavy infrastructure for logistics remains the country’s top priority, urban development also ranks high on the Brazilian agenda, with a pipeline of over 80 PPP projects in public lighting and on-street parking management. These projects aim to develop connectivity and the integration of various municipal services in one, centralised platform. Though smaller in size, these projects together represent a huge opportunity for industrial and financial sponsors looking to develop innovative responses to the municipalities’ environmental, mobility and communication issues.

Colombia: lessons learnt

Though much different in size and population, Colombia and Brazil share the same ambition to stimulate the post-crisis economy through infrastructure development and attracting private capital.

In 2012, Colombia’s national government, through the Agencia Nacional de Infraestructura (ANI), launched one of the largest PPP programmes in the region, mainly focused on toll road development. The fourth generation (4G) programme represented over 30 PPP projects, and has been generally successful at attracting investors, whether local, industrial concessionaires or international actors.

Now that most of these projects have reached execution phase – and some are already operational – the ANI has focused on the factors that delayed the financial closing of 4G projects, in order to design the fifth generation (5G) initiative. The 5G programme is composed of 12 infrastructure projects (not only roads but also fluvial, airport and rail), with an estimated investment of over $5bn – 1.6 percent of Colombia’s GDP. Tenders will occur in a gradual way, over the coming three years, in order to avoid the liquidity constraints experienced during the 4G programme.

Accesses to Cali-Palmira (Nueva Malla Vial del Valle del Cauca) is the first 5G project to be auctioned and the ANI has proved very attentive to the market’s concerns, offering a minimum guarantee on traffic for the first 13 years of operation in case of a health crisis. It has also improved social, environmental and right-of-way contractual obligations and management, capping the concessionaires’ responsibility in these matters and improving available coordination tools.

Mexico: the double uncertainty

In Mexico, the election of left-wing president Andres Manuel Lopez Obrador in December 2018 generated high expectations. However, the government’s stance on infrastructure creates uncertainty for the private sector, a situation further reinforced by the health crisis.

The federal government’s infrastructure programme published in November 2020 encompasses 68 projects for a total investment of $26bn, with 50 projects concerning the transport and communication sector, 14 in energy and four relating to water and waste.

This programme will generate employment and boost the construction sector but may not be sufficient in the post-crisis context – first and foremost because the impact of COVID-19 in Mexico is severe. According to the International Labour Organization (ILO), 44 percent of Mexico’s total labour market is at risk due to the pandemic. Consequently, only a massive infrastructure plan could help stimulate the economy, yet president Obrador remains strongly committed to public finance austerity.

Second, this plan leaves little space for private sector investment. Of the 14 energy projects, four will be led by public oil company Pemex and eight by public electricity company Comisión Federal de Electricidad (CFE). In addition, these projects are oriented toward fossil energies, such as the Dos Bocas refinery, with no investment in renewables energies, hence a lack of long-term perspective and attractiveness for private investors. Regarding road projects, seven were already awarded when the programme was released and 14 are desdoblamientos, meaning extended existing contracts.

Similarly, two airport projects (Santa Lucia and Tulum) will be built by the military, so are of little interest to the private sector. In addition, the recent cancellation of one of the biggest PPP projects of 2020, the Southeast bundle – a tender launched in May 2020 for the rehabilitation, operation and maintenance of 500km of road in the Southeast of Mexico (a $700m investment) – may affect the private sector’s willingness to invest in Mexico.

Despite the double uncertainty generated by unpredictable policies and the COVID-19 situation, Mexico has the capacity to promptly recover. Indeed, the International Monetary Fund (IMF) has improved its growth forecast to 4.3 percent for 2021 (after a fall of 8.5 percent in 2020). According to a survey by Credit Suisse, investors anticipate a low risk of Mexico’s sovereign rating being downgraded in the coming years. Mexico remains a strong economy in the Latin American region, and it seems improbable that investors would turn their back on it.

The halt in investment and privatisation programmes in 2020 may not be over, with the effects of the health crisis likely to last. Yet, as governments will need private sector investment to recover, they now have a strong incentive to propose better structured and more sustainable projects. And while both Brazil and Colombia implement infrastructure development strategies and rely on private capital to recover, Mexico is currently less open to private investment but remains a strong and attractive player in the region. There is hope that the worst will be behind us by the end of this year. Now is the time to think – and to learn.

 

Agathe Vigne is director of investments and new services and Perrine Chauliac is business development manager at Egis Projects SA. Ms Vigne can be contacted on +52 155 91 85 41 33 or by email: agathe.vigne@egis.fr. Ms Chauliac can be contacted on +52 1 55 7990 5153 or by email: perrine.chauliac-int@egis.fr.

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Agathe Vigne and Perrine Chauliac

Egis Projects SA

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