Q: What is driving infrastructure demand across Latin America and how does it compare with other emerging markets?
OCB: In general, we have seen, on the political side, a shift from populist governments to fiscally responsible, centrally driven governments. That has created a better investment sentiment and has been well received by investors globally. Obviously, it’s a gradual process. I think this is the most visible explanation for better sentiment towards Latin America.
In addition, macroeconomic fundamentals, including inflation, which is another very important element when making investment decisions – particularly in large countries such as Chile, Brazil, and Colombia – are very much under control and have been very well managed by the central banks and so that provides a more favourable entry environment.
Obviously, currency volatility is an issue that will continue to affect decisions, but from a structural point of view, there is a general perception this is the right time for investment decisions. The region is resuming growth and that is demanding capital.
Q: How open is the region to private capital?
OCB: There’s really not much dispute about the role of private capital. Each government in the region is pursuing large volumes of private capital in light of their inability to meet the investment requirements, considering the fiscal limitations all the countries have, with a few exceptions.
Brazil has been open to private investment in infrastructure since the 1990s, when Fernando Henrique Cardoso was president. He launched a major privatisation programme and in order to attract private capital, created the regulatory agencies for most of the sectors that he wanted to privatise.
Since then, the country has been very open to private capital. It’s quite a long process we’re talking about, almost 30 years. That allows investors to actually analyse the history and see the behaviour of the regulators in tariff decisions, concession renewals and on balancing competition. It’s a positive balance when it comes to offering a relatively stable regulatory environment that has been fostering investments.
The same is true in Chile, which has also had a long tradition of attracting private capital, and in Colombia. And although it’s a newer experience for Argentina, they are on the right track. If you do your homework and choose carefully which sectors and what situations [to invest in], you can find a very good risk-return balance.
Q: How much of the Brazilian investment pipeline is dependent on what happens in October’s presidential election?
OCB: Some are offering stronger support than others, but all the candidates in their campaigns are saying they will need to attract private capital. Even the leftist candidates here talk about continuing the concession and privatisation programmes, with some exceptions regarding the Brazilian state oil company, Petrobras. Apart from that, there is a very common element across all the candidates of defending private capital flows as key to regional growth, which needs to come as a result of greater infrastructure investments.
As an investor in this market for the past 12 years, we’ve been having good experiences across different cycles and presidents. The regulatory framework offers good stability, even with governments that are not so pro-market. We see a number of sectors that demand better infrastructure, so opportunities will continue to show up regardless of the result.
Q: In its most recent outlook, Fitch spoke of ‘erratic recovery’ in the Brazilian roads sector, with traffic growth slowing. It was more positive on the power sector, though. Do you think the latter might be more attractive these days?
OCB: Both sectors are actually quite attractive and we have investments in both. We created our own platform – Argo Energia – to invest in new transmission concessions, which is going quite well. We also invested in toll roads less than two years ago when we acquired a toll road in São Paulo through our platform Entrevias.
Entrevias is a brownfield asset in which we are required to duplicate a portion of the highway under concession, which is currently a single-lane road, but it already comes with operating cashflow. In terms of the outlook, the toll road sector has been consistently growing over the past months, on a trailing 12-month basis.
The power sector has also been expanding quite rapidly and continues to offer a stable regulatory environment, as well as a pipeline of investments in transmission lines, renewables and thermoelectric facilities, particularly natural gas-fired. Those are three segments within the power sector that we’re bullish about and we continue to see good economics for, as well as the pipeline of auctions that the government has been announcing for the short and medium term.
Q: Sticking with power, are you investing in renewables?
OCB: We have been investing in renewables since 2006 in Brazil, and more recently, we have invested in renewables in Chile and Peru with a company called LAP – Latin American Power. It currently holds the largest wind farm in Chile.
Currently, we are developing a wind project in Brazil, which is a very attractive project with strong capacity factors. The two segments we are likely to expand into the most in the next decade or so are wind and solar. The energy matrix in Brazil has historically favoured large hydro power plants, but this segment has mostly reached the limit due to environmental limitations.
Large hydropower still accounts for about 60 to 65 percent of our matrix. That is gradually being replaced by wind and solar, with wind growing very fast.
Q: Digital infrastructure is attracting a lot of attention in Europe and North America. How is this panning out in Latin America?
OCB: Latin America is one of the fastest-growing markets for data and for telecoms, but the bottleneck is still quite big. Broadband subscription in Brazil has been growing over the past two years at rates of close to 50 percent, so there’s huge demand. The same pattern is happening across the region, in Argentina and Colombia – these markets are demanding greater access to broadband and data centres. Brazil has a big deficit of high-quality, independent data centres.
Also, when it comes to telecom towers, we’ve seen a very strong expansion – substantially above GDP for the past decade. We’ve been investing in this sector since 2011 in both Brazil and more recently in Argentina. Of the two, Argentina is lagging behind and needs to push for more investments. But the general upward trend will remain if coverage is to be expanded, and that will require investment by the typical tower vehicles that you find in developed markets.
Q: What advice would you give to foreign investors considering making their first move in the region?
OCB: I’d say the major motivator in this region is that you can capture returns that are substantially above what you would normally find in developed markets, even above what would be generally required to offset the typical macroeconomic risks.
Having said that, I think Latin America remains a sophisticated market, which poses both opportunities and risks. It is not a trivial market to invest in, so having strong management teams and being associated with experienced managers that really understand the sector and have a good execution track record in the region is essential for investors to be able to capture superior returns.
In our view, global investors should consider having an increased allocation to the Latin American market in light of the large pipeline of opportunities and the compelling risk-adjusted returns.