Globally, many regions have faced infrastructure gaps for years. According to the Global Infrastructure Hub, the world faces a $15 trillion deficit between projected investment and the amount needed to provide adequate infrastructure by 2040. In Latin America, the gap is estimated at 2.5 percent of GDP, or about $150 billion per year, per the Inter American Development Bank. Much of that has been in key sectors like sanitation, communication, logistics, housing and energy.
But all is not lost. For obvious reasons 2020 and the start of 2021 have been challenging. However, some light exists at the end of the tunnel. In a Fitch Ratings report, The 2021 Sector Outlook for Latin America Infrastructure, Gregory Remec, senior director, says: “In spite of near-total economic shutdowns this year, infrastructure projects across Latin America faced significant operational and financial challenges, but mostly remained resilient, demonstrating their critical importance.
“Assets moving people were more affected than those that move goods, while energy projects were largely insulated through contractual revenues. Recovery to pre-pandemic levels will vary by sector and region, affected by government policy and intervention.”
Latin America has a diverse range of infra investments and opportunities. For institutional investors, opportunities lie more in certain parts of the region than others.
Brazil has taken shape as the country with the greatest opportunities right now. This year it announced the resumption of public auctions in the infrastructure sector, with six set to resume, likely taking place during H1 2021. The largest projects include the concession of coastal highways (valued at $556 million) and of two commuter rail lines ($467 million).
“Brazil is our biggest market in Latin America and when you look at infrastructure, Brazil is naturally the country where we see more activity,” says Fernando Faria, global deputy head of KPMG IMPACT and lead partner for KPMG’s infrastructure advisory practice in Latin America.
“But then we also have strong infrastructure teams in Mexico, Colombia, Chile, Argentina, Peru, Panama and Uruguay. We have people dedicated on the ground covering these markets.”
He notes this is important given the diversity of the region but also because political shifts and changes can have adverse effects if one positions all investments within a single area.
According to the Brazilian government, there are 172 infrastructure investment projects underway, ranging from airports to power distribution, water, mining and urban mobility.
Large institutional investors have a presence in the country, with Toronto-based CPPIB fielding a team of seven people in São Paulo. The investment firm managing the assets of the Canadian pension has had the team there for five years and also made investments in Mexico, Chile and Peru.
The fund, as of December 2020, had C$475.7 billion ($379 billion; €321 billion) in assets under management, of which C$38.2 billion (8 percent) was invested in infra, and C$17.6 billion (3.7 percent) in Latin America.
Recently, CPPIB made a C$270 million investment for a 45 percent stake in Iguá Saneamento, a water and sewage services holding company, joining Alberta Investment Management Corporation and IG4 Capital Group as investors. “Brazil is a special market for water,” says Scott Lawrence, managing director and head of infrastructure with CPPIB.
“There is approximately 84 percent coverage, meaning 16 percent of Brazilians don’t have access to clean water. So, there is a huge ‘greenfield’ growth opportunity that will provide a lot of value to the country and to the citizens of Brazil. That is an excellent opportunity for us to apply our capital.”
He also says fiscal problems for Brazil might provide further opportunities. “Like other governments around the world, Brazil is in a tough fiscal situation and we expect in the coming years there to be continued efforts to privatise utilities: not just water, but also electricity and gas. We think we will be well positioned as a partner in Iguá to support expansion in the water sector.”
Despite its huge pipeline of infra projects, Brazil is not an OECD country, explains Faria. “There are some institutional investors that will only look at Chile, Colombia and Mexico, even though the pipeline is not as extensive as the Brazilian one.”
Faria says of the sectors that make up Brazil’s opportunities, water and roads are the biggest. He adds that 20- to 30-year concessions are starting to come due and are providing new opportunities.
“We are expecting that, because of the size of the pipelines in both sectors, new investors are coming in, and government is keen to attract all of these. In the long term, I don’t see any obstacles for big players.
“In the short term, the challenge for the government is to make sure you have the transition from a market once dominated by the construction companies to a market that wants to attract long-term investors locally and internationally.”
Plenty more to choose from
Investors have also found opportunities outside Brazil. In Mexico, CPPIB has invested in toll roads, alongside IDEAL and Ontario Teachers’ Pension Plan. In Peru, it has invested in natural gas pipelines with TgP and in Chile it has also invested in toll roads with Grupo Costanera.
“From a focus standpoint, our priorities in the region are renewables, electricity transmission and distribution, and telephone infrastructure, which is somewhat more preliminary,” adds Lawrence.
With Chile, which is an OECD member, investors will find a very mature infra market, and it is not difficult for them to attract capital. Says Faria: “They are putting forward an important pipeline of roads as well as social infrastructure such as hospitals, decarbonising public transport and airports.”
Faria adds that the market is competitive, even with an active local construction company presence, although different than Peru and Brazil where these companies no longer invest in long-term infra assets.
According to Faria, Mexico is not focused on attracting private investment to infrastructure. “We saw a significant reduction of the pipeline and even with the pipeline that exists there is not much trust in it.”
Although in October President Andrés Manuel Lopez Obrador announced a $14 billion plan to lift Mexico’s economy, Faria says, “until we get some clarification that there is a role for the private sector in these projects, Mexico will not be on the top of the priorities for many infrastructure investors investing in the region”.
Columbia, while not as mature a market, is attracting investors, especially with its Fifth Generation road and transport projects.
CPPIB’s Lawrence says countries in Latin America have a special opportunity to incorporate ESG factors into their decision-making about the infrastructure they build and require. This will allow them to leapfrog the old carbon-based economies and build a better future for their citizens.