New wave of infrastructure and energy investment opportunities abound in Latin America

19 Jul 2018

Latin America is preparing for a new wave of infrastructure and energy activity, fueled by new public private partnership frameworks, rising political and economic stability, and a workforce increasingly equipped to manage large and complex projects.

These favourable conditions have produced a timely inflow of foreign investment, with a reported 226 infrastructure-related transactions worth $US61.8 billion in 2017, as the region attracts a larger availability of capital seeking yield in riskier markets.

Mario Fernandez, Managing Director on Macquarie Capital's Latin America Infrastructure team, expects this momentum to continue.

“Each completed project has a multiplier effect, creating jobs and fostering growth, but also adding to the pool of people who have the right skills to develop and build the next projects," he says.

“As a result, we are seeing more interest in direct foreign investment throughout Latin America, with many new major North American, Asian and European players entering the market to bid on or acquire large scale projects."

Latin America's infrastructure needs are extensive, requiring approximately 6.2 per cent of the region's gross domestic product annually between the 2012-2020 period, equaling approximately $US320 billion, according to the Economic Commission for Latin America and the Caribbean.

​Current infrastructure investment in the region sits at 2.8 per cent of GDP, according to a 2017 World Bank report, which ranks as the second lowest for any region in the world, only surpassing Sub-Saharan Africa.

Latin American economies are projected to grow at an average of 2 per cent in 2018 and increase to 2.8 per cent per annum for the 2018 – 2022 period1. This implies expected growth of GDP per capita by approximately $US1,600 during the same period. With the UN forecasting population growth to also increase by around 1 per cent over the same time frame2, significantly greater investments in infrastructure will be required to support this increase in GDP and meet the needs of an increasingly urbanised population.

"It’s good news that many Latin American countries are taking steps to close the infrastructure gap because infrastructure investment and economic growth go hand in hand," says Hector Morales, Senior Advisor for Latin America, Macquarie Capital. "That is why infrastructure priorities in Latin America include better transportation such as roads, ports and airports, more reliable and cleaner electricity generation and transmission, and improved water and sanitation facilities.”

Already there are multiple auctions running for renewable energy projects in Mexico and Colombia, along with transmission projects in Peru, Chile, Colombia and Mexico. A level of activity, reflective of the population growth and continuing urbanisation, is currently shaping the region.

The opportunity for infrastructure investment in Latin America is enormous. Private sector investors are uniquely placed to help fill this gap in the region if they can recognise and address the specific needs of each project and country.

Morales says there are significant opportunities for renewable energy investment.

“There are many countries in Latin America that are pursuing lofty targets for the development of renewable energy assets and represent promising venues for solar and wind projects," he says. “These markets need modern, flexible transmission grids in addition to the projected solar and wind generation facilities."

Many Latin American countries that have relied heavily on hydroelectric power are looking to diversify their energy sources in the face of uncertain weather conditions.

BMI Research forecasts non-hydro renewables generation will experience rapid growth over the coming decade, with total power capacity for non-hydro renewables in Latin America projected to grow +124% from 2015 to 2024.

"The opportunity for infrastructure investment in Latin America is enormous," Morales says, “But there are significant obstacles. Most notable is the capital constraints within the region, including high levels of local debt and low levels of liquidity in the private sector, both of which are hindering the delivery of key projects. Private sector investors are uniquely placed to help fill this gap in the region if they can recognise and address the specific needs of each project and country. This also means that they are able to appropriately price the inherent risks of doing business in Latin America."

Fernandez agrees, noting that successful investment in Latin American infrastructure requires technical, financial and government expertise that is specific to the region.

“Companies participating in Latin American infrastructure projects can encounter a plethora of regulatory, political and financial hurdles that investors might have not experienced in other markets," he says.

“Completing the project in a way that yields a positive outcome for the stakeholders and country, and an acceptable return on invested capital, requires the ability to untangle complex situations and create innovative solutions to often unforeseen problems."

An example is the recently completed Norte III combined cycle gas plant in Northern Mexico, which created approximately 2,000 full-time jobs at peak construction while providing power to more than 500,000 homes and businesses in the area.

Throughout Latin America, it is expected that increasing investments in infrastructure and energy, especially through new sources of private capital, will create significant opportunities for local communities in the immediate future while laying the foundation for more sustained long-term economic growth.

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1. The International Monetary Fund’s World Economic Outlook, April 2018.
2. The United Nation’s World Population Prospects of 2017.

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