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Infrastructure in Latin America: project origination

The last report of this GRI Hub series addresses the challenges of the embryonic stage of partnership with the private initiative.

4 MIN READ April 01, 2019

Issues such as policy changes, the regulatory framework and transparency are considered highly relevant to the establishment and success of sound public-private partnerships in the Latin American infrastructure sector. However, the true Achilles heel for further progress may be at an embryonic stage, long before public hearings, bidding, construction or operation, that is, in the so-called project origination.

GRI Hub’s last report in the ‘Infrastructure in Latin America’ series, which heard from renowned experts and market players, addresses the preliminary phase of privatization actions, which is considered a priority and the region’s main challenge in unlocking negotiations and in leveraging expansion movements.

“In general, Latin America’s main weakness in attracting private investments is project slowness. Between structuring and the construction plan, there is an important deadline, which is delayed by the presidential periods,” says Federico Villalobos, a Financial Advising and Infrastructure partner at Deloitte Costa Rica.

Specializing in PPPs, and with a track record of participation in important projects in Central America with the Organization for Economic Cooperation and Development (OECD) and the Inter-American Development Bank (IDB), Villalobos says that the first step, which is crucial for the best planning of the sector, is a paradigm shift in public administration. “Today, a management is evaluated positively or negatively based on how many inaugurations it makes. There is a short-term view.”

“Another major challenge is not giving the due attention to the initial phase of the projects – the preparatory and preliminary study periods. Without a solid study, a project will not be interesting to investors,” explains the Deloitte executive.

Greater private participation

Bernardo Serafim, head for Latin America Development at Vinci Concessions and managing director of the group for Colombia, in turn, advocates that companies increase their performance at this stage. “Nowadays, the private sector’s participation begins too late. The resources needed for structuring are not used yet, which causes delays and origination problems. It would be ideal for the private sector to contribute at this stage.”

“This collaboration, along with risk allocation, replicating the best practices of other countries, other governments, removing the political role, and imposing greater technical strictness, with transparency and customization within the local context, is important,” says Serafim.

Asked about what would be essential in this process and about possible directions, the Vinci Concessions’ executive emphasizes that “it is necessary to reduce the distance between public and private, always within the contractual spirit and with transparency. It is relevant that a partnership not start after the structuring or offer, but in the step before that, in advance, which will add solidity to the projects. That is the main point.”

Nevertheless, Villalobos says that such support is only possible if the States have technical capacity for analysis. “In a few cases, this kind of partnership did not progress because the States did not have the capacity and technical expertise to evaluate the proposal. They might approve a very bad project or reject a very good one. We saw delays in this evaluation and companies losing interest,” he says.

To Villalobos, the best solution is to turn to multilateral organizations, such as the World Bank and the IDB. “For lack of capacity, this is the typical path, but it is also essential that governments have their own structures that are able to present well-executed projects, which is good for all parties.”

Training on both sides

“A project is much more comprehensive than a works and engineering plan. A structuring in the form of non-recourse finance [for example] has a few component blocks, such as insurance and demand instruments, items that need to be carefully analyzed,” says Joísa Dutra, director of the Infrastructure Regulation Center (Brazilian Fundação Getúlio Vargas/Ceri) and former head of the National Electric Energy Agency (Aneel). 

At this point, she notes that the private sector also needs to be better prepared. “Some of the industries that offer these components, such as insurance or mechanisms to channel resources from institutional investors, do not yet have an architecture that is completely adequate to make things feasible.”

Accurate studies

Paulo Resende, coordinator of the Center for Logistics, Supply Chain and Infrastructure of the Fundação Dom Cabral (FDC), says another essential factor is rigorous studies. “We need to work and explain the projects better, especially in terms of demand. We must avoid the trap of justifying the demand for a project. If there is no demand, it is removed [the project from the portfolio]. There is nothing worse for the investor than being cheated in this regard.”

In Brazil, cases such as that at Viracopos Airport raised doubts about this capacity. In July 2018, the concessionaire that won the bid to operate the terminal located in the city of Campinas (SP) filed a request for court-supervised reorganization, liability flexibilization, and term increase to ensure the operation. Among the company’s arguments to justify the crisis, emphasis was put on the low passenger and cargo demand, below the figure that the federal government had set before the concession.

Positive perspective

Although Latin America is still far from what is expected, the experts the GRI Hub listened to reiterate that there are opportunities and that they see progress in the major economies. Programs such as the Brazilian PPI (Investment Partnerships Program), the Chilean Concessions one, and the Peruvian Proinversión are considered key pieces towards consistent structures, better modeling, and long-term visions.

“Without a doubt, [programs like Proinversión and PPI] are very interesting, as are the agencies that are responsible for taking the projects to market, as the case of the Colombian ANI [National Infrastructure Agency],” says Villalobos.

To him, Chile and Colombia are two of the highlights among the Latin nations that are making progress with state policies. "The ANI is a clear example of how to strengthen the institutional framework, as is [Chile’s] program. Another interesting initiative is the United States Millennium Fund, which has made a great contribution to the Central American governments, strengthening their technical capacities. That is the path – to create solid teams dedicated to the [infrastructure] sector.”

However, Villalobos warns of the need for States with smaller markets to carry out joint actions. "Latin America has enormous potential, and there are countries that, for their dimensions, can position themselves as an investment destination, such as Brazil. However, smaller economies, because they are very small, face an additional challenge,” he says.

Faced with such a question, he points out that a solution would be joint offers. "Countries such as Guatemala, Costa Rica, and Panama are not attractive; however, when we speak of a region such as Central America, we have an area larger than the territory of Peru or Colombia, that is, this type of alliance gives the small ones competitiveness.”

Joísa Dutra shares the same view about integration. When evaluating the Brazilian territory in particular, she also argues that “the Country still falls short for not understanding the importance of the regional dimension for investments in infrastructure, mainly because this is an opportunity to expand trade and make gains in efficiency in the region."

Read the other stories in the series:

Report by Estela Takada

Infra Latin America GRI 2019

The challenges in Latin America to overcome gaps for infrastructure development in the region are topics of the Infra Latin America GRI, which is scheduled for May 16 and 17 at The Roosevelt Hotel, in New York.

The 4th edition of the event brings broad discussions and regional analyses, country-specific topics, debates on the future of the industry, and the potential of the main segments. To participate, go to the event’s website.

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