Infrastructure investment in Latin America



FW moderates an online discussion focusing on infrastructure in Latin America between Mariano Cardona, a senior manager at Ernst & Young, José F. Valdivia, a partner at Hogan Lovells, and Márcio Leal, a founding partner at Leal Cotrim Advogados.

FW: In your view, how has the Latin American infrastructure sector fared over the last 12-18 months? Which countries seem to be attracting significant interest and activity? 

Leal: It is well known that one of the major barriers to economic growth in Latin American countries is the huge gap in infrastructure investments. It is also clear that over recent years a consistent increase of infrastructure projects can be identified, mostly with the participation of the private sector. However, the privatisation model of the early 1990s has been, in general, replaced by other legal structures, such as concession agreements and public-private partnerships. Chile has been leading the process for years. Brazil, especially with the upcoming FIFA World Cup in 2014 and the Olympic Games in 2016, is also playing an important role in the region, albeit some significant movements towards improvement of local infrastructure, though private capital may also be identified in Peru, Colombia and Mexico. 

Cardona: Even when the whole region took benefit from the last years’ high commodities prices, not all countries followed the same path regarding the development of infrastructure. For example, if we consider what happened in South America during recent years, we will find that some countries made significant efforts to attract private investment for the development of their infrastructure and some other countries based such development on public investment. Countries like Chile and Brazil have been attracting private investment for many years. More recently, Peru and Colombia became the rising stars in the region. Finally, we cannot set aside smaller countries such as Uruguay and Paraguay that are planning to offer some projects to private participation soon.

Valdivia: The sector has fared reasonably well, although financing continues to be constrained, and this has limited some of the investments that otherwise could have taken place. In Honduras and Guatemala, there have been some substantial hydroelectric projects. Ecuador has also attracted interest and has significant infrastructure initiatives under way in electricity, transportation, and oil and gas.

FW: Are any particular sectors attracting the majority of investor capital? What notable infrastructure projects have been launched recently?

Cardona: Of course each country has its own characteristics but it can be said that the first wave of projects was related to transportation and communications. This is because countries urgently needed to support production with better transport systems. Also, energy is another sector attracting great interest in the region. Some sectors where governments are now trying to focus are related to social infrastructure and include hospitals, prisons, schools and some sport facilities. Finally, many projects found in Brazil are related to the next FIFA World Cup and the Olympic Games in Río de Janeiro. Significant projects are the high speed train connecting Río de Janeiro and Sao Paulo; Brasilia Cargo Airport and the expansion of Guarhulos Airport in Brazil. Elsewhere in the region we see the Bicentennial Pipeline, Autopista de la Montaña and Bogotá Metro in Colombia; the Cargo Train Belgrano and Chihuido (hydroelectric power) in Argentina; and the Metro Lima Callao, Vía Longitudinal Project (route project) and South Andean Gas Pipe in Peru.

Valdivia: The majority of the investments that we have seen have been in the oil and gas and electricity sectors. The Refineria del Pacifico refinery project, the Coca Codo Sinclair hydroelectric project and the Quito Metro, are among a number of quite substantial initiative projects in Ecuador. In Guatemala, there is the Patuca hydroelectric project and underway in Mexico is the Ethylene XXI project. In Panama of course there is the canal expansion and more recently the Panama metro.

Leal: In the last few years, energy, public transportation – including airports, highways and railways – and telecommunications, have been the major focus of infrastructure private capital investments in Latin America. After the execution of several concession agreements for the construction of hydropower and biomass plants, the Brazilian Federal Government has awarded agreements for the concession of the international airports of Brasília, Guarulhos and Viracopos. The market now awaits the privatisation of the Rio the Janeiro international airport (Galeão). Several infrastructure projects including stadiums, highways, underground and bus transportation systems, have also been launched in Brazil during the last two years in connection with the upcoming FIFA World Cup and the Olympic Games. In the same path, Peruvian investment agency, ProInversión, has recently announced 26 public-private partnerships that are expected to be tendered in 2012 and 2013, among which are some very important projects such as Lima’s metro Line 2 and the Longitudinal de la Sierra highway.

FW: Have governments across Latin America announced any particular initiatives or policies to bring foreign capital into local infrastructure?

Valdivia: While different initiatives and policies to attract foreign capital are implemented across Latin America from time to time, on a case by case basis we often see tax holidays, reduced prices and guaranteed feedstock supply agreements as initiatives used to attract foreign investment in infrastructure projects. Included among these initiatives are reduced income tax rates, exemption for taxes on repatriation of profits, and duty free imports of services and materials to be utilised in the project. In addition, in some cases we have seen Latin American countries enter into stability agreements and investment protection agreements in order to provide an additional measure of comfort and protection from expropriation, changes in tax and other laws and other potential political risks.

Leal: Countries such as Brazil, Chile, Peru, Colombia and Mexico are aware of the need to foster the presence of foreign capital in their infrastructure projects and have been working on improving their regulatory framework in order to achieve this goal. Peru, for instance, has created a governmental agency called ProInversión, the major mission of which is the promotion of private investment. In Brazil, as a means to attract foreign investment, the federal government has recently enacted a special tax regime (RECOPA) that grants exemption on import taxes for goods and services related to projects in connection with the soccer Confederation Cup and the World Cup. Brazil has also established a fast-track regime (Regime Diferenciado de Contratação) for the award of public contracts related to the Confederation and World Cups as well to the Olympic Games and to projects included in the so-called Brazilian Growth Acceleration Programme (PAC), which is focused on the improvement of Brazilian infrastructure.

Cardona: Many countries in South America are taking action to attract investors and facilitate the development of infrastructure projects such us fiscal incentives, government financing support and the development of specialised teams or agencies to deal with infrastructure projects. Colombia and Uruguay recently passed new PPP laws and are actually in the process of launching the first projects under that new legislation. Brazil announced, in 2007, the Growth Acceleration Program (PAC) which included credit and financing stimulus and tax reductions. In 2010 Brazil announced the second phase of PAC which is going to be more oriented to social infrastructure. Some words must also be said about the Initiative for the Regional Infrastructure Integration (IIRSA) that promotes regional physical integration in South America since 2000. This program is supported by the Inter American Development Bank, the CAF and the FONPLATA Fund. This initiative has facilitated several projects including the North and South IIRSA highways in Peru, the Inter Oceanic Project in Argentina and Chile, and so on.

FW: To what extent are public-private partnerships (PPPs) a viable model for funding infrastructure projects in Latin America? 

Leal: It is undisputed that the federal budget deficit faced by most Latin American governments has clearly reduced their capacity to invest directly in all infrastructure projects that are paramount for their respective social and economic development. In this scenario, public-private partnerships offer an attractive tool to leverage public resources, especially in sectors where private investors’ returns are deemed uncertain. Private financing during the construction phase of a PPP combined with the guarantees that may be offered by the public authorities for a specific project create a framework that both meets the public interest and is attractive for private investors. However, in order to allow such model to become really viable in Latin American, it is important to recognise that current PPP laws alone are not enough. Indeed, there is still significant homework to be done by the public sector, mostly with respect to, first, its openness to and dealing with unsolicited PPP proposals made by private investors, and second, speeding up the award of both governmental designed and unsolicited projects. 

Cardona: PPPs had a significant role in the region, Chile having the longest track record in South America with encouraging results. Brazil has also has been actively using this structure for many years. More recently, Uruguay and Colombia passed their own laws to enhance PPP projects in those countries. It is expected that during the next few years the use of PPPs will continue to grow as several projects have already been announced or are under consideration by governments in the region.

Valdivia: Different forms of public-private partnerships have been utilised in Latin American infrastructure projects for some time, even in the absence of specific legislation. Many Latin American state-owned companies in the petrochemical, oil and gas and electricity sectors have historically gone into partnership with privately held companies in order to attract capital and financing for the investment, as well as to gain access to additional technology and operational expertise. 

FW: Could you outline the key challenges associated with infrastructure investments in the region, such as legal, regulatory, tax, political, and so on? 

Cardona: The whole region needs to increase investment in infrastructure and in order to do so private investor participation is needed. But in order to achieve this in a world where the uncertainty generated by the European crises and the situation of the US economy is ruling most of the investment decisions, some challenges need to be met in most South American countries. These challenges include: the promotion of new and better instruments for risk mitigation; the reduction of political risk in some countries in the region in order to attract foreign investors; the strengthening of local capital markets; the training of governmental staff, in order to be more efficient during the launch process and afterward; control over the operation of infrastructure projects; and the allocation more public funds for infrastructure improvements. 

Valdivia: This varies widely from country to country and it is difficult to generalise with respect to the region as a whole. Nonetheless, some of the particular challenges we have observed in some jurisdictions have been changes in the regulatory environment in the public utility sector whereby, as a result of political pressures, the tariff system on which the investment was based is arbitrarily modified or not respected resulting in a diminished return for a project. In addition, with respect to financing of projects, an increasing number of countries are implementing changes in their tax laws which require increased and often substantial levels of withholding tax on interest paid to foreign financial institutions, even when they are registered as financial institutions in the country. In some cases certain structures can be used to minimise this impact, but in others it has been much more difficult and has resulted in an increased cost of financing which may prove unsustainable over the long run.

Leal: From a legal standpoint, it is vital for the region that public authorities aim to simplify the procedure and requirements for the execution of infrastructure project agreements with private investors. The strict rules that have been adopted by most Latin American countries, governing PPP projects and their tendering, have delayed the implementation of envisaged projects, sometimes for years. For instance, the launching of any federal PPP in Brazil is subject to the prior approval of a committee formed by members of three different ministries (ministérios) of the federal government. Moreover, the issue of the invitation to bid is subject to the prior approval of the federal audit court. The regulatory framework also needs to be improved in order to set forth clear rules for the assessment of the private investors’ performance, avoiding political and subjective analysis by the public agencies in charge of their supervision.

FW: What general advice would you give to investors on structuring infrastructure investments in order to generate long-term value? 

Valdivia: Clearly it is important to understand the regulatory system prior to initiating the investment, particularly with respect to the possibility that rate structures are altered and to understand the ability to pass on increased costs to customers in non-export projects. Prior to the time a final investment decision is made, it may be possible to negotiate stability, incentive and other types of contracts with the host country that is trying to attract the investment and which can be useful in mitigating a wide range of risks and also enhance the project returns. This should be done early on in order to maximise negotiating strength. It is also important to make sure that any such agreements with the host country run with the project and are not affected by a change in ownership, in order that the value can be preserved at the time of wanting to exit the investment.

Leal: Latin American countries usually have a very complex legal system. Consequently, it is vital for any investor looking for an infrastructure project to examine not only the contractual and legal issues deriving directly from the project agreements, but also some ancillary legal aspects. Specifically concerning greenfield projects, investors must be concerned with environmental requirements, taxes levied during construction and operation phases of a project, real estate issues and labour rules specifically applicable to the type of venture the investor is willing to carry on. Lack of knowledge and/or misinterpretation of some of these rules have proved to be one of the main causes for delay in the implementation of several projects in Brazil, with significant impact on capital returns expected by investors. In countries that have different levels of government – for example, federal, state, regional or municipal – it is also of major importance to assess compliance of the project with the legislation enacted by each these political spheres.

Cardona: Countries in the region, even though they are now steadily growing, have historically suffered from significant economic volatility. In the past this resulted in many poorly structured projects which ended in renegotiations and even in cancelation because of the overestimation of incomes or the underestimation of risks. Therefore, it is advisable to consider getting some local advice during the feasibility study stage of the project as each country in the region has particular risks and issues to be addressed. Also, the most suitable financing strategy should be established, as local capital markets and economies are also very volatile. Some negative experiences had arisen from foreign investors trying to apply the same financing structure and methodology they used to apply in other countries.

FW: Are investors doing enough to implement risk management strategies to protect their investments? What insurance solutions are available to guard against downside? 

Leal: At first, it is necessary to point out that an actual risk management strategy can only be properly put in place after a careful analysis of each type of project exposures and requirements, and the risk-sharing regime designed in the infrastructure project agreements. A proper project risk management strategy is project-specific and client-specific. Having said that, we must note that in most PPP projects in Brazil there are specific rules concerning the taking out of insurance by builders/operators. Usually, material damage and third party liability insurances are mandatory and they are widely available in Brazil. As for project delay and performance risks, there is a myriad of solutions available, ranging from contractual arrangements to insurance. In general, investors in Latin America have been able to find reasonable comfort with standard risk management tools and insurance packages. In our experience, no investor has decided to avoid investment in Latin America as a consequence of lack of risk management solutions.

Cardona: One of the main challenges to enhancing infrastructure projects is in supporting the development of new credit risk mitigation instruments. For many years, especially in Chile, ‘monoliners’ played a significant role in reducing risks of many projects. After the financial crisis, monoliners are no longer available to support projects so investors are trying to replace them with other instruments such us partial credit guarantees from multilateral institutions, exchange rate swaps when available, political insurance (MIGA), off take contracts when possible, and so on. Infrastructure investment funds can potentially take a more active role in the financing of infrastructure projects. Considering some experiences in Europe where a fund provided some subordinated or mezzanine debt in order to enhance the credit rating of senior debt, it would be expected to see some similar structures in the region. The problem is that even when some infrastructure funds operate in the region, local regulations prevent these funds from assuming risky positions, limiting their participation to equity or senior debt. These kind or regulations should be reviewed in the future to allow more flexibility to these specialised investors.

Valdivia: Political risk insurance is a clear possibility, but it is not always available and even when it is available it may add a significant cost to the project. Having a multilateral or bilateral lender to the project may also provide a form of indirect ‘insurance’ against political risk. While the following may not always provide complete protection and requires careful consideration of tax considerations, structuring investments through entities created in countries that have bilateral investment treaties in effect with the host country can be an effective risk mitigator.

FW: What trends and developments do you expect to unfold in the infrastructure sector through 2012 and beyond?

Cardona: With few exceptions, most South American countries present a positive outlook regarding infrastructure projects, as investors are still interested in the region and there is a significant pipeline of projects. It is also to be expected that in the near future many local companies involved in infrastructure projects in a given country will start regional operations in neighbor countries in order to diversify their risk. The main constraint to the development of infrastructure projects may come from the less liquid and more adverse risk market where investors are becoming more selective and cautious about new projects. Even though this scenario may constrain in the availability of financing sources and therefore cause some financing costs to rise, it is not expected to significantly impact sector activity.

Valdivia: As a whole, Latin America has been stable and proven to be a good place in which to make infrastructure investments. This should continue the strong infrastructure investments that have been made by foreign investors in recent years. In the near future, oil and gas, petrochemicals, electricity and transportation are likely to be areas attracting significant foreign investment. Asian investment, both for equity capital and particularly for export associated credit, will continue to grow in importance.

Leal: Up to now, private investments in Latin America have been focused chiefly in the energy, public transportation and telecom industries, and there is no doubt that there is still enough room for new investment in these sectors. Nevertheless, there is also a great demand for investments in water and sanitation projects, logistics and ports, and, considering the recent finds of the UN Conference on Sustainable Development which was held in Brazil, renewable energy. We believe that, in short, a second wave of investments in these areas will reach most of the Latin American countries. In the long term, other areas that will require the presence of the private capital in Latin America are health, education and infant care.


Mariano Cardona is a senior manager in the South American Infrastructure Advisory Practice at Ernst & Young. He has 15 years experience, during which he has provided advice to several projects regarding different issues such as financial strategic advisory, financial structuring, capital markets strategy, economic and financial feasibility analysis, debt restructuring, fund raising, valuation and business modeling. Mr Cardona can be contacted at +54 11 4510 2325 or by email:

José F. Valdivia is a partner at Hogan Lovells and co-chair of the firm’s Latin American Practice Group. His practice focuses primarily on infrastructure projects, mergers and acquisitions, and other commercial transactions, particularly in Latin America and with an emphasis on financings and development and mergers and acquisitions involving energy, petrochemicals, agriculture, and water. Mr Valdivia has significant experience structuring, coordinating, and closing a wide variety of complex business transactions. He also has experience with project financing involving several multilateral lending agencies. He can be contacted on +1 305 459 6646 or by email: 

Márcio Leal is a founding partner of Leal Cotrim Advogados, which is focused on projects, M&A and tax. Since 1996, he has been a Rio de Janeiro State Attorney (Tax Department). His practice focuses on infrastructure, energy and oil & gas projects. He has represented some of the largest infrastructure companies in Brazil and has substantial experience with PPPs, public law, tenders and administrative contracts. He has been involved in several public and private infrastructure projects, including highways, railways, stadiums, power plants, industrial, manufacturing, water and wastewater facilities. He can be contacted on + 55 21 3549 9600 or by email:

© Financier Worldwide



Mariano Cardona 

Ernst & Young 


José F. Valdivia 

Hogan Lovells


Márcio Leal  

Leal Cotrim Advogados

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