Latin America and the climate for PPPs

Construction in Latin America is enjoying a strong recovery from the crisis. Among the most attractive sectors is the Brazilian energy segment, while the market for PPPs is maturing across the region.

Latin America has emerged from the global economic crisis more strongly than anyone could have expected, with growth in its key construction markets to rival the emerging markets of Asia.

Major long-running projects like the expansion of the Panama Canal and preparations for the 2014 World Cup and 2016 Olympics have helped of course, but perhaps more significant is the sound financial management that most governments in the region are now practicing.

The biggest construction market in the region is of course Brazil, and the two forth-coming major sporting events are providing a huge boost to what was already a powerful economy.

Infrastructure investment ahead of the 2014 World Cup could be as much as US$ 48 billion according to a report by UK Trade & Investment (UKTI), and another US$ 15 billion will be invested in Rio de Janeiro ahead of the 2016 Olympic Games.

But in addition to these headline grabbers are government schemes like the accelerated growth programme (PAC-2), which is expected to see a massive US$ 480 billion spent on various Brazilian infrastructure projects between 2011 and 2014.

These include US$ 232 billion for energy programmes, US$ 140 million for housing and US$ 52 million for transportation, as well as other projects focussed on areas like urban regeneration and water quality.

Elements of PAC-2 will extend beyond 2014, most notably the energy projects, and over the entire course of the programme, a massive US$ 546 billion will be spent on energy in Brazil.

This year for example finally saw the signing of concession contracts for the controversial Belo Monte dam and hydroelectric project on the Xingu River. The scheme is expected to cost some US$ 11 billion, and will have a generation capacity of 11.6 GW.

However, the consortium responsible for its construction is being led by the state-owned electricity company Chesf, a development that was more or less forced on the government when all the private sector groups to express an interest pulled out of bidding at the start of the year.

Belo Monte is the largest scheme on the cards in Brazil, but it is by no means the only one. Other power projects under construction include the Santo Antonio hydro power scheme on the Maderira River, and its upstream cousin, the Jirau project. They will have a combined capacity of some 5 GW.

Brazil is also investing in nuclear power, and one such current project is the Angra III scheme on the Rio coast. French nuclear specialist Areva is providing the pressurised nuclear reactor technology for this 1.35 GW project. The investment value is US$ 4.2 billion and completion is due in 2014.

PPP environment

Brazil may be the most obvious example of the booming Latin American market, but there are other countries in the region that are showing great promise - Chile and Peru are perhaps the most notable.

In fact all three countries seem to have started on a virtuous circle of growth, investment and careful financial management, which should make them more attractive to foreign investors.

These were the findings published in the form of a new edition of Infrasope, a project run by the Economist Intelligence Unit and the Inter-American Development Bank's (IDB's) Multilateral Investment Fund (MIF) that is designed to provide benchmarks for investment.

The study evaluates countries on their relative capacity to develop and implement public-private partnerships (PPPs) in water and sanitation, transportation and energy (specifically, electricity generation).

The study analyses the laws, regulations, institutions and practices that affect the environment for PPPs and evaluates these conditions alongside the rate and quality of PPP project development in the region.

The main findings were that out of 19 Caribbean and South American countries that the climate for PPPS had improved in Chile, Mexico and Panama thanks to legal reforms, as well as in Guatemala, thanks to the introduction of the April 2010 comprehensive PPP law.

Brazil, Chile and Peru came top for their institutional framework, with reasonable checks and balances in place for project planning and oversight. However, all three countries are said to have room to improve.

In terms of investment climate, most countries in the region experience some degree of political interference in institutions, policy implementation and business.

However, the study found that three countries in the region-Chile, Colombia and Peru-have a high level of political will for PPPs across sectors.

However, one of the problems with PPPs in the region is the relative lack of experience.

Only six of the 19 countries in the study implemented 20 or more concession projects between 1999 and 2008, and as a result they lack the capacity to plan and oversee schemes.

Not surprisingly, there is also a lack of lower level (sub-national) PPP projects in the region, with only six of the 19 countries looked at working on this level. Brazil topped the list in this measure of PPP maturity.