Market analysis: LatAm e-bus market en route to further investment

News Analysis 19 October

Market analysis: LatAm e-bus market en route to further investment

Electric transit buses are increasingly finding their way onto the streets of Latin American countries, driven by policies mandating reduced carbon emissions and pollution and a drive toward energy transition in the region. Infralogic’s Eva Llorens, Gabriela Valente and Jonathan Carmody asked investors how concessions have been developed and funded to date and what opportunities they see in the market in the future.

The Metropolitan Bus Services Office (OMSA) on the Caribbean island of the Dominican Republic is one of the latest Latin American authorities with plans to acquire and implement electric or e-buses to replace gasoline and diesel vehicles.  

Rafael García, the deputy director of OMSA, has said the agency anticipates deploying the first electric buses in operation as part of a pilot plan between January and March 2024.  

Other countries have been forging a brighter path through the region’s congested streets for years now.  

Chile leads the way in switching polluting diesel fleets to e-buses as part of the country’s transit agenda, which is focused on attaining zero emissions, according to Estefanía León, investment director at British investment firm John Laing

"One of John Laing's investment pillars is decarbonization of transportation. And our company itself has carbon-emission goals down the line where energy transition and decarbonization of transportation are at the center of that. We are aware of opportunities in a number of markets," said León, adding that she sees huge potential in the Brazilian market. 

In 2022, John Laing Group acquired two electric bus concessions in Bogotá, Colombia—the Electribus Bogotá Fontibón II and Electribus Bogotá USME I concessions from Somos K, Fondo Ashmore Andino II – FCP and Ashmore Andean Fund II, LP. The company obtained financing from France’s Proparco Groupe FAD and the local Financiera de Desarrollo Nacional (FDN), León said. 

Energy companies are joining infrastructure investors in the LatAm e-bus game, too.  

VG Mobility, a subsidiary of the oil and gas company Vitol, has projects in Colombia and is seeking opportunities in Chile, CEO Andres Jaramillo Botero, told Infralogic. VG Mobility has a flagship project that includes operation of about 446 e-buses in Bogotá and a 33,000-square-meter e-bus depot, Perdomo, financed with French lender Natixis. In Chile, VG Mobility is preparing a bid seeking for some 2,000 e-buses in Santiago next year and is participating in tenders for e-buses at Colina Til Til and la Serena Coquimbo, the CEO added. It also has won an e-bus tender in Antofagasta, which it will finance with company funds.   

Jaramillo Botero said that there are opportunities in Costa Rica, Panamá, and the Dominican Republic because government policies there favor e-mobility initiatives. Mexico is also increasingly moving toward adopting more e-buses, he said. Mexico, according to government numbers, has over 623 electric buses, of which the majority are in Mexico City.   

Christian Velasco, principal at global investment firm Infrabridge, said that his company started to look at e-mobility, and e-buses in particular, about two and a half years ago through a joint venture with Enel X, the Italian company’s e-mobility division 

Velasco said Infrabridge has the largest e-mobility fleet in the Western Hemisphere, with about 2,500 electric buses operating under concessions and lease agreements – around 2,100 e-buses in Chile, and in about 400 in Colombia – with some of their concessions including the maintenance of supporting infrastructure like depots and charging points and others seeing a bifurcation of the various responsibilities of operating, maintaining and charging the buses.  

“Because of the region’s demographics – dense, highly-populated cities, with a concentration of individuals in major and capital cities – and because there’s a preponderance of using buses over subways or other forms of public transportation, deploying electric buses intensifies the economic and social impacts of the energy transition,” Velasco added.  

Companies divided about opportunities in Brazil, Mexico 

Astris Finance’s Managing Director, Romain Papassian, who, with Associate Directors Damien Dupa and Marcelo Kapel, has been providing financial advisory services to Infrabridge on projects in Latin America, says Chile will continue to deliver a steady stream of opportunities. 

"We think Brazil will offer more opportunities, faster, for a number of large cities and operators to run tender processes for new buses as part of their regular procurement plans," Papassian said. "Mexico presents another huge opportunity for growth. A few modest pilot projects were launched, however, Mexico will require more groundwork to find the best way to procure new buses to a more segmented base of operators, and more complex payment and guarantee structures." 

Mexico has many separate, smaller bus concessions, making it difficult to implement the same investment structures as in Chile or Colombia, Velasco said. His firm is seriously looking at Brazil as several local authorities are creating frameworks for e-bus concessions and, although different jurisdictions have their own peculiarities regarding the management of concessions and operators, Velasco believes that once one area in Brazil successfully deploys the technology, others will lean on that mechanism. 

Brazil's largest city, São Paulo, is aiming to reach at least 2,600 circulating e-buses by the end of 2024, according to the Municipal Secretariat of Mobility. The number would equal 20% of the existing bus fleet, which transports 172 million people per month, according to SPTrans data. The current electric bus fleet in São Paulo consists of 201 trolleybuses and 69 battery-powered buses.  

Behind São Paulo's e-bus expansion is a 2018 municipal law requiring that e-buses must replace all diesel-fueled buses in the city after 10 years of circulation.  

The legislation has led companies operating the city's bus lines to integrate adaptation costs into their budgets and they have been discussing the contract's financial balance with local authorities, a source familiar with the city's initiatives said.  

SPTrans should pay around 15% more in subsidies for the transport of passengers in e-buses compared to transport using diesel vehicles, a spokesperson for the authority said. 

Eletra is the leading manufacturer of electric buses in Brazil. The company converts diesel vehicles using bodies of Caio Induscar and WEG engines and power batteries. In September, Eletra delivered 49 new e-buses for the São Paulo-based operators Ambiental, Transwollfe and Transppass. The 49 buses required BRL 160m (USD 30m) in investments. Country Manager of Enel Brasil Nicola Cotugno said in a press conference at the time that the operators have an agreement with Enel X, which funded the vehicles’ acquisition and will provide charging infrastructure in the fleet's garages.  

Besides São Paulo, the company has contracts to supply e-buses to São Bernardo do Campo, Sorocaba and Guarujá, all in the state of São Paulo, and to Goiania (Goiania), Salvador (Bahia), Curitiba (Paraná), Manaus (Amazonas) and Vitória (Espírito Santo), a company spokesperson told Infralogic

Brazil's president Luis Inácio Lula da Silva (Lula) and some of his cabinet members attended the inauguration of an Eletra factory in June, stressing their support for decarbonization initiatives and for the development of the domestic green industry.  

"Our partnership with China is very important, but I prefer national buses to be purchased. It is up to the Brazilian State to guarantee Brazilian industry's survival, " Lula said.  

Regarding da Silva’s remarks, Jaramillo Botero and Velasco both said Brazil's protective trade policies favoring locally-made e-buses make it a more challenging market.  

"Brazil is a country with great opportunities but it protects its market too much, and that has put the brakes on projects because there are not enough electric buses," Jaramillo Botero said.   

The opportunity presented by the transition to e-buses is wider than just public infrastructure. León noted that industrial and retail companies are also looking at deploying e-buses, electric fleets or both for other corporate purposes.  

While e-buses can cost on average about USD 300,000, operational and maintenance costs are low. However, there are still questions about how steepness in the many mountainous parts of Latin America will impact range; how humidity will affect the vehicles and supporting infrastructure; and how operating in those areas will degrade the batteries, Velasco said. 

León said that because the initial investment in e-buses is costly, contractors can need at least 15 years to amortize the investment. 

Contract terms can help deals 

Terms of concession contract also vary from country to country and can be a deal-breaker, Jaramillo Botero said. Laws that promote electromobility, such as in Costa Rica, Colombia, Uruguay, and Panama, which aim to decarbonize substantial parts of their economies by 2050, can help facilitate the wider adoption of the technology.  

For example, Colombia's e-bus concession contracts have 15-year terms because they include provisions requiring battery replacements. And, Chile's contracts are for up to 10 years, with operators reimbursed based on the number of passengers or kilometers driven. 

León praised the Colombian model for e-bus concession contracts from a public-private partnership approach. "In Colombia, public transportation has been provided through concessions for decades. So there has been a huge learning curve in terms of what works and what not, in how to pay for these assets and define the optimal risk allocation," she said. 

The Colombian model was replicated in Chile years ago and multilateral banks like CAF and IDB also see the Colombian contract model as an example. León said an example of how the model works is its Colombian contract Transmilenio in Bogotá.  

John Laing bought the buses and gave them to Transmilenio, who gave the buses to an operator. Both get paid availability payments subject to typical performance and quality metric under the contract. 

"What is interesting about this model, for example, from a risk allocation perspective, is that it allows the client, which is the municipality, to separate the risk of the operation from the investment in capex," León explained "Why is this useful? This PPP model allows the municipality to do this through a private company, and that allows them to free up budget" for other needs.  

Another advantage of the model in Colombia is that the operation of the buses and the bus fleet are in separate contracts, which allows the client to separate risk. In the extreme case of the operator performing substandardly, the client can bring in another operator.   

“Chile rolled out two models: a concession from a couple of years ago and which Infrabridge bought into, where the operator’s obligations are separate and there’s an interface agreement between the operator and charging infrastructure owner; and another model, which a straight lease with operators like Metbus,” Velasco said. 

Concessions involve elements of charging, energy provision and fleet. In its Santiago concession, Infrabridge is responsible for the maintenance and provision of the buses but doesn’t provide the charging infrastructure.  

“If a bus breaks, crashes, etc. the concessionaire replaces the bus or provides spare parts,” Velasco said.  

The second is a lease structure, a concession given to the operator for fleet renewal. In that case, the Ministry of Transport and Telecommunications provides assurances that the buses form part of the transportation system, so the concessionaire has protection, and there’s a bifurcation between the operator and the infrastructure provider.  

Infrastructure investors can provide lower costs of capital than local operators can and have better access to capital, which enables volume, costs and price savings.  

In Colombia, Velasco says that Infrabridge is operating one of the largest EV charging stations in the Americas, essentially a large parking space, for storage overnight. 

Papassian said Santiago, Chile, has lease agreements of 10 to 14 years, denominated in USD or inflation-linked CLP and paid by a trust managing the fares collected from the public system of Santiago. Still, all different types of contracts are separate from the operation of the buses with limited risks, with primary responsibilities related to acting as a financing intermediary between the bus operators and the bus manufacturers.  

Latin America’s current e-bus concessions make for “highly structured transactions,” facilitating elements for project finance such as elevated levels of leverage, Velsaco said. Infrabridge has leveraged partnerships across lending relationships with banks such as BNP Paribas, the Interamerican Development Bank and SMBC.  

Battery-powered buses the preferred option 

As Latin American countries adopt zero-emission policies, electric buses that run on batteries offer the best drivability, maintenance, and consumption performance, León believes.  

Jaramillo Botero said that in addition to producing no emissions, e-buses are more durable than regular diesel buses because they do not vibrate, lowering maintenance costs. He does not foresee buses using hydrogen as fuel becoming popular in Latin America in the near term. 

The e-bus market faces challenges despite its steady growth, observers said. Jaramillo Botero said one of the challenges is the lack of an electrical network to charge the buses. "These projects are not only the buses but the infrastructure around it," he said. 

León agreed and also said that renewables need to be part of the transition to e-buses. 

"For that transition to happen, the issues around charging infrastructure need to be addressed as well. The electric grid resiliency needs to be adapted or set up for the additional demand of electricity. Sustainable electricity supply from external sources, like solar, needs to be part of the equation," she said.   

Despite the challenges, Papassian believes Latin America will develop globally as a Top 3 market for e-buses. The adoption of e-buses aligns with the region's big, growing cities with massive transportation needs. And they will encourage broader electrification of mobility in Latin America.  

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