Year in review: Core infrastructure investment persists despite year of uncertainty

Data Insight Inside Infra 11 January

Year in review: Core infrastructure investment persists despite year of uncertainty

Political change in 2022 in Brazil, Colombia and Peru has changed the playing field in Latin America and rising inflation has forced core infrastructure investors to reassess how they structure project financing, but a healthy pipeline of opportunities still exists across the region.

Latin America experienced a year of political turbulence in 2022, as the major markets Colombia and Brazil held national elections that ushered in leftist governments, reversing periods of right-wing governance in the countries.   

In both countries, investors and market watchers are cautiously awaiting to see what postures the governments of Presidents Gustavo Petro in Colombia and Lula Inácio da Silva (Lula) in Brazil will take towards private investment in the infrastructure and energy sectors.   

Petro has spoken publicly about his desire to see more investments in the rail sector and in education and digital connectivity. While he has continued the development of the Canal del Dique waterway project, there has been little sign of a wider infrastructure program like the 4G or 5G programs to date in Colombia.  

In Brazil, now ex-President Jair Bolsonaro left several planned greenfield projects and privatizations untendered. Lula has appeared less keen on continuing the sale of refineries and other assets but there are signs that the administration could continue other initiatives like the privatization of the Port of Santos.   

Peru reverted to type in 2022 when President Pedro Castillo ended the year with an attempted 'auto-golpe' (self coup) on 7 December, which resulted in his ousting from power by Congress in his third impeachment vote. His removal from power has since sparked violent nationwide protests and several Latin American leaders have been hesitant to recognize the new government of President Dina Boluarte. Despite all this, Lima Airport Partners managed to close a USD 1.25bn financing for the expansion of the capital's airport and the government is pressing ahead with plans for water and healthcare PPPs.  

Despite the political changes, 2022 saw an increase in the volume of investments in the transportation and logistics spaces, according to Oliver Narro, head of Latin American infrastructure banking at JPMorgan.  

“While 2020 and 2021 saw a rapid increase in appetite for digital infrastructure assets in the region in the context of data demand growth during the height of the pandemic, we saw in 2022 a reactivation of some verticals such as transportation and logistics following a faster than expected recovery in traffic and volumes,” Narro told Infralogic.   

“The sale of a stake in OMA to Vinci and the sale of SAAM’s ports and terminal logistics business to Hapag Lloyd, in addition to the airport and highways privatization rounds in Brazil, which enjoyed the participation of local and global investors, are examples of the transport and logistics vertical reactivation,” he said.   

Elsewhere in the transportation sector, Macquarie Infrastructure Partners V (MIP V)closed a deal with Colombian infrastructure developer Odinsa for a 50% stake in the company’s highways division in June and in September announced a separate deal to acquire a 50% stake in airport concessionaires Opain and Corporación Quiport, in Colombia and Ecuador, respectively.   

The year was also marked by surging interest rates, which in Latin America saw food and transportation costs rise, as well as the price of project financing, according to Latham & Watkins’ Partner, Gianluca Bacchiocchi.   

Bacchiocchi said there was a marked slowdown in greenfield project financing as the year progressed. "Anybody who can wait to finance is waiting,” he said, adding that several deals they are working on are looking at a bridge-to-bond solution in the short term where the underwriters can provide a bridge loan. Other deals that were considering bond financing are deciding to go to the loan market instead due to the high-rate environment, he said.   

“A lot of people want to speculate, thinking these rates are transitory, short-term, but either this will be a new normal or a retrenching of the rates. Maybe by 2Q23 things will have lowered but the capital markets were cremated this year, and nothing is going there imminently,” he said.   

Activity in the core infrastructure sectors--environment, social, telecoms and transport--increased YoY versus 2021. Latin America saw USD 48.13bn in deals close across greenfield, refinancing and M&A projects in 2022, according to Infralogic data. By volume, the 153 closed deals came in lower than the 162 deals that closed for a total investment of USD 30.91bn in 2021.   

Projects in progress may face issues negotiating with EPC contractors, Bacchiocchi said, pointing to how many contracts contain escalation clauses in the event they don’t reach close by a certain time. At the same time, EPC contractors are finding it hard to offer lump-sum contracts. Locking in prices is an issue for developers and concessionaires.   

“Sponsors may have no choice but to inject more equity into transactions to reach close,” he said.   

Mexico saw 20 projects close in 2022 worth USD 4.71bn in investments. 14 of those deals were in the transportation sector, two in telecom and four in social infrastructure.    

Vinci Airports’ acquisition of a controlling stake in OMA was the most valuable transaction in Mexico, worth USD 1.17bn, while the financing of the Mexico City Subway Line 1 Improvement Project closed in a deal worth USD 830m.   

Latin America’s largest market, Brazil, had a productive year when it came to awarding new projects, with numerous airport and sanitation concessions tendered and won primarily by local companies.   

However, despite a busy year of for both procurement and financing, there is still room for improvement, according to José Virgílio Lopes Enei, a partner at law firm Machado Meyer. “As a developing country with a shortage of public resources, Brazil still accumulates a relevant deficit in its infrastructure,” he said. "Considering the continental dimensions of the country, its large population and the challenges imposed by the strong agricultural and mining production, among other activities closely dependent on infrastructure, our infrastructure continues not to meet the needs of our population and companies with the desired efficiency and scope.“ 

While Virgílio bemoaned the fact that volumes of public and private investments in infrastructure were still “insufficient” in 2022, he pointed to several areas where there were important advances and highlights that suggest a more promising future.  

"The highlight of infrastructure in 2022 was undoubtedly sanitation, notably in water supply and sewage services. Law 14,026, of 15 July 2020, already regulated and better established, has been paving the way for more private investment, with a clear goal of universalization by 2033.”   

By way of highlights, Virgílio picked the award of the CEDAE Block 3 concession to Grupo Águas do Brasil at the turn of the year, which completed the concessions of the four blocks into which the municipalities until then served by CEDAE were divided; the award to AEGEA, via auction on 27 September of the Ceará sewage PPP, covering a total of 24 municipalities in the metropolitan region of Fortaleza and Cariri; and the privatization of Corsan in favour of the Aegea group, on 20 December, in return for a BRL 4.15bn bid.  

He also pointed to tenders that awarded contracts in the road sector in 2022, like the 727km (451.73-mile) Rio–Governador Valadares highway concession in Minas Gerais, won by the Ecorodovias Group. “In the State of São Paulo, the Lote Noroeste concession was awarded to the Ecorodovias Group, which involves stretches of over 600km along five highways in São Paulo that pass through the regions of São José do Rio Preto, Araraquara, Barretos, São Carlos and most of Washington Luís (SP-310). The State of Minas also tendered the 627.4km Triângulo Mineiro concession and the 454.3km Sul de Minas highways, won by the Equipav and Perfin groups, as well as the Rodoanel project, won by Italian group INC S.P.A.  

Virgílio also highlighted work in the telecommunications and digital infrastructure space, where there are many expansion projects and mergers and acquisitions operations for data centre assets, optical fibres and telephone towers. Highlights for players like Scala, Equinix, Ascenty, ODATA, Highline, etc.  

Overall, Latin American deal-making remained robust in 2022 and there should be room for more financing activity in 2023 across the region, with ongoing asset sale processes and recently awarded greenfield projects likely to seek financing. 

Spanish company Sacyrrecently revealed that it would seek investors for its operational toll road assets in Colombia in a deal that could value the portfolio's equity at EUR 500m (USD 542.17m) and Peruvian investor Grupo Romero is close to sealing a deal for the sale of a stake in its port business Tramarsa.  

Brazil is still in the process of tendering projects like the USD 576.83m Rodoanel Norte Highway PPP and the USD 1.6bn São Paulo Intercity Passenger Rail (TIC) project and there is still the potentially massive privatization of São Paulo's SABESP sanitation utility.  

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