Prospects for Latin American Infrastructure Investments

1
Prospects for Latin American Infrastructure
Investments

• Confederation of International
• Contractors Associations
• Berlin, May 10-12, 1999

2
Structure of Presentation

• Current Economic Conditions
• Infrastructure Investment Needs
• Special case of Central America
• Trends in Sectors
• Trends in Projects
• Implications for contractors
• Prospects

3
Current Economic Conditions

• Crisis seems to have passed, with no long term
  damage.
• Perspective indicators are positive
• Spreads have come down drastically
• Renewed access to financial markets
• Terms of trade have improved (oil, copper)
• Stock markets have rebounded (all but Argentina
  are above levels, in US of mid-98)

4
Financial Markets

• Russia crisis had large impact on spreads,
  increasing the Latin Eurobond Index by almost 700
  bp.
• Brazil crisis had a smaller impact, increasing
  spreads by 150 bp. Since then, down to levels
  of early 1998.
• Devaluation did not spread through financial
  contagion, only through trade, mostly to
  Argentina.

5
Financial Markets

• Sovereigns and some corporations have gone to the
  markets Argentina, Colombia and Mexico, even
  Brazil.
• Capital markets access of infrastructure finance
  in 1997 disappeared in 1998.
• Second half of 1999 should open for private
  issuers and for some project finance.
• Importance for civil works

6
Foreign Direct Investment

• Net Private Flows to LAC fell by 20.
• FDI and Private Creditor Flows stayed basically
  constant.
• Nevertheless, growth trend was broken.
• Major recipients Brazil, Mexico, Argentina,
  Chile, Venezuela and Peru.
• Smaller countries started getting FDI.
• FDI is expected to fall by 20 to levels of 1996,
  mostly in Brazil.

7
Current Economic Conditions

• Markets distinguish between countries
• But, there will be a significant impact
• Growth in 1999 is expected to be close to zero
• Significant differences contraction in
  Argentina, Brazil and Venezuela, but record
  growth in Mexico, Chile and Peru.
• Increase in the unemployment rate
• Increase in poverty levels
• Markets recover faster than people

8
Infrastructure Investments

• New infrastructure needs of LAC estimated at
  US70 billion/year (ex. privatization)
• US25 billion in telecommunications
• US28 billion in energy
• US10 billion in transportation
• US7 billion in water and sewerage

9
Infrastructure Investments

• In spite of private participation, public sector
  continues to cover most needs.
• Private sector financing less than 15, but
  growing. Driving force in many countries.
• Participation uneven, mostly in telecomm and
  energy.
• Transportation and water mostly public.

10
Private Infrastructure Investments

• Hard to finance the riskier, inflexible,
  long-term investments. Nevertheless ...
• Project volume has not been seriously affected
  (lags in reacting)
• Premiums for privatizations continued to be high
  (Telebras64, Sao Paulo disco100)
• Economic reforms and success of private
  infrastructure continue to attract strategic
  investors.

11
Private Infrastructure Investments

• Major countries have made significant progress in
  regulatory framework legal and institutional
• Vast majority of countries intent on continuing
  trade and financial liberalization
• Crisis have tested reforms and strengthened
  resolve
• Regulatory risk WILL HAVE TO decrease

12
Private Infrastructure Investments

• Financing structures have changed, more equity or
  quasi-equity, less debt
• More expensive debt, shorter term, riskier.
• More reliance on multilaterals and other risk
  mitigation measures
• Governments more involved, but careful with
  providing too much comfort. Must keep its role.

13
Trends in sectors

• Energy
• Intensify competition in electricity
• Gas as a priority
• Continuing privatization
• Big ifs Mexico and Venezuela
• Transportation
• Intensify Airports Privatization
• Toll roads Drive with care

14
Trends in sectors

• Water
• Becomes riskier
• Modalities of lesser private participation
• Local governments hardest hit
• Telecommunications
• Less risky, hence robust
• Growth in cellular
• Few privatizations left

15
Trends in Projects Private

• Strong sponsors able to raise finance
• Enhanced risk awareness
• Risk mitigation measures multilaterals,
  government support, local finance
• Risk insurance and guarantees
• More creative financing structures
• Funds, Pools and Securitization
• Trend towards corporate finance

16
Trends in Projects Public

• Fewer Central Government Projects
• Tighter spending
• More private sector participation
• Contractors as partners
• More projects at the local level
• Riskier
• Harder to finance
• Politically charged

17
Implications for contractors I

• Public sector continues to be major mover, but
  trend towards decentralization of infrastructure
  gives enhanced role to local governments.
• Central governments want less involvement in all
  phases.
• Must be more creative in financing and must
  persue local governments.

18
Implications for contractors II

• Private participation is increasing.
• Contractors are becoming sponsors of private
  projects major or minor and may have to take on
  equity positions.
• Opportunities are large, but so are risks.
• Passive attitude not conducive.
• Transparency continues to be an issue, but
  improvements are on the way.

19
Prospects

• Private infrastructure is here to stay.
• For the time being.
• Need long term strategic, stronger sponsors
• Projects will have to be less risky
• Country and project selectivity
• Little impact on quantity in the short run

20
Prospects

• Impact on infrastructure investments will be
  minor, and temporary, on both, public and private
  sectors.
• Character of contractors participation will
  change. Environment more competitive.
• Economic fundamentals of LAC are in place.
  Reforms are not completed
• More crisis will come, are better prepared.

21
AND ..
LATIN AMERICA WILL SURVIVE THIS ONE TOO
22
Prospects for Latin American Infrastructure
Investments

• Confederation of International
• Contractors Associations
• Berlin, May 10-12, 1999

23
The special case of Central America

• Heavy damage to the infrastructure, mostly on
  transportation (more than 90)and concentrated in
  Honduras and Nicaragua.
• Honduras sustained more than half of its the
  damages in infrastructure.
• Damages to infrastructure exceed US 1 billion,
  but reconstruction and upgrading may require
  almost double the amount.

24
The special case of Central America

• Aim is to take an integral approach, including
  integration.
• Rehabilitation to go beyond reconstruction and
  include transformation.
• Transparency a key issue.
• Integrated approach by MDBs.
• Large opportunities, but mostly grants (tied aid)
  expected. Some MBD loans, with simplified
  procurement.

25
The special case of Central America

• Donors Meeting in Stockholm 25-28 May to agree on
  package to help reconstruction.
• US6 billion in aid have been pledged by more
  than 50 countries and organizations, including
  the EU, United States, Nordic countries, World
  Bank and IDB.
• Bank has already approved over US120 million in
  new infrastructure projects.