The Guide to Infrastructure and Energy Investment

Introduction

This practice guide is intended to be a tool for lawyers and businesspeople operating in the field of project finance in Latin America. In pursuit of this goal we have filled the chapters with advice and insight from leading lawyers and law firms of Latin America and abroad, as well as from professionals from banks and other finance institutions operating on the cutting edge of project finance in the region.

Our approach is premised on three topics of relevance to both sponsors and lender/investor groups: current deal structure, problem-solving after the bargain has been struck and future trends in project finance in Latin America.

Even as global oil prices in 2016 hit lows not seen in over a decade[1] and continue at less than half of the August 2015 prices,[2] appetite for investment in Latin America from the international oil community remains strong, and a number of Latin American economies continue to rely on production of oil to fund much of their governments’ operations. Statoil, Norway’s state-owned oil company, recently purchased Petrobras’ interest in one of Brazil’s most lucrative offshore fields for US$2.5 billion,[3] and the new expansion of the Panama Canal will allow it to accommodate an expected 550 liquefied natural gas (LNG) tankers per year by 2021, carrying Latin American and North American LNG to Asia.[4] The private sector remains active, investing heavily in new exploration and development of oil and gas fields in Bolivia, Guyana, Ecuador, and elsewhere in the region.

Despite low global oil prices and some country-specific economic slowdowns, regional oil and gas production and exploration remain strong. Brazil’s state-owned oil company, Petrobras, increased its extraction output by 6 per cent between June 2015 and June 2016,[5] to almost 3 million barrels per day,[6] and production is only expected to increase as more of Brazil’s offshore reserves are tapped. Despite recent production issues, Mexico[7] and Venezuela continue to extract over 2.1 million barrels per day.[8] Mexico’s new natural resources exploration regime allows, for the first time in Mexican history, for private concessions for exploration, and the Mexican government and industry experts expect this opening to increase output of extractable commodities. This new regime is explored further in Chapter 12 (Mexico).

Even the prospects of Argentina’s state-owned oil and gas company, YPF, are looking up after years of domestic political turmoil during which YPF’s oil and gas production dropped dramatically following privatisation and subsequent expropriation: the Vaca Muerta shale gas field has increased its production and drawn billions of dollars of development commitments from major international oil and gas companies.[9] We examine what trends we can predict and how those will affect project finance transactions and oil and gas sector investments in the years to come in Chapter 11 (The Future of the Oil and Gas Sector in Latin America).

Latin America has embraced renewable energy. Renewable energy investment in the region has increased dramatically: 1.1GW of solar energy capacity came online in 2015, doubling the region’s output,[10] and 4.4GW of wind energy capacity was added in 2015.[11] Overall, Latin American governments invested US$19.9 billion in renewable energy projects in 2015.[12]

Renewable energy project finance deals in Latin America present unique challenges for sponsors and lenders/investors. Latin American governments have been leaders in using the competitive bidding structures implemented for traditional development concessions in renewable energy concession auctions. This has driven project bid prices down, thinning margins for sponsors in an industry that is more dependent than most on good fortune and favourable weather conditions. Furthermore, with rare exceptions, the hardware needed for renewable energy development is produced outside of Latin America (principally in the United States, Europe and China), so involving an export finance agency is often necessary to achieve bankability. Despite these challenges, Latin American governments across the region remain committed to developing their countries’ wind, solar and hydroelectric power potential.

Transportation infrastructure – or the lack thereof – remains the great opportunity and the great stumbling block of Latin America. The region’s transportation infrastructure needs are well documented: some indices show that Latin America as a whole has underinvested in transportation infrastructure every year since at least 1980.[13] This ‘infrastructure bottleneck’ has contributed to Latin America’s stagnation in the global export market, holding steady at about 6 per cent of global exports since 2001.[14] Bridging this infrastructure gap could require as much as US$150 billion in investments across the region, in roads, railroads, ports and airports.[15]

This problem is too large for the public sector to solve on its own, which is why Latin America’s governments are taking steps to aid private-sector investment. In general, incentivising the private sector means loosening the public purse strings, and the region is doing that through programmes like the South American Council of Infrastructure and Planning (IIRSA)’s guarantee initiative, through which 12 of the region’s countries are offering over US$21 billion in guarantees for transportation infrastructure projects of all kinds.[16] Peru has allocated more than US$30 billion for future projects to address infrastructure shortfalls throughout the country[17] using a variety of strategies, as outlined in Chapter 14 (Regulatory Framework of Transport Infrastructure in Peru). Mexico has turned to the problem of its infrastructure gap with financial enthusiasm previously unheard of in the region, allocating just under 2 trillion pesos (just over US$100 billion) for transportation infrastructure projects, discussed in detail in Chapter 13 (Developing Transport Infrastructure to Support Industry: Mexico).[18]

Public-private partnerships are a popular structure for governments across Latin America looking to spur development, grow local industry or invite international players into the local market by offering a structured mode of access that allocates risk between public and private participants.[19] Latin America has been the leading region for public-private partnership project finance deals for over 30 years, with over 500 individual projects.[20] Perhaps no country has embraced public-private partnerships as a method for bringing infrastructure projects to fruition more than Brazil, where 23 public-private partnerships for projects of over US$1 billion each have been formed in the 10 years[21] since Brazil reformed its legal framework for public-private partnership investments. Chapter 1 (Brazilian Public-Private Partnerships: Retrospect of Past Decades and New Trends Ahead) examines the successes and failures of Brazil’s decade using public-private partnerships.

Public-private partnerships (commonly known as PPPs or P3s) are especially popular in infrastructure finance, where the local government can contribute security, authorisations, manpower and know-how in addition to funding. The smaller economies of the region are also embracing public-private partnerships as a way to attract funding that otherwise goes to bigger economies that can provide more upside and more stability for traditional private investment. Ecuador enacted legislation providing a framework for public-private partnership investments in 2015, and its progress is examined in Chapter 2 (Ecuadorian Public-Private Partnerships in a Nutshell: What We Can Tell So Far). A substantial majority of public-private partnerships are for road projects, where the private sponsors build the road and collect tolls for a concession period, and the local government provides safety infrastructure and retains control over the road after the concession expires.

Dispute resolution is and has historically been an area of project finance law and business that evolves quickly. Lenders and investors need constant vigilance from their lawyers to ensure the integrity of their security packages. Sponsors and borrowers need that same vigilance to confine risks to project companies and specific deals to the greatest extent possible, with as little exposure as possible to the parent companies and shareholders. Arbitration with the seat in New York or London or submission to the jurisdiction of the courts of New York or England and Wales is still considered the de facto approach,[22] but even when that approach is followed, local law governs several aspects of the lender/investor’s security package in project finance deals.[23] In addition, disputes with state-owned entities – so often crucial partners in Latin American project finance transactions – bring their own specialised local legal regimes into play. For the current state of play and context for the region’s fraught history of applying foreign legal systems to local projects, we provide Chapter 5 (Two Key Considerations on Infrastructure and Energy Disputes with the Arbitral Seat in Latin America) and Chapter 6 (Investment Treaty Arbitration).

‘Compliance’ is generally understood to be shorthand for ‘compliance with laws and anti-corruption regimes.’ Corruption costs – including cartel bidding where only local, politically connected firms have access to concession auctions, overbilling by local suppliers and service providers, and outright bribery demands by local officials – were long-treated as an operational cost required to be built into any business model for projects in Latin America.[24] However, the past few years have seen governments from Argentina[25] to Mexico[26] wake up to the economic and political toll that corruption takes on a country’s ability to attract foreign investment and develop local industries and champions. Chapter 8 (A New Environment) provides a nuanced look at the major international players and regimes shaping current compliance practice. This realisation, combined with large-scale popular protests against corruption across the region, have led to investigations into business and political elites previously considered untouchable, and the passage of legislation that created new anti-corruption regimes and authorities or enhanced existing ones.[27]

These changing legal regimes and, in some cases, a newfound enthusiasm for enforcement by local authorities, have created an environment that is at the same time optimistic and fraught with potential for breaking (or failing to enforce) newly minted rules. Never has it been so important to have top-quality international and local counsel to help clients navigate these regimes, nor has it been so important for lawyers to remain on the cutting edge of this field. The most famous examples of the need for effective and dynamic compliance advice are the ongoing anti-corruption operations in Brazil, studied in detail in Chapter 10 (When Corporate Prevention Fails: Crisis Management in the Brazilian Anti-Corruption Context).

This practice guide provides a primer for dealing with these issues before and during the life of a project finance deal in today’s market, that can be used as a launching point for businesspeople and lawyers when considering and navigating project finance deals in Latin America.

In the first section, we examine the use of public-private partnerships. The second section looks at some other traditional and innovative financing structures being put to use in the region, including project bonds, bringing in private equity investments and seeking financing from China, which has brought its financial diplomacy to bear on the region to an unprecedented extent in the past decade.[28] The third and fourth sections focus on two of the thorniest areas of legal development in Latin American project finance: dispute resolution and local and international compliance regimes. And the final three sections of this practice guide discuss the future of project finance in Latin America and, in particular, the three pillars of Latin American project finance: the oil and gas industry, renewable energy and transportation infrastructure.

Latin America is ripe for project finance investment, and sponsors and lenders/investors that moved into the region sooner are already enjoying the fruits of their investments. As touched on above and described in detail in the chapters that follow, Latin American project finance currently presents a compelling opportunity for legal practitioners and businesspeople: there are many opportunities for private-sector actors, with new oil and gas and renewable energy investment opportunities discovered monthly; there are complex legal landscapes to be carefully navigated with the assistance of experienced counsel, especially in the areas of dispute resolution and compliance; and there is great demand in the governments of the region for investment of every type, especially transportation finance. This means that there are strong incentive systems in place and being planned to further foster investment, and local governments are ready and willing to work with international sponsors and lenders/investors to generate deal work.

This practice guide provides information about current trends in Latin American project finance, and gives a look at the future of the industry and the law. It will also serve as a starting point for conversations between lawyers and their clients, giving each a solid and nuanced base from which to move forward. We hope it leaves the reader as enthusiastic about the business and practice of project finance as we are.

Notes

  1. Timothy Puko and Georgi Kantchev, ‘Oil Prices Tumble Below $30 a Barrel.’Wall Street Journal (15 January 2016), available at www.wsj.com/articles/oil-prices-fall-below-30-a-barrel-1452853918.
  2. 'Crude Oil & Natural Gas.’ Bloomberg Markets: Energy (accessed on 28 August 2016), available at www.bloomberg.com/energy.
  3. ‘Statoil acquires operated interest in Brazilian offshore licence containing a substantial part of the Carcará pre-salt oil discovery.’ Statoil (29 July 2016), available at www.statoil.com/en/NewsAndMedia/News/2016/Pages/29jul-brazil.aspx.
  4. Naureen S Malik, ‘Panama Canal to see 550 US LNG Tankers a Year Following Expansion.’ World Oil Magazine (1 July 2016), available at www.worldoil.com/news/2016/7/1/panama-canal-to-see-550-us-lng-tankers-a-year-following-expansion.
  5. Jude Clemente, ‘Brazil’s Oil Production Expected To Continually Increase.’ Forbes (12 July 2016), available at www.forbes.com/sites/judeclemente/2016/07/12/brazils-oil-production-expected-to-continually-increase/#57a3b6b4434c.
  6. Idem.
  7. ‘Mexico Crude Oil Production.’ Trading Economics, available at www.tradingeconomics.com/mexico/crude-oil-production. Accessed on 28 August 2016.
  8. Angelina Rascouet.,‘Venezuela’s Oil Production Fell to 13-Year Low in June, IEA Says.’ Bloomberg (13 July 2016), available at www.bloomberg.com/news/articles/2016-07-13/venezuela-s-oil-production-fell-to-13-year-low-in-june-iea-says.
  9. Charles Kennedy,‘Argentina’s Prized Vaca Muerta Shale Could See $10B Exxon Investment.’ OilPrice.com (3 June 2016), available at http://oilprice.com/Latest-Energy-News/World-News/Argentinas-Prized-Vaca-Muerta-Shale-Could-See-10B-Exxon-Investment.html.
  10. ‘Renewables 2016 Global Status Report.’ Ren21 (2016), p. 64.
  11. Idem at p. 76.
  12. Idem at p. 102.
  13. Tomás Serebrisky, Ancor Suárez-Alemán, Diego Margot, Maria Cecilia Ramirez, ‘Financing Infrastructure in Latin America and the Caribbean: How, How Much and By Whom?’ Inter-American Development Bank (2015), p. 8.
  14. Idem at p. 76.
  15. Idem.
  16. ‘Financing Mechanisms and Guarantees.’ Available at www.IIRSA.org.
  17. ‘Agilizando la Ruta del Crecimiento: Parte del Plan Nacional de Infraestructura 2016–2025.’ AsociaciÓn para el Fomento de la Infrastructura Nacional – AFIN (2016), p.21 fig. ‘Tabla 2’.
  18. ‘National Infrastructure Program 2014–2018.’ PWC Mexico (2014), p.2 fig.1.
  19. Cesar Queiroz, Gaston Astesiano, Tomas Serebrisky, ‘An Overview of the Brazilian PPP Experience from a Stakeholders’ Viewpoint.’ Inter-American Development Bank, (2014), pp. 12-13.
  20. José Luis Guasch, Daniel Benitez, Irene Portabales, Lincoln Flor, ‘The Renegotiation of PPP Contracts: An Overview of its Recent Evolution in Latin America.’ OECD (2014), p. 8.
  21. ‘The State of PPPs.’ World Bank Group (2016), p.13.
  22. Michael Nolan, Julian Stait and Erin Culbertson, ‘Dispute Resolution in Project Finance Transactions.’ International Project Finance Chapter 14: Oxford University Press (2011), pp. 425-426.
  23. Stefano Gatti, Project Finance in Theory and Practice: Designing, Structuring, and Financing Private and Public Projects Academic Press (2012), p. 277.
  24. ‘Custo econômico da corrupção.’ Federação das Indústrias do Estado de São Paulo – FIESP (2012), available at www.fiesp.com.br/indices-pesquis as-e-publicacoes/relatorio-corrupcao-custos-economicos-e-propostas-de-combate/.
  25. Benedict Mander, ‘Anti-Corruption Tide Reaches Argentina.’ Financial Times (19 May 2016), available at https://www.ft.com/content/e0de4f00-1daf-11e6-b286-cddde55ca122.
  26. Viridiana Rios, ‘Mexico Wins: Anti-Corruption Reform Approved.’ Mexico Institute at the Wilson Center (12 July 2016), available at https://www.wilsoncenter.org/article/mexico-wins-anti-corruption-reform-approved.
  27. Andrew M Levine, Bruce E Yannett, ‘Anti-Corruption 2016: Introduction.’ Latin Lawyer (2016), available at http://latinlawyer.com/reference/article/48826/introduction.
  28. ‘China’s Financial Diplomacy: Rich but Rash.’ The Economist (31 January 2015), available at www.economist.com/news/finance-and-economics/21641259-challenge-world-bank-and-imf-china-will-have-imitate-them-rich.

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