In preparing the foreword to last year’s inaugural edition of the The Guide to Infrastructure and Energy Investment, we noted the recent progress Latin America has made in terms of economic growth and democratic consolidation. Indeed, nearly 75 million people have joined the middle class over the past 15 years, and most citizens now reside in stable electoral democracies. This profound economic, political and social transition has improved the lives and prospects of citizens and created a new consumer class that asks more of its leaders. They are hungry for high-quality services, as well as the latest products and technologies. This change, in turn, has created countless new business opportunities for local entrepreneurs and global investors alike.
The ability to tackle infrastructure challenges will play a decisive role in the trajectory of Latin America. Citizens and businesses need universal access to electricity; water and indoor plumbing; improved reach and quality of telecommunications coverage; and improved transportation options that will reduce the costs and time it takes to move products through the value chain. Meanwhile, the region’s potential as an energy producer, both from traditional and renewable sources, is enormous and could fuel the region’s continued economic and social development.
As anyone who has spent time working or travelling in Latin America can attest, the region’s infrastructure challenges increase the degree of difficulty, cost and risk of doing business. In 2014, São Paulo, South America’s largest industrial hub, suffered another severe drought that forced water rationing and threatened widespread power outages – exposing the need to develop more integrated and resilient water systems and reduce the power grid’s dependence on hydroelectricity. An Inter-American Development Bank study demonstrated that high domestic transport costs serve as a constraint to exports around the region, and can exacerbate regional disparities in economic development. Meanwhile, internet users in Latin America pay much more for broadband connections than users in the OECD average, resulting in lower penetration rates, particularly in poorer rural areas. These examples (which, it should be noted, are not unique to Latin America) are illustrative of the broad set of challenges that governments will need to tackle in coming years. In all, the Inter-American Development Bank estimates that countries in the region need to roughly double their investments in infrastructure from between 2 and 3 per cent of GDP to something more like 5 per cent to close the region’s infrastructure gap.
Adding to these challenges, global energy and commodity prices have not rebounded to anywhere near the peaks seen during the previous decade and look unlikely to do so in the near term. This trend leaves governments with the difficult budgetary balancing act of finding the revenues to continue providing public services to an increasingly expectant population, while also driving forward new investments in areas like infrastructure, energy and innovation.
A year after publication of the first edition of this guide, these long-term fundamentals and challenges still hold true. However, in the intervening year, political and economic developments in many of the region’s key markets have added a further layer of complexity to this challenge. The Car Wash corruption scandal, born in Brazil’s energy and infrastructure sector, has expanded dramatically and implicated executives and public officials across the region. In addition to wasting precious public resources and roiling the political waters in these countries, this scandal has badly damaged the balance sheets and reputations of a number of prominent companies – reminding us of the scale of the challenge corruption poses for investors in Latin America and beyond.
Meanwhile, conditions in Venezuela continue to deteriorate, while Brazil, Mexico and Colombia face pivotal elections in 2018 that will shape the future of key reforms in the former two and the FARC peace process in the latter. New governments in Peru and Argentina are promoting investor-friendly reforms, but confront difficult internal political dynamics as they seek their implementation.
Further, the rise of economic nationalist political forces in the United States has the potential to alter trade and investment flows throughout Latin America. With China already aggressively pursuing investments in energy and infrastructure projects around the region, the US withdrawal from multilateral trade and climate deals like the Trans-Pacific Partnership (TPP) and the Paris Accord, as well as the decision to renegotiate the North American Free Trade Agreement (NAFTA), may further drive governments in the region to turn westward for investment and partnerships. However, it also seems to be leading to a renewed push to expand intra-regional trade. We have already seen efforts between Mexico and Mercosul to consider new trade agreements, as well as discussions among Pacific Alliance and Mercosul members about increased integration. While these trends do not preclude investment from the US and Europe, they may reshape geopolitical ties and reorder government priorities toward projects that facilitate Pacific trade.
And yet, even as Latin America finds itself passing through this period of political transition and some economic uncertainty, there are good reasons for investors to remain optimistic about the region’s short- and medium-term prospects.
In Brazil, despite significant political turmoil, we now see governmental and private sector support for needed fiscal reforms, moving away from a development model predicated on massive publicly financed infrastructure programmes. Dozens of key infrastructure and energy assets are being opened to private investment, while steps are also being taken to provide tax relief and ease local content requirements for energy producers.
In Argentina, President Mauricio Macri continues to push forward with an aggressive reform agenda aimed at attracting private investment, both local and foreign, while decreasing the tax and bureaucratic burden. The country is moving aggressively to develop traditional and renewable energy resources, and to improve infrastructure to unleash its dynamic agriculture and mining sectors.
The implementation of the long-awaited peace deal in Colombia will be a challenge for its next President, but there will be a need and opportunity for the government to expand infrastructure, services and economic development to parts of the country that have been disconnected from the formal economy for decades. Given the Colombian government’s focus on public–private partnerships, infrastructure and energy, investors will need to be key contributors if the country is to achieve its anticipated ‘peace dividend’.
In addition to promoting reforms to maintain growth in the country’s energy and resources sectors, Peru’s President Pedro Paulo Kuczynski has correctly identified water as an increasingly important political, economic and social issue. He has set ambitious targets for access to water and sanitation and is launching programmes that will create new opportunities for investors and improve the efficiency of service delivery in this crucial sector.
Finally, even as the remarkable scale of the Car Wash corruption scandal becomes clearer, there is reason for optimism to be found in the vigorous approach with which prosecutors and legal institutions around the continent have collaborated to pursue and prosecute these high-profile corruption cases. These efforts are exposing flaws in legal frameworks and enforcement mechanisms that have too often allowed corruption to fester – preventing investors from competing on a level playing field – or deterring them from investing at all. We are optimistic these investigations will help create a more transparent and competitive climate, where sophisticated global companies that must operate under the US Foreign Corrupt Practices Act (FCPA) and the UK Bribery Act are increasingly sought after as partners and investors. In the meantime, they serve as a reminder that investors will need to remain vigilant with their compliance programmes and vetting of partners.
In sum, addressing the obstacles and realising the major opportunities in front of us remain challenging tasks. For governments, progress will require building and reinforcing strong legal institutions and investor protections; exploring innovative approaches to project finance and cooperation with financial institutions, the private sector, and civil society; and taking calculated risks and the occasional unpopular decision. For investors, success will require a longer-term view; a nuanced understanding of the local operating environment and its laws, regulations and incentives; and sustained engagement with a wide range of local stakeholders to identify and mitigate risks and build on areas of mutual interest.
Given these complexities, we once again congratulate Latin Lawyer and Hogan Lovells LLP on the publication of the second edition of The Guide to Infrastructure and Energy Investment. This volume examines the many aspects involved in the complex task of modernising and revitalising infrastructure and energy systems throughout Latin America. A talented and experienced group of practitioners contribute to this comprehensive and valuable guide for potential investors, legal advisers and policy-makers.
Anthony S Harrington
Albright Stonebridge Group
 Mesquita Moreira, Mauricio; Blyde, Juan S; Volpe Martincus, Christian; Molina, Danielken. Too Far to Export: Domestic Transport Costs and Regional Export Disparities in Latin America and the Caribbean. Inter-American Development Bank, October 2013. https://publications.iadb.org/bitstream/handle/11319/3664/Too%20far%20to%20export%2010-19-13finalweb%5b1%5d.pdf?sequence=1.
 Serebrisky, Tomas, et al. ‘Financing Infrastructure in Latin America and the Caribbean: How, How Much, and By Whom?’ Inter-American Development Bank, November 2015. https://publications.iadb.org/bitstream/handle/11319/7315/Infrastructure%20Financing.%20Definitivo.pdf?sequence=1.