The Role of Project Finance in Developing a Region: Trends and Considerations

Project finance is a key driver in the growth of a country’s infrastructure and industry. Recent trends in project development and finance in Latin America, however, illustrate the importance of project finance not only in the literal build-up of projects in the region, but also in the growth of the region as an attractive centre for foreign investment, even in the face of challenging market conditions.

Prior to the financial crisis of 2007–2008, project development and finance in the region were driven primarily by soaring commodity prices, largely the result of a fast-growing Chinese (and Asian) economy. As a result, investments in mining and other natural resource projects across Latin America, particularly in Brazil, Mexico and Chile, were actively pursued and represented a majority of investment activity in the region. Following the financial crisis, natural resource and export-oriented projects experienced a significant slowdown as commodity prices collapsed. However, the boom created prior to the financial crisis by high commodity prices and strong foreign demand for exports led to a historical growth in the middle class across the region, which in turn provided a basis for domestic-driven growth, leaving the region less vulnerable to decreases in foreign demand and international market conditions. In order to sustain the growth of this rising middle class, countries recognised the need to invest in transportation and social infrastructure and began to focus on developing plans to build and fund these projects (with a strong focus on renewable energies and transportation infrastructure). The transition from an export-focused model of project development to a more balanced model that focuses on domestic growth and long-term stability helped many countries in Latin America weather what would otherwise have been a turbulent period for project development.

Project development and finance in Latin America continues to reflect this trend. For example, Colombia is embarking on an ambitious development of its road infrastructure system, Chile is leading the region in the development of renewable energy and Mexico is finally implementing its much-anticipated energy reforms, opening up its energy market to foreign investment.

While the region continues its efforts to build up the infrastructure required to supply its middle class with the basic resources necessary to support growth and consumption, this is only part of the current project development and finance story in Latin America. The region has also grown into an attractive investment centre for new forms of capital to take advantage of both the unexpected availability of projects and asset portfolios resulting from the fallout of corruption scandals in Brazil and the economic difficulties facing large, international developers like Abengoa, Isolux, SunEdison and others looking to divest energy assets in the region. As a result, increased M&A activity and increased financing of ongoing operations and expansions of brownfield assets are also driving project development.

This chapter examines these trends, as well as how more recent developments have changed the landscape for project development and finance in Latin America. We will also look forward to 2017 and beyond to identify key drivers as Latin America continues its efforts to stabilise growth and promote future sustainability through the development of attractive projects and core infrastructure.

The year in review

The year 2016 began with a strong pipeline of projects and a largely liquid finance market hungry for deal flow. However, by the beginning of the second half of the year, several factors contributed to a slowdown in project development and a tightening of financing terms.

Corruption scandals

The corruption scandals in Brazil have had far-reaching consequences both inside and outside of the country. Investigations have revealed bribes of approximately 6.2 billion reais and counting and alleged losses to the government of more than 30 billion reais, with dozens of people currently charged with alleged crimes. Many of Brazil’s largest and most active project development companies have been implicated in these investigations, including Odebrecht, OAS and Invepar. These companies own assets and projects across a vast range of industries in Latin America, many of which are now the subject of sale processes as these companies seek to exit amid tightening balance sheets and growing scrutiny not only from bankers but also concession authorities. Odebrecht, for example, has embarked on sales processes for its interests in Rutas de Lima, a 115km toll road project in Peru, and its stake in the GSP pipeline in Peru, as well as a wide range of other projects throughout the region – including (as has been widely reported) the Chaglla hydroelectric plant in Peru, Odebrecht Transport in Brazil, and Odebrecht’s stake in the Metro Line No. 4 in São Paulo.


Key international project developers have experienced financial difficulties in 2016 that have had knock-on effects in Latin America. Examples of this unfortunate trend include:

  • Spanish energy developer Abengoa, an active participant in the Latin American market, which is currently undergoing a global restructuring and asset divestiture;
  • Isolux, a Spanish engineering and construction firm, seeking to avoid a similar fate through the sale of assets in Brazil and other countries in order to raise much-needed capital;
  • Ferrovial, a Spanish infrastructure firm, undergoing asset sales in an effort to raise capital;
  • SunEdison, an active US developer that recently filed for bankruptcy protection, which among other things resulted in the termination of the planned acquisition of Latin America Power, a developer of alternative power projects in Chile and Peru (as well as mid-construction problems in multiple assets throughout the region);
  • Empresas ICA, a large Mexican infrastructure, construction and development company that is expected to soon file for bankruptcy protection; and
  • Pacific Exploration & Production Corp, a Canadian oil and gas company largely operating in Colombia, who is also seeking to restructure its debts.

The consequence of these and various other restructurings and bankruptcies, particularly in Brazil, has been a delay in the development of greenfield projects as owners either seek to sell assets or to hold on to them for future development pending an improvement in financial conditions.

Commodity prices

Commodity prices have continued to lag in 2016. Oil prices in particular have significantly delayed the development of assets subject to Mexico’s highly anticipated energy reforms and, consequently, Pemex’s pursuit of foreign investment. State-owned oil companies in Venezuela, Colombia and Brazil have also suffered to differing degrees and have delayed exploration projects and deferred capital investments until oil prices recover.

Metal prices have been similarly sluggish, which has delayed mining projects across the region, while shifting the focus by some mining companies on debt restructuring and refinancing as they await an uptick in commodity prices. However, this trend may change as a result of rising metal prices in the second half of the year.


Britain’s decision to leave the European Union was expected to cause severe aftershocks in the economic markets. Thus far, the market reaction has been more muted than expected and specific consequences for the Latin American region remain to be seen. However, the fall in global oil prices and the strengthening of the US dollar as an immediate consequence of the referendum certainly put additional pressure on an already stressed oil and gas industry. In addition, capital costs for European banks in particular may still increase as the specific mechanics for Britain’s formal withdrawal from the European Union and their potential effects become more clear.

Trends in 2016

Surprisingly, rather than shut down the project development market, the factors noted above have forced private and public investors and lenders to be more open to less traditional opportunities and have attracted a range of relatively new market participants. Active areas in the region include the following:


One notable theme in 2016 is the increased M&A activity that has resulted from the reorganisations and corruption scandals noted above. In some cases, large portfolios of projects are becoming available that, in turn, will require financing to complete development or continue operations. In other instances, minority stakes have been marketed (successfully). Non-traditional project finance participants, such as private equity and hedge funds looking for higher yielding investments, are increasingly active in this space. US and internationally based private equity firms have been active investors in the region and we expect that activity to continue as additional and more desirable assets come to market. In fact, one of the notable trends is that private equity firms have raised billions of dollars of capital that is earmarked for Latin America, thereby raising the visibility of investment opportunities throughout the region.


In the face of difficult economic and political conditions, infrastructure finance has continued to be active in 2016, particularly in Colombia, Chile and Mexico:

  • Colombia: This year was a very active one for toll road financings in Colombia, led by the country’s ‘fourth generation’ (or ‘4G’) infrastructure initiative, which can be compared in philosophy and scope to the Eisenhower Interstate programme in the United States. The overall 4G programme contemplates an expansion of the country’s road network, including bridges and tunnels, with a total investment of approximately US$10.7 billion. Local and international banks have been eager and active participants in these projects, with many more expected to come to market as the first wave of projects complete their financings. However, this market will face challenges in the near future as local and international banks begin to face risk concentration limits, which will hamper market liquidity. We do expect new sources of capital to step in to try and bridge some if not all of the gap with international institutions seeking to form funds aimed at lending to 4G projects. Blackrock’s recently announced Colombian infrastructure fund is an example.
  • Chile: Chile also remains active in the energy and infrastructure space with continued development of renewable and gas-to-power projects. The capital costs required for these projects total in the billions of dollars, with a majority of the funds expected to be raised on a limited recourse project finance basis. There is also a push towards major transportation projects, such as the recently closed US$900 million expansion of the Santiago airport.
  • Mexico: Mexico had the misfortune of passing its much-needed energy reforms right before a precipitous drop in oil and gas prices. As a result, while initial interest in the Mexican market was and remains strong, the levels of investment have not increased to the desired levels in light of current market conditions. Nevertheless, gas pipeline financing has been active in 2015 and 2016 with many projects coming to market following the award of concessions and oversubscribed energy tenders by the well-known Comisión Federal de Electricidad. This is an example of a market that is developing, based in large part upon the cheap US gas reserves.

Bank terms

On the lending side, the year started as a ‘borrower’s market’, but the factors noted above have started to result in a noticeable tightening of the project finance bank market. Lenders are seeking to reassess their risk appetite in the face of exposure to many projects sponsored by companies in financial distress and losses incurred as a result of the sale of distressed oil and gas assets in Brazilian foreclosure proceedings. One increasingly clear result of these developments has been the gradual shortening of available financing tenors in the market, with long-term financing available to a very select few projects (based on asset class, country and sponsor) by the second half of the year. Borrowers have responded by voluntarily foregoing longer tenors and generally opting to provide lenders with further structured  mitigants in an attempt to reduce execution risk.


In summary, this year has been marked by a mixture of traditional greenfield project finance and largely brownfield M&A activity that is expected, in turn, to drive financing activity in connection with the acquisition, development, expansion and operation of these assets. Where in the past the region may have experienced a general decline in project development and finance post-financial crisis, the present is actually witness to a maturing market that is resilient to international and even local slowdowns due to the long-term potential of the region as a whole.

Future development

The future looks to largely continue recent trends; additionally the expected re-emergence of once active markets in the region will present several opportunities to further drive growth. As discussed below, we expect project development to continue to be driven by renewable energy, an expected rise in the development of natural resource projects timed to come online when commodity prices are projected to have recovered, an expected increase in activity in Peru following the recent elections and the expected return and rise of Argentina in the international market.


Chile, lacking in domestic oil and gas resources, has emerged as a regional leader in solar and wind development. Chile recently conducted the largest electricity supply auction in its history, with indications of ongoing future auctions. As it finds itself with more projects in the pipeline than it needs, we expect lenders to become more selective and to focus on well-structured projects with experienced sponsors. Recent pessimism regarding the tightening of credit seems premature and deal flow should continue on the back of the Chilean government’s stated goal to have 70 per cent of the country’s energy come from renewable sources by 2050. In addition, the continually decreasing technology cost curve creates an opportunity for those developers willing to make investments based on continued cost reductions in the next five years. It is safe to say that those best able to accurately technically predict such cost savings will find themselves at a competitive advantage.

Mexico is also pushing for the development of solar and other clean energies. The country conducted its first clean energy supply auction in 2016, and awarded 11 photovoltaic projects for a total of 4 million MWh per year. Sponsors involved in those auctions include Enel, SunPower, EDF and Jinko Solar, among others, and we expect these projects to come to market in the near future. Sponsors in this space also are expected to benefit greatly from the combination of experience gained by lenders (and their internal credit committees) in financing the Chilean PPAs and the familiarity of those lenders in Mexico and with the well-known Comisión Federal de Electricidad.

Peru also recently conducted electricity supply auctions as well, awarding a total of 162MW to wind energy projects and 184.5MW to solar projects. Meanwhile, while Colombia’s focus remains on transportation infrastructure, some renewable energy projects (mainly hydrological) continue to move forward.

Natural resource projects

Commodity prices have shown a small rebound in the second half of 2016 and, while we are still far from the peak levels of the market, we do expect some well-positioned mining companies to begin focusing on bringing projects to market that can be online in a few years, when many long-term projections anticipate a healthy recovery of copper and other metal prices and demand. The year 2017 should see the first of these projects come to market from some of the larger industry players.

Re-emerging markets


Prior to the conclusion of the recent elections in Peru, activity in the country slowed down dramatically in anticipation of a change in government. Following the transition to the new administration, we expect the backlog in infrastructure and other projects to reinitiate development, with investors and lenders attracted to the relatively stable regime and comparatively healthy economy. The consummation of the sale of Odebrecht’s interest in the Gasoducto Sur Peruano project should reignite the construction of the pipelines and kickstart numerous ancillary projects and we expect there to continue to be an active M&A market for a wide range of energy-related assets there. Peru will also be an active market for transportation and social infrastructure projects.


While still very much in the early stages of its international re-emergence, Argentina presents a broad and exciting array of opportunities for project development. Many regulatory issues remain to be resolved, but we expect thermal and renewable projects to lead the way in the international project finance market. International banks may initially enter the market with caution, but the sheer volume of projects expected to come from the underdeveloped infrastructure and energy market presents an opportunity that in the long-term will be too attractive for local and international financial institutions to forgo. As of now, the country only has approximately 150MW of installed wind-generated energy, and 7MW of solar capacity, and the government has prioritised renewable energy development in some of its recent reforms. There is a widespread view that Argentina will develop into an active market for project development and M&A, but that it will take longer than the current ‘excitement’ would otherwise indicate.


Brazil is still going through a difficult period and is not expected to fully recover for a few years. While greenfield project development may face challenges, we do expect interesting brownfield assets to become available, which will further drive M&A activity.

Ecuador, on the other hand, remains largely a mystery to the international bank market. While the country returned to the sovereign bond market in recent years, project development activity has remained relatively quiet in the face of the country’s difficult past with international projects. Kinross sold its interest in the Fruta del Norte gold project to Lundin Gold Inc in 2014, after years of protracted discussions with the government over the terms of the exploitation agreement. The project itself is a world class gold asset, but has faced challenges attracting long-term financing sources. In the face of Kinross’ exit, the Ecuadorian government sought to reform some of the more challenging components of its mining law and it remains to be seen whether Lundin will be able to succeed where others failed or abandoned attempts. If Lundin and Ecuador are able to convince the international markets that Ecuador is generally open for business, other mining assets may also follow suit in what has largely been an untapped market.


Despite the strength of recent development in the region, it is clear that many opportunities remain to further develop infrastructure in the region. Colombia has already expanded its 4G programme to the development of river transport infrastructure with the broad Magdalena River project. There are airport projects planned throughout the region – with expansions and upgrades that are viewed as very attractive, particularly to non-local companies that are looking to expand outside their home regions. We are also seeing a renewed interest in many port-related projects, which may be surprising based upon the low commodity market, but nonetheless remains a focus for many infrastructure-related participants. Finally, there are several metro-related transactions planned in the region, which will inevitably keep local and international players active.

Asset sales

Due to ongoing reorganisations and shifts in corporate strategy, we expect sales of project- related assets in the region to continue and in some instances increase. Duke Energy is expected to complete its sale of Latin American energy assets by year end. Latin American Power recently announced its sale of energy assets in Chile and Peru. In addition, there are multiple ‘private transactions’ throughout the region, sometimes for an entire asset and other times for minority interests. This activity will continue and prices should remain attractive to sellers for the short-medium term. Furthermore, in most cases these transactions will involve financing and we expect the project-related acquisition finance in the region to be an active sector in the market.


The project development space in Latin America has experienced challenges in recent years but has demonstrated resilience based on opportunities coming out of distressed situations and a focus on infrastructure and energy development as a path to long-term sustainable growth. The shift to energy and infrastructure projects is a positive sign that the region is recognising the importance of infrastructure development as a means to support economic growth and a rising middle class. It is also encouraging to see that asset turnover in the region is active in the face of restructurings and reorganisations, and is a recognition of the viability of project development and the underlying strength of economic and social fundamentals in the region. Accordingly, project-related acquisition finance, infrastructure and energy investment and an expected recovery in commodity prices will continue to be active drivers in the project development market in Latin America.

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