Moving Project Finance in Latin America Forward, Issues and Prospects
As a worldwide economic recovery takes hold, Latin American countries will be buoyed by an expected firming in commodity exports and prices, still the lifeblood of the region’s economic well-being. The slide backward that characterised many of the region’s most important economies in 2014-2016 has reversed, setting the stage for a revival in new investments across a wide array of vital infrastructure projects.
Latin American countries generally start from a high base when compared with other developing countries. Only the OECD nations enjoy higher standards of living, electrification is nearly universal, and life expectancy for most countries compares favourably with developing Asia and Africa, and even parts of Europe.
Still feeling the psychological, if not financial, effects of successive debt crises, Latin America’s infrastructure, built to a great degree using government debt financing in the 1950s to 1970s, shows its age. Local financial resources seem insufficient to meet the growing demands for electricity, natural gas, roads, railways, ports, water and other essential services.
The authors in this practice guide have looked at a wide range of countries and infrastructure issues, ranging from oil and gas in Mexico and Brazil to transportation in Peru and Argentina. A full array of the nuts and bolts concerns are addressed: law and regulation, financial transaction types, corruption and compliance, dispute resolution, the roles for development banks, and innovatory ways to identify and structure financing for infrastructure.
What ends must infrastructure investments serve?
As the economic outlook brightens, Latin American countries have broadened their infrastructure goals beyond the basics – electricity, water, roads – to a wider array of needs. These include clean and renewable energy, rail transport, both urban and intercity, and upgrading regional and hub airports. These broadened infrastructure priorities reflect countries’ national aspirations. Key issues and concerns go beyond simply connecting two points with a road, railway or pipeline and must serve overall essential national goals. In comparison with last year’s edition, the chapters in this book reflect the improved economic outlook for most countries, and build on reforms already highlighted in previous work.
Meet growing energy and electricity demand
Even though the electricity grids in Latin America provide almost complete coverage, much of the network infrastructure was built for a smaller population and a lower level of demand. In much of the region demand doubles every 15–16 years. This growth compares with little or no net growth in the US and OECD Europe and Asia. Generation, for years based on local resources, generally either hydro or fuel oil, must now serve more customers, at a higher level of quality, and lower emissions than in the past.
One of the key aims of the new infrastructure push is to promote more economic activity away from the major cities, evening out some of the current regional service disparities. This network expansion requires significant additional resources. Replacing older oil-fired power plants with cleaner generation sources also calls for major expenditures by suppliers. As discussed in the previous edition, national planners now understand that the state-owned utilities in these countries generally find themselves unable to mobilise the resources necessary to accomplish this expansion. A major push into renewable energy sources for power generation, chiefly wind and solar, is no longer a debatable issue. Rather, the renewable energy mandates have assumed increasing prominence in almost every major country in the region.
Many of the chapters address the key issues for the ‘refresh’ that is needed in the region’s power sectors. Latin American infrastructure planners, investors, and regulators now understand that their energy infrastructure projects must:
- meet growing demand;
- improve service quality commensurate with the needs of a modern economy;
- help to unify the country by building up service to lagging regions;
- mobilise foreign sources of debt and equity;
- maintain national sovereignty over mineral resources;
- bring more natural gas into the national energy supply for both electricity generation and industry;
- pay attention to game-changing new supply technologies such as hydraulic fracturing;
- provide greater levels of service reliability and quality; and
- do all of the above far more cleanly than in the past.
The strengthened push for renewable sources of electricity resonates throughout many chapters, but especially in those chapters directly addressing energy supply issues. The discussions of energy in Argentina, Brazil and Mexico (Chapters 3, 11, 12 and 13) go well beyond simple obeisance to current thinking on renewable energy. For Brazil and Mexico especially, a number of renewable energy generation projects are seen as competitive today, even with relatively modest oil prices. This means that governments will be looking to discard their traditional financial liabilities with regard to renewable energy whereby the country, through some guarantee mechanism, was responsible for covering the differential between the renewable cost of generation and the wholesale market price. For project developers, this represents a sea change – renewables have been commoditised and are increasingly treated as just another technology. With most governments, out of the generation business, at least for new projects, this means that developers, EPC contractors and banks face the price risk for renewable energy projects, a risk previously borne by the country’s Ministry of Finance, regulator or market operator.
So much improved is the cost of building or purchasing renewable generation technologies that Mexico has committed to its NAFTA partners a more than doubling of its non-carbon generation portfolio by the middle of the next decade. Almost all of the Mexican renewables acquisition will be done by private developers and investors. Argentina plans to acquire 2.4GW of renewables through PPPs, an increase of 250 per cent over current non-hydro renewable energy generation, bringing these technologies to almost 10 per cent of total generation capacity.
Natural gas receives similar commoditisation across a number of countries. It is a paradox – on the one hand, gas is seen as an increasingly vital and high priority element of the fuel mix, while on the other technology has reduced much of the business to a series of simple technology and commodity acquisitions. Technologies that were somewhat daring a year or two ago – floating liquefaction or regasification – have also been commoditised to a significant degree. Prices for the various components of the natural gas system – LNG ships, regasification, pipelines, combined cycle power plants – are generally well understood by most of the participants in the sector. This commoditisation has been helped along by the ‘Cheniere formula’, which prices each element in the LNG value chain explicitly.
With technology risk largely out of the picture, the rationale for government monopoly largely exists as well. Discussions of gas supply and infrastructure development in Argentina, Peru, Brazil and Mexico are found in Chapters 3, 11 and 13, and generally follow similar lines. The push for gas was stalled by low commodity prices which led to increased state interference in the energy sector, which in turn suppressed new supply investment (See Chapter 11). With more confidence in economic growth, commodity prices, and gas technology, these countries now find themselves facing a need to vastly increase the supply of natural gas, its use in power generation, and the infrastructure to transport that gas without government enterprises capable financially of so doing. Even more significantly, none of the countries surveyed in this volume are even considering further use of state resources to augment future supplies of natural gas or renewable electricity.
In the past, countries have justified the limited uses of various contracting instruments as exceptions to the dominant role accorded to the state in the energy sector. Even in the previous edition of this collection, introducing private investors and operators involved some type of justification by the countries. This year, our contributors scarcely bother with the rationalisations for PPPs and other private instruments. Discussion is more focused on further detailing the uses for private funds and calculating the savings to the national treasury.
The chapters dealing with Mexico’s energy and power sectors, 11 and 12, show the greatest evolution in the role of government and acceptance of private participation. The discussion on Mexico has now moved from the post hoc efforts to promote the benefits of PPPs and other private investment vehicles to a broader discussion of the particulars of private participation throughout the energy sector, down to distribution of natural gas and refined oil products. The current Mexico energy chapter (Chapter 12), devotes considerable space to a discussion of the secondary implications of an increased private role. Key elements of the chapter address ancillary changes in labour laws, company laws, financial regulation, and other components that will make Mexico’s energy sector better able to take advantage of the private funds that investors and developers are eager to deploy. In just one example, a relaxation of local content rules for hydraulic fracturing equipment means that the US and Mexican markets can integrate to the degree that a slowdown in US drilling can almost immediately make available to adjacent areas in Mexico advanced technology and crews. Mexico’s offshore appears to be similarly benefiting from the easy movement of crews and equipment.
A similar discussion can be found in the Brazil PPP chapter (see Chapter 3). The authors there have identified the subsequent steps for reform and improved effectiveness of PPPs now that the major enabling legislation has been implemented. Key areas of interest are labour law, social security reform, tax simplification, and general debureaucratisation.
Now that the increased involvement of private parties has won the day in the Mexican oil sector, Chapter 12 describes how reformers have moved on to natural gas. Mexico hopes to see the construction of more than 5,100km of gas transmission, worth more than US$12 billion, none of it owned or operated by Pemex or CFE. The country has now embarked on a programme of institutional restructuring, placing CENEGAS as the market operator for natural gas, setting rules for access and tariffs. The rapid establishment of CENEGAS was accomplished using a streamlined multi-agency approach with each relevant ministry limited in its remit during the reform: energy identified the actors, locations, and timetables; finance addressed the proposed fiscal terms; economy addressed local content issues; and environment focused on industrial safety and emissions issues. The main thrust of private-sector participation was not refought during the implementation stage, permitting Mexico to make real progress in attracting new investors and developers.
The shift in thinking in Mexico, Argentina and Brazil is striking, even in comparison with last year. The psychological threshold for government has been crossed such that the oil and gas sectors are no longer seen as cash cows to be milked endlessly for public (and individual) gain. Rather, the oil and gas sectors are now viewed as essential parts of the functioning economy, and as such, must operate under the rule of law, efficient and transparent.
This change in thinking was most striking in Mexico. When Mexico was a strong net exporter of energy its primary considerations were all about the money – how to make the resources generate as much cash for the government as possible. As Mexico sees its self-sufficiency vanishing in oil and gas, becoming a net importer of refined oil products and natural gas, cash generation for the government needs to take a back seat to the technological and financial engineering of supply itself – how can the country meet its energy needs in the most cost-effective ways?
Chapter 11 focuses on the changing role of government and private investors and operators in the upstream oil and gas sector. As the price of crude has eroded the attractiveness of many of the upstream plays in Latin America, governments have responded with varying degrees of enthusiasm to these challenges. When oil prices were high, resource nationalism was coupled in many Latin American countries with a belief that the IOCs had no alternatives but to accept terms as offered. There was also a widespread belief that the China market would grow perpetually, relieving the producer countries from the need to offer IOCs attractive terms. This was, in effect, a shift from an equity model of development, prevalent in much of the rest of the world, where IOCs took most of the financial risk, to a debt-based model where the NOCs took most of the risk.
Along with the resource nationalism came harsh fiscal terms, strict local content rules, and differential treatment of national and international companies. Chapter 11 notes that the downturn in oil prices was engineered in large measure through heavy investment by independents and then those same IOCs who had been cut out of regional resource exploitation opportunities in one of the world’s most important remaining unexploited hydrocarbon resources, North American shale formations. With the world awash with natural gas and crude oil, and with OPEC in disarray, international firms were loath to take up the terms and conditions on offer in much of Latin America. This shifted the majority of the risk for existing field development back to the NOCs, who found themselves needing to borrow increasing sums for the privilege of competing against one another for the same markets.
The authors show how Brazil, Mexico and Argentina, in particular, have found the will to make substantial changes in their oil and gas sector governance. Local content requirements have been relaxed, regulations across different resource types – deepwater, onshore, unconventional – have been aligned with the technological needs for exploiting such resources, fiscal regimes have been improved, including the reintroduction of tax and royalty contracts. After the initial offering rounds of upstream blocks failed to attract much interest in Mexico and Brazil, governments made appropriate changes, especially in local content, operatorship regulations and fiscal take. In Argentina, this has led to a pickup in activity in the country’s Vaca Muerte shale formation, one of the world’s largest, which promises to revolutionise the country’s roles in regional and world oil and gas markets. Finally, operator rules are continuing the liberalisation trend that began in 2015–2016. Brazil is now allowing IOCs to enter its offshore domains as strategic partners of Petrobras. Mexico is attracting a variety of refining, retail, service and upstream firms as it consolidates its gains in the implementing regulations for oil and gas sector reform. Private investors now appear to have sufficient faith in the permanence of Mexico’s reforms and the ever-more-complete implementing regulations that they seem willing to invest in all segments of the industry, including refining, marketing and oilfield services.
Move people and goods more effectively
In the discussion of Peru’s regulatory framework, in Chapter 3, the authors identified the country’s vast investment needs for infrastructure. The evolving regulatory framework permits private companies to invest in PPPs and new regulations permit private investors to propose projects not now included in government planning studies.
The overall framework for PPPs in Peru has been expanded from a long-running road project to transport of many different kinds of goods – roads for motorised vehicles, natural gas, people and freight on railroads, electrons on new transmission lines, and information in new broadband. The regulations and laws in Peru reflect recent experience there and elsewhere, and include various dispute resolution options, with the aim of reducing litigation and transactional costs for the government wherever appropriate and feasible.
Throughout the region variations on the PPP model have achieved a degree of maturity and breadth that bespeaks the very rapid progress in this area. Chapter 3 describes Brazil’s current experiences with PPPs in the Temer era. The PPP framework described in the previous edition of this guide described how Brazil had transitioned to a mixed economy in the 1990s and 2000s. This transition necessitated the enactment of a legal framework that would make possible the participation of private investors and operators in certain critical infrastructure – roads, ports, power generation and gas distribution.
Recent legislation builds on the country’s PPP framework with a new investment law that improves the bidding and risk allocation features of Brazil’s PPP system. A new committee has been established to generate new project guidelines.
Specific laws have been drafted or will be enacted soon to further flesh out the legal framework for PPPs in specific transport and infrastructure sectors. The law governing private participation in port terminals has been updated to give private investors a larger role in ownership and operation. Brazil is updating some of its labour laws so that business and government can better distinguish between core and non-core activities and employees, thereby facilitating further outsourcing and contracting.
The improvements in Brazil’s bidding regulations discussed in Chapter 3 cover a broad range of transport infrastructure, including airports, toll roads and railways. Just since last year Brazil has expanded the scope of permitted private participation in transport, with more airport expansions and modernisations, more railway projects, larger port concessions, and capacity increases, and modernisations for the country’s toll roads, where more than 11,000km of projects have been approved thus far.
The PPP-led rehabilitation and expansion of Rio de Janeiro’s Galeão Airport provides a similar example of the alignment of a well-understood revenue model with a physical facility possessing tremendous expansion and operational potential. Toll roads and airports work for PPP-led modernisation, since there is a well-understood revenue model.
Other countries have made similar moves beyond the obvious toll road concessions. Mexico (see Chapter 14) plans to contract out US$750 million in inter-urban railway investment and more than US$1 billion for intra-urban rail transport. Mexico’s ports will also be upgraded and modernised with the intervention of private investors.
Argentina (see Chapter 3) aims for an extensive expansion of private involvement in its transport infrastructure. Under the country’s evolving PPP legal framework, authorities seek private investors for US$5 billion in roadways, 20,000km of expanded and upgraded inter-urban railways, US$8 billion for intra-urban railways, including US$1.4 billion just for the Buenos Aires metro, and private investment and management of all major airports in the country.
Some forms of infrastructure have proven more resistant to the PPP model than have those in energy and transport. Chapter 3 discusses the reasons for this, which are many, and ascribes the unevenness of results to ‘(i) the high transaction costs; (ii) informational asymmetries; and (iii) misalignment of interests between the public and private parties.’ This puts the onus on the government to devise mechanisms to reduce the incidence of these difficulties. Many regional governments have spent the past year in efforts to provide remedies for these difficulties. Specific initiatives include the use of public funds to perform the technical and financial feasibility studies for proposed PPP facilities, updating sector-specific legal regimes for oil and gas, mining, and use of public lands, among others, to reduce the perceived risk on both the governmental and private investor or operation sides for entering into a transaction.
More generally, Latin American countries have turned to private investment as an alternative to constrained government budgets. The era of ‘getting by’ with inadequate transport infrastructure seems to be over. The emerging frameworks for concession and PPP programmes in many countries will require some further institutional and legal buildout from the host countries (see Chapter 4). Key initiatives include improved in-house capabilities for planning and contracting and a preselected stable of high-quality advisers in the areas of construction, design, legal and financial services. Projects are often held up, and disputes can bloom, when the private partner and the public entity have different understandings and capabilities in relation to the proposed project.
The authors of this Chapter found that the lack of appropriate skills and advisory services for the government side could lead to projects rushing through the design stage only to stall later as problems emerge that should have been part of the contingency planning. The authors believe that demand-driven projects will improve the bankability of the PPP efforts, especially as government guarantees ebb in this sector. As with oil and gas projects, transport infrastructure is becoming increasingly a commodity item subject to ordinary market forces, and overseen by the government. In order to reduce overall risk and allocate it properly in the absence of the government guarantee, the authors suggest project revenues should be paid in foreign currency, allocating that risk to the government. Construction risks can be reduced using cost limits by critical subunits. And perhaps most important, the demand risk needs to be mitigated through the use of ‘de-risked’ demand forecasts (commonly known as P90, P50 and P10 forecasts, where the numbers refer to the likelihood of achieving such a level of demand).
A final risk consideration is the potential role of climate change. For transport projects this can take two forms. The first is the possibility of a reduction in the operational tempo of certain transport infrastructure due to falling fuel use mandates (e.g., controls on diesel long-distance truck transport). The second is the resilience of the subject infrastructure in the face of potential climate-driven events – floods, rising sea levels, storm intensity – that may stress the infrastructure beyond its ordinary design limits. Insurers will likely look at such issues before underwriting major privately financed transport infrastructure.
Mobilise additional private and public investment with less risk to national governments
Chapter 5 discusses the role of development banks and MLAs in financing Latin America’s infrastructure. There are three major elements: (1) the rise of new infrastructure financing banks, the BRICS New Development Bank (NDB), and the Asian Infrastructure Investment Bank (AIIB); (2) changes in the traditional roles and operations of the World Bank, IFC and IDB; and (3) national changes in PPP laws and regulations that have made many countries better able to use these new funds in conjunction with private investments.
The traditional MLAs, IBRD, IFC and IDB have made changes in their operational procedures to better compete with both private funds and the new infrastructure banks. In particular, the World Bank has extended its partial risk guarantee programme to private investments, aligning the popular guarantees with ongoing trends toward a greater private role in infrastructure. This risk-mitigating instrument has allowed Argentina to issue a 1GW (eventually, 2.4GW) tender for renewable energy technologies, tapping sources of financing in dollar, yen and euro markets that were unavailable to the country just a few years ago.
IDB has put in place streamlined procedures to participate in bond issues for private parties in the region. This allows the Bank to move aggressively into supporting various clean development projects in energy, transport and water.
The World Bank’s private-sector arm, the IFC, has expanded its Green Bond programme, now at US$100 billion annually, to renewable energy programmes in Mexico and Colombia, as well as the primary user of the Green Bond programme, China. The IFC has also expanded its ongoing Distressed Asset Relief Program, which is aimed at restoring its existing borrowers to health. Priority activities in this vein have included market support, capital funding, investor mobilisation and access to the IFC’s structuring expertise.
In the past several years Latin American countries had initiated serious legal and structural reforms to access these IFC and World Bank instruments. Argentina overhauled its PPP laws, creating a major opportunity for the IFC to restructure some distressed companies. Several Central American countries have moved toward the PPP model to push reform in the electricity sector, especially with regard to renewable energy technology promotion. Mexico and Colombia have both modified their PPP rules to access additional IFC and capital market funds for roads. Mexico has also applied these reforms to electricity generation, especially for hydro and other renewables.
Several of the Andean countries continue to resist these trends toward greater private investment and operation of infrastructure assets. Bolivia, Ecuador and Venezuela remain exceptions to the building continental trend toward ‘controlled liberalisation’ and privatisation in infrastructure.
Chapter 4 comes at the question of financing infrastructure from a different perspective: how can local companies and banks change their ways of doing business to adapt to an evolving economic and political environment? The downturn in commodities after 2013–2014, along with the economic and political problems in Brazil, combined to create a situation that weakened such Brazilian stalwarts as Odebrecht, reducing their (and Brazil’s) ability to implement large new infrastructure projects. One paradoxical effect of the commodities downturn has been lower prices for LNG, imported in significant volumes by Argentina, Chile, Mexico and Brazil. Such lower prices have improved the potential for market transactions in these countries with regard to the commodity LNG as well as its infrastructure.
Other collateral damage from the downturn included such major international players as Spanish companies Abengoa and Ferrovial, spreading to US, Mexican and Korean firms Sun Edison, Empresas ICA and Hanjin, respectively. The re-emerging markets of Argentina, Brazil and Peru have proved largely successful in devising more flexible transaction structures. Local banks have taken a larger role in a number of industries. However, the problem of risk concentration in regions, sectors and industries may limit some local financing options.
Some governments have started to divest assets held by SOEs, with assistance from the IFC’s Distressed Asset Relief Program. Brazil, in particular, is now aggressively divesting non-core assets held by Petrobras. The authors noted the likelihood of a greater role for M&A transactions in the region this year, as well as an extension of oil and gas reforms to the midstream, with significant divestiture of pipelines and processing plants in Brazil and Mexico in particular. The midstream divestment issues are discussed in detail in Chapter 13.
How is the legal and institutional environment evolving?
A major emerging theme in the Latin American region is the desire by Brazil and other major countries to put the corruption scandals of the past five years behind them. This means re-establishing a firm legal basis for transactions between government and private entities, providing clear rules of conduct, determining appropriate sanctions, if needed, and settling disputes efficiently and at minimal cost to the economy.
First, put out the fires
When the Car Wash scandal at Brazil’s Petrobras captured headlines, the interest in the scandal obscured the key role played by international laws and standards in discovering the illicit payments. Chapter 10, ‘Assessing Corruption Risks in the Brazilian Infrastructure Sector’ points out the steps taken worldwide to place boundaries on the kinds of problems errant employees can cause through criminal or negligent behaviour. It also helps to point out the safeguards in place and those that might be needed in the future to limit the damage from such scandals when they occur.
The authors state that the starting point of any successful approach to corrupt activities in corporations is the acceptance that some people will misbehave if given an opportunity. A second critical understanding is that the US and UK anti-corruption legislation plays a vital role in establishing procedures that serve as deterrents, and if that fails, a trail of evidence, to reduce corporate and individual misbehaviour. First, the Foreign Corrupt Practices Act (FCPA) of the US acts as a restraint on companies worldwide, but especially those listed on US exchanges or doing business in the US. Similarly, the UK’s Anti-Bribery Act deters and documents misbehaviour for firms doing business in the EU. Brexit may complicate the EU angle, as similar laws in Germany and France are not seen as having the breadth and international recognition of the US and UK approaches to corruption.
Chapter 10 notes that Brazil’s anti-corruption law focuses on individuals while the US and UK acts also make the company responsible for the errant actions of their employees. The authors argue that the employer must be held responsible to some degree for criminal acts by employees lest the company feign ‘shock and surprise’ when their employees are found to commit acts contrary to the country’s laws. While non-participation in corrupt contracting or purchasing schemes is often cited by firms as a challenge to their success abroad, the authors contend that more robust enforcement of these acts has also created opportunities for firms that are able to comply fully with the requirements of these laws.
The Sarbanes-Oxley legislation from the US, drafted in the wake of the Enron scandal, also acts as a deterrent to corporate and individual malfeasance. Companies must report payments, including questionable ones, and they must report risks to the company, including those from employee activities that may violate laws in both the home country (US) or in some other jurisdiction.
Compliance as a deterrent to corporate misbehaviour
Worldwide efforts to fight corruption and promote business transparency have led to the creation of a series of laws, agreements and practices under the heading of compliance. This is the subject of Chapter 9. As noted above, prosecutors worldwide now wield several big sticks over companies under their purview. In addition to the laws of individual countries, multinational companies, the MLAs and even the Organization of American States (OAS) have devised codes of conduct and rules to combat bribery and to proscribe illicit payments and transactions.
For Brazil, the key components of the legal edifice combating corruption are the FCPA of the US, the UK Anti-Bribery Act and Brazil’s Clean Companies Act. These three acts create an environment that requires senior management to commit to the following behaviours and actions:
- establish rules and procedures with regard to reporting and oversight;
- carry out risk assessments on suppliers and customers;
- nominate a responsible officer within the company’s corporate structure to oversee these efforts;
- train and certify employees and executives in avoidance of corrupt practices;
- establish internal controls consistent with SEC or COSO standards so as to integrate financial controls into a company’s enterprise risk management system. Such controls serve to limit an individual employee’s latitude for misbehaviour;
- carry out due diligence on transactional partners, including suppliers and customers, and undertake regular audits of departments and transactions;
- file reports as required by law;
- establish investigative procedures in the event of suspicious behaviour; and
- monitor ongoing activities.
These actions, if undertaken in good faith, provide a powerful deterrent to corrupt practices and mitigate a company’s liabilities in the event not all its employees are angels. In light of these laws, and in the wake of recent scandals, it has now become normal practice for inbound investors who are subject to the US or UK laws to carry out FCPA/Anti-Bribery Act due diligence on their prospective partners in Latin America.
And what if prevention and compliance fail? The emerging arena of dispute resolution in Latin America
Chapters 7 and 8 concern dispute resolution between governments and private investors, operators, developers and suppliers. Chapter 7 starts with the basics: the purpose of arbitration clauses in an agreement is to improve the quality of the overall contract. There are exceptions to this ‘rule,’ though. In Peru, the PPP framework permits whichever type of dispute resolution is the most efficient with regard to the government’s resources and the overall transaction. The authors of Chapter 3 on Peru raise the intriguing possibility that direct negotiation may sometimes be preferable to arbitration.
Chapter 7 enumerates the rationales for invoking arbitration rather than a country’s court system or a third-country court system. These include perceived fairness, time required to resolve the dispute, and transactional costs to the parties. Despite this trend, some countries still require that their court systems be the final arbiters of a disputed transaction. This requirement raises difficulties, possibly significant ones, when a transaction involves entities from countries with different local legal systems, for example, between civil and common law.
Chapter 8 opens with a discussion of the improved business and legal environments in Latin America as countries generally move from closed, protectionist systems to more open ones. The authors repeatedly stress the differential treatment of SOEs and private companies, foreign or domestic, and note that Latin America, while contributing a large number of disputes, is a seat for few arbitration fora. For example, in a number of countries local courts may step in to protect public or governmental entities, especially with regard to contract termination. In Mexico, Ecuador, Bolivia and Colombia the state-owned enterprise can exercise ‘exceptional interest powers’ to determine the forum for dispute resolution. Disputes with the ‘Bolivarian’ countries are more likely to end up in courts, both the host country’s and the investing country’s, than are disputes in countries that have ‘constitutionalised’ international arbitration.
Despite these difficulties there is a growing comfort in the Latin American region with international arbitration, and its outcomes are increasingly recognised as legal, binding and appropriate in the region. Miami remains the arbitration capital for Latin America. Participants believe that the local law regime still matters, and international arbitration needs to be protected against local legal quirks, its neutrality is essential, and arbitration agreements must be enforceable. These attributes are not generally characteristic of potential Latin American arbitration seats.
The authors note that an improving legal and investment climate in Latin America will lead to the region becoming more favoured as an arbitration seat. They see Peru and Colombia, and possibly Argentina, as the first Latin American countries to be awarded locations as arbitration seats.
 Claudette M Christian is a partner in the Rio de Janeiro office of Hogan Lovells.