Foreword

In preparing the forewords to previous editions of The Guide to Infrastructure and Energy Investment, we have noted the recent progress much of Latin America has made in terms of economic growth and democratic consolidation. Nearly 75 million people have joined the middle class over the past two decades, 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 higher-quality services, as well as the latest products and technologies. This change, in turn, has created 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; to water and indoor plumbing; to improved reach and quality of telecommunications coverage; and to 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. Infrastructure deficits also take a human toll – perpetuating economic inequality and leaving the region's poorest citizens increasingly vulnerable to natural disasters and the effects of climate change. In May 2018, striking truck drivers in Brazil blocked highways and brought the country to a standstill. While the incident came to symbolise broad dissatisfaction with the country's economic and political direction, it also demonstrated the vulnerability of Brazil's logistics networks, which are over-reliant on highway transportation. Last year, severe flooding in Lima claimed scores of lives, caused billions of dollars' worth of damage, and carved an estimated 0.5 per cent from the country's GDP.1 The reconstruction efforts are expected to cost nearly US$9 billion and add to the already serious backlog of infrastructure projects in the country. 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.2 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 face 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 closer to 5 per cent to close the region's infrastructure gap.3 Increasingly, there is a consensus forming that these investments should be largely targeted to sustainable infrastructure systems that help reduce energy consumption and greenhouse gas emissions, while helping countries increase their resilience to the shocks and stresses associated with population growth and climate change.

However, governments face these challenges in a resource-constrained environment. 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. Currency volatility, driven in part by recent changes in US trade and monetary policy, exacerbates this problem and complicates the task governments face in balancing the need to find the revenue to continue providing public services to an increasingly expectant population, while also driving forward new investments in areas such as infrastructure, energy and innovation.

The near-term political and economic environments in many of the region's key markets now add a further layer of complexity to this challenge. The Lava Jato corruption scandal, born in Brazil's energy and infrastructure sector, has expanded dramatically and implicated executives and public officials across the region, including in Peru, Argentina, Mexico and Colombia. This trend has eroded public trust and helped fuel the rise of anti-establishment political forces. Coupled with economic volatility in many emerging markets, governments in the region risk finding themselves distracted from the key objective of planning and executing important projects.

In Brazil, continued political turmoil has slowed progress on badly needed fiscal reforms and driven political polarisation to levels not seen in decades. The country's new leadership will face the difficult task of rebuilding public trust, while simultaneously grappling with the need for unpopular fiscal reforms. Progress will not be easy, and the government will need the support of private investors to continue to drive progress on much-needed improvements to its infrastructure and energy systems.

In Argentina, President Mauricio Macri continues to push forward with a reform agenda aimed at attracting private investment, both local and foreign, while decreasing the tax and bureaucratic burden. However, the country's ambitious plans to develop traditional and renewable energy resources, and to improve infrastructure, have slowed amid political resistance and an evolving currency crisis.

Further, the rise of economic and political nationalism 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, US-initiated trade wars and its withdrawal from multilateral trade and climate deals, such as the Trans-Pacific Partnership (TPP) and the Paris Accord, may increasingly drive governments in the region to turn to partners in Asia 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 economic uncertainty, there are good reasons for investors to remain optimistic about the region's prospects.

For example, Brazil continues to push forward with reforms to ease investment in its offshore oil fields. The country has held numerous successful bidding rounds for rights to its offshore fields over the past year, attracting billions of dollars in new investments from a variety of global oil majors. The country now looks poised for a new exploration and production boom that could create thousands of new jobs, though its success could ultimately depend on the next government's approach to managing the sector. The country has also long had one of the world's greenest energy matrices, and investments in renewable energy production have continued to grow steadily, with increased interest in wind and solar.

In Mexico, while new President Andrés Manuel López Obrador has worried some investors by promising to revisit energy reforms, he also promises to increase transparency in government contracting and focus resources on improving infrastructure and economic development in the country's south – a challenge that should open opportunities in every­thing from roads, railways and ports, to power generation and transmission, and expansion of the wireless grid. Success in these endeavours would help to improve the investment climate and create a more equal and prosperous Mexico.

Colombia's new president, Ivan Duque, will be tasked with overseeing the implementation of the country's peace accord with the guerrilla group, FARC, despite his opposition to the original deal. As his administration does so, 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'.

Finally, even as the Lava Jato corruption scandal continues to have a profound impact on the political environment throughout the region, the vigorous approach with which prosecutors and legal institutions around the continent have collaborated to pursue and prosecute these high-profile corruption cases is still a cause for optimism. Their 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 that these investigations will help to 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. For instance, in Brazil, a group of industry and civil society organisations (which includes our firm Albright Stonebridge Group) have come together to launch a potentially transformative project – Instituto Observ – in which all bid documents related to public infrastructure projects are indexed online for independent monitoring through artificial intelligence and traditional human oversight. In the meantime, the investigations 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 protection; 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. This is particularly true in a year where many of the region's key markets have new governments, which will be setting new agendas and testing new approaches to solving their infrastructure needs.

Given these complexities, we congratulate Latin Lawyer and Hogan Lovells LLP on the publication of the third 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 policymakers.

Anthony S Harrington and James King
Albright Stonebridge Group LLC
August 2018


Footnotes

1 'Grupo Macroconsult: PBI crecería 2.9% este año, por efectos del Niño Costero.' Grupo Macroconsult, April 2017. http://grupomacro.pe/2017/03/27/macroconsult-pbi-creceria-2-9-este-ano-por-efectos-del-nino-costero/.

2 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.

3 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.

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