This practice guide is intended to be a tool for lawyers and business people operating in the field of project finance in Latin America. In pursuit of this goal, we have filled the chapters of this guide 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 at the cutting edge of project finance in the region.
Our approach is premised on three topics of relevance to both sponsors and lender and investor groups: current deal structure, problem solving after the bargain has been struck and future trends in project finance in Latin America.
The past several years have shown the resilience of the Latin American market, and also its persistent frailties. The region's strengths are still powerful building blocks of successful economies: enormous mineral wealth, including the world's largest proven reserves of lithium in Argentina, Bolivia and Chile;2 vast areas well-suited for agriculture, with Brazil's soybean production just a shade below the largest producer, the United States;3 and some of the largest conventional and unconventional hydrocarbon reserves in the world in Venezuela4 and Argentina.5 The commodity wealth of the region continues to provide an economic platform for the individual countries of the region to propel themselves into higher levels of economic growth, income and development.
Latin America's recent cycles of growth and development have been largely countercyclical to those of the United States and Europe, with the region emerging as a hot spot for investors seeking good returns during the dark days of the 2007–2011 financial crisis. And, more recently, as Latin American economies slowed somewhat, and the rest of the world came out of the global recession, some of the investors that came during the Great Recession have retreated to more traditional FDI recipients in Asia and North America. Despite the recent slowdowns in FDI growth rates for the Chilean and Peruvian economies, 3.4 and 3.7 per cent respectively, these rates compare favourably with the lower rates in Brazil and Mexico, at 2.3 per cent in each country.6
FDI for Latin America as a whole fell by 3.6 per cent in 2017 and is fully 20 per cent below the 2011 levels.7 China's restrictions on investment outflows account for much of this decline worldwide. China's FDI in Latin America accounted for 5 per cent of the total in 2016–2017, with almost all of that in energy and transport.8
For Latin America, most of the fall in FDI was concentrated in Brazil and Mexico, which together account for 60–70 per cent of annual FDI in Latin America. These negative trends notwithstanding, a by-product of the rush to seek new places to invest in and develop projects of the last decade is that a much broader spectrum of investors has been exposed to the Latin American region, and many of those who came during the 2007–2011 period have stayed. Those who have – and who have reinvested while prices are relatively low – are expecting strong gains in the medium- and long-term.
The feeling in the global investment community and within Latin America itself is one of cautious optimism for the next few years. 2016 and 2017 were difficult, with the regional gross domestic product (GDP) contracting by 1 per cent in 2016 and increasing by 1.3 per cent in 2017.9 Every country in Latin America is expected to grow in 2018, except for Venezuela, with the regional average GDP growth at about 2 per cent.10 Traditional powers Brazil and Argentina find themselves struggling to maintain GDP growth much in excess of 2 per cent, while other regional stalwarts such as Colombia, Chile, Mexico and Peru are expected to maintain steady if modest growth rates in the 2.3–4 per cent range. Mexico is expected to benefit from a stronger US economy in 2018, with the IMF predicting higher growth for this year.11
Brazil has been rocked by setbacks of its own making in the past five years, with legal and political scandals getting in the way of economic development. Large protests against mismanagement of the economy, large-scale graft and the perceived legal immunity of the political elite of the country led to the downfall of the president, Dilma Rousseff, and a draining of economic confidence. This was felt especially acutely by international investors, for whom the social and political uncertainty added an unquantifiable risk to any business proposition. Meanwhile, the deep bench of local project developers – built up over many years and boosted by the boom years of 2007–2011 – has been hollowed out by several sprawling corruption investigations. The situation was exacerbated by falling commodities prices worldwide. After two years of contraction in 2015 and 2016,12 Brazil's GDP expanded by a modest 1 per cent in 2017 and was expected to achieve 2.3 per cent growth in 2018 until the tally of the countrywide truckers' strike was taken, reducing projected GDP growth in 2018 by 0.7 per cent, to 1.6 per cent.13 After spending the 2000s as the darling of the international investment community, Brazil has suffered from a lack of new investment and project development in the last several years, especially for badly needed infrastructure projects.
Recent indicators for 2018 point to continued difficulties for Brazil. The current government, led by Ms Rouseff's former vice-president and successor, President Michel Temer, is beleaguered and scandal-rocked, but is business-friendly nonetheless. The administration tried to aggressively market Brazil to foreign investors, seeking bidders for a privatisation scheme with the hope that this would bring in tens of billions of dollars.14 At the time, this was generally seen as a welcome change after over a decade of perceived hostility and outright protectionism from Ms Rouseff's Worker's Party (PT). However, the hoped-for investments have yet to materialise with the failure of the state lottery to attract investors and the withdrawal of the highly anticipated Eletrobras privatisation.15
Despite this privatisation campaign, FDI for Brazil fell 9.7 per cent from 2016 to 2017.16 2016 was itself a weak year for FDI. To help stimulate the economy, Mr Temer's government has allowed Brazilians to withdraw funds from their inactive unemployment insurance accounts (which are personal to the employee in Brazil), injecting billions of dollars of much-needed cash into the economy; other measures for putting cash in consumers' hands are planned.17 The current administration, in a further signal of its enthusiasm for the business community, was able to pass significant labour market reform in July 2017, which became effective in November of that year. This set of laws provided some important and valuable protections to the Brazilian work force but has also been controversial because of concerns, particularly from the unions, that the legislation will reduce job security and weaken unions' organising capabilities.
Two consecutive years of GDP growth, the business-friendly administration and the general feeling in the market that the worst is behind it have led Brazilians and foreign investors alike to be cautiously optimistic about Brazil's economic future. The halcyon days of 2011, with its 7.5 per cent GDP growth and unbridled optimism, may be in the past, but for the first time in two years it is possible to see a clear path to renewed economic growth for Brazil. This path relies heavily on the country's enormous resource wealth, and there is a presidential election coming at the end of 2018 that will go a long way towards determining whether Brazil is able to make the hard, long-term choices that it faces.
To the south of Brazil, the election of Mauricio Macri in late 2015 was heralded by the world as a signal that Argentina intended to re-enter the global economic community. However, after nearly two decades of fiscal isolation, tampering with official statistics for GDP growth and inflation, high tariffs and large subsidies, the re-entry has not been as easy as was hoped. The necessary, albeit painful, restructuring of the Argentine economy, after years of drift and mismanagement, along with newly accurate economic statistics, showed very high inflation for 2016 and 2017.18 Reducing tariffs and subsidies further raised prices for Argentine citizens, leading to a contraction in consumer spending.19 The country's economy grew modestly in 2017, by 2 per cent, but is not expected to maintain that rate in 2018, with GDP growth falling to 1.3 per cent.20
A short-term economic contraction was likely, perhaps, given the heavy lifting Argentina had to undertake to reset its economy. The government finally settled its 15-year long fight with the so-called 'vulture funds', which were holding the bonds Argentina defaulted on in 2002, for US$9.3 billion, effectively reopening the international capital markets to the country. This has allowed President Macri to continue financing the Argentine government through international debt, despite fiscal shortfalls.21 The reopening of international financial markets for Argentina also facilitated a dramatic increase in FDI, which rose by 253 per cent in 2017 over 2016. Despite the country's deteriorating exchange rates, economic growth continues to be driven by both consumer spending and the backlog of private investment in the country's economy.22
The business communities, both domestic and international, like President Macri, and are bullish on his ability to continue the stabilisation, modernisation and clean-up projects of the Argentine economy he has undertaken. President Macri removed controls on the Argentine peso, devaluing it overnight by 30 per cent against the dollar, a necessary reform after years of government controls on the currency led to the proliferation of a black market with a much higher exchange rate for the peso, but one which made the interest payments on what international debt the government has more expensive.23 However, the continuing fall of the country's currency, along with new import duties, has raised new concerns among investors and lenders with regard to the sustainability of the tough economic reforms undertaken by this government.24
The current administration has increased investment in the development of the country's vast natural gas reserves,25 and, in a move intended to entice foreign energy companies to invest right now, has extended the country's artificially high natural gas prices until the end of this year, making the country a net exporter of natural gas by the end of the year.26 However, the fall of the Argentine currency has imperilled the financial stability of the more than 2,000 small firms that help to develop this unconventional hydrocarbon resource.27 The country has also become a tech hub – it is a major outsourcing centre for companies around the developed world that need affordable design and engineering work, and is home to the majority of the continent's 'unicorns' (tech companies with a valuation of more than US$1 billion).28
Elsewhere in Latin America, the future is also looking cautiously optimistic. Colombia is on track to continue its streak of positive GDP growth, which it has achieved every year during this millennium.29 Colombia is currently benefiting from increased oil prices, which are back to over US$65 per barrel after a low of US$28 per barrel in 2016,30 and likely headed higher in 2019. The country's long-term investments in infrastructure should continue to bear fruit at these prices for oil and other commodities. It is also feeling the positive effects of the end of its 52-year civil war between the government and the Revolutionary Armed Forces of Colombia (FARC), which should open up wide swathes of the country that have been off-limits to farmers and developers of all kinds for decades, provided the new government adheres to the general principles of the deal with FARC.31 The peace agreement has been lauded internally and by the international community for putting an end to a bloody and costly struggle that was long seen as a major impediment to Colombia's entry into the class of fully developed nations. With the country's recently elected president an outspoken critic of the FARC deal, it remains to be seen whether and to what extent the peace will remain stable.
Bolivia has also continued its run of positive GDP growth in the new millennium, with growth of 4 per cent or more every year since 2010, a trend that is expected to continue.32 It has maintained this GDP growth rate without significant monetisation thus far of its significant reserves of lithium. With everything from smartphones to laptops to electric cars powered by batteries made primarily from the material, Bolivia's lithium reserves should provide it with a steady stream of resource income for decades to come, provided the country is able to attract the foreign investors needed to extract this resource.33 Lithium extraction in Bolivia is tightly controlled by the government. The private risk assessment firm, Stratfor, notes that the high degree of government involvement in the country's mining sector will make rapid monetisation of new lithium output difficult; any large-scale operations undertaken in the future will have to include the private sector, which has experience and know-how the government cannot match.34 Whenever Bolivia does decide to open its doors – even partially – to partnerships with the private sector, the investment figures will be in the billions of dollars.
The future for Latin America in these counties and around the region is viewed with guarded optimism. Latin America is ripe for project finance investment, and sponsors, lenders and investors that moved into the region earlier 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 business people. There are many opportunities for private-sector actors, with new oil and gas and renewable energy investment opportunities discovered monthly; complex legal landscapes to be carefully navigated with the assistance of experienced counsel, especially in the areas of dispute resolution and compliance; and great demand in the governments of the region for investment of every type, especially transportation finance, meaning 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.
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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 business people and lawyers when considering and navigating project finance deals in Latin America. It is organised as follows. In the first section, our contributors 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 last decade.35 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.
This practice guide will inform you about current trends in Latin American project finance and give you 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 you as enthusiastic about the business and practice of project finance as we are.
1 Claudette M Christian is a partner in the Washington, DC office of Hogan Lovells US LLP.
2 'A battle for supremacy in the lithium triangle.' The Economist (15 June 2017) available at https://www.economist.com/news/americas/21723451-three-south-american-countries-have-much-worlds-lithium-they-take-very-different.
4 'Crude Oil – Proved Reserves.' CIA World Factbook available at https://www.cia.gov/library/publications/the-world-factbook/rankorder/2244rank.html.
5 'World Shale Resource Assessments.' US Energy Information Administration (24 September 2015) available at https://www.eia.gov/analysis/studies/worldshalegas/.
7 ECLAC, Foreign Investment in Latin America and the Caribbean, 2018; https://repositorio.cepal.org/bitstream/handle/11362/43690/4/S1800411_en.pdf.
9 'Latin America and the Caribbean: Seizing the Momentum.' International Monetary Fund (11 May 2018) available at https://www.imf.org/en/News/Articles/2018/05/10/NA051118-Latin-America-and-Caribbean-Seizing-the-Momentum.
10 IMF, ibid.
12 'Inflation rate, average consumer prices (Annual percentage change).' International Monetary Fund IMF DataMapper available at www.imf.org/external/datamapper/[email protected]/VEN/CBQ/CMQ/SMQ/BRA.
13 The Economist, 25 August 2018, Economic and Financial Indicators. See also IMF https://www.imf.org/en/News/Articles/2018/05/10/NA051118-Latin-America-and-Caribbean-Seizing-the-Momentum. See also: Jeffrey T Lewis, 'Brazil's GDP Rises Slowly, Weighed Down by Trucking Strike.' The Wall Street Journal (August 31, 2018) available at https://www.wsj.com/articles/brazils-gdp-rises-boosted-by-service-sector-and-government-spending-1535720151.
14 Claudia Safatle, 'Governo prevê R$ 20 bi com concessões em 2018.' Valor Econômico (31 August 2017) available at www.valor.com.br/brasil/5101894/governo-preve-r-20-bi-com-concessoes-em-2018.
16 ECLAC, Foreign Investment in Latin America and the Caribbean, 2018; https://repositorio.cepal.org/bitstream/handle/11362/43690/4/S1800411_en.pdf
17 Edna Simão e Fábio Pupo, 'Governo que injetar R$ 16 bi na economia com liberação de PIS.' Valor Econômico (31 August 2017) available at www.valor.com.br/brasil/5092638/governo-quer-injetar-r-16-bi-na-
19 JRA, 'How Mauricio Macri is trying to rehabilitate Argentina's economy.' The Economist (23 September 2016) available at https://www.economist.com/blogs/economist-explains/2016/09/economist-explains-15.
20 'Latin America and the Caribbean: Seizing the Momentum.' International Monetary Fund (11 May 2018) available at https://www.imf.org/en/News/Articles/2018/05/10/NA051118-Latin-America-
and-Caribbean-Seizing-the-Momentum. 'GDP Growth (annual %).' The World Bank DataBank available at http://databank.worldbank.org/data/. See also: The Economist, 25 August 2018.
21 OECD, 2018, Argentina - Economic forecast summary (May 2018). Available at: www.oecd.org/eco/outlook/argentina-economic-forecast-summary.htm.
23 'Argentina Peso Drops to New Record After $50 Billion IMF Deal.' Available at: https://www.bloomberg.com/news/articles/2018-06-08/argentina-peso-drops-to-new-record-after-50-billion-imf-deal.
25 See Platts: 18/07/02/argentina-gas-demand/.
26 www.gasenergyla.com/download/Monthly-Bulletin-04_ENG_.pdf, Energy Bulletin #4, January 2018.
28 Benedict Mander, 'Argentina: home to the majority of Latin America's tech unicorns.' Financial Times (September 19, 2016) available at https://www.ft.com/content/687f5a58-5807-11e6-9f70-badea1b336d4.
31 https://mondediplo.com/2018/09/06colombia; see also: Nicholas Casey and Joe Parkin Daniels, '“Goodbye Weapons!” FARC Disarmament in Colombia Signals New Era.' New York Times (27 June 2017) available at https://www.nytimes.com/2017/06/27/world/americas/colombia-farc-rebels-disarmament.html.
32 'Latin America and the Caribbean: Bouncing Back from Recession.' International Monetary Fund (19 May 2017) available at https://www.imf.org/en/News/Articles/2017/05/18/NA190517Latin-America-and-
the-Caribbean-Bouncing-Back-from-Recession. 'Latin America and the Caribbean: Seizing the Momentum.' International Monetary Fund (May 11, 2018) available at https://www.imf.org/en/News/Articles/2018/05/10/NA051118-Latin-America-and-Caribbean-Seizing-the-Momentum.
33 'A battle for supremacy in the lithium triangle.' The Economist (15 June 2017) available at https://www.economist.com/news/americas/21723451-three-south-american-countries-have-much-worlds-lithium-they-take-very-different.
34 Stratfor, 'Why Cashing In On Lithium In South America Won't Be Easy', June 2018; available at https://worldview.stratfor.com/article/why-cashing-lithium-south-america-wont-be-easy.
35 See Brookings Institution, 'Chinese Investment In Latin America Continues to Expand,' March 2018, available at: https://www.brookings.edu/research/despite-slowdown-chinese-investment-in-latin-america-continues-to-expand/. The Brookings paper shows a slowdown in financial flows to Latin America. See also '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.