Publish in Perspectives - Wednesday, March 19, 2014
Funds are ready for well-functioning power markets that provide reliable and transparent mechanisms, experts say. (Photo: Government of Brazil)
Experts share their recommendations for financing Latin America’s $430 billion energy infrastructure.
The Latin American and Caribbean region is expected to almost double its currently installed power capacity by 2030, to about 600 gigawatts, at an estimated cost of some $430 billion, the Inter-American Development Bank noted in a recent report. How can such a large figure be financed? What role will public-private partnerships play in this, and what are their limitations? How might a tighter global money supply change the outlook for energy and infrastructure finance in the region?
Stephen M. Pearlman, managing partner of REAL Infrastructure Capital Partners LLC and Latin Renewables Infrastructure Fund: $430,000,000,000 seems like a big number. But over a 16-year period and taken as part of global capital investment or global infrastructure investment, it is not. The question is not if there is sufficient capital available to fund the needed investment in power generation; there is plenty. The question is if the combination of return and risk available to investors and lenders is sufficiently appealing to attract the required capital from other opportunities worldwide. For some countries of Latin America, the answer to this question will be yes; for some the answer will be no. The countries that have implemented well-functioning power markets that provide reliable and transparent mechanisms to translate the electricity demand of growing populations to a price for energy and capacity that investors can count on will lead the way. Those that have either never fully implemented markets or have allowed their markets to become dysfunctional will struggle. In these markets, public-private partnerships, both formal and informal, will continue to be important--however inadequate--forms for funding the development of energy infrastructure. State intermediation of power markets has always resulted in capital shortages, and it will continue to do so. However, even countries with well-functioning power markets face an additional challenge in attracting capital: maintaining a functioning judicial system. For some countries in the region, lawlessness has increased to the point of being a major impediment to investment. A tighter global money supply will increase the cost of capital, which should mean more expensive electricity. To the extent that the price signal is translated to the consumer, the demand for electricity will adjust accordingly. In countries in which the consumer never feels the price signal, then demand for electricity will not adjust to the cost and supply will not be adequate. This is quite like the situation in countries which have not allowed fuel prices to translate into electricity prices for consumers. They do not attract the required supply of new generation. The capital required to supply the generation capacity for a prospering Latin America over the next 15 years will be available to the countries with well-functioning energy markets and reliable judicial systems.
Jorge H. Kamine, counsel in the Washington office of Skadden, Arps, Slate, Meagher & Flom LLP: We have seen a significant amount of interest in the past couple of years among developers, investors and lenders who see the potential opportunity to expand their business in the region given the projected energy demand within the region and global demand for oil and gas. While international financial institutions continue to play an important role in financing these projects, we have also seen a significant increase in the participation of Latin American energy companies, commercial banks, pension funds, private equity funds and other institutional investors, and national development banks in these projects. Additionally, we have seen increased participation and interest in these projects from state-owned energy companies, sovereign wealth funds, private and state-owned banks, and various corporates from Asia. Greater participation and interest has also come from energy companies, commercial banks, various private equity, infrastructure and other investment funds, and pension funds and other institutional investors from the United States, Canada and Europe. We see new and innovative financing structures and products designed to tap local and global bond and capital markets to finance energy and infrastructure projects, including project bonds and the 'syndication' to institutional investors of debt historically placed with commercial banks. The region's financing needs will require continued efforts to deepen and expand capital market involvement and acceptance of this asset class and to push for greater depth, breadth and liquidity for the debt markets in general to match those seen in the United States and Europe. Governments also play a critical role in this effort through the legal, regulatory and policy frameworks that they create for the development and financing of these projects.
Mary Rose Brusewitz, chair of the international practice at Strasburger & Price in New York: Undoubtedly, a huge need for new electricity generation, transmission and distribution capacity exists in Latin America and the Caribbean. Whether sufficient financial and human capital can be attracted and successfully deployed is a major question. Each country must be analyzed separately. Political, social, economic, regulatory, legal and security challenges are unique to each place. Investors' expectations for returns and the ability to execute projects would reflect these factors, which are in constant flux. Projects take many years to plan and execute. The price tag in riskier environments could be unsustainable if commercial returns are expected. Impoverished people and struggling industrial sectors may be unable to pay tariffs sufficient to 'guarantee' sufficient returns in riskier environments. Public private partnerships (PPPs) could be key if the model is creatively adapted. Regulatory, political and economic rationality and stability are expected for the commercial private sector, and, increasingly, for the multilaterals and development institutions, to be willing to participate. Humans increasingly share a global expectation that access to electric power is a fundamental right. Yet we often have an inadequate understanding of the social, economic and political precursors for infrastructure projects to succeed. Generation assets can be ugly and dirty. Transmission and generation assets may affect sensitive ecological, cultural or social zones. Projects can be unpopular. Inclusive communication and consultation strategies are expensive. To adequately inform and include all affected peoples in the processes seems burdensome and can be frustrating for all. PPPs would need to involve inclusive, accountable and transparent structures for projects to succeed.
Gabriel Goldschmidt, senior manager for infrastructure in Latin America and the Caribbean at the International Finance Corporation: Power generation can be financed in several ways, depending on the risk-return proposition. While the public sector, through public works, could have a role funding a portion of total needs, I expect traditional PPPs (where the government is expected to contribute a portion of the financing) or schemes where there is a specific feed-in tariff to play a relatively minor role given the general appetite of the private sector to take generation risk in most Latin American and Caribbean countries. I expect equity and debt from the private sector to come from different sources, both through corporate as well as project finance. Companies already operating in the sector as well as new players (both strategic and financial investors) could contribute equity. Financial investors could include private equity funds, institutional investors and multilateral institutions. While multilateral lending could play a debt role, commercial bank lending and institutional investors would play a critical role, especially given the ability of institutional investors to apply vast sums to purchasing bonds. The ability of these investors to take some form of construction risk (as we have increasingly seen recently) will be key or, alternatively, to structure bonds in a way that strips the instruments from such risk (similar to what monoliners used to do in the late 1990s). Tighter money supply could negatively impact the supply of funding, but this could at least partially be addressed by adjusting the risk-return proposition of these projects.