Infraestructure Funds In Latin America (Mexico)

Infrastructure Funds in Latin America

MAY, 2010

Countries in Latin America are expected to invest $450 billion USD in infrastructure assets between the years 2011 and 2015. These long-life assets are usually characterized by high development costs (design and construction) but low marginal costs of production and little to no competition once in operation. While the bulk of the investment is expected to be allocated to the surface transport and energy sectors, the water/sanitation and ports/logistics sectors are expected to see substantial increases in the current levels of investment.

All across the region, the public sector is often affected by budgetary constraints and lacks efficiency when it comes to building and operating infrastructure assets. That is why, with the help of loans and guarantees provided by governments and multilateral development banks, strategic and financial investors from the private sector are increasing their role in the provision of such public works and services. The private sector’s involvement is done through private finance initiatives, concessions and joint ventures.

Several countries, mainly Chile, Brazil, Colombia, Peru and Mexico, offer attractive projects complemented by a strong political will, consistent and comprehensive legal, regulatory and institutional frameworks, appropriate investment climate and infrastructure financing mechanisms. It should be no coincidence then that the infrastructure funds established in 2009 plan to allocate their capital in said countries.

These funds purchase shares in the project company and work with strategic investors (operators, construction companies) to maximize the revenue. This increases their equity value over time. Their performance is tied to the ability to generate and extract cash from the operating asset (dividends) or through refinancing. The exit strategy can be the sale of their stake to other members of the consortium that owns the project company, to third parties or to the general public through an IPO.

Ashmore Investment and Inverlink’s offer won the competitive bidding process organized by the Colombian government to manage what is now called the “Colombia Infrastructure Fund Ashmore I FCP”. This fund is backed by Bancoldex, Colombian pension funds, the Inter American Development Bank (“IADB”) and the Andean Development Corporation (“CAF”). Macquarie Capital Inc. acts as the technical advisor. The fund has plans to raise USD $S500 million and intends to make ten transactions in private sector led projects from different areas such as sanitation, transport and energy. Also, the private equity fund Fintra raised USD $S300 million and plans to make equity investments in transportation projects.

Toronto based Brookfield Asset Management closed an infrastructure fund in Colombia (USD $S320 million) and set up another one in Peru. The latter, expected to start up with USD $S500 million, is a result of a partnership with the local private equity firm AC Capitales and will receive commitments from Peruvian private pension funds and loans from the IADB and the CAF.

With the implementation of the “Growth Acceleration Programs” (PAC I and PAC II) and the World Cup and Olympic Games coming up in 2014 and 2016 respectively, investment in infrastructure projects for the coming years in Brazil is expected to be in the hundreds of billions of dollars. Brazilian investment bank BTG Pactual is setting up an infrastructure fund with capital raised from private equity sources that will focus on road, dam and port projects. Furthermore, the domestic conglomerate, EBX, announced early last year that it was planning to launch a USD $S5 – 10 billion infrastructure fund, possibly with Chinese and Middle Eastern investors.

At the beginning of this year, Macquarie Group announced the launch of “Macquarie Mexican Infrastructure Fund” with USD $S408 million in initial commitments from Mexican pension funds, the domestic agency for infrastructure development, FONADIN, and Macquarie.

Although no funds were announced in Chile, this country remains the leader in the region in infrastructure investments as a percentage of the GDP with 6%. This number is expected to increase after the devastating earthquake that struck the country on February of this year. Reconstruction costs are estimated in at USD $S30 billion.

One of many similarities among these countries that will benefit from infrastructure financing is that they allow domestic pension funds to commit capital to funds and to hold long-term debt issues. Pension fund managers are always interested in these assets since their long-term lifecycle closely matches their own long-term liabilities.

There are other factors that are essential to attract private capital into the infrastructure development business, including: an adequate risk allocation when drafting the contracts to avoid lengthy renegotiations, a proper selection of the work or service to be provided, a transparent and competitive bidding process, speedy dispute resolution mechanisms, oversight agencies free of any political interference, a properly designed subsidy support system to incentivize usage or demand and a consistent and comprehensive regulation of the contracts by which the private sector hais outsourced the provision of a public work or service. A careful analysis of the aforementioned countries shows that in one way or another they fulfill these requirements.

Exciting times are ahead in infrastructure development for those Latin-American countries that have been successful in attracting private capital. A successful implementation of the projects will undoubtedly help their competitiveness and their overall welfare. It is not a coincidence that the countries that can’t seem to attract private capital for infrastructure investing are also those that are finding it increasingly hard to finance the provision of works and services with public resources, resulting in substantially lower amounts of investment compared to the countries highlighted in this article.

Author Biography


Patricio Abal has a J.D. from the Universidad Católica Argentina and is a Master in Project Evaluation Candidate at UCEMA & ITBA in Buenos Aires, Argentina. He has worked at an Argentine law firm, the United States Senate, and at an Argentine venture capital firm.

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