Public private partnerships (PPPs) will grow rapidly in coming years as Latin America moves to redress its weakness in infrastructure while its ambitious plans swamp the public sector’s ability to finance them.
Improved capacity in the public sector and a willingness by local banks and increasingly institutional investors to fund projects are also driving interest in PPPs.
But badly designed programmes, the reluctance of the public sector to allow in private companies and weak credit ratings are still hampering growth.
Uruguay is just the latest to announce a PPP deal. Last week CND, the country’s development corporation, said it was looking at two rail projects worth up to $500 million. Contracts will last for 25 to 30 years with payments of between $25-30 million to the government.
Luis Alberto Moreno, president of the IDB, said the region lagged behind in infrastructure. Asian countries typically invest twice as much as Latin America in the sector. Energy demand alone will increase 54% through 2025 in Latin America, he said.
Fabrice Henry, managing director at Astris Finance, which advises on infrastructure finance, predicted a boom in PPPs across the region.
He said Colombia and Mexico had particularly ambitious programmes and the former has extensively consulted with construction companies and banks on how best to structure the deals, a prerequisite for success.
However the global banking crisis and more recently Basel capital standards that impose greater restrictions on long-term investing limit international institutions’ role, said Mini Roy, head of export and agency finance at Sumitomo Mitsui Banking Corporation.
Marcos Siqueira Moraes, executive manager of the central PPP unit of the Brazilian state of Minas Gerais, said the main challenges included building capacity within the public sector and creating a sufficient pipeline of deals to attract foreign investor interest. For lower rated credits, managing the amount of subsidy that the government needs to provide is sensitive. Minas Gerais has been developing projects in areas ranging from waste to energy and protecting the environment, said Moraes. In an interview with Emerging Markets, he said that the governments of 11 Brazilian states including Minas Gerais, Sao Paulo and Rio de Janeiro, were seeking to coordinate and devise common standards to attract more international investors.
The states would like volume to attract especially large investors such as Dutch pension funds and Asian investors. He said that while the dialogue had started between the states, it remained challenging to agree common standards.
Multilaterals will be able to help catalyze the area. The IDB tripled its portfolio of lending to the private sector between 2006-12 and can help in areas such as designing PPP projects and corporate governance. The Multilateral Investment Fund and the IDB’s Infrastructure and Environment Sector are launching a regional PPP advisory services program to enable governments to attract increased private sector participation and strengthen government capacity.
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