The Inter-American Development Bank is ramping up its efforts to ensure that infrastructure projects that are needed to help fill a long term investment shortfall attract funding from the financial markets.
The development bank is examining a number of projects that could benefit from a process known as credit enhancement where the bank provides finance that raises the credit rating of the project to attract private investors.
“The bank has the instrument and is discussing several projects to be able to provide a solution for potential capital market transactions,” Jean-Marc Aboussouan, chief of the infrastructure division in the IADB’s structured and corporate finance department told Emerging Markets.
He said the bank was looking both at traditional credit enhancement as well as more novel techniques aimed at reducing the construction risk at the early stage of a project that can put off investors
“We are looking very closely at the construction risk because generally bondholders do not like to take construction risk so we can step in and provide some structuring so we eliminate or reduce construction risk so capital markets can invest.”
Latin America has a huge shortfall in infrastructure investment that has built up over the last three decades. The IADB has estimated a need of $250bn of investment a year for the next few years.
The region was hit by the drought of finance in the immediate aftermath of the global financial crisis. The implementation of Basel III has imposed higher capital reserve requirements and liquidity ratios has reduced the amount of bank lending.
“There is clearly a retraction in the potential coming from the banking market to
support projects,” Aboussouan said. “We bridge the gap with credit enhancement so that a transaction that cannot access the market becomes interesting and viable.”
Latin American governments have embarked on reforms aimed at attracting private capital. A large majority of South American countries has passed legislation to establish frameworks for public private partnerships (PPP) to attract private capital.
Brazil has unveiled a $250bn programme of investments in road, rail and air transport and has launched a global investor roadshow to drum up support. Urguay, Mexico, Panama, Colombia and Brazil have said infrastructure is a critical priority.
“Some of the governments have been very ambitious in promoting a vision on infrastructure,” said Alex Wong, head of the centre for global industries at the World Economic Forum. “Latin America could be very interesting for investors because it has not got as much attention as Africa.”
However, Andrew Davison, a senior vice president at Moody’s pointed out that the funding of infrastructure projects in Brazil had been dominated by BNDES, the national development bank, which was now facing increasing budgetary pressures. “The Brazilian government is keen to stimulate private sources of financing,” he said.
Aboussouan said another positive sign was the re-opening of the private placement market, the sale of securities to a relatively small number of select investors.
He pointed to Reventazón, a large hydroelectric plant in Costa Rica, which had been funded in part with $135m from US private investors while the IADB has provided a $200m loan.
“Those investors provide long term financing that are key for infrastructure projects,” he said. “The need is to start tapping the capital markets and the large amount of funds available locally and from international investors.”