Latin America's infrastructure gap is wide and deep, but a new wave of crucial projects are finally starting to fill the void. The Banker takes a look at some high-impact developments that look set to help the region's trade, energy and urbanisation needs.

Latin America’s infrastructure gap has become deeper and wider as economic growth in the region gained speed over the past decade. As international trade intensifies, cities become more populous and energy demands grow, Latin America is desperately trying to keep the pace of infrastructure development in line with that of its economies.

Earlier this year, Paul Riezler, the president of Eurocámara Uruguay, the association that represents chambers of commerce from members of the EU in Uruguay, told newspaper El País that “shipping a container from Europe to Montevideo [Uruguay's capital] costs less than [shipping a container] from Montevideo to [the port of] Rosario, in Argentina.”

A new Latin America 

Filling Latin America’s infrastructure gap requires deep pockets. Brazil’s infrastructure needs alone will cost about $100bn a year for the next decade, according to official figures. This puts pressure on public finances, but also creates opportunities for lenders as many governments have either relatively well established or nascent public-private partnerships (PPPs) programmes. Aside from Brazil’s framework for collaborations with the private sector, Peru has put together a serious PPP pipeline, while Colombia has entered its fourth round of infrastructure concessions. There are similar stories from other countries in the region, too.

In addition to government spending, a total of $33bn was raised by banks to finance transport projects in Latin America between 2010 and the end of 2014, one-quarter higher than the sum over the previous five years, according to data provider Dealogic. Even more impressive is the growth of the region's renewable energy sector and – although on a different scale – urbanisation-related projects such as urban railways and waste and water treatment facilities, where financing has almost doubled in volume over that time. This rate of funding is set to accelerate in the future, according to the Inter-American Development Bank (IADB).

While experts are generally cautious in claiming that such activity heralds a 'renaissance' of infrastructure in Latin America, most would agree that there are a number of initiatives and overriding trends that have the potential to change the region for good – propelling growth for local economies, individual businesses and financiers. Here are a few high-impact examples.

A tale of two canals

Transport and trade are traditionally popular projects, and one of the most important such infrastructure developments in this field lies within Latin America: the $5.2bn Panama Canal expansion. Funded by the Panama government and set for completion this year, the expansion is creating a new lane of traffic along the canal through the construction of a new set of locks, doubling the waterway’s capacity – current vessels are allowed to carry up to 5000 containers, while new vessels built to take advantage of the new passage can carry up to 13,000 containers, speeding up trade connections through the Atlantic and Pacific oceans.

As of the end of 2014, the state-run Panama Canal Authority declared that the work was very close to completion. The development has obvious consequences for future revenues for Panama as well as for ports in the region, from Colombia's to Trinidad and Tobago's in the Caribbean, which have the potential to serve ships in transit.

The Panama Canal expansion has also triggered parallel developments. Having nurtured the idea of an alternative channel since the 19th century, Nicaragua is finally seeing such a plan materialise – although some have voiced concerns about its feasibility. A consortium led by Chinese telecoms billionaire Wang Jing secured the 100-year concession over the new canal’s operation, to be run by Mr Wang’s Hong-Kong listed telecom group HKND. The Grand Canal of Nicaragua, as it will be called, will cost about $50bn, be completed by 2020 and cut through 277 kilometres of land and water (against Panama’s 82 kilometres). Controversially, the canal would disturb Lake Nicaragua, Central America’s largest freshwater reservoir – something that is sounding a number of environmental alarms.

Despite some experts’ doubts on whether the project will come to fruition, the venture does not lack funding. In an interview with Reuters last year, Mr Wang said he was pouring some $10m a month of his own money into the early preparation stages of the project. Nicaragua’s government hopes that about 5% of global trade sea traffic will be redirected through the Grand Canal, doubling the country's gross domestic product. 

On a higher ground 

It is not just Latin America's waterways that are undergoing a transformation; the region's airways are also being overhauled, though on a different financial scale and supported by proven feasibility studies. The $1.3bn expansion of São Paulo’s Guarulhos airport, which was carried out in anticipation of Brazil’s hosting of the football World Cup in 2014, was one particularly noticeable such project.

However, what is possibly the most interesting development is taking place in Mexico City, where a new airport is being built from scratch. The $9.16bn, six-runway Mexico City International Airport will have capacity for 120 million travellers a year and has the potential to overtake Hartsfield-Jackson in Atlanta as the world’s busiest air hub in terms of passenger traffic. More than 21 million people live in the capital’s metropolitan area, making it the largest in the Western Hemisphere, according to Stephen Trent, an analyst at Citi.

“This project is intriguing. Mexico City is unique in having such a huge concentration of the country’s population, and it also happens to be the country's political capital," says Mr Trent. "There is also very important economic activity in that part of Mexico. All three of these factors, all in one place, make the airport project exceptional. You don’t only have diverse air passenger flows – tourism, business, people visiting friends and relatives – which have all growth potential. But you also have important air cargo growth potential: air cargo companies in the Americas that can transport cargo in passenger planes such as Colombia’s Avianca, for example.” 

The energy-efficient, innovative curved walls and roof of Mexico City International Airport were created by internationally acclaimed architecture firm Foster + Partners and Fernando Romero, the son-in-law of Mexican business magnate Carlos Slim.

A Latam infrastructure renaissance

Mexico steps on the gas

A new airport is not the only groundbreaking project taking shape in Mexico, however. The Los Ramones pipeline physically plugs the country’s gas market in to that of the US for the first time, allowing Mexico to benefit from the cheap shale gas that has provided an economic boon north of the border.

The pipeline stretches across 1000 kilometres from Agua Dulce in Texas to Apaseo el Alto in Guanajuato in central Mexico, and it is the spine of a proposed 10,000-kilometre natural gas transport network across the country, which it is hoped will lead the transformation of Mexico’s energy industry. Passing through the municipality of Ramones in its first phase, the pipeline requires a total investment of $3bn. As of the end of 2014, before the first tranche of the work became operational, about one-fifth of Mexico’s power was generated through highly polluting and expensive fuel oil which, excluding subsidies, made the cost of electricity to industrial users 75% higher than it was in the US. 

Jean-Valery Patin, the head of Latin America power, infrastructure and project finance at BNP Paribas, which put together a $1bn financing package for the Ramones Sur part of the project, says: “Ramones Sur and the other upstream pipelines allow Mexico to have access to a more competitive source of financing – US shale gas – thus benefiting the country’s competitiveness.” Mexico’s state-run energy company Pemex, the US’s Sempra Energy and France’s GDF Suez are developing the project.

Growing energy demands and technological improvements are spurring the development of renewable energy across Latin America. This goes beyond the relatively well-developed hydroelectricity market in the region and includes wind and solar energy, according to Jean-Marc Aboussouan, the head of the infrastructure division in the IADB’s structured and corporate finance department. This trend has helped generate a larger volume of projects across Latin America, which has resulted in private sector financing to the market growing substantially, with more than $37bn raised over the past five years. This compares with a total of less than $20bn in the previous five-year period.

An urbanisation drive

Mr Aboussouan says that another interesting trend is taking shape in the region. As populations in cities continue to grow rapidly, local authorities are under pressure to improve metropolitan transport as well as water and waste-related infrastructure. “In big cities, the impact [of these projects] is major: they open access to easy and cheap transportation to low-income populations. If you [replace] some of the polluting transportations, the old technology, you can also improve quality of life in cities,” he says.

Projects that could be grouped under the urbanisation umbrella include São Paulo’s new driverless metropolitan line, Linea 6, which in its first phase will run for 15.9 kilometres and serve 15 stations. Construction of the $3.3bn PPP project is to be completed in 2020 and it is expected to carry more than 600,000 passengers daily. According to Odebrecht, a Brazilian conglomerate that is part of the Move São Paulo consortium that will build and operate the line, the average travel time for the entire stretch – which currently takes 90 minutes by bus – will be approximately 27 minutes. It will be the deepest subway line in São Paulo, with an average depth of 40 metres and with stations that can reach up to 60 metres deep.

Other subway rail lines are expected to be created from scratch in the region. Last year, Peru awarded a contract to build and operate Lima’s first subway line to an international consortium led by Spanish builder ACS Actividades de Construccion y Servicios. The project – Linea 2 – required an investment of $5.7bn and is designed to ease traffic in the city of 8.7 million people, where economic growth is putting more cars on its roads every year. The train line will run through a 35-kilometre tunnel with 35 stations, linking the city centre with the port area of Callao to Ate in the east, and cutting journey times from at least two hours by bus to 45 minutes, according to government statistics.

Talking to reporters in March last year, former Peruvian transport minister Carlos Paredes said: “The biggest infrastructure project ever undertaken in Peru starts today. It is going to improve the competitiveness of Lima and Callao and the quality of life of millions of Peruvians.”

The IADB’s Mr Aboussouan is equally enthusiastic about such projects, but is also realistic about the often disappointing pace at which infrastructure programmes have grown in the past in Latin America. He is also aware of how the region’s natural riches can get in the way of works. “In Lima, for example, there are different challenges,” he says. “From a construction perspective, once they start digging subway tunnels, it will be interesting to see what they find in terms of archaeological discoveries.”


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