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The Street View

Latin America: Boosting The Region

08 March 2022
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Latin America’s underdeveloped infrastructure hinders productivity, employment and growth. Strained fiscal balances post COVID-19 increase the role of the private sector in funding infrastructure investments. Whilst the role of the government varies across sectors, there are appropriate contractual and risk-allocation mechanisms that can foster investment from telecommunication towers to toll roads to wind farms.

The relevance of infrastructure investment in Latin America

The Inter-American Development Bank (IDB) estimates that in Latin America, a dollar of infrastructure investment has a 1.5x multiplier effect in terms of GDP over five years. They also estimate that investment in infrastructure generates, on average, 36,000 new jobs per US$$1 million invested. This type of job creation benefits low-income households and improves income distribution in one of the most unequal regions in the world.

Infrastructure investments also foster integration and international trade. Latin America has commercial costs almost 60% higher than in Asia, in part due to deficiencies in infrastructure. IDB studies suggest that a 1% decrease in logistical costs in Pacific Alliance countries (Mexico, Chile, Colombia and Peru) would increase exports by up to 4.5%.

Despite this, infrastructure investments in Latin America have nearly halved since the late 1980s from ~4% of GDP. Other than Peru at nearly 5% and Mexico’s paltry 1.5% major countries in the region invest ~2.5% of GDP on infrastructure, mainly on roads, energy projects and digital infrastructure (see Exhibit 1).

Latin America lags when compared to other regions: according to the IBD: between 2008 and 2018, Latin American countries invested on average 2.8% of GDP in infrastructure while the figure was 5.7% in East Asia and the Pacific, 4.8% in the Middle East and North Africa and 4.3% in South Asia. Studies from the IDB argue that Latin America needs to invest about 5% of GDP in infrastructure a year to catch up with advanced economies. Uncertain politics, fragmented financing and sometimes dysfunctional concession regimes have hampered progress. Fortunately we do see progress.

Who funds infrastructure spent?

Most of infrastructure investment in Latin America is funded by the public sector, but the private sector has a key role. Across the region, approximately 20% of infrastructure spend is funded by the private sector (~0.5% of GDP). In the largest economies, private sector investments in infrastructure range from almost nil in Argentina to 0.25% of GDP in Mexico and over 1% of GDP in Chile or Brazil (see Exhibit 2). While the overall infrastructure investment is higher China, India or Russia, relative private sector investment in Latin America as a share of GDP is higher compared to these three countries.

Diversification of funding sources matters: public funding is sensitive to economic cycles (procyclical) and is usually short-term focused. Between 2000 and 2016, total primary government expenditure in Latin America increased by 5.2% of GDP, with only 12% of that figure allocated to longer term investments such as infrastructure.

COVID-19 has underscored the benefits of diversifying funding sources. Latin American countries have focused on mitigating the steep ~7% GDP contraction for 2020 with short-term tools such as money transfers to vulnerable populations and credits/guarantees for businesses. Longer-term spending, such as infrastructure investment, has resulted in large cutbacks in the region.

An additional challenge that governments face across the region are weaker fiscal positions. In 2008, the region’s average fiscal balance was -0.4% of GDP whereas the IMF October 2021 Fiscal Monitor forecasts deficits above 3% out to 2025. Gross public debt rose from 40% of GDP in 2008 to 68% in 2019 and is forecasted by the IMF to be 74% at the end of 2025.

But what can governments do?

The role of the state varies by sector. In some, government acts as a contracting agent typically tendering for the construction and/or operation of specific assets and remunerates the private contractor under specific performance indicators. In others, the private sector leads on project development, commercial pathways and execution risk, such as the data centre space.

In this section, we discuss our on the ground view around the key mechanisms to attract private capital across sectors that have a natural tendency for varying levels of public sector participation. We revisit towers in the Digital Infrastructure sector, toll roads and power generation.

Digital Infrastructure – Towers

Most Telcos and TowerCos in the region are privately owned. The Telcos landscape is dominated by five major private operators: Telefónica, América Móvil, Millicom International, AT&T (DirectTV), and Liberty Latin America. In the tower sector, American Tower is the leading player with ~50,000 towers and Telefonica as its anchor tenant; Sitios and Telesites (both affiliated with América Móvil) follow with ~36,000 and ~19,000 towers, respectively. Other relevant players include SBA Communications, Phoenix Tower International, IHS Towers and Digital Colony.

While the private sector focuses on providing services to economically viable cities, governments have focused on promoting investments to connect the unconnected and improve data access, especially in rural areas. The digital divide is particularly stark in Latin America where several countries have 50 to 80 subscriptions of mobile broadband per 100 inhabitants (vs ~95 in OECD countries) and just 30% to 70% households have internet access in most countries (see Exhibit 3).

Despite having a limited role as contracting or operational agents, governments in the region have set regulatory frameworks to attract private investments in the sector and let private players take the lead on execution and commercial efforts.

There are three key levers that governments have used to influence the industry: frequency auctions with coverage obligations, flexible policies for the promotion of neutral networks and tax incentives for uneconomical projects (i.e. rural areas).

In Chile, for example, the Government held a 5G spectrum auction during 2021, raising US$450m. The country expects US$3.5bn of investments by 2023 to fulfil tender obligations and US$5bn in 5G-related investments over the next five years. Similarly, Brazil auctioned 5G spectrum and raised ~US$8.5bn while setting specific additional investment obligations for the winners.

Infrastructure – Toll Roads

Toll roads is one sector where the role of the state is crucial, as it centralises planning and expansion of the road network and acts as contracting agent. Brazil, Mexico, Colombia, Chile and Peru have relied on public private partnership (PPP) schemes, which alleviate budget constraints and transfer responsibilities and risk to private investors.

Across the region, concessions have evolved from the monetisation of existing assets to mandating targets for delivery of growth and risk sharing on traffic outcomes. Chile was a first mover, where the Government began to rely on concessions in 1993 to build and improve the road network. By 2020, the country had over 70 contracts in place with materialised investments of US$18bn. Over 3,600km of roads are concessioned through PPPs (~17% of total paved roads). PPPs in Chile include a minimum guaranteed revenue for the concessionaire.

In Mexico, the Government provides two main types of PPPs: concessions where the operator takes traffic risk and Service Projects (PPS) with fixed availability payments that incorporate road maintenance and exclude tolls. Around 20% of the more than 50,000km of federal highways are toll roads. Approximately half of toll roads are operated by the Government, with the balance by the private sector.

In Brazil, there are 23,230km roads under 20-50 year concession agreements. The km under private capital ownership is expected to increase by two-fold via a pipeline of 45 new concessions, which will transfer an additional 25,000km of roads to the private sector via privatisations.

Energy – Power Generation

The power generation space is largely liberalised across the continent with unbundling of the value chain across generation, transmission, distribution and commercialisation. This was a model spearheaded by Chile in 1982 and replicated across the region: Peru, Colombia and Brazil in the 1990s and Mexico more recently in 2013.

In Brazil, once environmental license and technical requirements are met, projects can participate in an energy auction, where distribution companies (56 in total, of which 45+ are privately owned) place their desired contracted amount, and generators bid to secure a 15 to 30-year, inflation adjusted BRL denominated Power Purchase Agreement (PPA). Another mechanism available to generators is to sell under the “Reserve Auction”, where the Government is the offtaker. More recently, as the sector continues to evolve, more consumers are allowed to secure direct PPAs with generators. This is projected to increase the Commercial & Industrial (“C&I”) space from c.21GW in 2021 to 45GW by 2025, based on the contracted incremental generation capacity for the period 2021-2025.

In total, the private sector owns 80% of Brazil’s installed capacity, which as of 2021 stands at 185 MW – according to the Government’s 10Y expansion plan 2031, published by the EPE. Wind and solar generation, mostly privately owned, have had a significant expansion that today corresponds to c. 30GW of installed capacity.

In Mexico, which was the latest of the large Latin American countries to liberalise its power sector, the Government still plays a key role with over 50% of the installed capacity via the national utility, CFE. Privately owned power plants have three routes to secure commercial viability: 1) state-sponsored PPA auctions; 2) statesponsored Build Own Operate tenders; or 3) market solutions via C&I PPAs or merchant projects. Private assets are usually anchored on long-term (15yr+), USD-denominated PPAs with no or limited price and volume risk for the producer. The private investor takes the development and construction risk and also a view on uncontracted revenues. Given the contracted and dollarised nature of the cashflows, projects are financed by a deep and diverse pool of lenders: local development banks, international banks and capital markets.


In Chile, the role of government is less pronounced as it mainly organises tender processes on behalf of distribution companies through the regulator (CNE). All generation technologies compete in the public tenders and contracts are standardised with 15 to 20-year terms and USD cash flows, which allows deep financing alternatives. Four companies concentrate ~65% of the installed capacity: Enel, Colbun, AES Gener, and Engie.

In Colombia, the market has been historically dominated by short and medium-term contracts not longer than five years and in local currency. However, as the Government seeks to introduce renewable energy into the generation matrix, it has promoted incentives such as long-term auctions providing PPAs with 15-year tenor. The private sector holds a ~75% market share with four dominant players: EMGESA, AES, Celsia, ISAGEN; while the state owned EPM holds the remaining 25%.

Latin America has a well-established track record of private funding of infrastructure across several sectors on the back of regulatory regimes that have sought to balance risk allocation between the state and investors. This has been achieved via models for sectors where the state has a smaller role, such as digital infrastructure, as well as for sectors where the role of government is crucial, such as toll roads. The successful experience of the power sector, largely liberalised across the region is telling: the region generally benefits from robust and cost efficient power systems that leverage on Latin America’s natural resource endowments (wind, solar irradiation, natural gas and hydro capacity).

Infrastructure investments are beneficial for Latin America as they increase economic growth, reduce inequality and foster international trade. Yet the region is not investing enough. The private sector can play a role in making up for the investment deficit, particularly in a context where fiscal balances are strained due to the COVID-19 response.

Liberalisation and enhanced private sector participation frees up government resources for social spending, healthcare and education. Unfortunately, the political tide has turned towards populism across the region. There are risks that the incentivisation of private sector capital reverses thus widening the infrastructure gap.

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