The best and worst LatAm countries for industrial projects

Friday, April 27, 2018

They were not the two fastest growing countries in the Americas in 2017. They also did not experience a stable or crisis-free political scenario during the last 12 months. But according to BNamericas data, Brazil and Bolivia were the two countries that showed the highest activity in the region for industrial projects in the electric power, oil and gas, mining and infrastructure sectors over the past year.

Based on its database with detailed information on more than 5,600 current projects in those sectors, BNamericas conducted a year-on-year comparative study of the progress of projects in all Latin American countries in April.

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The result revealed that Brazil and Bolivia led the region in number of projects entering the operational stage, and also had the highest number of projects moving beyond the pre-construction stage. The analysis was carried out on 4,162 projects.

Brazil recorded 134 projects that have started operations since April 2017. A total of 80 projects that are now online were in the construction stage a year ago, including 70 in electric power (40 wind and 25 solar). Another 54 projects were in pre-construction and are now also operational; the majority of these were renewable energy projects (35 wind and four solar).

The overwhelming progress of the wind projects left its mark on the country last year. Brazil rose one position in the wind capacity ranking developed by the World Energy Council (GWEC) and now ranks eighth in the world. In 2017, Brazil added 52.57GW of wind power, bringing its total to 539.58GW.

The push for renewable sources, which is based on expected energy demand in the country over the next few years, does not seem to be losing steam. In early April, a total of 39 projects with a combined capacity of 1,025MW were awarded contracts in the A-4 auction held to contract supply from renewable energy plants that will begin operating in 2022.

But not everything is explained by the advent of green energy. The counter-cyclical view of development banks and their private investment arms allow businesses to grow despite economic or political uncertainty. It should be remembered that, while dozens of wind and solar projects were advancing, former Brazilian president Lula was sentenced to 9 years in prison yet remained the most popular politician in the country - a situation that can scare off most investors.

James Scriven, general manager of IDB Invest, the private investment arm of the Inter-American Development Bank, gave BNamericas some clues as to why project activity continues to advance despite political noise. "BID Invest fulfilled its promises with Brazil in 2017. It was the country in which we had the highest business volume last year. This highlighted both our countercyclical role to participate in the markets when other investors prefer to wait on the sidelines, as well as our renewed strategy focusing on the customer experience, by which I mean that one adapts the products to the customer's needs."

The BID Invest strategy for 2018 in Brazil follows its organizational push toward "more transactions in transportation, energy, water and sanitation, social infrastructure (health and education) and telecommunications. Our goal is to work on our investments that already exist and continue to disburse the portfolio of transactions approved in 2017. We will make about US$500mn more this year," he adds.

Another reason lies in the foreign exchange protection mechanisms that have been used to protect investors in Brazil. "In my opinion, Brazil, because of its size, is an attractive option for investment in infrastructure. One of the strategies that the federal and local governments use to attract investors is to mitigate the exchange risk, in railway projects in particular, but also in energy projects and roads, where it's an important risk. A good mechanism to mitigate risk is one of the keys to a successful project in Brazil," said André Luiz Freire, partner at Demarest Advogados, in the latest edition of the Financier Worldwide magazine.

Considering all sectors, there is a total of 525 active projects in the pre-construction stage in Brazil in the BNamericas database, which implies an estimated total investment of some US$150bn.

Bolivia leaves early stages

Another way to measure the pace of activity of industrial projects in the region is to count the number of projects that leave the pre-construction stage (from mere announcements, adjudications or explorations until they are financed and ready to start being built).

In this case, the leader was Bolivia, which had the hightest number of projects move beyond the pre-construction stage.

Unlike Brazil, in the case of Bolivia most of these projects were in the infrastructure sector. In fact, of all the projects that abandoned the pre-construction stage over the past 12 months, 58% were in infrastructure, including the Beni II Bridge and the Huarina-Tiquina road.

One of the key projects for the coming months in Bolivia is the US$447mn Cochabamba railroad. At the end of 2017, the public works ministry gave the green light to the largest infrastructure project in the country, after the concessionaires finished the final design and delivered financial guarantees equivalent to 7% of the project's capex.

The reasons for Bolivia's fast progress on projects also differs from Brazil's. "In Bolivia there have been many projects that have been executed by the state. But these projects carried out by the government lack profitability or a market," says Álvaro Ríos Roca, managing partner at Gas Energy Latin America.

The most emblematic of these projects is the urea plant. "It's been operating for eight months without selling anything."

He adds that the Bolivian state has extraordinary revenue available from the sale of gas to Argentina and Brazil, but leaves a great of doubt as to the proper use of those funds.

According to BNamericas data, Bolivia currently has a total of 83 active projects in the pre-construction stage, totaling an expected investment of some US$52bn.

Chile, the investment crisis in numbers

During the presidency of Michelle Bachelet, which culminated in March of this year, a series of external and internal factors conspired against private capital. A questionable tax reform, the collapse of copper prices - the country's main export - and a series of corruption scandals that affected the whole political spectrum, and one of which even spilled over into the president's family, hurt consumer confidence and curtailed private investment.

The US$2.5bn Dominga mining project came to symbolize the state of investments in the country that is considered the most stable in the region. Dominga was ensnared in political scandal and was finally rejected by a ministers committee in August because of a flawed EIA that lacked proper mitigation and compensation measures. The mining company still hopes to be able to reactivate it through legal channels. As a matter of fact, last week the incumbent Ministers members decided to accept the judicial claim filed by the project owner, Andes Iron, and annul the resolution that had blocked it.

In Chile, according to the BNamericas data, the number of projects in operation has increased 19% since April 2017. It was the country where the lowest number of projects advancing out of the pre-construction stage.

The more recent improvement in the confidence indices, as well as the expected economic rebound for this year and the reactivation of mining exploration projects, should help to improve Chile's numbers in the next 12 months.

According to the BNamericas database, there are 466 active projects in Chile in the pre-construction stage, with an estimated total investment of some US$187bn.