PROJECT FINANCE: Investors still eyeing Argentina hesitantly

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Monday, March 20, 2017

Argentina wants to recover the infrastructure investments that were lost over the past decades, but many investors have been hesitant to commit long-term capital to a country with a history of populist rule.

Under President Mauricio Macri, the country has been seeking investments for ambitious infrastructure projects in renewable energy, transport and housing, telecommunication, and even flood risk management.

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Investors have long been hesitant. In an attempt to win them over, late last year the Macri administration passed a law on public-private partnership contracts whereby the government acts as the contracting party and the private sector as the contractor, establishing a stronger legal framework for private investment.

Even so, Cody McFarlane, a business development manager at Latin American legal and business advisory firm Harris Gomez Group, said few investors were ready to commit to Argentina.

"They are optimistic that the government is making the right changes and that things are going into the right direction," McFarlane told BNamericas. "But a lot of them are worried that the Argentine people may not be able to stick around and give support for as long as it is needed to really improve Argentina."

Interest in infrastructure investment only picked up with the election of Macri, who promised change and has since pushed wide-ranging reforms. However, Argentines have felt little improvement in their daily lives. Inflation and unemployment have risen, and investment has been slow.

McFarlane said the biggest concern among investors was that Argentines would eventually elect a new government, one that was less friendly towards foreign investment than Macri and which would compromise the ambitious infrastructure plans.

"They are not quite ready to put their money into the country until they see that the changes that are being implemented are really going to take hold," McFarlane said of his clients.

"Even if something came out tomorrow, I do not know if they would really jump in with both feet; they want to wait for a year or two to make sure that a lot of these changes going to be for the long term."

German conglomerate Siemens was one of the more high-profile investments in Argentina in recent months. It announced last year that it planned to double its business in Argentina by 2020, with potential finance and investment of up to 5bn euros in a power-generation network, railway transport infrastructure and traffic systems.

Argentina also tendered some 30 projects under its renewable energy program RenovAR last year that was oversubscribed.

Juan-José Zentner, a partner at law firm Herbert Smith Freehills in New York, who specializes in design and construction contracts and off-take agreements, said that despite these successes most investors would only commit to Argentina once it was more stable politically.

"It is an interest that has not yet materialized into actually making investments as such," Zentner told BNamericas. "It may become more expensive over time but a big macroeconomic issue for our clients is the direction of the country... whether Macri is going to stay in power for a subsequent term."

Macri faces legislative elections later this year and needs his Cambiemos political coalition to do well to get his economic reforms through Congress; even then, he will have only two more years left before the next presidential elections.

Infrastructure has been the topic Macri has posted about the most in his official Facebook page, including a photo with construction workers at the Timbúes port in Santa Fe province earlier this month (pictured); the construction site of the first-ever water system for the town of Charata, in northern Chaco province; and a rural school in Chorcán, northwestern Jujuy province, that finally obtained internet service last month through state-run telecom company Arsat.

Argentina will need tens of billions of dollars to finance its infrastructure needs, but Zentner said not all of its available investment models were necessarily suitable for every investor.

Public-private partnership contracts take a long time to develop, too long for some investors; resource projects that are already in place and in need of funding are often considered too large a commitment; other investors are looking for other types of investments, such as project financing or equity investments. Investors want stable infrastructure projects, such as highways or ports, and tend to get nervous in projects where too much financing comes from the government itself, he said.

Carole Megevand, a program leader for sustainable development in Argentina, Paraguay and Uruguay at the World Bank Group in Buenos Aires, said the World Bank had started providing guarantees to lower the risks and make investments specifically in renewable energy more attractive for private investors.

"We are bringing this guarantee that lowers the risk and makes the investment in renewable energy attractive," Megevand told BNamericas. "That is something we would like to do more because it really allows the private sector to invest more."

Investors have tended to focus on the investment opportunities in energy, mainly renewable energy, and telecommunications, but Eduardo Bonis, a partner at financial services advisory firm First Corporate Finance Advisors in Buenos Aires, said other sectors had been slow to attract interest and several existing projects had stalled because funding had run out.

Bonis said the government had several ambitious infrastructure plans that could be attractive to investors, and that the 2016 law around PPP contracts had been the most significant step in recent month.