Latin American pension funds are pounding the pavement looking for local infrastructure deals. Rodrigo Amaral reports
The rush of Latin American countries to upgrade their infrastructure is drawing the attention of global investors, and domestic pension funds are no exception to the rule. The opportunity to obtain solid rates of return from these long term investments, combined with the relaxation of investment rules for pension funds means infrastructure investments are of great interest.
Brazilian pension fund Previ has committed to investing a larger share of its portfolio in infrastructure, while in Uruguay, Union Capital AFP has said that up to $3bn could be invested in such projects by local pension funds as new invstment rules are being drawn by the government. In Peru, AFP Horizonte, AFP Integra, Prima AFP and ProFuturo AFP have joined forces to invest hundreds of million of dollars in infrastructure projects, while in Colombia the likes of AFP Porvenir have stressed they are seriously looking at this asset class too.
Latin American countries fell behind other emerging markets in sectors such as energy, transportation and communications in the 1990s and 2000s. This was due largely to spending cuts implemented by the government in a bid to balance their books. Public investments in infrastructure, which reached an average of 5% of GDP in the 1980s, fell to as little as 1.5% a decade later. Private investments filled part of the resulting gap in the late 1990s, but the crisis that hit the region in the first half of last decade took investment levels down again.
According to BBVA, a Spanish bank with a strong presence in the region, barely 2% of GDP has been invested in infrastructure by Latin American countries in recent years. The number compares very badly with the 5% ratio that is the rule in the most competitive emerging economies in Asia. In China, it reaches up to 9%, according to Brookfield, a Canadian asset management firm. Experts from the company believe the region needs the ratio to reach 4% to 6% of GDP to meet the needs of Latin American economies.
Infrastructure may have suffered as a result of the belt-tightening, but the efforts made by the governments of countries like Brazil, Peru, Colombia and even Mexico seem to have created the conditions for a spurt of fast and sustainable economic growth. Since the global financial crisis began, Latin American countries have emerged as some of the fastest growing economies on the planet. Brazil is expected to grow by 7.8% this year, Peru by 6.7%, and Colombia by 4.6%, according to the Economist Intelligence Unit.
Such numbers are the envy of the developed world, but policy makers and economists believe they could be higher, and sustained for longer periods of time, if their infrastructure was not below par.
Therefore measures have been taken to boost infrastructure investment. In Brazil, a R$500bn ($285bn) investment plan, known by the acronym PAC, was launched by the government of Luiz Inácio Lula da Silva in 2007 to upgrade ports, roads and energy sources. Other countries are developing similar strategies, but, this time, the idea is that the public purse won’t be solely responsible for investment. Partnership with the private sector is the order of the day and pension funds are being urged to get involved. “We won’t be able to fund infrastructure without the participation of pension funds,” said Dilma Rousseff, Mr. Lula’s chief of staff and the leading candidate in the Brazilian presidential election in November. “(They should) act in a bolder way,” she pointed out during a recent conference in São Paulo.
Brazilian funds seemed to have grasped the message. A few days later, the new board of Previ, Brazil’s largest pension fund, stated its intention to invest a larger share of its R$142bn portfolio in infrastructure-related vehicles and projects.
Previ has denied any political interference in its investment strategies, and a case can surely be made for Latin American infrastructure as an asset class for investors with a long term horizon.
BBVA said that most investments by pension funds in infrastructure today are indirect, via the acquisition of equities of companies active in the sector. Such investments amounted to 17.1% of the portfolio of Colombian funds, 11.5% in Peru, 9.17% in Chile and 6.9% in Mexico by the end of 2008. So far, direct investments in infrastructure projects are only significant in Chile, where they reached 1.8% of the portfolio, and Peru, where they stood at 3.3% in December 2008.
In presentations to investors, Toronto-based Brookfield Infrastructure Partners has highlighted several reasons why Latin America presents advantages in this particular sector. For instance, governments are providing incentives for infrastructure investments and have implemented policies to make the business environment more favourable to private capital. The firm also argues that positive demographic trends and economic perspectives offer the promise of juicy returns in the long term, while country risk has significantly reduced in countries like Peru, Colombia and Brazil. Such perspectives contrast with the slow pace of investment returns that is expected in the United States and Europe, the firm claims.
“A number of Latin American countries have put in place in the past 10 or 20 years very attractive regulatory frameworks that provide for private capital to be used to develop infrastructure,” said Brookfield’s head of infrastructure activities Sam Pollock. “As they are fast growing economies with huge need for capital, this creates a good environment for investors.”
New rules for pension funds in countries like Chile, Peru and Colombia have also helped, Mr. Pollock said, as they’ve widened the range of assets that funds can have in their investment portfolios. “Because of the superannuation systems, there is a huge amount of capital available and they are looking for professional managers to invest that capital. And they are investing ever larger amounts of capital in infrastructure.”
Brookfield focuses on four Latin American countries that it feels have implemented a market-oriented model: Brazil, Chile, Colombia and Peru. Many investors have favored these countries as they have reformed their economies in recent decades, to the detriment of others, like Venezuela, Bolivia and Argentina, where investors see a populist economic model in place. “We are particularly impressed with Peru these days,” said Pollock. “Their growth has been very strong and they have one of the strongest balance sheets in the world.”
Particular opportunities are also being created for infrastructure investments by punctual events like the 2014 football World Cup and the 2016 Olympics, which will both be hosted in Brazil, and the earthquake that devastated the infrastructure in parts of Chile earlier this year. But the long-term needs of their robust economies constitute the focus of investors like Brookfield, which has set up one infrastructure fund in Peru and another in Colombia in partnership with local pension funds
“We are currently focused in areas like energy, especially in hydro development and electrical and gas transmission. The amount of electrical requirements in those countries is staggering. In Brazil alone, the economy needs an additional 5,000 megawatts per year,” said Pollock. “We also have investments in the port sector, as these are export-oriented economies, and we see opportunities in the toll road sector too,” he remarked. Brookfield looks for returns in such investments that would be between 200 and 500 basis points above those that similar assets could achieve in North America.
Pension funds and other institutional investors from other parts of the world, especially Asia, are also getting into the game, said Pollock. “They have shown a lot of interest for infrastructure projects in Brazil and Chile especially, but there is a growing realisation that Peru and Colombia are interesting markets too.” But for private investors in general, and pension funds in particular, to be ever more involved in the development of infrastructure in Latin America, further regulatory reforms are needed, according to BBVA.
The route into infrastructure
In a recent study, A Balance and Projections of the Experience in Infrastructure of Pension Funds in Latin America, the Spanish bank’s research department detailed the experience of pension funds and other private investors in the infrastructure sector of Chile, Colombia, Peru and Mexico. The bank acknowledges the advantages that funds can obtain by getting more involved in infrastructure projects, especially being part of the Public Private Partnerships (PPPs) that Latin American governments have been so keen on lately. But there is still some way to go before pension fund managers should feel confident enough to allocate all the assets they legally can to such projects, the study says.
“In terms of the current status of PPPs in Latin America, the Chilean case is the most developed at this time, and Colombia, Peru and Mexico are generally taking steps in the right direction, but still need major reforms,” the authors argue. In Chile, the bidding processes can take too long, and the resolution of differences in the legal system can be lengthy too, they say. Legal uncertainty due to constant changes of rules for infrastructure concessions is a concern in Colombia, and Mexico lacks a coherent, unified law for the sector. In Peru, little clarity in the definition of responsibilities of public bodies involved in PPPs have caused significant delays in projects. “All these difficulties that have affected concession project investors have, if anything, increased the special precautions taken by Latin American pension funds to safeguard their portfolios from risk,” continues the study.
The authors also note that each country has implemented its own means of allowing infrastructure investments by pension funds. In Chile, investments are made via infrastructure bonds, issued by concessionaires of public infrastructure projects, which are 100% guaranteed by insurance companies. Colombian funds can chose between capital funds, stocks and debt instruments, but the study says that improvements are needed to allow direct investments by pension funds in particular projects.
The adoption of a project finance model for public concessions in order to assign responsibilities and risk and increase the efficiency of investments would be a step forward, the study says.
Mexico has adapted its laws but so far there have not been enough projects around that could draw the interest of pension funds, said BBVA. Peru, for its part, has taken steps forward by creating an infrastructure fund designed to attract pension fund investments and an infrastructure investment trust supported by the government.
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