Perspectives
1 December 2023
As Latin America (Latam) continues to urbanise and the region's socioeconomic development gathers pace, the need for more resilient, connected and sophisticated infrastructure to support communities and local businesses is growing.
Building and upgrading infrastructure that adds economic value and helps reduce inequality requires more than capital; investors need to have deep infrastructure expertise, a long-term growth outlook and an understanding of the region's complexities.
A large and diverse region, Latam comprises the entire continent of South America in addition to Mexico, Central America and the islands of Caribbean. Its population of almost 660 million1 predominantly resides in cities, with United Nations statistics showing more than 80 per cent of citizens live in urban areas – up from 40 per cent in 1950.2 This makes it easily the most urbanised region in the world – by comparison, only 55 per cent of China’s population and 34 per cent of India's residents reside in cities.3
Despite this, infrastructure development has failed to keep pace with Latam’s population growth and urbanisation. The Inter-American Development Bank estimates the infrastructure gap represents 2.5 per cent of the entire region's GDP – around $US150 billion a year.4 It notes that this hinders productivity, reduces economic output and exacerbates the already significant gaps between rich and poor in many countries.
While every country in the region is unique, the unifying factor is that virtually all face a significant infrastructure gap, we see an immense opportunity for investors with development expertise to help advance economic prosperity for the wider Latam community.”
Hector Morales
Managing Director and Chairman of Infrastructure & Energy Capital, Latin America
Macquarie Capital
Juan Miguel Custodio, Managing Director at Macquarie Capital based in Santiago, says that the region's infrastructure requirements fall into three key areas: economic and social infrastructure (covering everything from traditional transport infrastructure to healthcare, logistics and schools), digital infrastructure and energy transition.
Approximately 230 million people across the region, or about one third of the population, remain without access to mobile internet.5 As internet access becomes increasingly essential to day-to-day life, narrowing this connectivity gap is essential to supporting growing urban populations and rising living standards in the region. In an effort to address a significant connectivity gap in Spain, Macquarie Capital led the development of Onivia, the country’s first independent fibre network operator, which has connected one million homes to a fibre-to-the-home (FTTH) network to date, helping to close the digital gap between urban and rural communities.
"We're also seeing many governments in Latam pushing a strong decarbonisation agenda – including Brazil, Colombia and Chile – and investing heavily in renewables and green products," says Custodio. Latin America is still heavily reliant on fossil fuel energy sources, with petroleum, natural gas and coal accounting for 70 per cent of the region's primary energy production in 2019.6
Despite the abundance of opportunities, there are potential obstacles beyond the current macro environment for interested investors, says Morales. "Success relies on familiarity with the region and an ability to navigate the unique complexities involved - whether that's in licencing, working with regulators, communities, finding local partners or understanding cultural and linguistic nuances."
For instance, while Spanish and Portuguese are the primary languages spoken across the region, enormous cultural and historical differences exist both between and within countries themselves. These often shape attitudes around government, business and foreign investment.
Additionally, not all countries will be equally receptive to the same types of investment agreements. Kevin Nobels, who recently joined Macquarie Capital as Managing Director to expand the business's presence in Brazil, points out that while some countries, including Brazil, have seen enormous progress towards and government support for Public Private Partnerships (PPPs), others, like Colombia and Chile, have more favorable conditions to execute direct investments or corporate partnerships. Investors need to have a deep understanding of each country’s political and economic environment to properly assess the most successful investment approach.
Finally, Morales notes, in most parts of Latam, trust and relationships in the business context need to be built over time.
Investors must be prepared to properly assess these challenges and having an ‘on the ground presence' in the region can be hugely beneficial. This, he says, is what led Macquarie to invest further in its presence in Santiago, establishing a new office that brought its teams together under one roof in Chile.
Nobels echoes this sentiment, saying, "The Brazilian market is significant and represents an enormous opportunity, but requires an understanding of the local dynamic and finding the right partners, and for investors to be comfortable with volatility and complexity and to have a long-term, through-cycle view."
Macquarie Capital has supported significant infrastructure projects in the region, including winning a contract to improve and operate the Ruta Minera Road, which connects the world’s highest producing copper mine to a key north-south axis in Chile.
A Macquarie-led consortium invested $US23 million and committed to a multi-year agreement requiring it to make various capital improvements, as well as maintaining and operating the road. It is estimated that the project will create more than 200 jobs during the construction period, 80 of which are estimated to remain for ongoing road operations.
"The Ruta Minera is of critical importance both to the Chilean economy and the global mining sector," Custodio says. "This is a real asset class in resources infrastructure that will allow the Minera Escondida mine to grow, benefitting Chile's economy, and all facilitated by private capital."
Further north, in Colombia, Macquarie Capital acquired the Briceño-Tunja-Sogamoso's 206km toll road concession northeast of Bogotá. Since then, it has committed to making continued investments and upgrades along the road, which have significantly improved operation and maintenance, as well as implementing road safety strategies.
Custodio says the highway is a marquee asset and a critical component of the strategic trade corridor that connects Colombia’s capital city with vital agricultural productive centres in the central plains as well as the fast-growing city of Bucaramanga and the Caribbean coast.
In addition to the opportunities arising through PPPs and acquisitions, Custodio says that Macquarie Capital is increasing its focus on partnering directly with local and regional corporates on developing social, economic, digital and energy transition infrastructure projects.
"When we partner with construction companies on Mining BOT (build, operate and transfer) opportunities, for example, we're arranging the financing, construction and operation of ancillary assets," says Custodio. "This approach supports their growth strategy with our balance sheet while providing the necessary development expertise to execute large-scale infrastructure projects that advance economic and social prosperity for the communities that we are investing in."
"As the infrastructure market continues to evolve," Custodio says, "investors with a commitment to and presence in Latam will be well-placed to make an ongoing positive impact that supports the region's growth and development and benefits local communities."
"Whether it's looking at a greenfields project in Chile, a construction project in Colombia, or new opportunities in Brazil, you need experience of operating in the region and teams on the ground, capable of stepping in and properly assessing the risks," Morales adds.
"With the experience we have built up and investment we have made in our presence here, at Macquarie, we can understand the complexities involved in operating in the region and address a wide array of issues in partnership directly with stakeholders," he concludes.
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