Latin America Builds Back Better

British premier Boris Johnson opened a recent call to US president Joe Biden with one of his customary jokes. “You stole our slogan – Build Back Better”, said Johnson to a visibly amused Biden. Before conceding, “I think we took it from the UN.” Johnson’s point was that everybody is now repeating the phrase - including Biden in his presidential campaign. But beneath the humour is an interesting observation. Governments from Beijing to London are determined to build their way out of the coronavirus crisis – and that means we can expect a global wave of infrastructure projects.

Latin America, which has a large infrastructure deficit compared to emerging markets in Asia, desperately needs a post-pandemic building boom. Indeed, hundreds of billions of dollars of infrastructure will be needed to help Latin America take full advantage of its incredible clean energy resources. The irony is that the very same green forces driving the transition, will also push back against infrastructure projects with negative environmental impacts. That means successful projects will have to overcome the usual regulatory and institutional hurdles, plus prove that they are implementing environmental best practices.

Pandemic impact

As the pandemic made its way west from China, Latin America had plenty of time to prepare. As a result, it went into lockdown at a far earlier stage in its coronavirus cycle than other regions. Guatemala was the first country in the Americas to shut its international borders and infrastructure projects were also shuttered quickly.

Mauricio Acevedo is the General Manager of Trecsa and EEBIS, two Guatemala-based subsidiaries of Grupo Energía Bogota, a billion-dollar Colombian power utility. Together the two firms have already built more than 600 km of transmission lines in Guatemala, making them some of the largest infrastructure developers in the country. “The pandemic clearly made things more difficult,” remembers Acevedo, “as it – understandably – distracted the government. It also meant that we had restrictions around our construction projects.”

José Raúl González, CEO of Cementos Progreso, the largest building materials company in Central America, concurs. “The demand took a hit during the initial days of the pandemic due to the closing of operations of most of our customers. Gradually the retail sector began opening doors and the self-construction segment continued to grow as the remittances did not fall, as some expected, but continue to be used in home improvements.” However, although the DIY enthusiasts were keen to upgrade their houses in lockdown, larger infrastructure projects remained shuttered for longer. “This segment was most hurt because it spent more time closed.” But while the short-term pandemic impact on infrastructure was severe, the longer-term effects should be positive, says González. “We expect a full recovery in this segment, as the importance of new infrastructure projects become the cornerstone of our economic recovery.”

"The cement and concrete industries continue to be indispensable in the adaptation to climate change…"

If the likes of Biden and Johnson think that their rich nations need to build back better, then you can imagine how important it is for Latin America. First there is the economic factor, explains González. “Infrastructure is proven to be the fastest way to improve the efficiency of developing economies and it’s something that can be delivered within the period of this administration, providing instant results. If you build a road or bridge it brings immediate logistic benefits but there is also a multiplying effect, in terms of jobs and economic growth – which is precisely what Guatemala needs.”

Latin America’s energy transition also needs new infrastructure. As we have discussed elsewhere in this report, the region needs to upgrade everything from transmission lines to public transport, to make the most of its incredible renewable energy resources. Indeed, infrastructure is also required to help the region protect itself from the climate change that is already underway, says González. “The cement and concrete industries continue to be indispensable in the adaptation to climate change; especially in poor countries or countries that are particularly vulnerable to climate events like Guatemala. We had a tough reminder in Honduras and Guatemala, after the ETA and IOTA storms hit us last November. It became all the more obvious that we urgently need a strong infrastructure plan. We need dams that to prevent the floods that destroyed communities; canals to properly conduct the rainwater, bridges over rivers with resilient designs, etcetera. The cement and concrete industries will be at the forefront of those solutions with reliable long-life products that will prevent the effects of such potential disasters.”

Infrastructure delays

Latin America’s infrastructure need is obvious yet wanting something and getting it are two different things. And, with the exception of Chile and Panama, the region has a poor track record of building infrastructure. The commodity supercycle at the start of this century boosted economic growth across the Latin America, so that by 2010 most governments had the money to fund public works. Infrastructure programmes – with a combined value totalling hundreds of billions of dollars – were announced in Colombia, Peru, Brazil and Mexico. Yet very little of it was built. The Inter-American Development Bank estimates Latin America’s infrastructure deficit at $150billion – about 2.5% of regional GDP – per year.

In some countries the problems were caused by understandable delays in using the new public-private-partnership model to develop infrastructure. That has been improved, for example Colombia now has a competent and sophisticated infrastructure agency. Yet across the region, weak institutions and unclear constitutions hamper projects. Corruption and incompetence bedevil the public bodies that procure infrastructure, while legal flaws, such as the lack of compulsory purchase orders, create risk and uncertainty for investors. Finally, weak populist governments don’t protect strategic national projects – that will benefit the country in the long-term – from short-term local protests.

"We have touched rock bottom. If things were bad before the pandemic, they are even worse now…"

Acevedo has had to deal with these challenges first-hand. “There is a disconnect between various parts of the state and that hinders international investment. The problem is that central government policies will often face opposition from some of the approximately 300 municipalities in the country. Until that issue is solved it is hard for the central government to advance strategic projects, like PET, that are in the national interest. So instead, we have to deal with each one of these municipalities ourselves.”

Yet González believes the severity of the pandemic will finally force action. “We have touched rock bottom. If things were bad before the pandemic, they are even worse now. That has created a sense of urgency in the government of president Alejandro Giammattei, which is now in its second year.” These aren’t just empty words, Progreso has formed an alliance with local infrastructure players and consulting firm McKinsey to present an infrastructure plan to the government. In other words, Progreso no longer simply makes building materials, it also helps to build infrastructure.

“It’s something the country desperately needs”, says González, “and it allows us to use our core competencies to help build bridges, roads, ports and housing. We see a big opportunity for housing projects to improve the lives of millions of Guatemalans. So, we don’t just make and sell building materials but look further to the world that they can create. One example of this is the private toll road that we recently built to Guatemala City.”

Environmental protection

A growing source of opposition to projects comes from environmental activists. This challenge affects every democracy in the world – so even Latin American countries with good infrastructure track records, like Chile, have seen projects cancelled or postponed for environmental reasons. As a result, infrastructure developers now have to mitigate the environmental impact of a new project. Environmental leaders, such as the Costa Rican Institute of Electricity [ICE by its Spanish acronym], which built the world’s first completely renewable national power system, are not above criticism. “There will always be people against the construction of any project”, says ICE President, Irene Cañas. “That’s because anything you do will create an impact.”

It is ironic that building all of the infrastructure Latin America’s energy transition needs, means depending heavily on industries, such as cement, that environmentalists label ‘dirty’. And with ESG funds managing ever greater sums of capital, these industries will have to demonstrate their environmental measures to access the most competitive rates of finance, says Alfredo Mordezki, manager of the Santander Latin America Investment Grade ESG Bond Fund. “At the moment access to finance is quite cheap for everyone. Eventually this will change and the financial advantage of clean issuers over lower ESG scored companies will grow larger.”

Yet Mordezki believes there is widespread misunderstanding about which industries or companies are environmentally ‘clean’ or ‘dirty’. “Steelmakers normally score very badly because it’s a heavy, energy-intensive industry. However, we’ve found Brazilian steel producers that are reusing scrap metal, which improves the environmental profile and that’s something we want to encourage.”

Progreso is an example of a company in a supposedly ‘dirty’ industry that is actually far cleaner than people realise. The firm, which has issued international bonds in the past, invests heavily in world-leading environmental practices. These guided the design of San Gabriel, Progreso’s latest installation, which entered full operation in 2020. “San Gabriel is a cement plant with state-of-the-art German technology”, says González. “Its efficiencies come from utilizing a modern version of the equipment that allows us to enjoy lower thermal and electrical energy consumption. The design also allows for an improvement in fossil fuel consumption since the crushed limestone is transported from the quarry to the plant using a 1.5 kilometres conveyor belt operated by electricity; not by trucks as it is traditional in the industry. Another advantage is the renewable source of our electricity which contributes to lower our carbon footprint. The production process per se is dry so the only water that we use is for human consumption and to cool the equipment. To reduce our environmental impact, we harvest the water that falls in the industrial area of both the San Miguel and San Gabriel plants and we recycle is back. Some of the water is evaporated during the cooling of the equipment and goes back to the environment. The rest is treated in on-site plants using natural processes. Finally, both plants occupy only a fraction of their respective property, leaving the rest as a natural forest reserve where the biodiversity is protected, and CO2 emissions are captured by the trees. I am very proud of our environmental team. They have demonstrated that industrialisation is a great ally of the environment.”

But Progreso doesn’t just do this to attract competitive finance, says González. “The fundamental reason, though it may not sound strange to institutional investors in the UK, is that sustainability is embedded in the core values of the founding family. Progreso is still a family company and our finder, Carlos Novella, was taking sustainable measures 100 years ago. He might not have used the buzzwords that we hear today but he was looking after the environment around his operations because he realised that would ensure the company’s long-term future.”

In many ways Latin America has already done a lot of the hard work for the energy transition. It has the greenest electricity grid in the world, with almost two thirds of its power coming from renewable resources. But taking full advantage of that clean power will require massive infrastructure upgrades. Whether it’s taking the power to remote communities, or electrifying public transport systems – there is a lot of building to be done. And for those projects to pass in this new age of protest, developers need to mitigate the environmental impact. Capital will start flowing to the firms that manage it best.