Central America: Mixed Opportunities, Risks All Round
BMI View : The Central America region offers a plethora of investment opportunities in the infrastructure sectors and is on track to post some of the highest industry growth rates seen globally. However, small industry sizes, fragmented markets and unsophisticated and often risky business environments will mean these opportunities are available to only a select few.
Central America presents a broad range of opportunities across the infrastructure and wider construction sectors as infrastructure deficits across the region are addressed. However, it also poses significant risks. With countries in the region home to deep-run corruption, high crime rates and unsophisticated institutions, the small industry sizes in general offer little scale to make those risks palatable. As a result, we expect those who will capitalise on opportunities will be regional players, including the large construction players in Mexico, as well as those with high risk tolerance, such as Chinese investors. Some of the first movers into the region, however, have been Spanish companies, who are capitalising on cultural ties to incorporate Central America into their successful and broad international expansion plans.
|Risks Stack Up Against Rewards|
|Infrastructure Risk Rating (part of BMI's Infrastructure Risk/Reward Ratings)|
Opportunities are on offer across a wide range of sectors. Social infrastructure is a significant growth area as the region's governments seek to address the wide housing deficits. At the same time, economic infrastructure is being built up to cater for the ongoing expansion of the Panama Canal - including new ports in the region, as well as an ambitious plan to build a rival canal in Nicaragua. Building up electricity-generating capacity is also seeing growth as companies seek to capitalise on the region's indigenous and lucrative renewable resources, as well as provide electricity to support industrial growth.
|Opportunities Driving Value Higher|
|Construction Industry Value, US$bn|
We highlight a number of key growth sectors over the medium term:
Residential And Non-Residential Building: A severe housing deficit in Central America has prompted governments to enact low-income housing programmes. In Nicaragua this has prompted a significant boom in residential construction, which is driving overall industry growth well into the double digits. In Costa Rica, expansionary fiscal policies are boosting the consumer and driving retail construction.
Renewables: Indigenous wind and geothermal potential in the region are both attracting investors who are desperately seeking new markets for renewables. The completion of Gamesa and Iberdrola's 100MW Cerro de Hula Wind Farm in Honduras is the first of many projects planned in the region. El Salvador is hoping to start its first commercial wind farm in 2016/2017, and Acciona is building a 49MW project in Costa Rica. Also in Costa Rica, the state-owned utility announced plans in June to develop 100MW of wind by 2014. Geothermal potential is also being explored, Panama has called for companies to register interest in geothermal concessions, and Ram Power has completed the first phase of expansion of its San Jacinto-Tizate geothermal plant, with completion of the second phase due in December 2012. Nicaragua and Costa Rica are also working to capitalise on their significant geothermal potential.
Power: New electricity-generating capacity is seeing considerable investment in Central America. Hydropower is the dominant source of electricity and will remain so given the number of projects being developed across the region. Key hydropower projects include: the US$300mn Patuca III in Honduras, the US$700mn Tumarin project in Nicaragua, the Tres Ninas project in Guatemala, the 138MW Paz hydropower project in El Salvador and the 223MW Changuinola in Panama. The largest potential project in the region, Nicaragua's long-delayed US$1.1bn 235MW Tumarín Dam, has progressed over the quarter, with construction now hoped to begin in February 2013. The Central American Electrical Interconnection System is also nearing completion, with a number of sections entering operations over 2012.
Ports: Port infrastructure appears to be a priority area of investment across the region. The most important project is undoubtedly the expansion of the Panama Canal. The US$5.2bn project will significantly alter the regional trade and shipping dynamics. Delays have been reported on the project, with the completion date, as expected, now officially pushed back to Q215. Other notable projects include the US$1bn Moin Container Terminal in Costa Rica, to be built and operated by APM Terminals, which is on track to start construction in 2013, and the US$500mn plan for a port at Monkey Point in Nicaragua, for which Andrade Gutierrez was contracted for a feasibility study in August 2011.
Airports: Opportunities are expected in the region's airport sector. Honduras has announced a US$300mn plan to invest in five airports, whilst Panama is progressing on the Tocumen Airport project, with the tender due in mid-August 2012. El Salvador, Nicaragua and Honduras also all have projects under way or in the pipeline.
Public Private Partnerships: A number of countries in the region are seriously considering using public-private partnerships (PPPs) to develop infrastructure. In addition to Guatemala having established a PPP agency in November 2011, El Salvador announced in April 2012 that it is considering using a PPP to develop the Cuscatlán International Airport. In July 2012, Honduras announced it was hoping to negotiate a PPP for the Palmerola Airport. On the whole, regulations across the region are largely in their infancy, and the longer-term policy environment does not instil enough confidence to attract long-term commitments from investors. In addition, securing financing for investments in the region would be a tall order. However, if we see a couple of projects move forward successfully this could set an encouraging precedent.