Rocketing Growth Built On Weak Foundations
BMI View : Ecuador ' s construction industry has been posting exceptionally strong growth, and as such , we have revised up our 2012 and 2013 outlook for the sector. However, the industry growth is built on weak foundations with unsustainable funding sources. Whilst demand is undoubtedly there for new infrastructure, opening up the country to private capital will be key to a sustainable growth outlook.
Based on quarterly data from the Banco Central del Ecuador , we have revised up our 2012 growth outlook to 15.21%. First half real industry value has surprised , significantly to the upside - averaging 21% higher compared to H111 - however, the trend is for a deceleration and , therefore , we believe the year as a whole will average lower. Additionally, p re-election spending , as Correa seeks to boost popularity in a country where infrastructure shortcomings are notable , is providing part of this boost and should sustain high growth into H212.
|Ecuador Construction Industry Value And Growth|
The number and scale of projects entering the tendering and construction phase leads us to believe high growth will be sustained into 2013, despite an expected slump in government expenditure following the election in February 2013. As such we have revised growth up to 5.7% for 2013.
Over the medium term, growth should slow, unless Ecuador is able to tap international capital markets for funding projects, or to attract private investors. The country has damaged its international reputation following a series of expropriations, and the exclusions of construction companies and infrastructure operators. Indeed, we believe that the country will struggle to re-tender the Manta Port concession following the contentious ending of the previous agreement with HPH.
Without the ability to tap into public-private partnerships (PPPs), and its continued absence from international capital markets, following its voluntary default on its loans in 2008, the country's funding sources are slim and have seen oil revenues plunged into capital investment. However, we have seen falling investment into the industry, and income generated from the sector declining; with output expected to fall over the coming years (see our online service, August 24, 'Energy Sector In Decline'). Consequently, reliance on oil revenues for infrastructure investment is unsustainable.
In terms of external funding, Ecuador has increased reliance on development funding, as well as loans from China. The Inter-American Development Bank, the Andean Development Corporation (CAF), and even the European Investment Bank, have all pledged funding for infrastructure projects. China has been perhaps the biggest financier however, providing US$7.3bn in loans since 2009 (according to Bloomberg), including funding for a number of infrastructure projects.
|Shifting Reliance To Unsustainable Sources|
|Ecuador - Composition Of Public Debt %, 2000 (LHS) and 2011 (RHS)|
Despite these fundamental concerns, there are a number of high value projects which could boost industry value over the medium term, if they progress. Financing will remain the crucial issue, and those with the most chance of progressing are either benefitting from development funding or potential investment from China.
The biggest project in the pipeline is the US$12.5bn El Pacifico Refinery. The 300,000 barrels per day (b/d) refinery is being developed by Petróleos de Venezuela, S.A. ( PdVSA) and Petroecuador - who are currently in talks with China to partner on the project. Preliminary site works are already underway - contracted to Brazil's Odebrecht and the project is hoped to enter operation in 2015. Much will depend on securing a capital rich partner. Other projects providing upside potential include: the Quito Metro, which is due to enter construction in 2013; the US$2bn Coca Coda Sinclair Hydropower plant, currently under construction; and the Zamora hydropower plant, which was slated to start construction this year. In addition, a number of large investment plans have been announced for the utilities sector, including US$2.1bn worth of water projects by SENAGUA, and an US$8.4bn electricity master plan (2012-2021) announced by Conelec.
|Source: BMI Infrastructure Key Projects Database, Correct As Of 9 October 2012|
|New Quito International Airport (Mariscal Sucre)||Airports||600||7.5 mn passengers||Corporacion Quiport, CRR||2006- Feb 2013||To be operational Feb 2013 (Sep 2012)|
|El Pacifico Refinery||Industrial Construction||12500||300,000b/d||Petroecuador, PdVSA, Odebrecht (site preparation)||2012-2015||Preliminary works underway at site, looking for partners|
|Esmeraldas refinery upgrade||Industrial Construction||700||110000 b/d||Petroecuador||2013-2014||Delayed one year, due to start Sep 2013|
|Manta Port Concession||Ports||na||1.6mn TEU||APM||2012 - 2030||Tender launched (Apr 2012). Six companies interested, deadline extended Nov 2012|
|Zamora hydropower plant||Power Plants & transmission grids||2760||2300||Ministry for Coordination of Strategic Industry||2012-2017||Construction due to start 2012|
|Coca-Codo Sinclair hydropower project||Power Plants & transmission grids||2000||1500MW||Sinohydro||July 2010- 2013||U$1.7bn loan agreed with Export-Import Bank of China. Work underway.|
|Sopladora hydroelectric power plant (HPP)||Power Plants & transmission grids||571||487MW||Celec, Hidropaute||2009-2014||China Eximbank signed loan contract (October 2011)|
|Minas-La Union hydropower project||Power Plants & transmission grids||478||353MW||Geodata-Astec (feasibility study)||2010-2014||Tender underway|
|Chachimbiro geothermal project||Power Plants & transmission grids||100||50MW||na||na||Japan to work with Ecuador on the project|
|Quito Metro||Rail||1400||37km||Metro de Madrid (studies)||-2016||Studies complete. Construction to start Nov 2012 (Oct 2012)|