Dino Barajas & Jaime Rodriguez, Paul, Hastings, Janofsky & Walker
With the future of electric utility companies around the world in flux, many companies are examining their past investment decisions and reassessing their options for additional investment opportunities with a critical and skeptical eye. In the recent past, certain markets that had been deemed to be extremely lucrative
In Brazil, a number of factors converged to create the “perfect storm” and resulted in difficult investment environments for early market entrants following the privatization of a large portion of the electric energy sector and development of projects by thermal power plant developers. Early market entrants viewed Brazil as a market with unlimited growth potential given its massive consumer base, projected long-term demand growth and vast resources that placed Brazil in a dominant market position within South America. Many of the foreign investors who paid huge premiums for an early market position have suffered massive losses because the anticipated energy sector reforms that had enticed them to enter the market never materialized.
During the last several months, various market stakeholders (including government officials, power sector participants and ultimate end-users) have attempted to devise a market solution that would satisfy all parties. Unfortunately, the proposed regulatory regime has failed to meet the expectations of all stakeholders and thus may need to be further modified. The current regulatory uncertainty has led many potential investors to postpone additional investments that are needed by the energy sector in order to avoid a potential crisis resulting from under-investment in certain regions of the country.
Despite the challenges in the Brazilian energy market, investment opportunities still are possible. Investments relating to the development of hydro generation assets are still an attractive option in an otherwise turbulent investment environment. Given that these assets are the backbone of the electric energy sector, their long-term market dominance is assured and thus hydro generation asset investors will continue to enjoy a certain level of comfort not available to other market participants.
Argentina, which was once the darling of electric sector market players, continues to struggle to emerge from the monetary collapse it suffered in 2001. Its energy sector is now experiencing a power shortage that may further complicate its current economic recovery. As part of its response to this crisis, Argentina is cutting gas exports to neighboring countries including Chile, which lowered Chilean power plant production dependent on gas imports. Among the factors contributing to this energy crisis are drought conditions in Argentina, which have forced the Argentine energy sector to redirect natural gas intended for exportation to be utilized within the country to offset reduced hydroelectric output.
Given the recent financial troubles of the country, attracting foreign capital to the energy sector and stimulating interest from the financial community, which has been forced to restructure a number of the outstanding Argentine loans, is not likely to occur in the near term. Investment opportunities may possibly occur in value shopping among distressed assets currently owned by foreign investors waiting to exit the market and relieve themselves of any additional contingent obligations.
Mexico continues to be the lighting rod for foreign investment in Latin America. Among the reasons for this interest is the macro economic stability which has resulted in a high investment grade and a successful private investment framework, the IPP program, that has facilitated the entry of foreign private investment during the past decade. As more projects are awarded and successfully financed and built (currently two projects are being financed, the Tuxpan V and Valladolid projects), more investors will continue to enter this market.
In addition to IPP investment opportunities, foreign investors have also embraced investment opportunities relating to (i) publicly financed works (OPF) which require the Comisi
Although Mexico is poised to continue its tremendous success in attracting foreign investment to its energy sector, there are potential factors that may impede the current investment pace. One of these factors is the demand by certain market participants for reforms in the energy sector. Although market participants have continued to demand that proposed reforms be enacted, their investment decisions have shown that they will continue to invest in the sector despite the lack of desired reforms. Another factor that may affect the ability of project sponsors to invest in the Mexican energy market will be the appetite of the financial community to continue to increase its exposure to a market in which they have already actively participated for the last decade.
Although politics continue to undermine some of the efforts in certain markets to develop energy infrastructure projects, some examples do exist of regional economies that are able to facilitate energy infrastructure investments. It should be noted that Mexico has managed to succeed in attracting foreign capital for energy projects despite a strong nationalistic view of that country’s natural resources and its energy infrastructure.
Barajas and Rodriguez are from the Paul, Hastings, Janofsky & Walker Los Angeles office and specialize in the development and financing of domestic and international energy sector infrastructure and general Latin American transactions.