Latin America offers huge opportunity for investors, particularly in the energy sector. Hugh O’Shaughnessy charts the progress of some recent foreign entrants to this market and speculates on their future.

It was September 27 and the smoke had hardly stopped rising from the Twin Towers on Manhattan Island when the first indication of a continuing faith in the profitability of one chunk of global business emerged.

The future of the world economy as a whole was the subject of debate, doubt and fear. The chief economist of the IMF gave a confused and confusing speech about his organisation’s forecast. The airlines were in a tailspin. The hoteliers were rending their garments. To read some reports, the world business leaders were groping around, not knowing where to turn and often falling over each other.

In this scene of uncertainty, Iberdrola, the Spanish power utility, published its 2002–2006 strategic plan. As part of its plan, Iberdrola – already well established in Latin America – announced it was going to sink Pta680bn ($3.72bn) into new power generation in Mexico and electricity distribution in Brazil.

Land of opportunity

The plan underlines one constant that has been obvious for many years and, short of the unlikely outbreak of hostilities on a worldwide scale, will persist: the opportunities offered by Latin America are very large indeed.

These opportunities, already identified by forward-looking companies and their financiers, can be recounted briefly. Latin America is a font of energy of all types, yet individual countries of the region – most notably Brazil – have not got enough and are pleading for more as drought hits the hydroelectricity sector and more and more ordinary people still without electricity demand power. While the US government’s Energy Information Administration has suggested the world’s demand for power will rise by less than 2% a year in the first two decades of the new millennium, the rate of growth in Latin America should more than double that, with an average annual rate of 4.2%.

Moving the assets

There should also be money to be made in exploiting the energy sources and in carting that energy from where it flows out of the ground – or from under the sea – to where local consumers are desperate for it.

At the same time the potential for exports outside the region has seldom been better, improved in a tragic way by the Twin Towers atrocity. According to leaks from Washington in recent days to oil company executives, the continuing instability in the Middle East is convincing policy makers in Washington that the US, the world’s largest energy importer, stands to gain much if it nurtures and fosters Western Hemisphere sources of supply as never before. Better to draw in energy across the border from Mexico or ship it in from suppliers in Venezuela, Ecuador, Colombia and Trinidad & Tobago than rely too much on suppliers in the Persian Gulf and Central Asia in the front line of an unpredictable “war on terrorism” and involved in the Arab-Israeli struggle.

FDI floods in

A report, Foreign Investment in Latin America and the Caribbean, recently published by the UN Economic Commission for Latin America and the Caribbean (ECLAC) said a flood of foreign direct investment had already poured into the region in the past few years, particularly into its energy sector.

ECLAC also pointed to the enormous growth of FDI, the tripling of such capital flows since 1995 to reach an estimated $1100bn worldwide in 2000. In this multi-billion dollar flow, however, the developing countries tended to lose out. While more than one-third of the global total went to the developing world in 1995, this had fallen to less than one-fifth by last year.

Latin America’s share of the total FDI going to the developing world nevertheless increased, rising from 29% in 1995 to 37% last year. It stood at some $74bn in 2000.

ECLAC said in its report: “The copious amounts of FDI that flowed into Latin America and the Caribbean in the 1990s brought about changes in the countries’ and the subregions’ competitiveness and in the structure of industrial property in the region as a whole.” The Latin and Caribbean world was being turned upside down by this new avalanche of foreign money.

The energy sector is the most dynamic and fast-changing of all industrial sectors and its investments illustrate how the US, long seen as the foreign investor par excellence in Latin America, is often being overtaken by companies from the EU, with the Spaniards in pole position.

Looking at the hundred largest transnational firms present by their consolidated sales in 1999, ECLAC finds that Telefónica of Spain with $12.44bn just pipped General Motors to the title of number one foreign investor. Repsol with $8.1bn turned out to be the seventh largest investor, leading the petroleum sector a little way ahead of Royal Dutch-Shell in ninth place with Exxon in 10th. Similarly in the power sector Endesa-Espańa, in 12th position with a turnover of $5.5bn, just pipped AES of the US with $5.2bn.

Tabulating the privatisations and tenders involving foreign investments of more than $100m in 1999–2000, ECLAC shows that $4.6bn went into oil and gas while $4.3bn was ploughed into the region’s electric power infrastructure.

Nor must one forget coal. In Colombia last year, Anglo-American and Billiton of Britain and Switzerland’s Greencore each shovelled $128m into the enormous Cerrejón mine.

If you have a taste for investment in the exotic extremities of power generation, Latin America is your oyster. Central America is the place if you want to experiment with getting energy out of volcanoes; Cuba is your port of call if you want to try getting power from bagasse, the fibrous stuff left behind after sugar cane has gone through the wringer. Fascinated by biomass, photo-voltaic cells, wind power, running your car on alcohol produced from sugar? Then take a plane to sunny Brazil and see how they do it there.

Common culture

One of the attractions that have brought foreign investment to the Latin American energy market is that the individual countries form something approaching one extended family sharing many common cultural traits. The majority speak Spanish or Portuguese and the professed religion, where it exists, is Christian. There are certainly quarrels among the members – but only on rare occasions has one gone to war with another. Latin America has seen nothing comparable to the Iran-Iraq war, which claimed so many millions of lives in the 1980s. Latin America has nothing similar to the Arab-Israeli conflict.

A regional energy market is growing. Argentina sells its gas to Brazil and Chile. Ecuador exports some of its crude through a Colombian port. Paraguay and Brazil each have a half share in the Itaipú hydroelectric plant on the Paraná River, although the tiny Paraguayan economy absorbs only a fraction of the power to which it is entitled, selling the rest to its giant neighbour. The Spanish are helping the countries of Central America build an energy grid. The Venezuelans have a record of selling oil cheaply to their tiny neighbours in the Caribbean.

In many republics, the red carpet is rolled out for the foreigner with cash. The UN ECLAC report on foreign investment itself pointed out that: “Fierce competition for FDI has led to the proliferation of agreements aimed at promoting and providing guarantees for FDI… For many countries, these instruments are part of a fairly undiscriminating policy of attracting as much FDI as possible.”

Under the surface

As the Latins pine for your dollar are you not in an investors’ market? Surely all you must do is find one of those promising oil or gas deposits or one of those giant rivers waiting to be dammed, get a billion dollars or two together, take Spanish or Portuguese evening classes and wait until the cash flows in.

If that is the impression given so far, it is time to consult another UN ECLAC study, its 1999–2000 Social Panorama of Latin America. This gives a sober analysis of the downside of the region, which more than any other part of the globe, is disfigured by dreadful poverty and an alarming gap between rich and poor, causing increasing social tensions – bad news for investors.

The raw truth of Latin America is that of its 510 million inhabitants, no fewer than 220 million live in poverty. In Colombia in 1997, 51% of households lived with an income below the poverty line; the figure for Guatemala was 69% and for Honduras it was 79%. The lack of purchasing power in their hands sabotages the emergence of mass markets and poisons the political atmosphere. Analysts are divided over how much progress reformist and democratic governments, now in office in many countries, are making.

There can be no doubt that investment opportunities in the energy sector are to be found throughout the region. There can be no doubt either that a massive wave of investment in energy, well directed, would do much for the modernisation of Latin America. But it is not as easy a job as it appears at first sight.