In a bid to boost economic and political ties with Latin America, create opportunities for U.S. companies, and counter China’s growing influence, the United States has introduced several measures aimed at facilitating investment in energy and infrastructure in the region. The new approach is a sensible way to make use of the U.S.’s limited toolkit to match China’s expanded reach in Latin America. For countries in the region, boosting investment in natural resources and infrastructure would undoubtedly spur economic growth. However, the impact will likely be constrained by the challenging investment environment in many Latin American countries, demonstrating the limitations for the U.S. in competing with China’s centralized economic model.
A key pillar of the new U.S. strategy is the Better Utilization of Investment Lending to Development Act (or BUILD Act), signed into law in October 2018 with the aim of consolidating and upgrading the government’s development finance capabilities abroad. The bill created the Development Finance Corporation (DFC), replacing the smaller Overseas Private Investment Corporation (OPIC) in December by merging it with the United States Agency for International Development’s (USAID) Development Credit Authority. The DFC has several important new capabilities, including a higher total investment limit ($60 billion as opposed to OPIC’s $29 billion), an increased emphasis on inter-agency cooperation, more flexibility to work with non-U.S. companies, authority for equity financing, and the ability to provide loans and guarantees in local currency to shield investors from currency exchange risk. The DFC encourages private investment in the developing world across a wide spectrum of sectors including energy, infrastructure, and healthcare.
In Latin America, the América Crece (‘Growth in the Americas’) initiative serves as the policy framework for U.S. lending and other bilateral cooperation, employing various government agencies from the DFC to the Department of Energy to catalyze private sector investment in energy and other infrastructure. Through América Crece, the U.S. has signed various memoranda of understanding with Latin American governments including Argentina, Chile, Jamaica, Colombia, El Salvador and Panama. Major loans under the initiative include $300 million to help Argentine oil and gas company Vista develop, operate and sell shale oil and gas from the giant Vaca Muerta basin and over $1 billion to El Salvador to construct Energia del Pacifico, a project that includes a 378 MW natural gas-fired power plant, a floating LNG import unit, and a 44-km transmission line.
DFC and América Crece are soft power tools to advance U.S. strategic interests—principally countering China’s influence in the hemisphere, as well as aiding friendly governments. China’s Belt and Road Initiative, an ambitious platform focused on infrastructure and other forms of connectivity globally, has raised concerns among President Donald Trump’s administration that its Asian rival will expand its economic, political and military influence around the world. In Latin America, Chinese state-owned banks have lent more than $137 billion since 2005, and Chinese state and private companies, directed by Beijing, have brought in billions more through foreign direct investment. Although these companies are profit driven, they tend to invest in markets considered too risky by many Western companies.
The Trump administration’s approach of seeking to facilitate and encourage U.S. and other private companies to invest in the region through loans, bilateral dialogues and technical assistance is arguably the best tool it has at its disposal to respond to Chinese influence. Unlike China, the U.S. government cannot direct state companies to invest abroad or demand banks to lend to domestic companies in specific markets. However, this approach has major constraints and its impact will ultimately be limited. DFC’s projects must pass financial, environmental, and social impact screenings to ensure they meet internationally recognized standards. In Latin America, many utilities and other potential loan recipients do not qualify because of lack of creditworthiness. Due to more stringent social and environmental standards, DFC lending will inevitably remain slower, which will deter some investors. In contrast, Chinese banks and companies tend to have more lenient standards, opaque contracts and often charge ahead with projects without practicing due diligence.
But a much greater obstacle is the conditions for investment in many Latin American countries, which remain a major deterrent to energy and infrastructure companies. Political and regulatory risks pose a threat to investment in many markets, and bilateral meetings, technical assistance and loans with favorable conditions will not bring enough benefits to compensate for such risks. Infrastructure investments in particular are vulnerable because they have a long life cycle, and revenue generation from the project typically lasts past one administration’s term.
In Mexico, for example, after a 2013 energy reform under President Enrique Peña Nieto opened the renewable energy sector to private investment, the current administration of Andrés Manuel López Obrador took steps to dismantle the reform and favor the state utility Federal Electricity Commission (CFE) over private companies. Such steps include the cancellation of renewable energy auctions and proposed regulatory changes that would undermine the value of Clean Energy Certificates, an incentive to build new renewable projects. In Argentina, new investment in the Vaca Muerta is currently frozen, as investors fear a return to capital controls, energy subsidies, and export taxes under the new Peronist government of Alberto Fernández. The recent oil price collapse will further deter investment. Even the most attractive DFC loans will not lure private companies to countries with high risk and unfavorable investment conditions.
Recognizing this challenge, the Trump administration has offered technical assistance to countries to improve their regulatory frameworks. However, decisions about economic and energy policy stem from complex domestic considerations, and many governments will resist making reforms. Lopez Obrador’s energy policy, for example, is driven by ideological support for state owned enterprises, while Argentina’s president is primarily concerned with containing inflation and improving living standards as the government seeks to renegotiate the largest International Monetary Fund (IMF) loan in the fund’s history.
Even with its souped-up capabilities, DFC’s loans may be concentrated in countries with stable regulatory environments, and disbursements will be slowed by the agency’s necessary lending requirements. Still, this new strategy takes advantage of the U.S.’s limited options to compete with China and will open opportunities for countries seeking alternatives to the Chinese model. To maximize its impact, the key will be for the U.S. to double down on assisting interested countries in opening up to private investment. For governments that are willing, providing stable policy environments will be the key to unleashing energy and infrastructure investments and boosting economic growth.