Argentina's new infrastructure partnership framework provides opportunities for insurers

Infrastructure development has been highlighted by the government as a fundamental pillar in ensuring Argentina’s long-term economic success, however, the industry remains relatively underdeveloped.

According to the World Economic Forum’s “The Global Competitiveness Report 2017-18” report, the country ranked 85th out of 135 in terms of infrastructure development. To improve this situation, the government has demonstrated support for public-private partnerships (PPPs) to help fund infrastructure projects after the model’s proven success in countries such as Chile and Colombia.

Not surprisingly, further development of infrastructure financing tools was included as one of the two priorities for Argentina during the 2018 G20 Summit, which took place in Buenos Aires.

In its “Argentina – Capital Market Financing for Infrastructure” report published in June 2017, the World Bank estimated that Argentina requires $155bn worth of investments between 2018 and 2033 to support infrastructure development.

Funding is expected to come mainly from private institutional investors; however, PPPs are likely to contribute about 10% to 20% of these funds.

Game Changer

While 2018 marked the beginning of the first PPP tender, which is focused on developing 2500 km of motorways, Argentina is still working on formulating the regulatory framework under which PPPs will operate.

With the government now listing the infrastructure projects available for tender, questions have been raised as to the financial specifications surrounding PPPs. Key among these concerns was how these projects would be insured.

In early July 2018 the Superintendency of Insurance of the Nation (Superintendencia de Seguros de la Nación, SSN) approved the contractual conditions of insurance for PPPs. Thanks to this new financial instrument, insurance companies are now allowed to participate in the PPP compliance guarantees, which before only banking institutions could grant.

Opening PPPs to the insurance sector was a move supported by several industry players. John Pollner, chief economist at the World Bank, told international press in March 2018 that the new PPP law provides greater flexibility as it allows for the issuance of bonds to finance infrastructure projects.

Pollner also suggested that legislation could be developed to encourage insurers to offer new products, promote the production of instruments to handle foreign exchange risks and stimulate the development of real estate investment trusts.

Sector Momentum

The SSN’s approval has opened up a new window of opportunity for insurers. Industry analysts now expect the local market to draw up new subscription guidelines and reinsurance agreements in order to complete the environment for insurers to participate in PPPs, which would be a considerable gain for the industry.

According to Alejandro Guerrero, CEO of global Marsh in Argentina, the opening of PPP projects to the insurance sector is indeed a positive step; however, it also means that the SSN needs to step up its game as industry regulator.

“Given Argentina’s underdeveloped insurance industry, we need stricter guidelines and a heavier regulatory enforcement,” Guerrero said in a conversation with OBG. “There is no room for flexibility or leniency in insuring large PPP projects.”

While PPPs in Argentina are close to becoming a reality, some financial challenges remain to be addressed. According to Pollner, in order to encourage the financing of PPP projects, there are three important areas to focus on: “The expansion of capital market instruments so that investors can access financing, the development of a regulatory framework, and the creation of guarantee instruments to attract investors and external creditors.”