INSIGHT March 2021 ISSN: 2054-1368 Americas Infrastructure Argentina Contents Public Infrastructure Investment To Drive Argentina...... 1 Argentina Construction Recovery In 2021 Public Infrastructure Investment To Drive Argentina Construction Key View Recovery In 2021 ...... 1
Latin America (Region)...... 4 • We have broadly maintained our forecasts for Argentina’s construction industry, which we expect will see growth of 22.0% y-o-y in 2021 and average annual real growth of Tracking Our Infrastructure Key 3.8% y-o-y between 2022 and 2025. This will follow an estimated contraction of 25.4% Themes For 2021 ...... 4 y-o-y, adjusted this quarter from a previous estimate of a contraction of 27.3% y-o-y. • Base effects will underpin robust annual growth for the construction industry in 2021, Panama ...... 10 following the removal of government restrictions on on-site construction activity Panama Construction Recovery which drove the sharp decline in construction activity seen in 2020. To Gain Pace In 2021 Following • Public investment will play a central role in driving the construction industry’s performance over the next several years, as the Fernández government eyes a Historic Contraction...... 10 strengthened role for the public sector in the infrastructure and building sectors. United States ...... 12 • Private investment growth will also contribute to the construction industry’s recovery, Developer Selection Marks Key though we highlight that factors including high inflation and policy uncertainty will continue to weigh on investor sentiment and will prevent a stronger rebound in private Step Forward For Maryland construction investment. Highway PPP ...... 12 Growing Scrutiny Of US Pipeline
Argentina’s construction industry is on pace to see a sizeable rebound in 2021 Projects Challenges Canadian Oil and a strengthening in the following years, after the industry saw a sharp Sector...... 13 downturn in 2020 amidst the Covid-19 pandemic. We have broadly maintained our forecasts for Argentina’s construction industry, which we expect will see growth of 22.0% y- o-y in 2021 and average annual real growth of 3.8% y-o-y between 2022 and 2025. This will follow a deep contraction in real construction industry value in 2020 amidst the Covid-19 pandemic with the industry contracting by an estimated 25.4% y-o-y, adjusted this quarter from a previous estimate of a contraction of 27.3% y-o-y.
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Recovery From 2021 For Construction Industry Argentina - Construction Industry Value and Real Growth
e/f = Fitch Solutions estimate/forecast. Source: INDEC, Fitch Solutions
Underpinning our outlook particularly in 2021 is the impact of base effects, due to the deep contraction in construction activity seen in 2020 as a result of government restrictions on on-site construction activity aimed at preventing the spread of Covid-19. Those restrictions and the broader impact of weakened economic activity and uncertainty amidst the pandemic drove a historic contraction in construction activity extending from March through September with construction activity falling by an average 38.1 y-o-y in the seven months included in the period according to INDEC’s Monthly Estimator of Economic Activity (EMAE). April and May, in particular, stood out for their massive contractions in construction activity, with declines of 69.5% y-o-y and 48.8% y-o-y respectively. Following the removal of restrictions, construction activity strengthened in the second half of 2020, with activity nearly returned to pre-pandemic levels as of November 2020 with construction activity contracting by just 3.3% y-o-y. While we highlight considerable downside risk to our forecast for the construction industry in 2021 due to the potential for new restrictions to be implemented by the government as the Covid-19 pandemic continues to be a challenge in Argentina and globally, we expect that the likely absence of such measures over the coming months will be key to supporting the robust recovery of the country’s construction industry.
Sharp Slowdown Followed By Strengthening In Q4 Argentina - Monthly Estimate Of Economic Activity (EMAE), Construction (Index 2004=100)
Source: INDEC, Fitch Solutions
Public investment will play a central role in driving the construction industry’s performance over the next several years, as the Fernández government eyes a strengthened role for the public sector in the infrastructure and building sectors. Since coming into office in December 2019, the Fernández government has announced a number of infrastructure and building programmes aimed at expanding public investment into construction projects, in particular as part of economic recovery efforts amidst a sharp downturn in economic activity amidst the Covid-19 pandemic. These programmes include: fitchsolutions.com THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Page 2 Any comments or data included in the report are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research. Americas Infrastructure
• The Argentina Construye plan announced in May 2020 by President Fernández and including investment of ARS29bn (USD426mn) in 2020 in housing construction works. The plan aims to create 750,000 direct and indirect jobs between 2020 and 2021, with the goal of building 5,500 new units of public housing and supporting repair works on another 42,900 housing units, along with other measures, including credits for materials purchases. • The relaunch of the Procrear programme announced on August 4, 2020 by President Fernández, through which the government aims to provide new housing credits totalling ARS25bn (USD342mn) to improve access to adequate housing and stimulate economic activity. According to the president’s announcement, the government aims to provide 300,000 credits for home improvement expansions and the construction of 44,000 new housing units between 2020 and 2021. • The Argentina Hace programme, which aims to support local economic recovery through the development of public infrastructure projects. The programme was first announced in January 2020 with the goal of creating 20,000 jobs and investing ARS30.0bn in municipal and provincial infrastructure projects including water and sanitation infrastructure, social infrastructure including health centres and schools, local road improvement projects and urban infrastructure improvements such as public lighting, sidewalks and handicap accessibility.
In addition to these programmes, government-directed investment in the rail sector backed in turn by Chinese funding is also set to be a key driver of construction growth, with a robust increase in funding outlined in recent agreements between Chinese firms and the Argentine government posing sizeable upside risk to our forecast. On December 11, 2020 Argentine President Alberto Fernández announced the signing of four agreements with Chinese firms involving USD4.7bn in funding for rail investments in the country to be undertaken over the coming years. The deals include:
• USD817mn in funding for investments for the Belgrano Cargas freight rail line through an agreement between Argentine state- owned rail infrastructure operator Administración de Infraestructura Ferroviaria (ADIF) and Chinese firm China Machinery Engineering Corporation (CMEC). 65% of planned funding will go toward infrastructure improvements on the line while the remaining 35% will go toward the acquisition of rolling stock and other equipment for the line, continuing a modernisation programme already underway in recent years due to a previous agreement between CMEC and ADIF. • USD784mn in funding for modernisation works on the North Patagonian freight rail line (Tren Norpatagónico) linking Bahia Blanca and the Vaca Muerta shale region in Neuquén through the provinces of La Pampa and Rio Negro, also the result of an agreement between ADIF and CMEC. • USD2.6bn in funding for the San Martin freight rail line linking the provinces of Mendoza and Buenos Aires through the provinces of Santa Fe, San Luis and Córdoba as the result of an agreement between ADIF and China Railway Construction Corporation (CRCC). • A further USD490mn in funding for the purchase of rolling stock to be provided by CRRC International for various rail lines in Argentina including respectively 111, 45 and 20 passenger cars for the Belgrano Sur, Sarmiento and Mitre passenger rail lines and an additional 90 passenger cars for regional and commuter rail services in Argentina’s interior.
These planned investments point toward a considerable increase in rail infrastructure investment and infrastructure development more broadly in Argentina over the next several years, backed by Chinese funding to be provided to the Argentine government. That said, we note that the specific timing of planned investments remains unclear, meaning that these plans largely remain upside risk to our forecast.
Private investment growth will also contribute to the construction industry’s recovery, though we highlight that factors including high inflation and policy uncertainty will continue to weigh on investor sentiment and will prevent a stronger rebound in private construction investment. Macroeconomic conditions in the country are set to see a modest improvement in 2021 and strengthen thereafter, as economic activity rebounds; with our Country Risk team forecasting real GDP growth of 3.1% in 2021 and average annual real growth of 2.6% between 2022 and 2025. This will follow a sharp downturn in 2020 amidst the Covid-19 pandemic as the country’s economy contracted by an estimated 11.4%. We expect improving conditions will support new investment in construction projects, including both residential and non-residential construction. Nevertheless, we highlight that the rebound in private investment will be undermined considerably by high inflation in the market as well as fitchsolutions.com THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Page 3 Any comments or data included in the report are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research. Americas Infrastructure
continued uncertainty around policy direction as the government has yet to adopt a consistent approach to economic policy. In particular, we expect concerns over state intervention and expropriation to remain a deterrent to private investment in the infrastructure and industrial sectors in particular market, limiting new investment.
Latin America (Region) Tracking Our Infrastructure Key Themes For 2021
Key View
• Following the publication in December 2020 of our Infrastructure Key Themes for 2021, we will continually monitor key metrics throughout the year to confirm the realisation of our Key Themes. • Our expectation of lower capex and opex from infrastructure operators in 2021 will be borne out in their respective financial statements and the reassessing of their existing capital commitments. • As numerous developed markets position green infrastructure as a core component of their economic stimulus efforts, the number and scale of these fiscal ommitmentsc will be the primary means of quantifying this Key Theme. • Despite the continued appeal of Public-Private Partnerships (PPP) as a financing oolt for governments to enact infrastructure projects, particularly in emerging markets, we expect data from our Key Projects Database (KPD) to ultimately highlight the heightened project risk facing many PPPs during 2021. • 2021 will see a continuation of the stand-off between Chinese and US infrastructure investment in many emerging markets, with data from our KPD crucial to tracking the development of this Key Theme.
Following the publication in December 2020 of our Infrastructure Key Themes for 2021, tracking the progress and realisation of these themes during the year remains fundamental to our coverage and analysis of infrastructure and construction across all markets. Given the scope and impact of these Key Themes on industry, and our successful track record of early calls in areas such as the deployment of micro-mobility infrastructure and sustainability policy efforts in Europe in previous years, these Themes remain crucial for informing our industry forecasts. As such, we highlight the key metrics that we will continually monitor throughout the year and which will, ultimately, confirm their ealisationr of our Key Themes by the end of 2021:
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KEY METRICS FOR TRACKING INFRASTRUCTURE KEY THEMES FOR 2021 Theme Metric Relevant Source(s)
Company investment levels into asset expansion and Infrastructure operators' Lower investment from infrastructure operators renewal financial statements
Number and value of government stimulus announcements Green infrastructure feature at the core of Government stimulus packages allocations for renewables, featuring green economic recovery public transit, new energy technologies infrastructure, Fitch Solutions industry forecasts for capacity additions
Fitch Solutions Public-Private Partnerships (PPP) in emerging Infrastructure Key markets to remain high risk even with low Number of PPP's progressed/stalled compared with 2019 Projects Database, Fitch borrowing costs Solutions Project Risk Index
Number of Belt and Road Initiative projects added to the Fitch Solutions US-China relations to impact infrastructure Key Projects Database & US global infrastructure market Infrastructure Key investment share. Projects Database
Source: Fitch Solutions
Lingering Demand Shortfall To Translate Into Reduced Investment Levels
Following the widespread blow to revenue from infrastructure assets globally, in light of the Covid-19 pandemic, our expectation of lower capex and opex from infrastructure operators in 2021 will be borne out in their respective financial statements and the eassessingr of their existing capital commitments. Prominent operators of major infrastructure assets will register reduced expenditure during the course of 2021 in response to the dramatic revenue shortfall seen during 2020 amid the Covid-19 pandemic. Exemplified by the sustained eductionr in trafficolumes v over 2020, coupled with the sluggish recovery ahead for air trafficolumes v in particular, operators and public authorities alike will be unwilling, and often unable, to permit fresh capital investment in the sector and instead resort to sanctioning only the minimum maintenance required in an effort to shore-up their financial positions.
While the publication of financial statements from operators will, naturally, be more periodic, high-frequency data from public infrastructure operators will continue to highlight the scale of their demand shortfall and need for emergency funding. Transport for London (TfL), the public authority responsible for the UK capital's Underground rapid transit system, saw the Underground's usage plummet to just 4% of pre-pandemic usage levels following the initial imposition of public health restrictions in late-March 2020, with the figure remaining below 45% for the duration of 2020. As of the 7-days to February 1 2021, usage averaged just 16% of pre- pandemic levels; highlighting that TfL, as with other public transport infrastructure operators, is fast-approaching a full 12 months of demand shortfall. Already, TfL had resorted to two funding package of GBP1.6bn and GBP1.8bn from the UK Government during 2020, while halting the development of its GBP41bn Crossrail 2 project. With discussions ongoing between TfL and the UK Government regarding its financing package through to 2030, further emergency funding and the reassessing of TfL's capital investment will be inevitable.
Ultimately, we highlight TfL's ongoing financial pressures as emblematic of those facing public transport infrastructure operators in the near-term and the reality that, though the ongoing global vaccine rollout may serve to improve economic optimism in the near- term, operators are in our view unlikely to be able to offset the Covid-19 pandemic's damage to their ability to enact investment in the medium-term, even with emergency funding assistance. fitchsolutions.com THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Page 5 Any comments or data included in the report are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research. Americas Infrastructure
Disruption To Infrastructure Demand To Translate Into Lower Investment Levels In 2021 Passenger/Trafficolumes V For Key Assets/Groups, % chg vs 2019
Source: Vinci, Ferrovial, ACS, Tfl, Fitch Solutions
Integral Position For Green Infrastructure In Economic Stimulus Efforts
As numerous developed markets position green infrastructure as a core component of their economic stimulus efforts, the number and scale of these fiscal commitments will be the primary means of quantifying this Key Theme. Our Key Theme in this area, namely that governments will seek to stimulate their post-pandemic economic recoveries through investment to support their longer-term decarbonisation efforts, will be seen via the funding allocations given to renewable energy, low-emission transport infrastructure, and to reduce the energy intensity of building stock. The European Union's (EU) EUR750bn 'Next Generation EU' recovery funding, for which member states are in the process of finalising their spending plans, stands as the most prominent example of governments focusing their investment partly on green infrastructure; building on one of our Key Themes for 2020 that Europe would continue to lead globally on policy-driven efforts to sustainability.
With the Biden Administration in the United States having assumed office in January 2021, the prospects of stimulus for green infrastructure on both sides of the Atlantic have been materially boosted. We expect that Biden will advance efforts to boost infrastructure investment broadly, with a particular focus on the development of projects which favour the decarbonisation of the US economy, such as clean energy projects. Biden’s clean energy plan, entitled The Biden Plan To Build A Modern, Sustainable Infrastructure And An Equitable Clean Energy Future, aims to invest USD2trn over four years in clean energy and infrastructure, and though we expect the US Senate to prove an insurmountable roadblock for the plan in full, green infrastructure will nonetheless remain a prominent fixture of US stimulus efforts.
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2021 Renewables Capacity Additions To Dwarf Other Power Sources Global – Net Capacity Additions, GW
e/f = Fitch Solutions estimate/forecast. Source: EIA, National Sources, Fitch Solutions
In addition, our Power & Renewables team's forecasts for net capacity additions will provide direct insight into the impact of stimulus on the renewables sector. Following a resilient performance during 2020, which saw the non-hydro renewables sector realise a net capacity addition of over 135GW globally, 2021 will see the sector add 174GW of net capacity, dwarfing the additions of other power sources. Our forecasts indicate that thermal capacity additions in 2021 will, in contrast, register a meagre 66GW with non-hydro renewables annual capacity additions set to exceed all other power sources combined across our forecast period to 2030.
Public-Private Partnership Data In Key Projects Database To Highlight Prevailing Risks
Despite the continued appeal of Public-Private Partnerships (PPP) as a financing tool orf governments to enact infrastructure projects, particularly in emerging markets, we expect data from our Key Projects Database (KPD) to ultimately highlight the heightened project risk facing many PPPs during 2021. Featuring large-scale construction and infrastructure projects over USD30mn in value, our KPD contains 4240 PPP projects at the time of writing, with a combined project value of over USD2.6tn among projects where value figures are available. India hosts the largest number of PPPs, 600, followed by the United States, Vietnam, and Canada with 236, 203, and 182 respectively.
While we do not foresee any material risk to the completion of PPP projects across the likes of the US and Canada, our Key Theme in this area concerns the prevailing high risks facing PPPs in emerging markets, despite the collapse in borrowing costs globally and in spite of governments' desires to leverage private capital following the Covid-19 pandemic. Though this low interest rate environment would, in isolation, allow governments in emerging markets to readily access debt financing orf infrastructure projects, broader factors including weak economic confidence and relatively heightened project risk levels will leave emerging markets unable to leverage private capital in a similar manner to developed markets.
Currently, our KPD shows Niger with the highest proportion of suspended PPP projects of any market globally, 50%, followed by Lebanon, Benin, and Kazakhstan with 25%, 25%, and 12.5% of their respective PPP project pipelines suspended. In Niger's case, this stems from the suspension of the Benin-Niger Rail Link; one of two PPP projects in the market alongside the Niger - Nigeria Single Track Standard Gauge Line being financed by KfW IPEX-Bank and Africa Finance Corporation. In absolute terms, India exhibits the highest number of PPP project currently suspended, 13, alongside Peru and Brazil with 5 and 4 respective suspended PPP projects.
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PPPs In Emerging Markets To Remain High Risk, With Number Of Suspended Projects Set To Rise Global - Top 10 Markets, Share Of PPP Project Pipeline Suspended, %
Source: Fitch Solutions Infrastructure Key Projects Database
As such, we would expect our KPD to exhibit at least its current proportion of suspended PPP projects at the end of 2021, since higher-risk infrastructure markets are unlikely to realise the requisite reforms to improve their respective project financing environment.
Coupled with data from our KPD, our proprietary Project Risk Index (PRI) will continue to highlight the elevated project financing environment present in emerging markets at the end of 2021. Our PRI provides a concise measure of the risks associated with carrying out an infrastructure project in a given market, providing scores for over 100 markets globally with higher scores indicating a more attractive market. Assessing the risks on a market-by-market basis, the Index considers the entirety of a project's life cycle; with sub-components for the respective financing, onstruction,c and operation phases of a project within a given market. Developing Asian infrastructure markets score an average of 49.1, well below their Developed Asian counterpart with 80.1. Again, Without risk profiles improving, emerging market governments will most likely be frustrated in their efforts to attract large amount of private capital.
Evolving Sino-US Relations To Impact Progression Of Belt And Road Initiative
2021 will see a continuation of the stand-off between Chinese and US infrastructure investment in many emerging markets, with data from our KPD crucial to tracking the development of this Key Theme. At present, many emerging markets have to depend on external financing from multilateral lenders and other major international players for the financing and realisation of infrastructure projects, with China's Belt and Road Initiative having established itself as a dependable partner for many markets in the provision of project financing. With China having already drawn criticism from the US and its allies regarding China's involvement in infrastructure markets, particularly in Sub-Saharan Africa, Western governments are effectively posing an ultimatum to emerging markets to choose between project support from either China's BRI or from the West. The realisation of this Key Theme, therefore, will be measured via both the progression of BRI projects from pre-construction through to completion, and the respective China and US share of construction and financier olesr in infrastructure projects.
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Sizable Number Of BRI Projects At Pre-Construction Global - Share Of BRI-Designated Projects By Status, %
Source: Fitch Solutions Infrastructure Key Projects Database
At the time of writing, our KPD features close to 1,020 BRI-designated infrastructure projects globally, with a combined value of USD817bn, with close to 400 of these projects currently under construction. In contrast, our data show 24 BRI projects currently suspended, with the remainder largely being at planning stage or having seen construction contracts awarded. Whether these proportions shift markedly by the end of 2021 will indicate both the impact of US efforts to provide a counterweight to Chinese involvement in infrastructure, and also the broader aforementioned impact of prevailing project risk among emerging markets where the BRI is focused.
China In Front In Share Of Construction Roles Globally, US In Front On Financier Roles Global - Share Of Construction, Financier Roles By Company Nationality, %
Source: Fitch Solutions Infrastructure Key Projects Database
Additionally, any shift in the respective Chinese and US shares of construction and financier olesr globally will also indicate the industry impact of evolving Sino-US relations. Currently, our KPD shows the US occupying 9.9% of construction roles across large- scale infrastructure projects globally, with China just outstripping this share with 10.4% On financier oles,r however, the US holds 12.4% of such roles globally, versus China's 5.9% share. We note that the US' financier share also accounts for project financing provided by the US-domiciled World Bank.
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Panama Panama Construction Recovery To Gain Pace In 2021 Following Historic Contraction
Key View
• We have revised our growth forecast for Panama’s construction industry and now expect will see annual real growth in industry value of 60.4% y-o-y in 2021 and average annual real growth of 5.6% y-o-y between 2022 and 2025. This follows an estimated contraction of 48.9% y-o-y in 2020. • While Panama will see the strongest year-on-year growth rate for construction industry value in 2021 among any market globally, we highlight that much of this growth will be the result of base effects, given the sharp slowdown seen in 2020. • Infrastructure development will play a key role in the construction industry’s reactivation and recovery in Panama, with the national government planning a number of sizeable projects backed with public funding. • Private investment-driven projects will also see a significant eboundr from 2021 but will struggle to return to pre-pandemic levels as a result both of elevated uncertainty and reduced demand due to the economic impact of the Covid-19 pandemic. • Nevertheless, we highlight that risks to our forecast remain elevated, given the potential for additional disruptions to construction industry activity as a result of the Covid-19 pandemic.
Panama’s construction industry is set to see strong growth from 2021, following a deep contraction in 2020 amidst the Covid-19 pandemic. We have considerably revised our growth forecast for Panama’s construction industry and now expect the industry will see annual real growth in industry value of 60.4% y-o-y in 2021, followed by average annual real growth of 5.6% y- o-y between 2022 and 2025. This follows an estimated contraction of 48.9% y-o-y in 2020 as government restrictions on on-site construction activity implemented between March and September to stop the spread of the Covid-19 pandemic weighed heavily in the industry and brought most construction activity in the country to a halt.
High Growth In 2021 Following Deep Contraction Panama - Construction Industry Value, Real Growth % Chg y-o-y
e/f = Fitch Solutions estimate/forecast. Source: INEC, Fitch Solutions
While Panama will see the strongest year-on-year growth rate for construction industry value in 2021 among any market globally, we highlight that much of this growth will be the result of base effects, given the sharp slowdown seen in 2020. We note that the risk of additional restrictions being implemented remains, a point highlighted by the government’s decision to stop most on-site construction between January 1 and January 14 2021. Nevertheless, with national restrictions lifted as of now and no government plans to restore them, construction activity should be able to largely resume in the country over the coming quarters, underpinning robust year-on-year growth in industry value in 2021. We highlight, however, that despite high percentage growth, the industry will fitchsolutions.com THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Page 10 Any comments or data included in the report are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research. Americas Infrastructure
not regain its pre-pandemic level of activity in our view until 2025, due to the lagging effects of the economic downturn seen in the country since early 2020 on both private investment and public spending capacity.
We expect that infrastructure development will play a key role in the construction industry’s reactivation and recovery in Panama, with the national government planning a number of sizeable projects backed with public funding. In January 2021, Panamanian President Laurentino Cortizo inaugurated works on the USD177.9mn Panama City Metro Line 1 extension project. The project, awarded in July 2019 to consortium Consorcio Línea Panamá Norte made up of OHL and Mota-Engil, involves the construction of a 2.2 km extension of Line 1 from the current terminus at San Isidro to a new station at Villa Zaita as well as a widening to six lanes of the Vía Transístmica roadway, where the metro line will pass. Additionally, the government on February 22, 2021 was scheduled to give permission to consortium HPH Joint Venture to start construction on the USD2.8bn Panama City Metro Line 3 project, awarded in February 2020 to the consortium, made up of Hyundai Engineering & Construction and Posco E&C and being financed by a loan from the Japan International Cooperation Agency. The full realisation of the project still faces uncertainty as it will depend on the construction of a 5.3km tunnel under the Panama Canal, a project to be built under a separate contract to be tendered following the tender and completion of engineering and design works. Construction of the tunnel would involve an investment of USD360mn according to a recent government estimate. Nevertheless, the launch of works on the parts of the project not reliant on the tunnel will represent a significant investment over the coming quarters.
Rising public investment driven by these projects will provide a key boost to the construction industry’s recovery, complementing a broader public works effort by the national government which involves the advance of a number of other sizeable infrastructure projects. Among these are the USD370mn Panamanian Highway: Puente de la Americas-Arraiján road project and the USD603mn Corredor de las Playas I road project, among others. Also of note, though facing elevated uncertainty, is the Fourth Panama Canal Bridge project, a USD1.5bn project awarded in 2018 to Consorcio Panamá Cuarto Puente, made up of China Communications Construction Company and China Harbour Engineering Company but yet to begin construction. As of February 2021, reports indicate that the government is currently evaluating a new financing proposal for the project presented by the consortium, with the goal of reaching an agreement and moving the project into the construction phase. If the government is able to advance the project, it would provide additional boost to construction industry activity, though the timeline of the project remains unclear currently, leaving it as upside risk to our forecast.
Private investment-driven projects will also see a significant rebound from 2021 but will struggle to return to pre- pandemic levels as a result both of elevated uncertainty and reduced demand due to the economic impact of the Covid-19 pandemic. The Covid-19 pandemic greatly exacerbated a slowdown in private construction in Panama already underway since 2019 as residential development, in particular, saw a sharp decline due to reduced demand. While private project development has been allowed to resume with national restrictions removed on January 14, 2021, we expect that investment will nonetheless be slow to recover to pre-pandemic levels. Uncertainty remains elevated around the pace of the country’s Covid-19 vaccination campaign, the country’s economic recovery and global economic conditions more broadly, posing a considerable strain on investor sentiment. At the same time, the negative impact of the pandemic on firms’ er venue and on employment has limited the ability of both firms and individuals ot spend on building construction projects, further complicating the construction industry’s recovery.
We highlight that risks to our forecast remain elevated, given the potential for additional disruptions to construction industry activity as a result of the Covid-19 pandemic. With the country continuing to face a widespread Covid-19 pandemic outbreak, we highlight elevated risk of additional restrictions over the coming quarters, posing downside risk to our growth outlook for 2021. Additionally, we note the potential for the recovery of key economic sectors in the country to underperform expectations, an outcome that would put further strain on demand for new construction as well as the ability of firms and individuals ot launch new projects.
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United States Developer Selection Marks Key Step Forward For Maryland Highway PPP
Key View
• The selection of a private development partner for the American Legion Bridge I-270 to I-70 Relief Plan bolsters the likelihood that the project will advance, adding private backing to a project already benefitting from robust state government support. • More broadly, the selection of a developer for the PPP marks a significant development for the US transport PPP market, illustrating confidence on the part of both government officials and private developers amidst a clouded backdrop for transport infrastructure amidst the Covid-19 pandemic.
The American Legion Bridge I-270 to I-70 Relief Plan, one of the largest planned transport PPP projects in the US, has taken a key step forward with selection of a developer for the project by state officials in Maryland. On February 18 2021, the Maryland Department of Transportation (MDOT), MDOT State Highway Administration (MDOT SHA), and the Maryland Transportation Authority (MDTA) announced the selection of consortium Accelerate Maryland Partners, LLC, as the developer to be responsible for the oversight of pre-development work on Phase I of the American Legion Bridge I-270 to I-70 Relief Plan, to be advanced under a 50-year public-private partnership (PPP) agreement. The group is led by Transurban (USA) Operations Inc. and Macquarie Infrastructure Developments LLC as well as Dewberry Engineers Inc. and Stantec Consulting Services Inc. as designers. While the specific improvements to transport infrastructure to be undertaken and investment amounts remain subject to a review process and environmental study as well as collaboration between the state and federal and local officials, the state’s preferred alternative includes the construction of two tolled express lanes across a new American Legion Bridge between Virginia and Maryland over the Potomac River and on to I-270, and along the I-270 highway up to its interchange with the I-370 highway. Under the current plan, the PPP developer of the project will be responsible for the design, construction, financing as ellw as the operations and maintenance of the roadways involved.
The decision follows a tender process launched in February 2020 with the issue of a Request for Qualifications orf the project. Technical and financial proposals were received in December 2020 and January 2021 for the Phase P3 Agreement from three teams. In addition to Accelerate Maryland Partners, LLC, the other two teams presenting proposals were Accelerate Maryland Express Partners, led by Itinera Infrastructure & Concessions Inc, and Capital Express Mobility Partners, in turn made up of Cintra Global SE and John Laing Investments Limited, with Ferrovial Agroman US Corp. serving as the lead contractor.
AMERICAN LEGION BRIDGE I-270 TO I-70 RELIEF PLAN TENDER: PROPONENTS Proponent Lead Project Developer/Equity Lead Contractors Designers
Accelerate Maryland Transurban (USA) Operations Inc., Macquarie Dewberry Engineers Inc., Stantec Transurban, Macquarie Partners, LLC Infrastructure Developments LLC Consulting Services Inc.
Accelerate Maryland Halmar International Atkins North America, Inc., Gannett Itinera Infrastructure & Concessions Inc Express Partners LLC, Itinera S.p.A Fleming Inc.
Capital Express Mobility Ferrovial Agroman US AECOM Technical Services Inc, Cintra Global SE, John Laing Investments Limited Partners Corp. HNTB Corporation
Source: Maryland Department of Transportation, Fitch Solutions
The selection of a private development partner for the American Legion Bridge I-270 to I-70 Relief Plan bolsters the likelihood that the project will advance. The selection of a private partner adds private backing to a project already benefitting from robust support from the Maryland state government. Following the selection, the Developer Phase P3 Agreement with the consortium will be reviewed for approval by state agencies including the MDTA Board and the Maryland Board of Public Works fitchsolutions.com THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Page 12 Any comments or data included in the report are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research. Americas Infrastructure
before the project can be awarded to the selected consortium. Additionally, an environmental review process is set to be advanced on the State of Maryland’s preferred alternative for the project.
The selection of a developer for the American Legion Bridge I-270 to I-70 Relief Plan also marks a significant development for transport PPPs more broadly in the US, illustrating confidence on the part of both government officials and private developers in PPP development in the road sector. The American Legion Bridge I-270 to I-70 Relief Plan, with a full planned investment of between USD9.0bn and USD11.0bn included in all phases according to reports, stands out as one of the largest transport projects currently planned to be advanced as a PPP in the United States. As such, the decision of state officialso t advance the project as well as the participation of three different groups backed by firms with onsiderc able experience in the market reflect an important signal of confidence. While the US has seen numerous transport projects advanced as PPPs over the past several decades, this is nonetheless significant, given both the project’s large size as well as headwinds currently facing the transport infrastructure sector in the US as a result of the Covid-19 pandemic. As in many markets globally, the pandemic has seen a negative shock for demand for transport infrastructure in the US since early 2020 while also clouding future demand projections, in turn key to the planning and economic sustainability of transport infrastructure projects. These factors have seen capital investment plans on a number of transport projects in the country altered since 2020, with airport infrastructure projects in particular seeing considerable project delays, postponements and cancellations. Given these challenges, the advance of the American Legion Bridge I-270 to I-70 Relief Plan sends a significant signal egarr ding continued support for PPPs in the transport sector, in turn boding well for broader transport PPP developments in the market.
Growing Scrutiny Of US Pipeline Projects Challenges Canadian Oil Sector
Key View
• The darkening outlook for the expansion and continued operation of crude oil transportation capacity in Canada and the United States is raising obstacles to Canada’s large oil sector, reaffirming our bleak medium-term crude oil production and exports forecast for Canada. • In particular, the Biden administration’s decision to block the Keystone XL pipeline as well as Michigan Governor Gretchen Whitmer’s recent order to shut the Enbridge Line 5 pipeline reflect an increasingly complex policy environment for oil pipeline infrastructure in the US and in particular for two projects which are key to Canada’s oil sector. • We maintain our crude oil production forecast for Canada this quarter as the optimism derived from the growth in crude oil prices globally will likely be outbalanced by the systemic challenges faced by the producers in Canada over the near-term, including limited midstream capacity and a push toward green energy in the country. • Nevertheless, we do note that two large-scale midstream projects, the Trans Mountain Expansion (TMX) and Enbridge Line 3 replacement, pose an upside risk to our long-term crude oil production and export forecasts for the market.
The darkening outlook for the expansion and continued operation of crude oil transportation capacity in Canada and the United States is boosting challenges facing Canada’s oil sector, reaffirming our bleak medium-term crude oil production and export forecasts for Canada. Expanding crude oil midstream capacity in both Canada and the United States remains pivotal for Canada's future crude oil production growth. With approx. 4.0mn b/d of available cross-border capacity, Canadian producers have been able to increase crude oil exports to the US in recent years, with exports growing from an average of 1.97mn b/d in 2010 to an average of 3.81mn b/d in 2019. Western provinces, especially Alberta, also supply the key demand centers in the eastern parts of Canada, including the metropolitan areas of Toronto and Montreal with required refining eedstf ock through a network of domestic pipelines. Nevertheless, the future growth of crude oil production depends on the expansion of cross-border capacity, as the currently available export capacity has recently been used almost in full, and continued operation of the cross-national pipeline network. Any major outage or maintenance disruption of pipeline operations will likely require producers to rely on alternatives such as less efficient and more costly "crude-by-rail' or freight networks.
In this context, recent developments have increased the obstacles confronting Canada’s oil sector and particular efforts to maintain fitchsolutions.com THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Page 13 Any comments or data included in the report are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research. Americas Infrastructure
current levels of production, as they have darkened our outlook for key midstream export projects in Canada and raise risks to the continued operation of existing midstream infrastructure upon which the sector depends. First, US President Joe Biden has revoked the permit for the Keystone XL pipeline, and the developer, TC Energy, subsequently suspended the project’s construction. We highlighted the risk of the suspension of the Keystone XL over the past few quarters and we have not included this project in our forecasts. Although the developer and investors, among which is the provincial government of Alberta, could potentially launch legal proceedings and seek compensation from the US, in our view the future of this project remains highly uncertain. The likelihood of Biden's decision being revoked in particular is weakened by the stance of Canada's federal government which seems unlikely to strongly support Alberta in pursuing any aggressive action against the Biden administration.
In addition to the Keystone XL pipeline, we also highlight growing obstacles to the continued operation of the Enbridge Line 5 pipeline, a 540,000 b/d capacity pipeline which transports light crude and natural gas liquids from Alberta to Michigan and further to Sarnia, located in Ontario and remains one of the key suppliers of feedstock to refineries in eastern Canada and the US northern Midwest. In November 2020, after completion of a state review, Michigan Governor Gretchen Whitmer ordered the pipeline shut by May 2021, citing environmental concerns in particular related to the pipeline’s crossing of the Strait of Mackinac between Lake Michigan and Lake Huron. Although the operator of this asset - Enbridge - has challenged the governor's decision in a district court, arguing that pipeline safety is the responsibility of the expert federal agency and not state legislation, in our view the risk of permanent closure of this pipeline has substantially increased. Should the court lift the governor's decision, the result of future proceedings in a federal agency remains uncertain. Our view is reaffirmed byec r ent media reports which indicate that key oil producers in Alberta are considering alternatives to transport feedstocks to their refineries in Canada's eastern provinces. Among options reportedly under consideration is a crude-by-rail solution which would see crude transported via the St. Lawrence Seaway or via Portland (ME) - Montreal pipeline. Although the alternatives exist, the shut-down of the Line 5 pipeline would likely increase the cost of transportation of crude and make producers reshape their production strategies.
We maintain our crude oil production forecast for Canada this quarter as the optimism derived from the growth in crude oil prices globally will likely be outbalanced by the systemic challenges faced by the producers in Canada over the near-term, including limited midstream capacity and a push toward green energy in the country. This quarter, we maintain our bleak outlook for crude oil production forecast in Canada after a slight upward revision for 2020. We have revised our 2020 average estimate given that Alberta's output grew more robustly over H220 than initially expected on the back of the lifting of production curtailments and stronger demand in the US, which allowed for higher exports of Canadian crude in the second half of the year. We now estimate that over 2020 crude oil output fell by 5.7% y-o-y, revised from a previous estimate of a contraction of 6.6% y-o-y. For the following years, we expect oil production to continue to decline, with contractions of 3.2%, -1.8%, and -0.6% respectively in 2021, 2022 and 2023.
Strong Recovery For Alberta Oil Sector Over Q420 Alberta - Crude Oil Production (2020)
Source: Alberta Government fitchsolutions.com THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Page 14 Any comments or data included in the report are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research. Americas Infrastructure
Along with limited pipeline capacity, producers in Canada face other systemic challenges, including a push toward green energy, which most recently materialised in the planned hike in the federal carbon tax from CAD30/t in 2020 to CAD170/t in 2030. While the federal carbon tax is only implemented in provinces that request it or do not have a provincial carbon tax in line with federal standards, the increase in federal carbon tax price rates will also require provincial tax prices to increase, meaning that the policy will have considerable implications across Canada. Although we recognise upside risk to our forecast stemming from the robust recovery in crude oil prices over H220 and our expectation of a rather bullish oil price environment over the medium term, we note that even the average annual Brent price level ranging between USD56.0-60.0/bbl might seem insufficientor f a number of projects in Canadian oil sands to receive a green light given the relatively high break-even price of these type of projects. We maintain our view that Canadian producers will likely pursue low-cost projects and suspend high-risk developments over the medium term. In our view, the lingering uncertainty about policy direction toward the sector in Canada coupled with the bleak outlook for domestic fuel consumption and risks to the pipeline projects will weigh on the investor sentiment, leading output to decline over the next few years.
Canada To See Declines In Output Over The Medium Term Canada - Crude Oil Production Forecast (2019-2030)
e/f = Fitch Solutions estimate/forecast. Source: CER, EIA, JODI, Fitch Solutions
Nevertheless, we do note that two large-scale midstream projects, the Trans Mountain Expansion (TMX) and Enbridge Line 3 replacement, pose an upside risk to our long-term crude oil production and export forecasts for the market. While the completion of neither project is currently factored into our forecasts given considerable opposition and significant obstacles, the projects if completed would provide a key increase in midstream capacity and would reduce infrastructure bottlenecks facing Canada’s oil and gas sector. In the case of the TMX pipeline, the project, if realised, would increase oil transportation capacity between Alberta and crude oil export terminals in British Columbia from 300,000b/d currently to 890,000b/ d. This project has faced mounting challenges from First Nations as well as the provincial government of British Columbia in recent years however as of February 2021 construction has resumed after the Supreme Court allowed the project's construction to proceed in July 2020. We note that the financial backing of this project by the federal government, which purchased the existing pipeline and the expansion project from Kinder Morgan in 2018, further lifts some uncertainty. Should the project’s construction be completed and operations start in 2022 as currently planned, we would likely see an improvement in investor sentiment and a quicker recovery in crude oil production among key Canadian producers as compared to our current forecast.
In the case of the Enbridge Line 3 pipeline, the project, if completed, would add 370,000b/d of new cross-border capacity. The Line 3 project, connecting Edmonton in Alberta and Superior, WI, has seen the Canadian side completed and awaits the completion of the US section, between Neche, ND, and Superior, WI. As in the case of the TMX, the Enbridge Line 3 project has faced a number of legal challenges. Most recently, on February 8 2021, a federal appellate court denied a motion to stop the construction of this pipeline in Minnesota, ruling in favour of the pipeline developer. However, we note that the future of this project remains uncertain, given the potential for challenges at the state level. We also note that general uncertainty facing fossil fuel infrastructure projects has been elevated given the Biden administration's more critical stance toward new pipeline projects in the US, highlighted by the fitchsolutions.com THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Page 15 Any comments or data included in the report are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research. Americas Infrastructure
administration’s decision to stop the Keystone XL pipeline project.
fitchsolutions.com THIS COMMENTARY IS PUBLISHED BY FITCH SOLUTIONS COUNTRY RISK & INDUSTRY RESEARCH and is NOT a comment on Fitch Ratings' Credit Ratings. Page 16 Any comments or data included in the report are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.