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The themes of energy and infrastructure shaped the first panel of the second annual Chicago Booth Emerging Markets Conference, held in Harper Center on January 13, 2012.
Energy and infrastructure, and the interplay between public and private investment, are key interests for emerging market economies. In his introduction of the day’s events, dean Sunil Kumar pointed out that 15 or 20 years ago, emerging markets “fell into the category of ‘curious phenomenon.’”
Today, however, there is immense development in emerging market economies, such as India and countries in Latin America. Lucas Aristizabal, director of oil and gas at Fitch Ratings and current Evening MBA Program student, joined Munish Mehta, ’02, CEO and president of KarpeDium, on the Booth panel. Each gave a short presentation and responded to student questions about the new demands being placed on emerging economies—and the challenges of meeting them.
Aristizabal, who analyzes Latin American power companies for Fitch Ratings, spoke about the increased need for infrastructure in Latin America. As the infrastructure is developed to meet the growth in demand, Aristizabal considers how to best evaluate that progress in infrastructure changes. The primary consideration, he said, is “consumption versus GDP. There is a strong correlation between GDP and demand for electricity.”
Even in small countries like Panama, demand for electricity has grown by as much as 7 percent in the last year. Especially in Latin America, energy resources depend heavily on government regulations, and currently, the region is largely focused on traditional utilities such as electricity, oil, and gas. Therefore, any trends toward greener energy will move forward very slowly.
“As a region evolves and we become more conscious of the environment,” Aristizabal said, “we will start to see renewables, like wind or small hydroplants, represent a larger piece of the pie chart.”
Mehta, who had the idea to create KarpeDium, a project management and advisory firm, while he was still a Booth student, spoke about the energy and infrastructure markets in India. As the world’s fourth largest market (behind China, the US, and Japan) India is experiencing an enormous population growth that is estimated to swell from 1.12 to 1.5 billion people by 2030, with a GDP five times what it is today.
With this growth comes both rapid urbanization and an unprecedented demand for energy and infrastructure. Mehta said, “Infrastructure drives prosperity. The primary effect of increased infrastructure is the rearrangement of the spatial distribution of jobs, industry, and residences within a local area.”
Both Mehta and Aristizabal saw government regulations and bureaucracy as a serious obstacle to foreign direct investment (FDI) in infrastructure. In most emerging markets, demand outstrips financing, and many countries and regions are unable to assume the full financial burden—India alone, Mehta estimated, will need to double its infrastructure spending to $1 trillion in the next five years in order to achieve annual growth rates of 10 percent.
Mehta stressed that there were no easy solutions, but outlined several possibilities that India could tap into to acquire the capital necessary to keep pace with infrastructure demands. The country could use their huge pile of foreign exchange reserves, use FDI as source of cash, combined with foreign technical know-how to gain global participation, or they could borrow from open market.
Mehta and Aristizabal’s panel was part of a daylong conference organized by the professional student organization Emerging Markets Group (EMG), and sponsored by International Finance Corporation, a World Bank group.
—Laura M. Browning