Navigating construction challenges in Latin America

Main challenges faced by international players in the LatAm region

Despite the immense demand for infrastructure, construction projects in Latin America have historically faced and continue to face significant challenges, resulting in a difficult environment for foreign investment which often gives rise to disputes. Some of the most frequently encountered issues at the root of disputes are summarised below. 

Case study: Brazil's efforts to address key challenges to construction and infrastructure projects

Certain Latin American countries are attempting to address some of the challenges outlined above through the implementation of new regulations and economic initiatives. Among them, recent efforts by the Brazilian government and the private sector are of particular note.  

Recent project financing trends in Brazil

In Brazil, project financing is undergoing a significant shift, moving away from traditional full-recourse and limited-recourse models towards non-recourse financing. In the latter model, lenders can only seek repayment from the project’s own cash flow and assets, thereby reducing financial risk for sponsors. The recent enaction of Law 14,801/2024 further exemplifies this shift by introducing a new category of infrastructure debentures designed to provide tax benefits to issuers.

Whilst the diversification of funding models enhances financial flexibility (and, consequently, project viability), it also introduces diverse investor expectations and requirements. Among these, ESG requirements have become paramount, adding another layer of complexity to the project financing model. If these are not properly aligned with project objectives and contractual frameworks, they can lead to disputes over risk allocation, performance benchmarks, and financial returns.

The increased role of DABs in Brazilian construction and infrastructure projects

As noted above, delays, cost overruns, and regulatory uncertainties are common challenges that often stall project timelines and increase costs on Latin American projects. To address these issues, Dispute Adjudication Boards (DABs), have emerged in Brazil as a key mechanism for resolving conflicts quickly and efficiently.

For instance, DABs have been adopted in large-scale infrastructure projects such as São Paulo's Yellow Line 4 subway, rail projects in Belém (Pará), and the reconstruction of Mariana (Minas Gerais) following the Fundão dam disaster. These examples highlight the effectiveness of DABs in mitigating disputes and ensuring smoother project execution.

Brazil's regulatory framework has also been evolving to support the use of DABs, indicating a growing recognition of the importance of this dispute resolution mechanism for the country's construction and infrastructure sectors. Recent developments include the following:

• Law No. 14.133/2021, which explicitly authorises the use of DABs in public contracts involving patrimonial rights;
• Resolution No. 6040/2024, issued by the Brazilian National Land and Transport Agency (ANTT), which provides clear guidelines for implementing DABs in federal highway and railway projects; and
• Bill No. 2.421/2021, which is currently under review by the Brazilian Chamber of Deputies, and aims to regulate DABs in contracts involving federal, state, and municipal governments.

The increasing adoption of DABs is expected to significantly enhance the development of Brazil’s construction and infrastructure sectors. By providing a structured approach to interim dispute resolution, DABs help to mitigate the risks associated with delays and cost overruns. Supported by recent legislative developments, DABs are therefore expected to perform a pivotal role in ensuring smoother project execution and fostering a more stable and predictable construction environment in Brazil, thereby attracting more foreign investment.

Conclusion

Similar to Brazil, many other Latin American countries are implementing measures to address the various issues inherent to construction and infrastructure projects in the region. These, along with the introduction of regulatory changes designed to incentivise successful project delivery, will no doubt be welcomed by foreign companies participating or looking to participate in Latin American projects.

Nevertheless, foreign participators should continue to be prepared to navigate the region's endemic challenges before the inception of a project. To this end, it will remain essential to:

• Understand the local environment, including its cultural, economic and legal characteristics. Establishing strong relationships with local partners can facilitate navigating unfamiliar social environments and complex legal frameworks;
• Thoroughly evaluate and provide appropriately for political and economic risks, including potential changes in government policies that may affect the financial viability of a project;
• Adopt robust compliance programmes, including anti-bribery and corruption measures, and oversee compliance, including throughout the supply chain, by means of appropriate control systems and staff training;
• Implement local strategies that advance sustainability and corporate social responsibility to enhance the company's reputation and avoid the risk of conflicts with local communities and authorities; and
• Finally, carefully consider and select an appropriate dispute resolution mechanism to be applied if disagreements or disputes arise. Whether opting for arbitration, litigation, or a combination of alternative/interim and formal dispute resolution, the relevant dispute resolution mechanism should be tailored to the particular needs of the parties, project and any mandatory law requirements.