We have witnessed significant challenges and transformation in Latin America in the past year. Businesses across the region have grappled with political tensions, macroeconomic uncertainty, high interest rates and shifting regulatory landscapes—as well as the boom in AI.
The elections in Latin America in 2024 are now behind us, though, as expected, the results have led to as many questions about the future as they have to answers. We are particularly focused on Venezuela and are hopeful that the democratic aspirations of the people of Venezuela will be respected. The US presidential election has also now concluded, and its outcome could have significant consequences for many jurisdictions.
In this year's edition of Latin America Focus, we will explore some of these complex dynamics and consider how companies can adapt to changes and capitalize on trends to forge a path through this ever-changing environment.
We begin with a look at our extensive pro bono efforts in the region, which focus on promoting justice, equality and the rule of law. From upholding the fundamental human rights of children with incarcerated mothers to advocating for the rights of asylum seekers, our projects underscore the importance of legal awareness and access to justice. In 2023 alone, we logged more than 1,900 pro bono hours in Latin America, reflecting our dedication to making a meaningful impact.
As artificial intelligence continues to accelerate globally, Latin America is no exception. Our second piece examines how the region is navigating the balance between fostering innovation and implementing AI regulations to mitigate risk. Brazil, Mexico, Chile and Argentina are each exploring regulatory frameworks—with varying amounts of progress—aligned with their policy priorities. These efforts are crucial, as AI is projected to contribute significantly to the region's GDP, driving economic and social development.
Next, we provide an overview of investment and disputes trends. Foreign investment remains a critical driver of growth in Latin America, though political volatility often leads to investor-state disputes, particularly when investment-hostile policies replace more favorable ones. However, the region continues to attract robust investment in sectors such as mining, renewable energy and data centers. Navigating these complexities requires a well-integrated investment protection strategy to safeguard interests and foster long-term growth.
We then turn to the pressing issue of water security, with many regions facing scarcity and aging infrastructure. Brazil and Chile are leading the way in unlocking private investment to tackle these challenges through public-private partnerships (PPPs). These initiatives are essential to improving access to clean water and sanitation, which remain critical for sustainable development and public health. We are optimistic that meaningful reforms in other countries, including Mexico, will help PPPs or other structures gain similar traction there to ensure long-term water security.
Lastly, we consider the booming data center industry in Latin America, whose rapid growth brings challenges, particularly in securing necessary resources like power and water. Countries such as Mexico, Chile and Brazil are at the forefront here, addressing these issues through innovative financing and strategic planning. The expansion of data centers not only supports the digital economy but also presents significant investment opportunities in the region.
We look forward to discussing these and other issues with you.
Lending a local hand: White & Case pro bono in Latin America
Raquel Szomstein, a 2024 White & Case summer associate, contributed to this article.
As the demand for artificial intelligence (AI) accelerates, governments and private investors in Latin America have made big strides in recent years to ramp up investments in digital infrastructure to keep up with the so-called "Fourth Industrial Revolution." One type of infrastructure asset has, in particular, led this build-out of digital infrastructure: data centers. As dedicated facilities designed to house thousands of servers and related computing equipment in an optimal environment, data centers have been around in industrialized economies for decades.
Today, however, data centers are one of the fastest-growing asset classes in commercial real estate, and especially in emerging markets. A large portion of this growth is now concentrated in so-called "secondary markets" such as Latin America, where the larger data center companies are expected to invest more than US$2 billion in 2024 alone. The increased use in cloud computing in the digital economy, combined with data localization rules and "nearshoring" to the US economy, has spawned near exponential growth in their construction in Mexico and other "trusted" Latin American countries.
Data centers are extremely resource-intensive, requiring large amounts of power, water and land. More off-site space close to urban centers—as well as reliable water and power supply—is needed than ever before to support the large amount of computing and processing capabilities for AI and 5G technology. This unprecedented, rapid growth has necessitated careful infrastructure and finance planning from governments and private investors. This article examines the nature of the demand for data centers in Latin America, the challenges they pose for project developers and sponsors, and how this may impact investment and financing approaches.
The LatAm data center market is expected to double by 2029, with a value of up to US$10 billion
Exponential growth in Latin America
The data center market in Latin America is expected to double over the next five or so years, from roughly US$5 to US$6 billion in 2023 to anywhere from US$8 to US$10 billion by 2029. The market is dominated by the usual countries—Brazil, Mexico and Chile—with Colombia, Peru, Costa Rica and Panama as emerging centers for investment. The most active data center companies in the region include Scala, Equinix, Cirion, Ascenty, Kio and Odata. Since 2022, there have been approximately 30 new data centers built or under construction (11 in Brazil and ten in Chile) and 90 active projects.
The vast majority of these projects are located in major urban centers such as Rio de Janeiro, Santiago and Bogotá—cities that have an established, stable power and water infrastructure. Interestingly, though somewhat as an outlier, Mexico has seen data center projects emerge largely in Querétaro rather than Mexico City due to the lower cost of land as well as concerted local and state government efforts to create a stable power supply. As land becomes more expensive and local entities step up to fill the increasing demand, we expect to see more remote data center "cities" emerging across Latin America outside of the common urban agglomerations, which will mean greater demand for greenfield water and power infrastructure requiring investment and financing.
estimated liters of water used by data centers daily, with the average data center using 300,000 gallons a day to keep cool by 2030
The rapid development of data centers has placed increasing demands on energy consumption in developing countries' infrastructure. In a context of climate change where temperatures rise to unseen levels, the cooling systems of the data centers and over-consumption of water and electricity has become a technical, ecological and financial issue. In Brazil, for example, already 0.5 percent of the national energy demand is due to data centers. Data centers consume as much as 100 to 200 times more electricity than standard offices in the US, and the world's data centers in aggregate are consuming more electricity than the entire countries of Colombia and Argentina.
A large, reliable and consistent power supply is essential for the smooth operation of data centers. In Brazil, for example, 750 MW of power capacity is used by data centers, with "hotspots" in Barueri and Campinas, which have in effect become mini data center cities. All other areas are, by comparison, "emerging markets," with less than 100 MW of power capacity currently utilized by data centers. There is considerable potential for growth in these emerging markets if there is sufficient investment in the necessary infrastructure.
A major challenge remains to securing enough reliable power. Hyperscale customers, particularly following the recent developments in AI, require ever-larger data centers to house their computing. Any loss of power to a data center during operations will expose a data center operator to significant claims due to breaches in power continuity service levels. Given many areas in rural Latin America have limited power access, the current trend is for data centers to be built near large cities that have a relatively stable power source. As data centers expand to other areas, they will have to not only secure energy, but also connect to the grid and work on transmission needs.
Data center operators are also encouraged to not only comply with increasing government calls for renewable energy—sometimes procured from local utilities or government—but also to invest in creating their own energy on site, i.e., to generate or self-source their own power. This has operational and project cost considerations. Data centers' increasing power requirements will necessitate coordinating with regulators of grid and power rules. Chile has encouraged massive investment in renewables, for example, by committing to shift 100 percent of the power supply currently made to Microsoft data centers to renewable energy by 2025. Brazil's push for renewables signals a similar intent. Meeting the energy demand has not been easy, and the investment needs remain a challenge, especially given the need to show that the power source is "green."
Similarly, data centers' water-cooling needs pose infrastructure challenges in areas that suffer water shortages. By 2030, data center water usage will be 1.7 billion liters daily—more than double the known consumption in 2017. The average data center uses 300,000 gallons of water a day to keep cool.
This is especially troublesome in certain Latin American areas that are water-scarce and have rapidly emerging data center hubs, such as Chile, Uruguay and Mexico. Chile has been in a drought since 2010, and we have seen lawsuits commenced that have forced Google to rethink its cooling methods and adopt air rather than water-based cooling systems. Data centers have also had to reconfigure their water consumption plans. For example, planned data centers in Canelones, Uruguay would use 7.6 million liters of water daily, the equivalent of water consumption for 55,000 people in Montevideo. Following significant protests, the original project was scrapped in order to be re-worked for a more efficient plan. As mentioned above, while Querétaro has to date attracted larger investments in data centers than Mexico City itself, and has become in effect the hub for data centers in the country, it is also increasingly at high risk of facing droughts.
Given the increasing demand for data centers, the question for investors and financiers has been how to efficiently finance the development of such data centers and their infrastructure needs. Data center financings can take a number of forms, from project financing to real estate financing, corporate or leveraged financing. While a range of financing models can be used, the method employed will largely depend on what sector the lenders come from. Until recently, most financings of data centers have been corporate or lease-based financing structures and are mostly owned or developed for large technology investors such as Google, Oracle or HP.
Today, while companies like Microsoft and AWS are still investing actively in the region, investments now come from a greater variety of stakeholders including private equity, funds and development finance institutions. New-build data centers in Latin America are increasingly owned by regional data center operators who operate data centers for hyperscale customers. The regional players have continued to grow. Ascenty is the largest colocation company in Latin America in terms of number of sites, with 34 projects including data centers either in operation or under development. Odata received investments from the International Finance Corporation, the private sector arm of the World Bank, to expand operations in Brazil, Colombia and Mexico.
In Latin America, data center and hyperscaler companies are quickly developing and improving upon their business models given the rise in demand. The most typical form in which a data center financing may occur is by way of a loan to a data center operator that requires funds to construct a dedicated space for its customers whether on a shared basis (co-location model) or build to suit for a single customer, such as a hyperscaler. A large part of these investments to date involve equity rather than debt financing. For example, Ascenty relies on equity investments alongside a recently announced credit facility—arranged by Citibank, ING, Itaú, Natixis and Scotia Bank—of US$925 million to accelerate operations, and Equinix has expanded its presence in Latin America through acquisition of existing data centers, mostly financed by a combination of equity and leveraged debt. However, given the increased scale of the data center developments and the demands of AI technology, there is an increased need for further financing as opposed to sole equity investments.
The high upfront costs of constructing large capital assets with long-term revenue streams mean that these projects could lend themselves to limited or non-recourse financing structures. However, the fact is that very few of the data center financings have been done on a non-recourse or limited-recourse basis in the region. For example, Scala is now using green debentures to raise money instead of sustainability-linked bonds. The growth in the sector is so strong that companies are beginning to diversify their investment and financing sources, especially as projects become problematic to develop, due to constraining power and water supplies.
Conclusion: Toward integrated infrastructure data centers?
While there has been a steep upward trajectory of acquisitions and developments in the data center space in Latin America, this is only set to further grow based on the great potential for expanding capacity. However, as the size of these data centers increases, so do the constraints in terms of power and water resource inputs. The time is ripe for the industry to look beyond current equity-focused investments and explore whether there are financing options beyond real estate transactions. Given the vast greenfield infrastructure needs of data centers in Latin America, project financing solutions—whether through loans or bonds—may be viable methods to support the capex needs of the digital infrastructure growth of Latin America.
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This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
View full image: Comparison of IT capacity between Brazil, Mexico and Chile (PDF)
View full image: Domestic electricity consumption (TWh) of selected countries vs. data centers in 2020 (PDF)
View full image: Data center investment planned in Mexican states under drought (PDF)
