Jamestown Latin America | Trends + Views | Infrastructure Challenges in Latin America - December 2013


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Latin American economies require substantial improvement to physical infrastructure to raise potential GDP growth.

As macroeconomic stability has been achieved in the largest economies, the public sector now aims to prioritize microeconomic issues.

The region’s major economies must address inadequacies in the years to come, focusing on the quality of roads, railroads, bridges, airports, and ports.

Governments have started to prioritize the urgency of closing the infrastructure gap, by allocating more public resources for infrastructure and pursuing public-private partnerships.

Recently, there have been important strides made, with private capital increasingly attracted to investment opportunities in infrastructure projects in the region.

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Jamestown Latin America | Trends + Views | Infrastructure Challenges in Latin America - December 2013

  1. 1. TRENDS + VIEWS The Infrastructure Challenges in Latin America - December 2013 executive summary Latin American economies require substantial improvement to physical infrastructure to raise potential GDP growth. As macroeconomic stability has been achieved in the largest economies, the public sector now aims to prioritize microeconomic issues. The region’s major economies must address inadequacies in the years to come, focusing on the quality of roads, railroads, bridges, airports, and ports. Governments have started to prioritize the urgency of closing the infrastructure gap, by allocating more public resources for infrastructure and pursuing public-private partnerships. Recently, there have been important strides made, with private capital increasingly attracted to investment opportunities in infrastructure projects in the region. JAMESTOWN LATIN AMERICA Real Estate Private Equity www.jamestown-latam.com Contact: Bret Rosen – Managing Director, Research +1 212-652-2141 brosen@jamestown-latam.com Rio de Janeiro • Bogotá • Atlanta • New York
  2. 2. TRENDS + VIEWS The Infrastructure Challenges in Latin America - December 2013 When one considers the major impediments to This paper addresses the issue of infrastructure in Latin faster economic growth in Latin America, inadequate America, with a focus on Brazil, Colombia, and Peru. We infrastructure is often cited as one of the chief causes divide the note into the following sections: 1) arguing mentioned. Here are just a few examples and images that infrastructure is vital to economic development; of infrastructure constraints that occur throughout Latin 2) discussing what Latin America needs to do to America. Transporting a good from the Colombian port improve its physical capital; 3) highlighting what is city of Barranquilla to the capital of Bogotá, a distance being accomplished to improve the infrastructure in of approximately 1,000 kilometers, can cost more the various target countries; 4) noting the challenges than sending it the 15,000 kilometers from China to encountered in addressing the infrastructure deficit. Barranquilla. Trucks containing agricultural exports Finally, we describe the potential impact on the real often line up for miles, unable to enter Santos port in estate market from the infrastructure deficit and São Paulo state of Brazil, as the port is at overcapacity. initiatives to improve it. 1 Isolated communities in Peru are often economically and socially disconnected from the rest of the country because paved roads do not reach these villages. To begin, we must define infrastructure for the purposes of our discussion. Definitions vary for describing a country’s infrastructure, but typically include roads/ However, there have been important advances in the highways, railroads, bridges, ports, airports, and public physical infrastructure of Jamestown Latin America’s transport such as subway systems. Additionally, one target countries (Brazil, Colombia, Peru, Mexico, and can include electricity/power generation and quality of Chile). Airports, such as Eldorado Airport in Bogotá telecommunications. and Jorge Chavez Airport in Lima, were both recently renovated; indeed Lima’s airport has won numerous awards for the quality of its service.2 The Brazilian government recently privatized a majority stake of several large airports, which should improve service.3 The interoceanic highway now connects São Paulo state with the western coast of Peru. Governments in Brazil, Colombia, and Peru have committed billions of dollars to infrastructure projects and in many cases are seeking to follow the emerging public-private partnership (PPP) model that has achieved some success, both in the region and internationally, in the past. Furthermore, private capital from abroad has allocated substantial resources recently to solving the infrastructure gap, with private equity firms having dedicated record amounts to infrastructure in the region this year.  There is high between clearly a correlation economic development, competitiveness, and GDP per capita and the quality of a country’s infrastructure; this correlation Latin American governments are recognizing the necessity of addressing the infrastructure deficit in the region. not is a perfect one however, as the United States is clearly suffering from infrastructure deficiencies that have been increasingly exposed in recent years. The World Economic Forum’s Competitiveness report defines 12 pillars of competitiveness for an economy, with infrastructure listed as one of the most prominent. 1 According to StratFor, a consultancy, it costs US$30 on average to ship a ton of merchandise from the interior of the country to the coast, but half this amount from a Colombian port to Asia. The total cost of exporting a shipping container from Colombia costs on average 20% more than from Argentina for example. 2 Skytrax, a UK based commercial aviation consultancy named Lima’s airport the top rated airport in South America in 2012, for the fourth consecutive year. Edward Plaisted, Chairman of Skytrax, stated, “A perennial favourite with passengers, other airports in the region must be wondering what they have to do to unseat Lima from this top position. http://www.worldairportawards.com/Awards_2012/ ” bestairport_samerica.htm 3 In November 2013, two additional stakes in major airports were sold: Rio’s Galeao airport, and Belo Horizonte’s Confins. R$20.8 billion were raised. TRENDS + VIEWS December 2013 Page 2
  3. 3. TRENDS + VIEWS The Infrastructure Challenges in Latin America - December 2013 According to the 2012-13 report, “Extensive and efficient woeful in most measures of the quality of its physical infrastructure is critical for ensuring the effective infrastructure, which is a key component of the “custo functioning of the economy and is an important factor Brazil, or cost of doing business in the country. As the ” in determining the location of economic activity and the country’s economy has grown impressively over the last kinds of activities that can develop within a country. 4 ” two decades, bottlenecks have formed on a large scale, The report goes on to state that quality infrastructure: thanks in part to the issues in the table below: 1) reduces the effect of distance between regions; 2) integrates the national market; 3) connects an economy Table 1: Brazil country ranking at a low cost to markets in other countries and regions; 4) is a prerequisite for access of less developed Quality of overall infrastructure 114 communities to core economic activities and services. Quality of roads 120 Efficient modes of transport, whether via rail, highway, Quality of railroad infrastructure 103 or water, enable businesses to get their goods and Quality of port infrastructure 131 Quality of air transport infrastructure 123 services to market in a secure and timely manner. Available airline seats (km/week) 9 Judging the quality of a country’s infrastructure can be Quality of electricity supply 76 subjective; the aforementioned World Competitiveness Mobile phone subscriptions per capita 45 Fixed telephone lines per capita 52 Overall ranking 71 Report Latin American countries rank low in global surveys that measure the quality of infrastructure. ranks 148 countries on the basis of a number of inputs Source: World Competitiveness Report, 2012-2013. presumed to influence the competitiveness Similarly, Colombia rates well in terms of availability of an of air seats, but the ratings highlight the country’s poor economy. Infrastructure is roads, railroads, and ports. one of the pillars as mentioned above. Table 2: colombia country ranking Unfortunately Latin America does not stack up well compared to the other regions across the globe in terms Quality of overall infrastructure 117 of infrastructure. Brazil is rated 71st for its infrastructure, Quality of roads 130 Colombia 92nd, and Peru 91st. While this report should Quality of railroad infrastructure 113 not be considered the only means for judging a country’s Quality of port infrastructure 110 Quality of air transport infrastructure 96 Available airline seats (km/week) 39 Quality of electricity supply 63 infrastructure, it does add credence to the view that the quality of Latin America’s infrastructure falls well short of developed country standards, even possibly Mobile phone subscriptions per capita Emerging Asia and Europe. 87 Fixed telephone lines per capita 84 Turning to the country rankings, Brazil rates well on air Overall ranking 92 travel capacity and telecommunications, but is rather Source: World Competitiveness Report, 2012-2013. 4 http://www.weforum.org/issues/global-competitiveness TRENDS + VIEWS December 2013 Page 3
  4. 4. TRENDS + VIEWS The Infrastructure Challenges in Latin America - December 2013 Meanwhile the rankings in Peru reflect a similar situation: a reflection of decades of underinvestment in the physical capital base of the countries. In prior decades, Table 3: peru country ranking low levels of public investment were a function of economic underdevelopment, and incapable and 101 inefficient public administrators. When these countries Quality of roads 98 lacked macroeconomic stability, it was impossible Quality of railroad infrastructure 102 to attract meaningful private capital to infrastructure Quality of port infrastructure 93 Quality of air transport infrastructure development projects; furthermore, when sovereign 85 Available airline seats (km/week) 40 Quality of electricity supply 73 Mobile phone subscriptions per capita 93 Fixed telephone lines per capita 87 backdrop has changed, and governments can be more Overall ranking 91 active in infrastructure development. Cost of capital for Quality of overall infrastructure Source: World Competitiveness Report, 2012-2013. balance sheets were overly leveraged, the public sector had limited capability to dedicate resources to the building of roads and ports. More recently, the macro the public and private sector in Latin America has fallen markedly, allowing for deeper and more varied methods The World Bank also publishes data on a number of of financing infrastructure projects. infrastructure-related categories, which allow a further As Latin American countries have become wealthier, quantitative assessment of how Latin America stacks up with established middle classes, world class exporters versus the rest of the world and its Emerging Market of commodities to Asia, and larger populations, the peers. Here is a sampling of statistics: deficit has become particularly pronounced – and the • The percent of total roads that are paved in Brazil is necessity to address the deficiencies has become more 14%, as of 2010. This compares to 23% in Chile, 36% for Mexico, and 100% in the UK and USA. Some other Emerging Markets: Turkey (89%), Poland (70%), and Malaysia (80%) display much higher percentages than Latin American countries.5 • For rail lines, Brazil has 29,000 km of tracks, Colombia under 2,000, and Peru slightly above 2,000. In comparison, China (a similar landmass to Brazil) has 66,000 km of tracks, India (with 20% less GDP than Brazil) 64,000 km, while Poland (similar geographic size as Colombia and Peru and 20% larger GDP than Colombia) possesses 20,000 km. In fact Mozambique has more rail track, at 3,100 km than Colombia or Peru. Clearly, Latin America has a major infrastructure deficit, urgent. In the cases of Colombia and Peru, there is ample space in future government budgets to dedicate resources to public investment; Brazil faces a more challenging backdrop more fiscal to direct resources to this need. In all cases, financial Macroeconomic stability equates to lower cost of capital and flexibility on the fiscal side to fund infrastructure projects. resources are still limited, which speaks to the need to carry forth with PPPs. The opening paragraph of this note provides some examples of the infrastructure deficit, but the issue 5 http://data.worldbank.org/indicator/IS.ROD.PAVE.ZS TRENDS + VIEWS December 2013 Page 4
  5. 5. TRENDS + VIEWS The Infrastructure Challenges in Latin America - December 2013 extends beyond some of the interesting anecdotes and Atlantic. For example, it takes 3-4 hours for an mentioned there. A casual visitor to any of the region’s item that arrives at Buenaventura port to reach Cali, capitals is of course overwhelmed by traffic congestion, even though the distance is just 78 miles. Driving from which while obviously annoying, also entails a large Medellin to Bogotá, the country’s two largest, cities economic cost (in terms of lost man hours for the separated by 274 miles, takes approximately six hours. In workforce, additional costs of transporting goods, etc.). other words, road quality is highly inadequate; decades Traffic jams in cities such as São Paulo, Lima, and Bogotá of internal conflict with the FARC and other guerrilla are legendary. In fact many senior Brazilian business movements have made it unfeasible to develop much executives hop from meeting to meeting in helicopters of the country’s national transport infrastructure but as rather than face the the security situation has stabilized, capital is flowing unpredictable traffic into this area. When economists explain the recent Geographical obstacles toward improving infrastructure are substantial. patterns São subpar performance of Colombia’s manufacturing may sector, among the reasons cited – along with the be the only city in appreciation of the peso – is that transport infrastructure the world where the is inadequate and this inadequacy is highly detrimental total amount of traffic to the competitiveness of industry. On the positive side, congestion, known however, a city such as Barranquilla has seen substantial as lentidao, is almost continuously broadcast on the development in recent years as the city’s last two mayors news and in elevator videos, and can sometimes have emphasized infrastructure investment, focused on total into the hundreds of kilometers. While traffic public roads, facilitating transport, and encouraging congestion is a symptom of a growing middle class, trade promotion. Paulo, of which 6 with access to credit, stable jobs and hence the ability to purchase autos, it is also a result of insufficient public investment in infrastructure and a major detriment to economic productivity in urban areas. Clearly the pace of construction of bridges, subway lines, and highways in a city such as São Paulo has not been sufficient to keep pace with population growth, economic vibrance in recent years, and the number of autos on the road. The challenges that Peru faces in terms of improving its infrastructure are massive, due in part to the vast socioeconomic divide that exists between the coast and the more remote jungles and sierra regions. Given that nearly half the country’s GDP is concentrated in the metropolitan area of Lima, the quality of the country’s infrastructure is weighted toward the capital and its immediate surroundings. Similar to Colombia, Peru’s Beyond the topic of economic costs related to the geography presents a major obstacle to connecting absence of urban infrastructure, one can also observe disparate regions of the country while it also faced the consequences of poor connectivity within countries. security issues in prior decades (namely from the Colombia faces massive geographical obstacles, as Sendero Luminoso, i.e., Shining Path movement), which within its borders there are Andean mountain ranges, made development of large-scale projects in certain dense jungle, and ultimately coastline with the Pacific parts of the country unfeasible. 6 On November 14, 2013, a record of 309 km in total traffic congestion occurred in São Paulo, as Paulistas headed out of town for a three day weekend. http://www.tribunahoje.com/noticia/83853/brasil/2013/11/14/ so-paulo-tem-lentido-recorde-com-309-km-de-filas.html TRENDS + VIEWS December 2013 Page 5
  6. 6. TRENDS + VIEWS The Infrastructure Challenges in Latin America - December 2013 The Challenges – country by country Brazil Ask any Brazilian economist what is most needed to raise the country’s potential GDP growth, and improved infrastructure ranks high on the list of responses. In The Financial Times recently published a survey describing some of the challenges that Brazil faces regarding infrastructure.7 Below are some telling figures and statistics from this report and other sources: • The asset stock of Brazil’s infrastructure is equal to 16% of GDP versus the global average of 70%, short, Brazil has invested well short of what is necessary according to a McKinsey study. to update and modernize its physical infrastructure, and this has created important bottlenecks that affect all • On an annual basis, Brazil invests just 2% of its GDP in infrastructure which, according to Credit Suisse major sectors of the economy. economists, is half the amount needed to sustain 4% Domestic demand has been strong for years, and annual GDP growth. In comparison, China invests combined with incentives provided by the government, 13% of GDP in infrastructure, Colombia 6%, and India has led to a massive surge in car ownership. Yet as any 5%. visitor to São Paulo or Rio can attest, traffic congestion has worsened dramatically because the pace of urban • São Paulo has a infrastructure development, i.e., roads and subways, population 40% has not kept pace with the population growth and greater than increased number of cars on the road. Meanwhile as London Brazil has become an export powerhouse in recent metro has 1/6 the years, the port capacity has also not kept pace with capacity of that in this growth. Given the large geography of the country, the UK capital. in the best of times it would be a challenge to link the • On yet average its it For years, Brazil’s investment in infrastructure has been inadequate, a prime cause of GDP growth below the regional average in recent years. various regions of the country by rail and highway; but, takes a container as demand for agricultural products from the hinterland ship 21 days to has soared, exporters have encountered greater clear Santos port in São Paulo state; in comparison, challenges moving their goods to market. Perhaps the according to global shipping company Maersk, in most instructive example of infrastructure deficiencies Rotterdam it takes just two days. relates to mining giant Vale, which actually built its own railroad in the northeast region of Brazil to move • Over the last decade, annual light vehicle sales rose by 2.5x, yet the number of paved roads increased by its iron ore to port rather than relying on government just half. to do so. In a nutshell, for Brazil to burst through the low GDP growth equilibrium that it now experiences, It is estimated that Brazil has double the dependence infrastructure improvement is the number one priority; on road transport that the United States does, due to a massive program to improve roads, ports and so on its inadequate railroad infrastructure. In fact President would lift potential GDP remove bottlenecks, lower the , Dilma Rousseff, when recently officiating at a railway custo Brazil and also reduce inflation. project in Mato Grosso, stated that Brazil was “two centuries” behind with regard to building rail networks.8 7 http://www.ft.com/intl/reports/brazil-infrastructure-2013. September 9, 2013. 8 http://www.ft.com/intl/cms/s/0/f2296aa8-2373-11e3-98a1-00144feab7de.html#axzz2l6cRF8XI. September 9, 2013. TRENDS + VIEWS December 2013 Page 6
  7. 7. TRENDS + VIEWS The Infrastructure Challenges in Latin America - December 2013 As the economy has expanded and developed over Group, which operates, according to some surveys, the past decade, the government has recognized the the highest quality airport in the world in Singapore, inadequacy of the current infrastructure. In 2007, the Lula paid R$19 billion, (for a 51% stake) or four times the administration launched PAC (Programa de Aceleracao minimum bid, for Rio’s Galeao Airport.9 The Aerobrasil de Crescimento), a program with a four-year budget group formed by Brazilian construction company CCR through 2010 equivalent to R$650 bn. The Rousseff and the operators of the Zurich and Munich airports paid administration followed up with PAC 2, a R$965 bn plan, almost R$2 billion for Belo Horizonte’s Confins airport, of which over 1/3 has already been invested. However, or double the minimum bid for the 30 year concession.10 according to the Financial Times survey, just R$33 bn One issue that the government has faced with regards of PAC 2 has gone into infrastructure, with a greater focus on energy and housing. Since the initiation of the first PAC program, only R$101 bn has been dedicated to infrastructure, a reflection of the government’s inability to properly execute investment plans related to infrastructure. to the auction of highway concessions relates to allowing adequate rates of return; to attract private investment, the government faces a tug of war between keeping tariffs low on toll roads and allowing the private sector an ample internal rate of return. One auction in fact attracted no bidders since the government did not More recently, the government has moved forward with allow an IRR deemed sufficient by potentially interested a program intended to allow greater involvement of the parties. private sector in infrastructure development. Its R$133 For Brazil to make inroads will require involvement of bn intended concessions program is meant to construct 7,500 km of toll roads and 12,000 km of railroads. Other tenders will also include light rail and bus lines. There have been examples of success so far via the auctions of participation various The current administration has had some recent successes, especially the privatization of several airports. in airports. In 2012, majority stakes in airports in São Paulo, Campinas, and Brasilia were sold to private operators who assumed shares from Infraero. These auctions raised R$24.5 billion in 2012, attracting prominent international bidders. More recently, on November 22nd, control of Rio’s international airport and Belo Horizonte’s were successfully auctioned. Singapore’s Changi Airport the private sector and improved implementation from the notoriously bureaucratic public sector. The current PT government has had, at times, a less than amicable relationship with parts of the private sector; but there are signs that the current Administration is looking to provide adequate incentives to encourage more privatesector involvement in infrastructure development. Delays are natural for these types of projects. But on the positive side, as Itau's economic team writes: “There is no shortage of investment opportunities. In addition to large sports events such as the World Cup and the Olympic Games, there is the need for infrastructure updates and crude oil exploration in pre-salt fields. Favorable dynamics in government debt create room for increases in public investment. Additionally, equilibrium interest rates are lower than in the past. Hence, investments (as a share of GDP) should increase to about 20% of GDP and the expansion in the 9 The Economist, “Taking off at last: Some serious private money for airports and roads, November 30, 2013. ” 10 http://www.aviationpros.com/news/11247976/brazil-gets-9-billion-in-airport-auction, November 25, 2013. TRENDS + VIEWS December 2013 Page 7
  8. 8. TRENDS + VIEWS The Infrastructure Challenges in Latin America - December 2013 capital stock will likely be the main driver of growth in on which construction is expected to be initiated within the next few years. ” the next couple of years. The total investment required is over US$12 billion for these projects. They include peru electric trains in Lima that would presumably alleviate Peru’s economy has been the region’s fastest growing congestion in the capital, docks at Callao port near over the last decade, among major economies, despite Lima, – not due to – its infrastructure. A sampling of figures facilitate the transport provides some information which highlights the urgency of minerals, and a of the matter: number of highways • According to national statistics agency INEI, 88% of that would penetrate the homes in rural zones lack adequate sanitation. • Over half of rural homes lack access to clean water. • The country’s estimated infrastructure needs which less would accessible regions of the country. From a real estate Peru’s economy has been fast-growing, despite major bottlenecks related to subpar ports and roads. perspective, between 2012-21 amount to US$88 billion, over 1/3 improved capacity at of annual GDP . the port of Callao can result in substantial demand for • While for 2007-12 the budget for infrastructure grew warehouse space and logistics. Over the 2013-16 time 17% on an annualized basis, the country has a history period, public investment in infrastructure is estimated of inefficient execution of public investment. Notably to total over US$43 billion, equal to 20% of annual GDP; 36% (total of 69 bn soles) of the resources intended this compares to US$27 billion in the prior four years. for public investment projects between 2005-12 were Peru’s improving economic track record should help it never utilized according to the Ministry of Economy attract more foreign capital for infrastructure projects and Finance. under its PPP framework. The country’s senior economic Along with a lack of financial resources until recently, officials have held numerous roadshows throughout Apoyo Consultoria, a local economic consulting firm, Europe, the US, and Asia, in recent months, in a bid also notes lack of human capital to carry out projects, to further deepen relations with institutional investors. and inadequate rules and regulations to attract capital. While there are questions about the ability of public Apoyo recommends that the state moves from providing officials to carry out these projects, the overall macro infrastructure to becoming a purchaser and regulator backdrop and business environment in Peru looks to be of infrastructure services while also following the PPP supportive of the attempts to attract private capital into model.11 infrastructure projects. However, there are some signs of improvement, as Peru Colombia has a long list of infrastructure projects in its pipeline. Apoyo Consultoria provides a list of 17 major projects – nine highways, four ports, one airport, and two railroads – that are either in phases of construction or Colombia faces major geographic obstacles to improving its infrastructure. For years, the interior of the country faced security issues, causing the country’s major cities to lack the internal transport links that 11 Apoyo Consultora, “Cuatro medidas para incentivar el uso iniciativas privadas confinanciadas, September 2013. ” TRENDS + VIEWS December 2013 Page 8
  9. 9. TRENDS + VIEWS The Infrastructure Challenges in Latin America - December 2013 exist in most other countries. Meanwhile geographical of the decade, with potential growth likely to increase barriers add to the complexity. Colombian territory from 4.6% currently to 5.3% by 2024 as a result.12 With includes the Andes mountain range, dense jungle, and the improved highway network, according to official inaccessible coastlines. According to a recent survey of sources, the estimated time to transport items from the Colombian economy by the Financial Times, Luis Bogotá to Medellin would be reduced by 28%, while Carlos Villegas, the head of the national industry group, from Bogotá to Cali there would be a 27% improvement, likens the infrastructure deficit to a 10%-15% tax on 26% from Cartagena to Bogotá, and 33% from Cali to business. Cartagena.13 Vehicle transport costs between cities While the Colombian The current Santos administration is dedicating increased resources to infrastructure, especially roads and highways. government has been investing only 0.6% would fall between 16%-30%. Currently the government is looking to move forward with these concessions in the next few months. of GDP in transport Aside from the planned improvements to roads, and communications, there are also expectations that the country’s minimal this is railroad system will be expanded. The government’s rising and the level plan includes railroads from Bogotá to the Caribbean of of coast, theoretically linking the economic center of the percentage execution infrastructure projects country with the main ports serving the United States is showing some signs of improvement. According to at Barranquilla and Santa Marta (and a function of the the Agencia Nacional de Infraestructura, between 2011- accompanying free trade agreement between the two 14 investment in infrastructure should reach 1.2% of countries). GDP by the public sector alone. While 3 trillion pesos Overall the government aims to invest US$100 bn in were invested in infrastructure in 2010, it is expected that up to 9 trillion will be dedicated to infrastructure investment this year overall. infrastructure by 2021, and as Luis Fernando Andrade, director of Agencia Nacional de Infraestructura says, “Nowhere else in the world is there such an ambitious Fortunately as the security situation The country’s infrastructure plan focuses first on program. 14 ” highways as roads account for 80% of internal improves, the government can divert resources away transportation in Colombia. According to the Ministry of from defense toward more productive uses such as Transportation, the next generation program to develop capital projects. highways would add 8,000 km of roads, 1,200 of which In addition, there is a focus on improving the infrastructure would be two-laned. A four-lane road from Bogotá to Buenaventura, which will cost US$4 bn is a highlight of this plan. Another top priority is connecting Medellin directly to Pacific and Caribbean ports. As these highways are constructed, the government estimates a 1%-2% direct and indirect influence on GDP over the rest along the country’s rivers. Semama magazine recently described plans to invest 2.1 trillion pesos, or around US$1.1 billion in new ports along the Magdalena River, Colombia’s most important, as well as on maintenance of canals and on dredging of them. River transport in Colombia can be a more efficient method of transporting 12 At a seminar around the IMF meetings in Washington in October 2013, Finance Minister Mauricio Cardenas also mentioned that potential GDP for Colombia could increase by 0.7% per annum if certain infrastructure projects were realized. 13 The aforementioned FT survey quotes a truck driver who states that the 410 km between Bogotá and Cali can take 14 hours, on one of the “better routes. ” 14 www.ani.gov.co provides information on the country’s infrastructure plans. TRENDS + VIEWS December 2013 Page 9
  10. 10. TRENDS + VIEWS The Infrastructure Challenges in Latin America - December 2013 goods, given the aforementioned challenges that the of at least 60 km/h. On top of funding from FONDES, country’s geography presents. Semana reports that it private capital will be invested alongside, via debt and costs US$3,200 to move a container from the center equity, from the firms that win bidding processes, as of the country to the Atlantic ports, but just US$1,800 part of a PPP model. if transported by the Magdalena River. A concession will be auctioned, via a PPP format with the national Final thoughts and impact on the real estate market government, local governments, and state oil firm For Latin American economies to increase their level Ecopetrol to make these improvements. Investment in of productivity and potential GDP growth, lifting the ports is also a prime focus for the Caribbean coastal quality and quantity of infrastructure is a necessity. cities of Cartagena, Santa Marta, and Barranquilla, Inadequate infrastructure has become a political issue thanks to the emergence of the free trade agreement too, as the recent protests in Brazil showed. The next with the United States. For example, the port capacity half decade will be crucial as governments have drawn at Cartagena is expected to double by 2017, to move 5 up proposals for improving infrastructure; whether million containers per year, thanks to expansion plans. private sector concessionaires will provide the capital Investors in the industrial space are already expressing remains to be seen. growing demand for warehouses to attend to this Furthermore, efficient increase port capacity. public administration Additionally, the government is looking to privatize is mandatory for these assets as a way of financing infrastructure development. projects to be carried In the first half of 2014, the government intends to out in a timely and sell-off its participation in utility firm Isagen, which is transparent manner. expected to raise US$2.6 billion. The proceeds of the There is a long path sale would then be transferred to the National Fund for ahead. Logistics costs Infrastructure Development (FONDES), a vehicle which as a percentage of GDP for the region dwarf those in can then spend the proceeds on infrastructure without other major economies: for Peru 32%, Brazil 26%, negatively impacting the central government’s fiscal Colombia 23%, Mexico 20%, and Chile 18% compared position.15 Eventually funds raised from potential sales to 10% for the United States and 9% in the OECD. The of the government’s stake in Ecopetrol could also fund upside for the region is that if even semi-adequate FONDES. infrastructure can be established, the potential returns According to a recent Global Source report, FONDES over the long run can be huge in economic terms. will become a crucial vehicle to support the success of Despite the mixed outlook on infrastructure, there are the upcoming wave of road infrastructure projects to be impressive achievements occurring. For example, Rio developed through public-private partnerships, better de Janeiro’s landscape is changing, in anticipation of the known as the “4G program”; the main goal of the 4G World Cup and Olympics. Specifically, the city accounts initiative is to give Colombia a set of strategic highways for over R$2 billion of funds earmarked for urban through which trucks will be able to travel at a speed transport from the government’s credit line for World Cup Positive strides are being made, but investments take years to mature and impact economic outcomes. 15 Escobar, Andres and Veronica Navas. Global Source Partners Monthly Report. “Boring Race, Known Outcomes. Section titled “Selling assets to build new ones, December 2, 2013. ” ” 16 Financial Times, “Rio’s Olympic deadline forces transport upgrades, September 10, 2013. ” TRENDS + VIEWS December 2013 Page 10
  11. 11. TRENDS + VIEWS The Infrastructure Challenges in Latin America - December 2013 transport projects.16 The state government is investing paved roads versus total roads, more kilometers of rail R$8.5 billion to double the capacity of underground rail lines, and increased numbers of subway lines. that connects Barra, which will host the Olympic village, with the rest of the city. The city of Rio has dedicated another R$5.6 billion to an express bus system which will connect disparate areas such as the Galeao airport with Barra and Santa Cruz. In Lima, the city government is also in the midst of an ambitious infrastructure development plan. One new metro line is slated to be completed in 2014, with other additions to Metro Linea 2 scheduled for 2019. Infrastructure improvements can literally change the face of certain cities and shift trends of demand for real estate to certain areas. Additionally, the city has embarked on the construction of five new lines of electric trains, totaling 130 km of track, according to Consorcio Eletronico.17 number of Tren A new highways are under construction, many under the PPP format, intended to ease the city’s notorious congestion as estimates show that the number of autos in the Lima metro area will reach 1 million by 2017, double the level of 2002. One major project is the Via Parque Rimac requiring US$700 million dollars of investment connecting the port area of Callao with Javier Prado, one of the major thoroughfares in the central city. While the track record of infrastructure improvements in Latin America is poor, and skeptics can point to years of failed attempts to improve roads, ports, airports, etc., the next half decade will be particularly telling, to determine if the region’s major economies reverse years of disappointment in this area. One can point to a number of ways to measure infrastructure improvements, ranging from increased public investment to GDP , growing capacity of airports, larger percentages of For the real estate investor in Latin America, closing the infrastructure deficit has important ramifications— both macro and micro. On the macro side, clearly if infrastructure improvements are realized, potential GDP growth will increase. Substantial improvements to these countries’ capital stock would raise potential GDP by 1% per year according to the estimates of various economists. Higher GDP of course means more productive businesses, more demand for labor, additional job creation, and higher standards of living; these all positively impact real estate demand. Since these countries are starting from a low base, even marginal improvements to infrastructure can have outsized benefits for economic activity – and hence demand for real estate. Improved business competitiveness and productivity, all things equal, should boost real wages. On the micro side, greater connectivity within cities would also result. Better urban transport can enable people to live further away from their jobs. For example, in São Paulo there is great demand for finance professionals to live near Faria Lima, the financial district. If there was a better urban transport network, this could allow finance professionals to live further away and hence the trends of demand for real estate could shift as a result. Urban plans and zoning could be potentially adjusted, and the idea of suburbs would develop further. If urban infrastructure could be improved, we would expect lower price differentials between locations with proximity to the central business district and more dispersed locations. For example in São Paulo, prices of residences near the central business district can command prices 2x-3x those located 10 kilometers away due to the massive challenges of public transport and 17 Apoyo Consultoria, “Inversiones en Transporte en Lima, December 2012. ” TRENDS + VIEWS December 2013 Page 11
  12. 12. TRENDS + VIEWS The Infrastructure Challenges in Latin America - December 2013 traffic. The same phenomenon occurs in Lima where in the southwest region of the city, near the financial prices in San Isidro and Miraflores have appreciated and business districts of Faria Lima, Avenida Paulista, dramatically, in direct correlation with the increase and Berrini tend to be priced 40%-50% above the city’s in traffic congestion in that city. Thus far, these urban average, partially for their proximity to the workplace, agglomerations have centered around the business and this trend could be exacerbated further if urban and financial centers and extended outward; aside from transport is not improved enough to meet demand. We Santiago and Buenos Aires, where public transport is see similar trends emerging in cities such as Bogotá generally better than the rest of the region, we have yet and Lima; prices in higher end areas such as Rosales to see true suburbs emerge in major Latin American in Bogotá and San Isidro in Lima have outperformed urban areas. In the United States, we see that cities with the city average thanks to their close proximity to the good urban connectivity tend to exhibit smaller price central business districts in each city; if infrastructure gaps between central business locations and suburbs. constraints are aggravated we would expect this gap to This is not to suggest that all suburbs of a city such as widen. Another trend that has evolved in São Paulo is New York exhibit prices similar to Manhattan. But for the increased demand for microapartments, as young, example, Greenwich, CT which has a train that connects urban professionals sacrifice space – these units are professionals to Grand Central Station in New York in typically 35-45 square under 45 minutes has an average home price of $1.1 meters – for the ability million (versus $1.6 million for an average dwelling in to walk to work, hence Manhattan). 18 Vienna, VA is connected to Washington avoiding extremely DC by that city’s metro line. The average home in Vienna long sells for $865,000, compared to $480,000 in the nation’s times. capital, and $1.2 million in Georgetown, the ritziest microapartments neighborhood of Washington. has If infrastructure remains sub-standard, we can also Given poor standards of urban transport, residents of certain cities pay large premiums for proximity to offices. the Avenida Paulista commute A series emerged of near identify some impacts. As mentioned, traffic congestion business center. in major Latin American capitals is a major urban issue, Lack due in part to inadequate highways, roads, and public congestion, also impact zoning regulations. In São transportation. If we see continued inability to improve Paulo, specifically, the current mayor has pushed in subways, roads, and other urban transport, there will the direction of fewer high density projects that are not be even stronger demand from urban professionals to in close proximity to public transport. Furthermore, as live near their places of work, especially in a city such new transport nodes are being developed over time, the as São Paulo. As mentioned above, those who work in city’s urban plan will allow for higher density projects the financial center of Faria Lima tend to prefer to live that are near these points. Consequently, there may be near their office, to avoid long commute times. This fewer new developments in the future in areas without has pushed up the value of property in neighborhoods immediate access to public transportation, while more with close proximity to Faria Lima. Indeed homes supply can be expected in zones that are located near of infrastructure, and the resulting traffic 18 Based on figures provided by Zillow.com. TRENDS + VIEWS December 2013 Page 12
  13. 13. TRENDS + VIEWS The Infrastructure Challenges in Latin America - December 2013 subways, bus lines, and other transportation. This concept has been implemented in a number of cities across the globe, such as Los Angeles, where new high density development zones are placed around transport hubs. Table 4: Planned infrastructure improvements to Rio de Janeiro Transport mode From/to % of work complete Trans Oeste BRT (express bus) Jardim Oceanico / Santa Cruz Trans Carioca BRT (express bus) Barra / Deodoro Trans Olimpica BRT (express bus) Int'l Airport / Ipanema Trans Brasil BRT (express bus) Light rail Metro VLT Line 4 cost (R$ mn) budget executed (R$ mn) 100 900 700 70 1,600 800 0.5 1,550 70 Santos Dumont Airport / Santa Cruz 0 1,500 0 Downtown area 0 1,164 0 Connects to line 1 at Ipanema 32 8,500 2,600 Source: Rio Negocios, Rio Municipal Secretary. Rio 2016. TRENDS + VIEWS December 2013 Page 13