Research done while in PwC Mexico. A short version was included in PwC publication "Future of Pacific Alliance", that was presented in the presidential summit of Chile, last July 2016.

1. 1
Pacific Alliance: Physical Connectivity
Physical connectivity is often associated with the transport infrastructure and set of
facilities involved in logistics, a key aspect when looking to promote trade
development among countries. Here we will review the concept in this sense, but
also as infrastructure in its broader meaning, since we want to show the
opportunities that exist to invest in areas such as telecommunications, electric
power (particularly from clean sources such as hydro and gas, and non-
conventional renewable energy, such as solar, wind and geothermal), mining and
oil industry, the supply of gas and water to households, among others. The
positive causal relationship between infrastructure investment and economic
development has been widely credited in the economic literature.1
a) Relevance
The infrastructure
represents a significant
portion of the global
economy. In the period
2006-2013, the share in
the world GDP rose from
5.7% to 6.3%.2
By far, the financing of
infrastructure has been the
responsibility of
governments; therefore,
the strength of their
finances is a decisive
factor in the dynamics of
investment.
The option of public-private partnerships can make the restriction of public
resources more flexible, provided that future payment commitments assumed by
the government are clearly posted and maintained at an appropriate level. Or else,
1
See Chapter 3 of the publication Syncronized factories: Latin America and the Caribbean in the era of
Global Value Chains, “The drivers of global value chain participation: cross-country analysis”; J.S. Blyde,
Coordinator, Inter-American Development Bank, 2014.
2
Capital Project and infrastructure spending: Outlook to 2025; PwC y Oxford Economics, 2014.

2. 2
when the project generates its own revenue streams and the private partner is
willing to take the risk of future demand.
The growth of global
investment in infrastructure is
estimated in 6.5% annual
average until 2025, although
stronger growth is expected in
emerging countries. In terms of
sectorial distribution, a slight
decline in extraction (oil and
mining) is expected, and a
slight increase in manufacturing
(oil refining, chemicals and
heavy metals).
While investment in
infrastructure increased its
share in the Latin American
GDP between 2003 and 2012
from 1.6% to 3.5%, ECLAC
estimates that its level should
be about 6.2% in order to
meet the needs, and even
higher if it wants to close the
gap with the Asia-Pacific
countries.3
3
FAL Bulletin, issue number 332, number 4, 2014.

3. 3
According to Oxford Economics,
the market size of Latin American
infrastructure will be 500+ billion
dollars in 2025, and the four
member countries of the Pacific
Alliance will account for 40%. In
terms of sectorial distribution,
transport has the largest share in
Colombia, utilities
(telecommunications, gas and
water supply, generation,
transmission and distribution of
electricity) are greater in Mexico,
and extraction is the main sector in
Chile and Peru.
Moreover, based on a more detailed analysis made by Oxford Economics for PwC,
the marker size of infrastructure in the four countries of the Pacific Alliance can be
observed.

4. 4
In Colombia, this market will grow from a value of 17 billion dollars in 2014 to 32
billion in 2025, with a share of 4% of GDP during the period.
In Chile, the market value will growth from 14 to 31 billion dollars between 2014
and 2025, with an estimated investment of 6% of GDP over the period.
In the case of Peru, the infrastructure market will grow from 10 to 24 billion dollars
in the period 2014-2025, maintaining a share of the GDP above 5% over the
period.

5. 5
The infrastructure market in Mexico is expected to move from a value of 60 billion
dollars in 2014 to 107 billion in 2025. Investment will remain at an average of 5%
with regard to GDP during that period.
It is not only necessary to invest more, but also to invest better. This is particularly
true in Mexico. According to a study carried out by the Mexican Institute for
Competitiveness (IMCO), the average return on public and private investment in
the period 2003-2012 was 6.74% in Mexico, compared to 28.5% in Peru, 18.0% in
Chile, and 17.9% in Colombia.4
Among the major infrastructure investment projects that Pacific Alliance countries
are planning to make are the following:5
4
"Profitability and volatility of countries’ investment", in Cuadernos de Mathematica 10, Manuel J. Molano,
2015. You can request the full study to manuel.molano@imco.org.mx.
5
Selection from three sources: Business Plan CP&I: Hispanic America Region; PwC, June 2015, updated to
September; Strategic Top 100 Latin American Infrastructure 2014 Report; CG/LA Infrastructure, Inc.; and
PROINVERSION project portfolio.

6. 6
Country Owner/promoter of
the project
Name of project Estimated
investment
in (million
USD)
Colombia ANI 4th generation projects: more than 40
highway concessions
18,000
Colombia FDN/Government of
Bogota
Bogota Metro 15,000
Colombia ANI/OPAIN El Dorado airport expansion and studies
for the expansion of the new Bogota
airport
n.a.
Colombia ANI Projects of regional airports in public-
private partnership
n.a.
Colombia ANI Domestic railroads and logistics projects 3,000
Colombia ANI Maritime infrastructure projects in ports 1,500
Colombia Sociedad Portuaria
Regional de Cartagena
Expansion of Cartagena port 500
Colombia National Planning
Department
Various health, urban infrastructure and
prisons projects in public-private
partnership
n.a.
Colombia Ministry of Defense Project for the expansion of the Ministry of
Defense headquarters and administrative
buildings
n.a.
Colombia CODENSA Infrastructure transmission lines and
network improvement
n.a.
Chile CODELCO Portfolio of structural projects (El Teniente,
Andina, Chuquicamata, Ministro Hales,
Radomiro Tomic)
25,000
Chile 20-30 different Project portfolio of non-conventional
renewable energy
6,000
Chile Antofagasta Minerals Esperanza Sur Project 3,500
Chile Ibereólica AES Gener Maria Elena thermoelectric plant 3,290
Chile Antofagasta Minerals Sulfides Encuentro Project 2,700
Chile Antofagasta Minerals
and other (JV)
Alto Maipo hydroelectric plant 2,050
Chile InterChile, S.A. Cardones-Polpaico electric transmission
line
1,000
Chile Ministry of Public Works International Airport Arturo Merino Benítez
expansion
800
Chile Ministry of Public Works Chacao Bridge 750
Chile GDF Suez (Engie) Interconnection of the SING-SIC network 700
Chile Ministry of Public Works International Pass Agua Negra (Argentina-
Chile corridor)
n.a.
Peru MMG Limited Las Bambas 10,000
Peru Chinalco-Aluminium
Corp. of China
Toromocho 3,500
Peru Anglo American
Quellaveco, S.A.
Quellaveco 3,300
Peru PROINVERSIÓN Energy supply of new hydroelectric plants 3,000
Peru Ministry of Energy and
Mines
Cerro del Aguila hydroelectric plant 1,050
Peru Ministry of Energy and
Mines
Hydroelectric plant, Chagalla 812
Peru PROINVERSIÓN Main infrastructure for the supply of 600

7. 7
drinking water to the city of Lima
Peru PROINVERSIÓN and
Ministry of Transport
and Communications
Subway Line 3 of Lima 549
Peru PROINVERSIÓN National broad band network 420
Peru PROINVERSIÓN Three new high-complexity hospitals 400
Peru Ministry of Health Hospital Dos de Mayo 180
Peru Ministry of Health Hospital Sergio Bermales 150
Peru PROINVERSIÓN Three port terminals, two for mineral
concentrates and one for containers
n.a.
Mexico Ministry of
Communications and
Transport.
Installation of national shared broad-band
mobile network
8,387
Mexico Ministry of
Communications and
Transport.
Construction of a new airport in Mexico
City
7,741
Mexico PEMEX Reconfiguration of the Tula refinery 4,000
Mexico Federal Electricity
Commission (CFE)
Underwater pipeline from Texas to Tuxpan 3,100
Mexico Ministry of
Communications and
Transport.
Construction of the new port of Veracruz 1,700
Mexico CFE Southeast II and III wind farm 1,079
Mexico CFE Combined-cycle plant in San Luis Potosi 864
Mexico PEMEX Gas pipeline from Salina Cruz to
Guatemala
700
Mexico CONAGUA Flood-protection water project in Tabasco 490
Mexico IMSS and ISSSTE Several projects for hospitals, equipment
and services in public-private partnership
n.a.
n.a. = not available
It is worth mentioning that mining projects in Chile as a whole, despite the fall in
international commodity prices, account for 60 billion dollars and will generate
additional requirements for ports, water pipelines, slurry pipelines, railroad lines,
among others along the supply chain.
In particular, transport infrastructure is relevant to Pacific Alliance integration
process for its effect on the cost of trade logistics. In 2007, World Bank experts
estimated this cost as a percentage of the value of products in:6
• Peru, 32%
• Colombia, 23%
• Mexico, 20%
• Chile, 18%
• United States, 9.5%.
6
“Latin America addressing high logistic costs and poor infrastructure for merchandise transportation and
trade facilitation”; Julio A. González, José Luis Guasch, and Tomás Serebrinsky; Query of San José, August
2007.

8. 8
This level of logistics costs significantly reduces the economic competitiveness of
countries, and reflects the lack of infrastructure as well as the poor quality of
services. In this sense, the logistics performance indicator, also prepared by the
World Bank that ranks 160 countries, in 2014 recorded the following results:
Country General
Ranking
Ranking of the components of the Logistics Performance Index (LPI)
Customs Infrastructure International
shipments
Quality and
competitiveness
of logistics
Tracking On-time
delivery
Chile 42 39 41 53 44 40 44
Mexico 50 70 50 46 47 55 46
Peru 71 96 67 69 76 83 66
Colombia 97 79 98 95 91 108 111
Germany 1 2 1 4 3 1 4
United
State of
America
9 16 5 26 7 2 14
Between the 42nd place of Chile and the 97th of Colombia, there is space for the
exchange of experiences and best practices among Pacific Alliance member
countries.
The global slowdown and the drastic reduction in the price of raw materials have
played a significant role in reducing the budgets of public investment in
infrastructure of the four countries. Also, depreciation of our currencies against the
dollar has forced adjustments in the forecasts of capital and operating expenditure
in multiple sectors.
For example, raising costs for the Metro project in Bogota has complicated the
assessment of the two existing technical options: an underground route of several
kilometers underneath the densely populated financial sector of the city vs building
it on the surface.
b) Challenges
Physical infrastructure and connectivity should increase and improve in Pacific
Alliance region, with the support of regional and extra-regional private investment,
as well as the selective and careful use of public resources. Considering the size
of the need, the region must persevere in the search for new sources of funding,
including international cooperation – particularly from PA observer countries- and
imaginative schemes agreed with its most important local business groups.

9. 9
Acknowledging their specific contexts, the institutional design leading to the
selection and implementation of large projects in each country deserves a review,
aimed at transparency, streamlining, making projects consistent, and providing
certainty to the processes. It also requires visualizing investments as part of
logistics projects in order to support the specific needs of global value chains. In
the context of integration process among Pacific Alliance member countries, port
and airport projects deserve special priority, along with those that raise logistics
efficiency of supply chains.
The region could benefit from harmonization of rules and contracts, so that global
players and increasingly active multi-Latin companies can effectively consider it as
a single extended market. Also a clear and timely dissemination of information
about investment opportunities in infrastructure within the region can be added, for
example, by means of an exclusive online portal. Professionalization of
"infrastructure investment" activity is a key element to have well-prepared and
updated specialists, in a context where business and operational models and
financing schemes are evolving very quickly.
While the institutional framework in which investment in infrastructure occurs is
diverse in the four countries, it is possible to learn from the experience of
organizations such as Proinversión in Peru, the Concessions Coordination in Chile
and the National Infrastructure Agency and National Planning Department in
Colombia. And certainly, a third party supervision of construction works, with
specialized experienced companies, can help keep projects within defined
schedules and budgets, with a noticeable impact on the profitability of projects and
public finances.
It is clear that the timely application of resources in public investment projects
largely determines its outcome. But the effect is magnified when there are private
resources committed. The availability of public resources in a timely manner for
public-private partnerships is critical to the viability of the projects. In the
conditions we are living of greater restriction of public resources for investment, it is
of utmost importance to find ways to ensure the uninterrupted flow to the
committed projects, that have been already passed through a bidding process,
have been awarded and have even started. In this regard, the Chilean government
announced in late 2015 the creation of an infrastructure fund that will integrate into
its assets a group of infrastructure projects with public participation that are
generating income. The idea is to allocate that income to new infrastructure
projects, without being subject to the general policy of public resources, based on
an independent and transparent management.

10. 10
Governments in the region are also working in the creation of an infrastructure fund
that could provide an institutional channel for the expressions of support made by
various countries that are part of the observer nations of the integration process.
It is necessary to solve with a high priority logistical deficiencies, in order to reduce
their high cost, through key infrastructure that will remove bottlenecks and foster
modernization of services (such as customs).
It is also important to bear in mind the evolutionary nature of infrastructure needs,
from the most basic to the most sophisticated, as the region, its cities and
territories develop.
c) Strategic bets
Below is a list of some areas of opportunity for public and/or private action that
could have a crucial effect on the consolidation of the floor that our countries need
to grow at a faster pace, which could be enhanced through the regional integration
process.

11. 11
Coordination of strategic planning of infrastructure investments.- To define which
projects should be considered strategic for the country's development in an inter-
sectorial vision, is a critical planning activity in which various areas and levels of
government are involved as well as other stakeholders from the social and private
sectors. The guiding principle in this process is the alignment of projects with
medium and long-term goals in each country. This first general approach has a
clear influence on subsequent sectorial ranking processes, which choose specific
projects by assessing the technical alternatives available with socio-economic and
environmental criteria. It is therefore important to have a large portfolio of projects
evaluated at different depth levels, and which creates the institutional acquis to
start with. We must also consider that the infrastructure investment cycle does not
end with the execution of the projects. There is an ex post evaluation task to
extract lessons and learn from them. All these elements are included in national
public investment systems (SNIP), which certainly can leverage the framework of
the Pacific Alliance to exchange experiences and best practices.
CHILE’S GOVERNMENT PLANNING AND BUDGETING PROCESS FOR INVESTMENT IN
INFRASTRUCTURE PROJECTS
It is considered among the best international practices, and from which useful
lessons can be obtained for the other three member countries of the Pacific Alliance.
Institutional change to bring transparency and independence in the management of
infrastructure projects.- The development of the infrastructure investment cycle is
managed differently in the member countries of the Pacific Alliance. In particular,
the preparation and tendering of projects is carried out by the public entity in
charge of the corresponding sector (transport, communications, energy, water and
sanitation, etc.). To the extent that business and operating models within the
investment projects and financing schemes that may be used, in public-private
partnerships are evolving with great dynamism, it is appropriate to develop
specialized human resources that can be kept permanently updated, operating
under one same roof. This is the case of the Peruvian entity PROINVERSION.
PROINVERSION, PERU’S GOVERNMENT PRIVATE INVESTMENT PROMOTION
AGENCY
It is responsible for promoting and implementing investment projects in
infrastructure based on public-private partnerships schemes, in the various sectors
of the Peruvian economy, such as transport infrastructure, electricity generation,
digital connectivity, among others. It has put together a specialized technical group
and institutional experience from which other countries of the Pacific Alliance can
draw lessons.

12. 12
Unconventional innovative collaboration in infrastructure projects among partners
who contribute and share key resources.- The need for financial, technological and
organizational resources to meet the specialized requirements of various
investment projects in infrastructure is creating a broad range of public-private
partnerships. In face of reduced resources because of the fiscal effect of raw
materials price drop, Pacific Alliance member countries have had to focus on
unconventional schemes like assets’ monetization as a source of additional
resources. An example would be, in the Mexican oil industry, "Fibra E", which is
the adaptation of a scheme widely used in the United States (Master Limited
Partnership). Another, in the same industry, are the so-called farm-outs, through
which the company that owns the rights to exploit a reservoir may partner with one
or several companies that provide technology and/or financial resources in order to
share project’s risks and benefits.
PEMEX ASSOCIATION WITH BLACKSTONE AND GLOBAL WATER DEVELOPMENT
PARTNERS
PEMEX is agreeing joint ventures with global investment funds such as Blackstone,
and in this case with its specialized agency Global Water Development Partners
(GWDP), in order to design, build, finance, operate, and maintain water treatment
plants throughout the value chain, both in upstream and downstream activities. To
date, projects worth 800 million dollars have been identified and selected.
NEW PORT OF VERACRUZ
After several postponements due to the lack of sufficient public resources, the new
port of Veracruz will be built and funded to a significant extent by the operating
companies that are interested in the project. Investment requirements amount to
about 1.7 billion dollars.
Strengthening logistics companies7 to expand their scope and scale of services in
the region.- The distribution of products within Pacific Alliance region still has a
high cost. Logistics can be improved. Companies that handle regular volumes of
trade (exports and imports), tend to hire specialized service companies that can
guarantee secure timely deliveries at reasonable cost to their customers, wherever
they are. This type of specialized companies can lead the overall improvement of
logistics activity, including infrastructure, processes and complementary services.
Many of them are global companies, but also local companies are emerging with
growth potential that may follow their example.
7
Third party logistics companies (3PLs).

13. 13
3PL ENTERPRISES
Most of the best and largest global 3PL companies already operate in Mexico: DHL-
Excel, UPS, Expediters International, CEVA Logistics, Ryder Supply Chain Solutions,
etc. Their performance could help measure the requirements of supply chains and
logistics efficiency of a wide range of economic activities.
Innovative financing models to secure public resources in public-private
partnerships.- The availability of public resources to finance investment projects in
infrastructure has fallen in recent years due to the fall in the prices of key export
products in the region, such as copper and oil. This has led to the temporary or
permanent suspension of projects, with the corresponding costs and the effect on
their future viability. Mechanisms to give fluidity to the implementation of projects,
in an environment of scarce and diminishing public resources, are required.
INFRASTRUCTURE FUND IN CHILE
The Chilean government has decided to create an infrastructure fund with 9 billion
dollars in assets of public projects that are generating income, in order to spend the
annual revenue flows to finance infrastructure projects in public-private
partnerships in the field of roads, ports, railways, hospitals, prisons, among others.
The fund will have a governance scheme and business structure in line with the
purposes of independent management, long-term vision and financial strength.
External project oversight mechanisms in order to ensure efficient and timely
execution.- The large investment projects in the region often have deviations in
their schedules and budgets, raising the pressure on resources and public
commitments. The support of a qualified external oversight can help reduce or
eliminate such deviations.
PROJECT MANAGEMENT OFFICE
Infrastructure investment projects in the region could include in their tender stage,
the selection of a “project management office” (PMO) services provider, with
experience and recognition in the corresponding field. In a first phase, they could
focus on the larger projects (250 million dollars or more), and then move downward
with adjusted supervision schemes that would not represent a significant cost within
overall project costs.