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

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.

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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.

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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


117

of infrastructure. Brazil is rated 71st for its infrastructure,

Quality of roads

130

Colombia 92nd, and Peru 91st. While this report should


113

not be considered the only means for judging a country’s


110


96


39


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


Emerging Asia and Europe.

87


84

Turning to the country rankings, Brazil rates well on air

Overall ranking

92

travel capacity and telecommunications, but is rather


4 http://www.weforum.org/issues/global-competitiveness

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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


102

to attract meaningful private capital to infrastructure


93


development projects; furthermore, when sovereign

85


40


73


93


87

backdrop has changed, and governments can be more

Overall ranking

91

active in infrastructure development. Cost of capital for



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

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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

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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.

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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.

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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.
”

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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.

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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.
”

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December 2013

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TRENDS + VIEWS

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.
”

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December 2013

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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.

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December 2013

Page 12

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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

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