jamestown latin america | trends + views | infrastructure challenges in latin america - december...
DESCRIPTION
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.TRANSCRIPT
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.
The Infrastructure Challenges in Latin America - December 2013
TRENDS + VIEWS
JAMESTOWN LATIN AMERICA
Real Estate Private Equitywww.jamestown-latam.com
Contact:
Bret Rosen – Managing Director, Research+1 [email protected]
Rio de Janeiro • Bogotá • Atlanta • New York
The Infrastructure Challenges in Latin America - December 2013TRENDS + VIEWS
TRENDS + VIEWS DEcEmbER 2013
When one considers the major impediments to
faster economic growth in Latin America, inadequate
infrastructure is often cited as one of the chief causes
mentioned. Here are just a few examples and images
of infrastructure constraints that occur throughout Latin
America. Transporting a good from the Colombian port
city of Barranquilla to the capital of Bogotá, a distance
of approximately 1,000 kilometers, can cost more
than sending it the 15,000 kilometers from China to
Barranquilla.1 Trucks containing agricultural exports
often line up for miles, unable to enter Santos port in
São Paulo state of Brazil, as the port is at overcapacity.
Isolated communities in Peru are often economically
and socially disconnected from the rest of the country
because paved roads do not reach these villages.
However, there have been important advances in the
physical infrastructure of Jamestown Latin America’s
target countries (Brazil, Colombia, Peru, Mexico, and
Chile). Airports, such as Eldorado Airport in Bogotá
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.
This paper addresses the issue of infrastructure in Latin
America, with a focus on Brazil, Colombia, and Peru. We
divide the note into the following sections: 1) arguing
that infrastructure is vital to economic development;
2) discussing what Latin America needs to do to
improve its physical capital; 3) highlighting what is
being accomplished to improve the infrastructure in
the various target countries; 4) noting the challenges
encountered in addressing the infrastructure deficit.
Finally, we describe the potential impact on the real
estate market from the infrastructure deficit and
initiatives to improve it.
To begin, we must define infrastructure for the purposes
of our discussion. Definitions vary for describing a
country’s infrastructure, but typically include roads/
highways, railroads, bridges, ports, airports, and public
transport such as subway systems. Additionally, one
can include electricity/power generation and quality of
telecommunications.
There is clearly a
high correlation
between economic
d e v e l o p m e n t ,
competitiveness, and
GDP per capita and the
quality of a country’s
infrastructure; this
correlation is not
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.
PagE 2
Latin american governments are recognizing the necessity of addressing the infrastructure deficit in the region.
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.
The Infrastructure Challenges in Latin America - December 2013TRENDS + VIEWS
TRENDS + VIEWS DEcEmbER 2013
According to the 2012-13 report, “Extensive and efficient
infrastructure is critical for ensuring the effective
functioning of the economy and is an important factor
in determining the location of economic activity and the
kinds of activities that can develop within a country.”4
The report goes on to state that quality infrastructure:
1) reduces the effect of distance between regions; 2)
integrates the national market; 3) connects an economy
at a low cost to markets in other countries and regions;
4) is a prerequisite for access of less developed
communities to core economic activities and services.
Efficient modes of transport, whether via rail, highway,
or water, enable businesses to get their goods and
services to market in a secure and timely manner.
Judging the quality of a country’s infrastructure can be
subjective; the aforementioned World Competitiveness
Report ranks 148
countries on the basis
of a number of inputs
presumed to influence
the competitiveness
of an economy.
Infrastructure is
one of the pillars as
mentioned above.
Unfortunately Latin America does not stack up well
compared to the other regions across the globe in terms
of infrastructure. Brazil is rated 71st for its infrastructure,
Colombia 92nd, and Peru 91st. While this report should
not be considered the only means for judging a country’s
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.
Turning to the country rankings, Brazil rates well on air
travel capacity and telecommunications, but is rather
woeful in most measures of the quality of its physical
infrastructure, which is a key component of the “custo
Brazil,” or cost of doing business in the country. As the
country’s economy has grown impressively over the last
two decades, bottlenecks have formed on a large scale,
thanks in part to the issues in the table below:
Similarly, Colombia rates well in terms of availability
of air seats, but the ratings highlight the country’s poor
roads, railroads, and ports.
PagE 3
4 http://www.weforum.org/issues/global-competitiveness
Latin american countries rank low in global surveys that measure the quality of infrastructure.
CoUNTRY RANKING
QUALITY of ovERALL INfRASTRUCTURE 114
QUALITY of RoAdS 120
QUALITY of RAILRoAd INfRASTRUCTURE 103
QUALITY of PoRT INfRASTRUCTURE 131
QUALITY of AIR TRANSPoRT INfRASTRUCTURE 123
AvAILABLE AIRLINE SEATS (Km/wEEK) 9
QUALITY of ELECTRICITY SUPPLY 76
moBILE PHoNE SUBSCRIPTIoNS PER CAPITA 45
fIxEd TELEPHoNE LINES PER CAPITA 52
ovERALL RANKING 71
Table 1: brazil
Source: World Competitiveness Report, 2012-2013.
CoUNTRY RANKING
QUALITY of ovERALL INfRASTRUCTURE 117
QUALITY of RoAdS 130
QUALITY of RAILRoAd INfRASTRUCTURE 113
QUALITY of PoRT INfRASTRUCTURE 110
QUALITY of AIR TRANSPoRT INfRASTRUCTURE 96
AvAILABLE AIRLINE SEATS (Km/wEEK) 39
QUALITY of ELECTRICITY SUPPLY 63
moBILE PHoNE SUBSCRIPTIoNS PER CAPITA 87
fIxEd TELEPHoNE LINES PER CAPITA 84
ovERALL RANKING 92
Table 2: Colombia
Source: World Competitiveness Report, 2012-2013.
The Infrastructure Challenges in Latin America - December 2013TRENDS + VIEWS
TRENDS + VIEWS DEcEmbER 2013
meanwhile the rankings in Peru reflect a similar situation:
The world Bank also publishes data on a number of
infrastructure-related categories, which allow a further
quantitative assessment of how Latin America stacks up
versus the rest of the world and its Emerging market
peers. Here is a sampling of statistics:
• The percent of total roads that are paved in Brazil is
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,
a reflection of decades of underinvestment in the
physical capital base of the countries. In prior decades,
low levels of public investment were a function of
economic underdevelopment, and incapable and
inefficient public administrators. When these countries
lacked macroeconomic stability, it was impossible
to attract meaningful private capital to infrastructure
development projects; furthermore, when sovereign
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
backdrop has changed, and governments can be more
active in infrastructure development. Cost of capital for
the public and private sector in Latin America has fallen
markedly, allowing for deeper and more varied methods
of financing infrastructure projects.
As Latin American countries have become wealthier,
with established middle classes, world class exporters
of commodities to Asia, and larger populations, the
deficit has become particularly pronounced – and the
necessity to address the deficiencies has become more
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 fiscal
backdrop to direct
more resources to
this need. In all cases,
financial 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
PagE 4
macroeconomic stability equates to lower cost of capital and flexibility on the fiscal side to fund infrastructure projects.
CoUNTRY RANKING
QUALITY of ovERALL INfRASTRUCTURE 101
QUALITY of RoAdS 98
QUALITY of RAILRoAd INfRASTRUCTURE 102
QUALITY of PoRT INfRASTRUCTURE 93
QUALITY of AIR TRANSPoRT INfRASTRUCTURE 85
AvAILABLE AIRLINE SEATS (Km/wEEK) 40
QUALITY of ELECTRICITY SUPPLY 73
moBILE PHoNE SUBSCRIPTIoNS PER CAPITA 93
fIxEd TELEPHoNE LINES PER CAPITA 87
ovERALL RANKING 91
Table 3: peru
Source: World Competitiveness Report, 2012-2013.
5 http://data.worldbank.org/indicator/IS.Rod.PAvE.ZS
The Infrastructure Challenges in Latin America - December 2013TRENDS + VIEWS
TRENDS + VIEWS DEcEmbER 2013 PagE 5
extends beyond some of the interesting anecdotes
mentioned there. A casual visitor to any of the region’s
capitals is of course overwhelmed by traffic congestion,
which while obviously annoying, also entails a large
economic cost (in terms of lost man hours for the
workforce, additional costs of transporting goods, etc.).
Traffic jams in cities such as São Paulo, Lima, and Bogotá
are legendary. In fact many senior Brazilian business
executives hop from meeting to meeting in helicopters
rather than face the
unpredictable traffic
patterns of São
Paulo, which may
be the only city in
the world where the
total amount of traffic
congestion, known
as lentidao, is almost continuously broadcast on the
news and in elevator videos, and can sometimes
total into the hundreds of kilometers.6 While traffic
congestion is a symptom of a growing middle class,
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.
Beyond the topic of economic costs related to the
absence of urban infrastructure, one can also observe
the consequences of poor connectivity within countries.
Colombia faces massive geographical obstacles, as
within its borders there are Andean mountain ranges,
dense jungle, and ultimately coastline with the Pacific
and Atlantic. for example, it takes 3-4 hours for an
item that arrives at Buenaventura port to reach Cali,
even though the distance is just 78 miles. driving from
medellin to Bogotá, the country’s two largest, cities
separated by 274 miles, takes approximately six hours. In
other words, road quality is highly inadequate; decades
of internal conflict with the FARC and other guerrilla
movements have made it unfeasible to develop much
of the country’s national transport infrastructure but as
the security situation has stabilized, capital is flowing
into this area. When economists explain the recent
subpar performance of Colombia’s manufacturing
sector, among the reasons cited – along with the
appreciation of the peso – is that transport infrastructure
is inadequate and this inadequacy is highly detrimental
to the competitiveness of industry. On the positive side,
however, a city such as Barranquilla has seen substantial
development in recent years as the city’s last two mayors
have emphasized infrastructure investment, focused on
public roads, facilitating transport, and encouraging
trade promotion.
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
geography presents a major obstacle to connecting
disparate regions of the country while it also faced
security issues in prior decades (namely from the
Sendero Luminoso, i.e., Shining Path movement), which
made development of large-scale projects in certain
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
Geographical obstacles toward improving infrastructure are substantial.
The Infrastructure Challenges in Latin America - December 2013TRENDS + VIEWS
TRENDS + VIEWS 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
short, Brazil has invested well short of what is necessary
to update and modernize its physical infrastructure, and
this has created important bottlenecks that affect all
major sectors of the economy.
Domestic demand has been strong for years, and
combined with incentives provided by the government,
has led to a massive surge in car ownership. Yet as any
visitor to São Paulo or Rio can attest, traffic congestion
has worsened dramatically because the pace of urban
infrastructure development, i.e., roads and subways,
has not kept pace with the population growth and
increased number of cars on the road. Meanwhile as
Brazil has become an export powerhouse in recent
years, the port capacity has also not kept pace with
this growth. Given the large geography of the country,
in the best of times it would be a challenge to link the
various regions of the country by rail and highway; but,
as demand for agricultural products from the hinterland
has soared, exporters have encountered greater
challenges moving their goods to market. Perhaps the
most instructive example of infrastructure deficiencies
relates to mining giant vale, which actually built its
own railroad in the northeast region of Brazil to move
its iron ore to port rather than relying on government
to do so. In a nutshell, for Brazil to burst through the
low GDP growth equilibrium that it now experiences,
infrastructure improvement is the number one priority;
a massive program to improve roads, ports and so on
would lift potential GdP, remove bottlenecks, lower the
custo Brazil and also reduce inflation.
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%,
according to a mcKinsey study.
• On an annual basis, Brazil invests just 2% of its GDP
in infrastructure which, according to Credit Suisse
economists, is half the amount needed to sustain 4%
annual GDP growth. In comparison, China invests
13% of GDP in infrastructure, Colombia 6%, and India
5%.
• São Paulo has a
population 40%
greater than
London yet its
metro has 1/6 the
capacity of that in
the UK capital.
• On average it
takes a container
ship 21 days to
clear Santos port in São Paulo state; in comparison,
according to global shipping company maersk, in
Rotterdam it takes just two days.
• Over the last decade, annual light vehicle sales rose
by 2.5x, yet the number of paved roads increased by
just half.
It is estimated that Brazil has double the dependence
on road transport that the United States does, due to
its inadequate railroad infrastructure. In fact President
Dilma Rousseff, when recently officiating at a railway
project in Mato Grosso, stated that Brazil was “two
centuries” behind with regard to building rail networks.8
PagE 6
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.
For years, Brazil’s investment in infrastructure has been inadequate, a prime cause of GDP growth below the regional average in recent years.
The Infrastructure Challenges in Latin America - December 2013TRENDS + VIEWS
TRENDS + VIEWS DEcEmbER 2013
As the economy has expanded and developed over
the past decade, the government has recognized the
inadequacy of the current infrastructure. In 2007, the Lula
administration launched PAC (Programa de Aceleracao
de Crescimento), a program with a four-year budget
through 2010 equivalent to R$650 bn. The Rousseff
administration followed up with PAC 2, a R$965 bn plan,
of which over 1/3 has already been invested. However,
according to the Financial Times survey, just R$33 bn
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.
More recently, the government has moved forward with
a program intended to allow greater involvement of the
private sector in infrastructure development. Its R$133
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 in
various 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
Group, which operates, according to some surveys,
the highest quality airport in the world in Singapore,
paid R$19 billion, (for a 51% stake) or four times the
minimum bid, for Rio’s Galeao Airport.9 The Aerobrasil
group formed by Brazilian construction company CCR
and the operators of the Zurich and munich airports paid
almost R$2 billion for Belo Horizonte’s Confins airport,
or double the minimum bid for the 30 year concession.10
One issue that the government has faced with regards
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
allow an IRR deemed sufficient by potentially interested
parties.
for Brazil to make inroads will require involvement of
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 private-
sector 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
PagE 7
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.
The current administration has had some recent successes, especially the privatization of several airports.
The Infrastructure Challenges in Latin America - December 2013TRENDS + VIEWS
TRENDS + VIEWS DEcEmbER 2013
capital stock will likely be the main driver of growth in
the next few years.”
peru
Peru’s economy has been the region’s fastest growing
over the last decade, among major economies, despite
– not due to – its infrastructure. A sampling of figures
provides some information which highlights the urgency
of the matter:
• According to national statistics agency INEI, 88% of
homes in rural zones lack adequate sanitation.
• over half of rural homes lack access to clean water.
• The country’s estimated infrastructure needs
between 2012-21 amount to US$88 billion, over 1/3
of annual GDP.
• While for 2007-12 the budget for infrastructure grew
17% on an annualized basis, the country has a history
of inefficient execution of public investment. Notably
36% (total of 69 bn soles) of the resources intended
for public investment projects between 2005-12 were
never utilized according to the Ministry of Economy
and Finance.
Along with a lack of financial resources until recently,
Apoyo Consultoria, a local economic consulting firm,
also notes lack of human capital to carry out projects,
and inadequate rules and regulations to attract capital.
Apoyo recommends that the state moves from providing
infrastructure to becoming a purchaser and regulator
of infrastructure services while also following the PPP
model.11
However, there are some signs of improvement, as Peru
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
on which construction is expected to be initiated within
the next couple of years. The total investment required
is over US$12 billion for these projects. They include
electric trains in Lima that would presumably alleviate
congestion in the capital, docks at Callao port near
Lima, which would
facilitate the transport
of minerals, and a
number of highways
that would penetrate
the less accessible
regions of the
country. From a real
estate perspective,
improved capacity at
the port of Callao can result in substantial demand for
warehouse space and logistics. Over the 2013-16 time
period, public investment in infrastructure is estimated
to total over US$43 billion, equal to 20% of annual GDP;
this compares to US$27 billion in the prior four years.
Peru’s improving economic track record should help it
attract more foreign capital for infrastructure projects
under its PPP framework. The country’s senior economic
officials have held numerous roadshows throughout
Europe, the US, and Asia, in recent months, in a bid
to further deepen relations with institutional investors.
While there are questions about the ability of public
officials to carry out these projects, the overall macro
backdrop and business environment in Peru looks to be
supportive of the attempts to attract private capital into
infrastructure projects.
Colombia
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
PagE 8
11 Apoyo Consultora, “Cuatro medidas para incentivar el uso iniciativas privadas confinanciadas,” September 2013.
Peru’s economy has been fast-growing, despite major bottlenecks related to subpar ports and roads.
The Infrastructure Challenges in Latin America - December 2013TRENDS + VIEWS
TRENDS + VIEWS DEcEmbER 2013
exist in most other countries. Meanwhile geographical
barriers add to the complexity. Colombian territory
includes the Andes mountain range, dense jungle, and
inaccessible coastlines. According to a recent survey of
the Colombian economy by the Financial Times, Luis
Carlos villegas, the head of the national industry group,
likens the infrastructure deficit to a 10%-15% tax on
business.
While the Colombian
government has been
investing only 0.6%
of GDP in transport
and communications,
this percentage is
rising and the level
of execution of
infrastructure projects
is showing some signs of improvement. According to
the Agencia Nacional de Infraestructura, between 2011-
14 investment in infrastructure should reach 1.2% of
GDP by the public sector alone. While 3 trillion pesos
were invested in infrastructure in 2010, it is expected
that up to 9 trillion will be dedicated to infrastructure
investment this year overall.
The country’s infrastructure plan focuses first on
highways as roads account for 80% of internal
transportation in Colombia. According to the Ministry of
Transportation, the next generation program to develop
highways would add 8,000 km of roads, 1,200 of which
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
of the decade, with potential growth likely to increase
from 4.6% currently to 5.3% by 2024 as a result.12 With
the improved highway network, according to official
sources, the estimated time to transport items from
Bogotá to medellin would be reduced by 28%, while
from Bogotá to Cali there would be a 27% improvement,
26% from Cartagena to Bogotá, and 33% from Cali to
Cartagena.13 vehicle transport costs between cities
would fall between 16%-30%. Currently the government
is looking to move forward with these concessions in
the next few months.
Aside from the planned improvements to roads,
there are also expectations that the country’s minimal
railroad system will be expanded. The government’s
plan includes railroads from Bogotá to the Caribbean
coast, theoretically linking the economic center of the
country with the main ports serving the United States
at Barranquilla and Santa Marta (and a function of the
accompanying free trade agreement between the two
countries).
Overall the government aims to invest US$100 bn in
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
program.”14 Fortunately as the security situation
improves, the government can divert resources away
from defense toward more productive uses such as
capital projects.
In addition, there is a focus on improving the infrastructure
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
PagE 9
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.
The current santos administration is dedicating increased resources to infrastructure, especially roads and highways.
The Infrastructure Challenges in Latin America - December 2013TRENDS + VIEWS
TRENDS + VIEWS DEcEmbER 2013
goods, given the aforementioned challenges that the
country’s geography presents. Semana reports that it
costs US$3,200 to move a container from the center
of the country to the Atlantic ports, but just US$1,800
if transported by the Magdalena River. A concession
will be auctioned, via a PPP format with the national
government, local governments, and state oil firm
Ecopetrol to make these improvements. Investment in
ports is also a prime focus for the Caribbean coastal
cities of Cartagena, Santa Marta, and Barranquilla,
thanks to the emergence of the free trade agreement
with the United States. For example, the port capacity
at Cartagena is expected to double by 2017, to move 5
million containers per year, thanks to expansion plans.
Investors in the industrial space are already expressing
growing demand for warehouses to attend to this
increase port capacity.
Additionally, the government is looking to privatize
assets as a way of financing infrastructure development.
In the first half of 2014, the government intends to
sell-off its participation in utility firm Isagen, which is
expected to raise US$2.6 billion. The proceeds of the
sale would then be transferred to the National fund for
Infrastructure development (foNdES), a vehicle which
can then spend the proceeds on infrastructure without
negatively impacting the central government’s fiscal
position.15 Eventually funds raised from potential sales
of the government’s stake in Ecopetrol could also fund
foNdES.
According to a recent Global Source report, foNdES
will become a crucial vehicle to support the success of
the upcoming wave of road infrastructure projects to be
developed through public-private partnerships, better
known as the “4G program”; the main goal of the 4G
initiative is to give Colombia a set of strategic highways
through which trucks will be able to travel at a speed
of at least 60 km/h. on top of funding from foNdES,
private capital will be invested alongside, via debt and
equity, from the firms that win bidding processes, as
part of a PPP model.
Final thoughts and impact on the real estate market
For Latin American economies to increase their level
of productivity and potential GDP growth, lifting the
quality and quantity of infrastructure is a necessity.
Inadequate infrastructure has become a political issue
too, as the recent protests in Brazil showed. The next
half decade will be crucial as governments have drawn
up proposals for improving infrastructure; whether
private sector concessionaires will provide the capital
remains to be seen.
Furthermore, efficient
public administration
is mandatory for these
projects to be carried
out in a timely and
transparent manner.
There is a long path
ahead. Logistics costs
as a percentage of GDP for the region dwarf those in
other major economies: for Peru 32%, Brazil 26%,
Colombia 23%, mexico 20%, and Chile 18% compared
to 10% for the United States and 9% in the OECD. The
upside for the region is that if even semi-adequate
infrastructure can be established, the potential returns
over the long run can be huge in economic terms.
despite the mixed outlook on infrastructure, there are
impressive achievements occurring. For example, Rio
de Janeiro’s landscape is changing, in anticipation of the
World Cup and Olympics. Specifically, the city accounts
for over R$2 billion of funds earmarked for urban
transport from the government’s credit line for World Cup
PagE 10
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.
Positive strides are being made, but investments take years to mature and impact economic outcomes.
The Infrastructure Challenges in Latin America - December 2013TRENDS + VIEWS
TRENDS + VIEWS DEcEmbER 2013
transport projects.16 The state government is investing
R$8.5 billion to double the capacity of underground rail
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.
Additionally, the city
has embarked on the
construction of five
new lines of electric
trains, totaling 130
km of track, according
to Consorcio Tren
Eletronico.17 A
number of 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
paved roads versus total roads, more kilometers of rail
lines, and increased numbers of subway lines.
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
PagE 11
17 Apoyo Consultoria, “Inversiones en Transporte en Lima,” December 2012.
infrastructure improvements can literally change the face of certain cities and shift trends of demand for real estate to certain areas.
The Infrastructure Challenges in Latin America - December 2013TRENDS + VIEWS
TRENDS + VIEWS DEcEmbER 2013 PagE 12
traffic. The same phenomenon occurs in Lima where
prices in San Isidro and Miraflores have appreciated
dramatically, in direct correlation with the increase
in traffic congestion in that city. Thus far, these urban
agglomerations have centered around the business
and financial centers and extended outward; aside from
Santiago and Buenos Aires, where public transport is
generally better than the rest of the region, we have yet
to see true suburbs emerge in major Latin American
urban areas. In the United States, we see that cities with
good urban connectivity tend to exhibit smaller price
gaps between central business locations and suburbs.
This is not to suggest that all suburbs of a city such as
New York exhibit prices similar to manhattan. But for
example, Greenwich, CT which has a train that connects
professionals to Grand Central Station in New York in
under 45 minutes has an average home price of $1.1
million (versus $1.6 million for an average dwelling in
Manhattan).18 vienna, vA is connected to washington
dC by that city’s metro line. The average home in vienna
sells for $865,000, compared to $480,000 in the nation’s
capital, and $1.2 million in Georgetown, the ritziest
neighborhood of Washington.
If infrastructure remains sub-standard, we can also
identify some impacts. As mentioned, traffic congestion
in major Latin American capitals is a major urban issue,
due in part to inadequate highways, roads, and public
transportation. If we see continued inability to improve
subways, roads, and other urban transport, there will
be even stronger demand from urban professionals to
live near their places of work, especially in a city such
as São Paulo. As mentioned above, those who work in
the financial center of Faria Lima tend to prefer to live
near their office, to avoid long commute times. This
has pushed up the value of property in neighborhoods
with close proximity to Faria Lima. Indeed homes
in the southwest region of the city, near the financial
and business districts of Faria Lima, Avenida Paulista,
and Berrini tend to be priced 40%-50% above the city’s
average, partially for their proximity to the workplace,
and this trend could be exacerbated further if urban
transport is not improved enough to meet demand. We
see similar trends emerging in cities such as Bogotá
and Lima; prices in higher end areas such as Rosales
in Bogotá and San Isidro in Lima have outperformed
the city average thanks to their close proximity to the
central business districts in each city; if infrastructure
constraints are aggravated we would expect this gap to
widen. Another trend that has evolved in São Paulo is
the increased demand for microapartments, as young,
urban professionals sacrifice space – these units are
typically 35-45 square
meters – for the ability
to walk to work, hence
avoiding extremely
long commute
times. A series of
m i c r o a p a r t m e n t s
has emerged near
the Avenida Paulista
business center.
Lack of infrastructure, and the resulting traffic
congestion, also impact zoning regulations. In São
Paulo, specifically, the current mayor has pushed in
the direction of fewer high density projects that are not
in close proximity to public transport. Furthermore, as
new transport nodes are being developed over time, the
city’s urban plan will allow for higher density projects
that are near these points. Consequently, there may be
fewer new developments in the future in areas without
immediate access to public transportation, while more
supply can be expected in zones that are located near
18 Based on figures provided by Zillow.com.
Given poor standards of urban transport, residents of certain cities pay large premiums for proximity to offices.
The Infrastructure Challenges in Latin America - December 2013TRENDS + VIEWS
TRENDS + VIEWS DEcEmbER 2013 PagE 13
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.
TRANSPoRT modE FROM/TO% of woRK COMPLETE
COST (R$ mN)
BUDGET ExECUTED (R$ mN)
TRANS oESTE BRT (express bus) Jardim Oceanico / Santa Cruz 100 900 700
TRANS CARIoCA BRT (express bus) Barra / Deodoro 70 1,600 800
TRANS oLImPICA BRT (express bus) Int'l Airport / Ipanema 0.5 1,550 70
TRANS BRASIL BRT (express bus) Santos Dumont Airport / Santa Cruz 0 1,500 0
vLT Light rail Downtown area 0 1,164 0
LINE 4 Metro Connects to line 1 at Ipanema 32 8,500 2,600
Table 4: planned infrasTruCTure improvemenTs To rio de Janeiro
Source: Rio Negocios, Rio municipal Secretary. Rio 2016.