Infrastructure in South America: Fits and Starts

Infrastructure in South America: Fits and Starts

On the vast plains of Brazil’s Matto Grosso, farmers of wheat and soy are enjoying productivity rates that exceed those of their counterparts in the United States. But freight costs in west-central Brazil are also 50 percent higher than on the Great Plains of North America, dramatically undermining Brazil’s productivity advantage.

“You lose your gains. You are just wasting your resources in transportation,” said Mauricio Mezquita Moreira, chief economist at the Inter-American Development Bank.

The emergence of South America’s fastest-growing nations — Brazil, Chile, Colombia and Peru — has obscured the deficiencies of the continent’s transportation infrastructure. Between 1986 and 2010, Latin America’s share of global exports increased from 4.4 percent to 6.9 percent, according to the World Bank, all the more remarkable considering the simultaneous emergence of China, India and other East Asian countries.

Yet economists agree that the region’s underdeveloped infrastructure places it at a distinct disadvantage compared to other emerging regions in the Asia-Pacific and eastern Europe.

South America’s rugged topography provides unique challenges that aren’t for the faint of heart. In southwestern Colombia, for example, the 49-mile road between Pasto, capital of Colombia’s Nariño department, and the town of Mocoa in the Andean foothills typically takes more than three hours to negotiate, because of multiple mountain gorges that have claimed the lives of numerous travelers.

It’s no wonder Latin America, at a mere 22.2 percent, had the lowest proportion of paved roads as a percentage of its total road network of any region in the world in 2011.

Side-by-side, the region’s emerging nations don’t stand up to their counterparts in East Asia when it comes to transportation infrastructure. According to the most recent report on infrastructure by the Economic Commission for Latin America and the Caribbean and the Union of South American Nations, only 6 percent of all roads in Brazil were paved in 2011, compared with 54 percent of roads in China, 59 percent in Indonesia, 75 percent in Vietnam and 99 percent in Thailand.

Whereas Vietnam had 0.87 kilometers of rail lines for every 100 square kilometers, Colombia had only 0.15 kilometers, and Peru, 0.16 kilometers. In all of South America, only Uruguay — one-55th as large as China — exceeded that country in the density of its road network: 44 kilometers per 100 square kilometers in Uruguay, versus 40 kilometers in China. (1 kilometer equals 0.625 mile.)

Until recently, investment in infrastructure actually had been declining as a percentage of GDP, from 4 percent of South America’s GDP in 1980-85 to 2.3 percent of its GDP in 2007-08. The region’s weak infrastructure has hurt its competitiveness in various respects, including productivity, international trade volume and foreign direct investment.

So how have South America’s largest economies been able to expand? Economists note the continent’s resource-rich economies, primarily Brazil, Chile, Colombia and Peru, have thrived in good measure because of rising world prices for their key exports: gold, copper, agricultural products and iron ore.

But Barbara Kotschwar, research fellow at the Peterson Institute for International Economics, cautioned that those exports tend to be heavy — as in the case of the minerals — or perishable, as in the case of fresh fruits and vegetables. “Both categories of goods are highly sensitive to transportation costs,” she said.

Moreira argued that lowering the region’s high transportation and logistics costs would have an impact “much more important than that of trade agreements” when it comes to raising the region’s competitiveness. Mindful of the gap between their region and East Asia, several South American governments are planning a major push to upgrade transportation and other infrastructure, using the model of public-private partnerships.

The Latin Business Chronicle’s latest Latin American Infrastructure Guide, for example, lists more than $31.6 billion in 20 major infrastructure bids in the region (including Central America and Mexico). These projects range from transportation — railroads, ports, airports and roads — to other essential infrastructure such as hydroelectric power plants.

How much would the major South American nations have to invest to catch up with the leading countries of East Asia? That question is impossible to answer. According to the ECLAC-UNASUR report, South American nations invest about 2.3 percent of their collective GDP per year on infrastructure projects (some $53.5 billion at constant 2000 prices), but they would need to invest an annual average of $128 billion to $180 billion at constant 2000 prices — or between 5.7 and 8.1 percent of regional GDP — on maintenance and capacity expansion to close the infrastructure gap.

Another $74.5 billion to $126.5 billion, between 3.4 and 5.8 percent of South America’s GDP, therefore should be spent annually from 2006 through 2020 to maximize the positive effects of infrastructure on their economies, the study recommended. 

Such scenarios assume China will continue to grow at a strong rate, sustaining strong demand for South American commodity exports to Beijing, Kotschwar noted. But if China’s growth slows, South American governments won’t have as much money to spend on maintaining and expanding their infrastructure.

Quality of implementation is a critical issue when assessing infrastructure projects, not just the quantity of money spent. “Lots of money was spent on infrastructure in the 1980s,” noted Kotschwar, but by and large, “they have not seen the results.”

Major cross-border initiatives such as the highly touted Pan-American Highway have failed to make much impact, in part because South American manufacturers and commodity producers are less dependent on maintaining cross-border supply chains than their counterparts in East Asia. “It does not make sense to invest in infrastructure just for the sake of infrastructure,” Kotschwar said. “You need to have business incentives in place, and buy-in from companies.”

The Pacific Alliance, an economic integration pact established in June 2012 by Chile, Colombia, Peru and Mexico, may provide an impetus for some companies to establish regional supply chains that parallel those in East Asia, she added. In East Asia, where transportation and logistics networks are more efficient, companies in higher-cost countries such as Japan can opt to outsource assembly processes to lower-cost countries such as Thailand and Indonesia, or choose to import some components or raw materials from those countries.

Launched in 2000, the Initiative for the Integration of the Regional Infrastructure of South America — an ambitious multinational development plan intended to link South America’s economies by integrating their highway networks, waterways, hydroelectric dams and telecommunications links — has disappointed supporters because of insufficient political support, and opposition from environmentalists. 

In Brazil, by far the largest country in South America, weak transportation infrastructure helps explain why manufacturers haven’t moved their operations to the country’s Northeast, where wages are one-third to one-half that of the South, where most Brazilian manufacturers are located. It’s not just that educational levels are low in the Northeast, but “there are no good ports and no good roads,” Moreira said.

High transportation costs are part of the so-called Brazil Cost, used to describe the combination of bureaucratic barriers, poor infrastructure and high taxes that make Brazil a challenging place to do business.

There are stark contrasts between the track records of the region’s major countries, Moreira said. “Chile is always cited as the example of excellence, while Colombia and Peru have done a lot in the last decade, but there is still a lot that remains to be done there,” he said. In Peru, a lot of infrastructure deals involving local governments have had to be renegotiated because they weren’t done properly.

Throughout South America, international trade generally involves only those few areas of each country that have modern transportation infrastructure. The states of southeast Brazil, for example, generate about 60 percent of the country’s exports. In Peru, 80 percent of exports come from the coastal region in and around Lima, the capital city. In Colombia, exports are heavily concentrated in the region surrounding Bogota. In each of these countries, large areas of the countryside remain difficult to access, and are mired in poverty.

According to Moreira, Brazilian bureaucrats have done a fine job of diagnosing the country’s weaknesses, and laying out a fitting list of priority projects in their comprehensive development plans, known as PACs. He’s skeptical, however, about the pace and quality of their implementation.

Unlike the neo-liberal governments of Chile, Colombia and Peru that have moved toward the private-public partnership model, Brazil has hesitated for more than a decade about which model to use for getting the private sector involved in making infrastructure investments.

The core support for the ruling Workers’ Party is suspicious of private-sector management of transportation assets such as toll roads. Concessions for toll roads awarded in 1999, when Brazil’s “country risk” in global financial markets was high, set toll roads at levels so expensive that usage levels lagged expectations. In 2007, after Brazil’s country risk improved, the tolls on the next set of road concessions dropped because Brazilian borrowers were charged lower interest rates.

Trade-offs are required for private-public partnerships to work effectively in any country, Moreira noted. The regulatory model needs to encourage the private sector to invest by allowing high enough tolls for investors to get a return on their investments, but the model also should minimize the likelihood of political backlash by not allowing the private sector to appear to be earning too much of a profit.

“It is still unclear what the model in Brazil is. The devil is in the details,” Moreira said. “Finally, they are moving. Let’s hope that things really get off the ground in Brazil.”

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