Regional Report: Latin America's infrastructure focus

13 May 2014

The Panama City metro.

The Panama City metro.

Economic growth in Latin America has been disappointing in the aftermath of the global financial crisis. The Inter-American Development Bank (IDB) expects just +3.0% GDP growth for the region this year, rising to +3.3% in 2015. It cites the absence of growth-inducing reforms to boost productivity as a key problem.

Despite this poor growth, the construction sector looks in reasonable health. According to the Inter-American Construction Industry Federation – Federación Interamericana de Industria de la Construcción (FIIC) – the Latin American construction market is worth some US$ 320 billion. Growth varies across the 18 countries the Federation draws data from, and in some cases construction output looks set to grow faster than the wider economy thanks to heavy investment in infrastructure.

For example, construction output in Chile is expected to increase by +7.5% this year, while the country’s GDP growth is around +4.9%. Uruguay is another country where construction growth is a big step ahead of the expansion of the wider economy, and there are other countries where both GDP and construction growth are very high, thanks to industry activity.

The obvious example is Panama, where GDP growth is up around +7.0% thanks mainly to the expansion of the Panama Canal, the biggest construction project in the world at the moment. Colombia is another example of a country where high GDP growth is going hand-in-hand with heavy investment in infrastructure.

But of course for sheer volume of work, it is the major economies in the region that are the most important. Consultant CG-LA Infrastructure has identified 100 strategic projects throughout the region that will start in the next 18 months or so, with a total investment value of US$ 145 billion. Of these, 47 are in Mexico and Brazil, and with a total value of US$ 91 billion, they account for 62% of the schemes by value.

The total of US$ 145 billion applies to infrastructure in the broad sense. The biggest slice is transport schemes, accounting for nearly 64%, or US$ 93.3 billion. Water and sanitation is next, with a total approaching US$ 22 billion, the oil & gas sector has some US$ 16.5 billion of imminent projects and finally there is the energy sector, which has US$ 14.8 billion worth in the pipeline.

But as impressive as these figures are, many would say that the region is not investing enough in infrastructure. One of these is FIIC president Juan Ignacio Silva, who in his day-job is executive chairman of one of Chile’s oldest construction companies, Desco, founded in 1938. Speaking to iC sister-publication Construction Latin America (CLA), he cited development bank reports to reinforce his views.

“I think you can and should strengthen the regional economy by boosting infrastructure. The IDB notes that to sustain its growth, the region should invest some US$ 200 billion each year, and that is not happening. This is manifested in increasing bottlenecks that raise the export of our products and make us less competitive, or straight develop prevent certain activities.

“Governments have the primary responsibility to create conditions to promote these works, both with direct investment and with systems to encourage private funding. This is critical because otherwise, the last decade or so of poverty reduction in our region could be reversed,” he said.

FIIC is broadly in favour of using PPPs to help increase the amount invested in infrastructure, but it is a relatively new model in Latin America, and according to Mr Silva, there is not yet enough experience in the market about what works best, and there are also key differences between different countries in how they administer PPPs.

“There are many variations of them [PPPs] and they are used in various forms and to different degrees of success in the region. There is no doubt that PPPs bring progress to countries, but there is much still to do. Within the FIIC there is full cooperation between national Chambers of Commerce to disseminate information regarding the various regulations with which each country operates,” said Mr Silva.

Urban transport

Economic growth and urbanisation in many countries in Latin America over the last decade have put pressure on major cities’ infrastructure. A common solution has been investment in metro systems – either in terms of expanding networks that were first built in the 1970s, or in the case of the Colombian, Panamanian and Ecuadorian capitals of Bogotá, Panama City and Quito, building their counties’ first metro systems.
CLA calculates that metro projects worth a total of US$ 20.6 billion are currently underway or close to being let across 11 major cities in seven Latin American countries.

Front and centre is Brazil, with schemes underway to improve urban rail transport in six major cities at a cost of US$ 13 billion. In addition, the country has ambitions to build Latin America’s first high-speed rail link, a 608 km line between Rio de Janeiro and Sao Paulo, with a spur to Campinas, at a cost of US$ 17.2 billion.

Meanwhile in Panama, the focus on the huge project to expand the Panama Canal has perhaps overshadowed the fact that in April this year the country inaugurated Central America’s first metro system. Built by as a consortium including Spanish contractor FCC and Brazil’s Odebrecht, the US$ 2 billion, three-year scheme was delivered on time following the award of the contract in 2010.

The 15.9 km Line 1 has 14 stations, seven of which are underground, and crosses the city from north to south, from Albrook national bus station to San Isidro station with a 23 minute journey time. The second phase of Line 1 is currently under construction, with completion due next year. Meanwhile the city is expected to put Line 2 out to tender later this year and is in the feasibility study and planning stages for Line 3 and Line 4.

Elsewhere in Central America, there is a project in Guatemala City to rehabilitate some 25 km of disused urban railway lines for use by trams or metro trains. Re-using existing infrastructure should help keep costs down for the Guatemalan government, and the plan envisages six or seven stations along the route.

Metro extension

In Mexico City meanwhile, work is underway to extend Line 12 of the Metro system by some 4.1 km. More significant however is a scheme newly launched by the Ministry of Communications and Transport to link Mexico City with 15 municipalities along a 212 km rail link ending at El Marqués y Querétaro. The budget for the project is put at US$ 3.2 billion.

Further South in continental South America there are metro schemes at various stages in the Colombian, Ecuadorian and Chilean capitals of Bogota, Quito and Santiago.

In Quito, Ecuador, four consortia have reached the pre-qualification stage for the country’s first metro line. It will be a 22 km north-south link through the capital with 16 stations and a budget of US$ 1.6 billion.
Plans for the Bogota, Colombia metro are still at the surveying stage, but it is possible construction could begin next year on the city’s proposed first 26.5 km, 28 station urban railway. The budget is likely to be around US$ 1.2 billion.

It is a different case in Santiago, Chile, where the already established metro system is seeing a 22 km extension built on Line 3 and an additional 15.3 km added to Line 6. The total investment is put at US$ 2.8 billion and when complete in 2018, the city will have a 140 km metro network with 136 stations.

Lima metro

Meanwhile in the Peruvian capital of Lima, a consortium including Spain’s FCC and ACS, along with Impregilo and Ansaldo of Italy and local company Cosapi has won the € 3.9 billion (US$ 5.3 billion) contract to design, build, finance, operate and maintain the new Line 2 of the city's metro system, and a spur from Line 4 to the airport. Construction is expected to take five years, followed by a 30 year operation period for the concession.

The scheme will involve 35 km of track – all underground – and 35 stations. Line 2 is a 27 km east-west connection though Lima. It is expected to serve 600,000 commuters per day when complete and save as much as 90 minutes in travel times, compared to making the same journey by car.

The spur from Line 4 to Jorge Chaves airport meanwhile will be 8 km long with eight stations.

So there is no doubt that there is the will to invest in infrastructure in Latin America, and for now there are projects making it through to completion. The question for the region is how can it maintain and increase these investments in the face of weak GDP growth and with only limited experience of PPP models.

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