Regional report: Latin America's infrastructure investment surge

With institutional lenders, governments and the private sector all investing in infrastructure, the future of Latin America's construction industry looks secure. Richard High reports.

The recent announcement that the World Bank is to boost its financial support to developing countries reeling from the global financial crisis with an extra US$ 100 billion over the next three years should mean Latin America can look forward to continued funding of its infrastructure expansion plans.

The new commitments "could almost triple" the International Bank for Reconstruction and Development's (IBRD) lending to more than US$ 35 billion dollars in the 2008 to 2009 fiscal year, up from US$ 13.5 billion in the previous year.

Making the announcement, World Bank president Robert Zoellick urged donors to fulfil pledges for development aid, adding that countries can also direct funding into one of the International Finance Corporation (IFC)'s credit facilities.

The IFC plans to invest US$ 1 billion over three years in the Bank recapitalisation fund, with another US$ 2 billion expected to come from investors. The infrastructure facility will get at least US$ 300 million from the Bank, with another US$ 1.5 to US$ 10 billion from outside sources.

Institutional lenders

While it will take some time for the World Bank's initiative to be felt, recent loans by the Inter-American Development Bank (IDB) include US$ 400 million for the Panama Canal expansion, the largest infrastructure project currently underway in Latin America (see iC's November feature on Large Structures and www. khl.com/features for more information on this project). In 2006 the IDB lent US$ 1.8 billion to 21 infrastructure projects, including 16 public sector projects (US$ 1.4 billion) and five private sector projects (US$ 347 million).

Loans made by the IDB so far this year include US$ 200 million to expand potable water and sanitation services in Buenos Aires, Argentina. The project, part of a wider expansion program, is the first of a US$ 720 million conditional credit line for investment projects (CCLIP) approved by the IDB. CCLIP is used to speed up the process of arranging and approving IDB loans. It is also designed to reduce loan-processing costs for both the Bank and the borrower.

In October the IDB lent US$ 100 million to Uruguay to finance rehabilitation work and long-term maintenance of roads under the Corporación Vial del Uruguay concession. Like many IDB loans it is designed to improve the competitiveness of the recipient-country's economy. In Uruguay the road system is used for nearly all passenger and 90% of freight transportation.

Another US$ 80 million will be used to streamline and improve the efficiency of mass public transportation in Montevideo, home of half of Uruguay's population.

Donor countries are also providing plenty of funding. During October's 18th Ibero-American Summit in San Salvador, El Salvador the Spanish government and the IDB signed an agreement to cooperate in the execution of the Fund for Cooperation for Water and Sanitation, a Spanish initiative could provide up to US$ 1.5 billion in grants to countries in Latin America and the Caribbean over the next four years.

Spain will provide € 300 million (US$ 378 million) in 2008 as its initial contribution to the new fund. The grants will be available to finance projects in water supply, sewerage, wastewater treatment, urban storm drainage, water resource management, adaption to climate change, efficiency and operations management.

Elsewhere the IDB agreed a US$ 100 million loan to Brazil to support expansion of the Florianópolis-Osorio Highway. According to the IDB, economic growth and the transport of goods and people in Brazil is being hampered by the poor state of many of its roads, which become impassable in the rainy season.

Part of the Mercosur corridor, the highway is a major transportation route between Argentina, Brazil, Paraguay and Uruguay. The loan forms part of the final stage in a lengthy process to develop the Mercosur highway corridor. Extending for almost 1600 km in Brazil, it will link the states of Minas Gerais, Rio de Janeiro, São Paulo, Paraná, Santa Catarina and Rio Grande do Sul with a four lane limited access highway.

Road funding

But road projects do not have to be on the scale of the Florianópolis-Osorio Highway to have an economic impact. In Peru, ProInversión, the state agency for the promotion of private investment, is set to invest US$ 33 million on rehabilitation and maintenance over a 15-year period on the Ovalo-Chancay-Huaral-Acos stretch of the Costa Sierra highway. The road's poor condition increases transport costs and limits regional development, where there is potential for agricultural and tourism activities.

Peru is also expected to invest a further US$ 770 million in road, airport and port infrastructure, according to Juan Carlos Zevallos, president of Peru's transport regulator Ositran. About US$ 202 million will be spent on five highway projects, while US$ 157 million will see the modernisation and expansion of regional airports. A further US$ 408 million is earmarked for port infrastructure.

Colombia is also investing in its roads. It will spend US$ 58 million constructing a highway from Tunja city, in Boyacá department, to Puerto Boyacá on the Magdalena River. The project will reduce travel time between the two by three hours and, perhaps more importantly, will increase travel on the trade corridor to the Atlantic coast. Of the 280 km road, only 56 km are currently paved.

Rural roads in Colombia will also receive a boost as the national road authority - Invías - expects to invest around US$ 67.6 million to improve road conditions in the country's municipalities this year. This rural investment program aims to improve regional connectivity and increase local competitiveness.

Argentina is also investing heavily in its infrastructure. It plans a public works budget of about US$ 6.5 billion in 2009. Public works minister José Francisco López said work will be carried out where it is "most needed" in an effort to tackle congestion areas and bottlenecks.

There are 450 road projects currently underway as part of the 2008 US$ 2 billion budget, comprising 30000 km of national roads and 20000 km of toll roads.

Further commitment

By far the largest economy in Latin America Brazil's government has long realised infrastructure investment is the route to economic growth. Under its Growth Acceleration Plan (PAC) the country will invest at least US$ 182 billion on infrastructure. (See iC's July/August Latin America feature for more details on this initiative.)

Brazilian president Luiz Inácio Lula da Silva said last month the PAC will not be affected by the current global financial crisis. Reiterating Lula's declaration of faith in PAC was the recent announcement by Finance Minister Guido Mantega that US$ 2.6 billion will be injected into the agricultural and construction sectors to combat the "negative impacts of the ongoing global financial crisis."

The agricultural sector will receive US$ 1.2 billion, the construction sector US$ 1.4 billion.

Elsewhere, Paulo Godoy, president of Brazil's national infrastructure and basic industries association Abdib, has called on President Lula to form a private equity fund (FIP) to support private sector infrastructure projects.

"The fund would be used to finance short to medium-term initiatives of 12 to 18 months, as opposed to the longer term projects which are financed by financial institutions such as national development bank BNDES. President Lula will discuss the initiative with the treasury department before making a decision," said an Abdib spokesman, quoted by BNamericas news agency.

Private investment

While the government is keen to encourage the private sector to inject money into its infrastructure expansion plans, many companies, such as Brazilian mining company Vale, are already doing so. Last month it announced plans to spend US$ 3 billion adding 546 km to the Estrada de Ferro Carajás railroad, alongside construction of an additional 104 km of railroads, bridges, viaducts, tunnels and loading systems, as well as the purchase of wagons and locomotives.

Vale also has a US$ 163 million expansion plan for Ponta da Madeira port, in Maranhão state. This investment could be helped by a recently signed Presidential decree designed to increase private investment in the country's infrastructure that changes the regulations for private companies that build and operate public ports under concessions.

The government expects the new regulations will attract investors to expand the country's port network. Bid winners will have the right to construct and manage the ports, as well as transport third-party cargo.

Pedro Brito, head of its special ports department (SEP), said the government expects to attract investments of US$ 9.05 billion in the first five years. The concessions will be valid for 25 years and can be extended for another 25.

The decree eliminates the need for private port operators to handle mainly their own cargo. Now, any type of investor can be a port concessionaire. The private sector can still build terminals to handle its own cargo, but can also offer services to third parties.

The two first new ports to be offered in 2009 are expected to be the freshwater port of Manaus in the northern state of Amazonas and the seaport of Ilhéus in the northeastern state of Bahia.

Crunch proof?

With World Bank funding for infrastructure seemingly secure for the foreseeable future, and the willingness of development banks like the IDB to provide money where needed, Latin America should continue to see its infrastructure networks grow. Especially if the private sector can be persuaded to take part in the region's ambitious plans through initiatives such as President Lula's port operation deregulation.