In a recent post, we showed that Latin Americans are some of the least happy with their infrastructure in the world. The question is, are we right to be so upset? The short answer is, yes.
In Americas Quarterly, Eric Parrado has summed up the situation:
“For starters, the region invests too little. We believe the infrastructure investment gap amounts to 2.5% of GDP, or $150 billion per year. It also lags in quality, ranking fifth out of six regions, only ahead of Sub-Saharan Africa. We also found that failure to invest more in infrastructure hurts the poor the most, likely because they spend more of their income on infrastructure services.”
The Inter-American Development Bank (IADB) adds:
“Growth in Latin American and Caribbean is sharply impacted by the failure to invest in infrastructure and the cost rises over time […] On average, failure to add new capital to existing stocks is estimated to cost the selected Latin American and Caribbean countries approximately 1 percentage point of forgone GDP growth. The cost rises to 15 percentage points in forgone growth if the gaps persist over 10 years.”
The Economist summarises it perfectly:
“Latin America is hobbled by its inadequate infrastructure. More than 60% of the region’s roads are unpaved, compared with 46% in emerging economies in Asia and 17% in Europe. Two-thirds of sewage is untreated. Poor sanitation and lack of clean water are the second-biggest killer of children under five years old, according to the World Health Organisation. Losses of electricity from transmission and distribution networks are among the highest in the world. Latin America spends a smaller share of GDP on infrastructure than any other region except sub-Saharan Africa.”
An important angle is infrastructure underdevelopment is the impact it has on the most vulnerable, something we see evidently now in the midst of the Coronavirus pandemic. Low investments in hospitals or sanitation, for example, will hit those with fewer resources to pay for private care. As the IADB summarises: “Failure to invest more in infrastructure hurts the poor the most, likely because they spend more of their income on infrastructure services.”. On average, as this BBC article shows, Latin American countries have invested three times less on health (including infrastructure) than EU countries, and that includes the private sector. Our readiness to deal with something like Coronavirus is severely limited, although that varies considerably per country, with Venezuela, Haiti, Guatemala, Honduras, Nicaragua, El Salvador, Bolivia and Peru being the worst performers. Equality of access is another issue. The article highlights that only Cuba, Uruguay and Argentina have more beds per population than the global average of 27 per 10,000 inhabitants. We have the right to be more than just upset, and the current crisis is making this more evident than ever before.
As we always discuss, Latin America is a huge and varied region, so expect variations. As the IADB emphasises, “The region performs best in the energy sector, with scores that are close to emerging Asia. It performs most poorly in the transport sector. The report identifies the sectors where the region has the biggest gaps. For instance, in telecommunications, Panama, Mexico and Guyana underperform, while Jamaica, Barbados and Costa Rica score above their predicted quality levels given their level of development.”. The Economist also highlights the exceptions: “There are some bright spots. Chile’s roads are better than those of Belgium, New Zealand and China, according to the World Economic Forum. Uruguay’s electricity and telecoms outclass those in the United States and Canada.” I live in Uruguay and I travel often across the region. I can tell you the contrast is shocking.
We could discuss the impact of poor infrastructure investment on the economy forever. Let me just give you this (questionable but valuable) gem from The Economist: “The biggest need, say economists, is for roads, railways, ports and urban transport to speed exports and the travels of workers. To move sugar from Jujuy in northern Argentina to Buenos Aires by rail, a journey of 1,675km, takes 22 days, as long as it takes to ship it on to Hamburg. Cargo can take two days to journey from Bogotá to Santa Marta on the Caribbean coast; then it can wait as long to pass through customs.”
According to the IADB, PPPs could be an interesting way to bridge this infrastructure gap. This World Bank article summarises some of the patchy progress across the region with regards to PPPs. Uruguay has been traditionally pushing for PPPS, as well as Colombia. You might remember our interview with Martin Finnigan, who has worked on PPPs in Uruguay from his base in Scotland. In Brazil, next month, there will be an auction of a street lighting PPP contract in Brazil, the first after the COVID-19 crisis started. If you are interested in PPPs, check out for example the recently-published “Climate resilient public private partnerships: A toolkit for decision makers” by the IADB. PPPs have their drawbacks, too. As The Economist summarises, “Public-private partnerships (PPPs) are open to abuse by construction firms such as Odebrecht, which make low bids to secure contracts and then renegotiate them to push up the cost, often by bribing a politician or two. More than three-quarters of Latin American PPP contracts in transport have been renegotiated within about three years of signing, according to José Luis Guasch, a professor of economics at the University of California.”
Opportunities are there in a plethora of forms: PPP structuring (legal, economic, etc), construction, investment, modelling, operations, maintenance and so on. Canning House, for example, gave an insightful view of infrastructure gaps in Latin America and potential opportunities for British investors last year.
If you want to do business in infrastructure in Latin America, you will no doubt need some local presence: either your own office, a local partner or a local distributor, depending on what you are selling. Get in touch if you would like to discuss this further.
And, to sum up, are we right to be so upset? The answer is yes. But we should be less angry in Uruguay and Chile than in the rest of the region.