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AACCLA’s 2014 Outlook on the Americas
February 5, 2014
Omni Hotel, Los Angeles CA
AACCLA’s Latin America: The Legal Environment Through a Business Lens
May 1, 2014, 2014
The Ritz-Carlton Coconut Grove, Miami
Worldfund 10th Annual Education Leadership Award Dinner
June 4, 2014
Mandarin Oriental, New York
AACCLA’s Business Future of the Americas
July 14-16, 2014
Panama City, Panama
FELABAN XIV CLAB 2014
September 10 & 12 2014
Hard Rock Hotel and Convention Center – Panama
AACCLA’s Forecast on Latin America and the Caribbean Conference
Sept. 29 – Oct. 1, 2014
Over the next 20 years, Latin America will need to do more than build new infrastructure. It will also have to concern itself with maintaining what’s already there, prolonging its useful life, renewing it, and optimizing its capacity to the maximum.
| By Élida Bustos |
It’s not enough to build a huge dam. The transmission lines connected to it have to be well maintained so the electricity they distribute arrives at homes and factories without interruptions. And the highways have to be properly maintained, because if not, they will deteriorate steadily over a few years and will have to be built all over again.
This approach – taking into account not only the construction of new infrastructure works, but also its maintenance and prolonging its useful life – really works to improve people’s quality of life. This is the new vision the multilateral credit organizations are putting into practice.
“More and more, we are seeing infrastructure as a vector of social inclusion, as something crucial for the quality of life of the people,” Tomás Serebrisky, senior economic advisor for the Infrastructure and Environment Department of the Inter-American Development Bank (IDB), told Latin Trade. “What’s important to us, for example in the case of electricity, is that a person, a home, is connected and receives electricity 24 hours a day with proper tension and at an affordable rate, not the number of high-voltage lines we build. We’re talking about focusing less on works and more on services.”
This new approach to infrastructure incorporates environmental, social and financial sustainability as its fundamental pillars, and recognizes that a multi-sector focus is essential for making it possible to take advantage of the synergies among infrastructure sectors.
Similarly, Gabriel Goldschmidt, director of infrastructure in Latin America and the Caribbean for the World Bank’s International Financial Corporation, said, “What’s needed is more investment than works. Works are limited to construction, and our experience shows that sometimes creating something is what’s needed, and other times it’s much more useful or efficient to fix what’s already there.”
Goldschmidt recognized that this new way of thinking could be less attractive for governments than the traditional approach of “creating works.” There are no ribbon-cutting ceremonies in repairs, and maintaining or modernizing projects doesn’t give politicians headlines in the news, but it does play a basic role in strengthening a nation’s infrastructure. “It’s less attractive and less visible to repair turbines to prolong the useful life of a hydroelectric project than ribbon-cutting, which is seen by everyone.”
But sometimes countries don’t have to build more capacity; what’s needed is putting more resources into optimizing what’s already there and obtaining enormous production gains from money invested in maintenance.
Serebrisky agreed that “infrastructure has to be seen from the standpoint of a life cycle. It’s not just the works; we have to change the emphasis toward optimum maintenance.”
He explained it very simply. If preventive maintenance of a highway costs, say, $10 per year and it’s not done, by the third year, it will need more than $30. It will cost $500 to restore the layer of asphalt because depreciation isn’t lineal. The deterioration can even reach a point where repairing it is impossible and a new highway has to be built.
The international consulting firm McKinsey & Company prepared a report in 2013 called Infrastructure productivity: How to save $1 trillion a year, which deals with this exact theme at a global level.
In electricity production, for example, there’s a lot that can be optimized. The losses that occur in electricity distribution, that is, moving the energy from the power plant to the end consumer, in the countries of the Organization for Economic Cooperation and Development (OECD), runs at between six and eight percent. In Latin America, it can be as high as 17 percent.
The report Power Lost: Sizing Electricity Losses in Transmission and Distribution Systems in Latin America and the Caribbean, prepared by IDB experts last year, is an in-depth study on the costs of electricity losses. The report said that 20 of the 26 countries analyzed in the region posted annual losses higher than 10 percent of the total production of electrical energy, and 12 of the 26 lost more than 17 percent (not including Haiti, where losses are closer to 50 percent of energy production).
To put that into perspective, in 2012, Latin America and the Caribbean lost the same amount of energy as what was produced in the region’s largest hydroelectric plant: Itaipú.
Of those losses, 80 percent occurs during distribution, and in 2012, it represented between $11 and $17 billion per year – in other words, 0.3 percent of the region’s GDP.
There are many reasons for those losses. It could be the distance of the users from the dam, the poor condition of the transmission cables, lines that are overextended because of high consumption, poor voltage control, or even commercial losses due to poor management of the companies providing the service.
That’s why the experts talk about “optimizing” what’s already there.
That’s an important part of the problem, not enough servicing. The other part, more obvious, is that the region needs to invest in works. This is true both intrinsically from the need to address economic and demographic growth, and because it’s been left behind compared to Asia.
Juan Alberti, author of Pre-Investment in Infrastructure in Latin America and the Caribbean, published by the IDB, stated categorically: The gap in Latin America between the level of infrastructure growth and where it should be at this time has worsened over the last two decades.
He provided an example in urban infrastructure where he said the shortage is “particularly pronounced” in the area of water resources, both in the pipes carrying drinking water, sewage and in storm sewers. “It is estimated that the water sector would require $12.5 billion annually – almost triple today’s investment – over the next 20 years to close the gaps in infrastructure,” Alberti said.
Alberti added that transportation is another weak point in the big Latin American cities, and it’s getting worse. The time wasted due to traffic jams results in economic losses of about two percent of GDP.
The region has important projects at the planning stage and many that are already underway (see box). But the experts agreed that at least an additional $150 billion of investment per year beyond what’s budgeted will be needed, not to miss the boat.
“One thing is clear: in general, the volume of investment is below what experience shows is needed for sustained growth,” said Goldschmidt. “The region invests, depending on which country, an average of two to three percent of GDP. The best international practices for countries in a similar situation that have succeeded in advancing sustainably and reducing poverty is that they have invested about twice as much, he said.
During the 1980s, the average investment in infrastructure in Latin America was around four percent of GDP. Then it started falling behind until it was just two percent between 2007 and 2008, according to data from the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). After that, the upswing in commodity prices helped it recover and now it fluctuates around three percent. But it needs to be at five percent of GDP.
Is the region in a position to manage this level of investment? How will they pay for it?
With regional growth rate falling over the past four years, the IDB isn’t optimistic.
“Whenever there are hard times for government revenues, the first thing that’s reduced is investment in infrastructure,” said Serebrisky, because it is more resilient than current expenditures on health or education. “We aren’t terrifically optimistic” on the increase in investment, he added. “What the IDB is proposing is more effort to attract private investment.”
Serebrisky thinks there’s room to attract the private sector because the region has important amounts of funds that could be attracted for this purpose: pension funds, insurance funds or even domestic savings. “There are countries with a lot of pension fund savings like Colombia, Chile, Brazil and Mexico that invest very little in infrastructure.”
Something else to consider is government controls on contracts and public works, due to the delicate balance required between transparency and flexibility. Juan Manuel González Bernal, stakeholder at Greenberg Traurig in Mexico City, said the challenge lies in “finding a middle ground to guarantee a transparent system with public bids and internacional criteria for biddings, but without a rigid contract regulation,” which would not allow adjustments along the building period, especially when related to huge works that may undergo delays. Because that produces a “tension between flexibility and the possibility of abusing, using (that flexibility) in an incorrect way,” is something that some countries should solve.
More, and better
Closing the debate on regional needs, Serebrisky summed up by saying that more investment in infrastructure creates growth “but not just any investment, the right investment, the one that has an impact on productivity.”
Goldschmidt concluded that a coherent and consistent policy must contemplate construction of new works where there are needs that are not covered, and must also take into account the needs of preventive and operations maintenance, re-engineering and modernization. “In Latin America, there’s room for both,” he said.
INFRASTRUCTURE PROJECTS THAT WILL TRANSFORM LATIN AMERICA
With all its advances and reversals, the region continues to grow. Every day, it showcases evidence of infrastructure works that will help to transform the quality of life of people over the next 20 years.
Trans-Andean Tunnels. The Agua Negra Pass and the Aconcagua Bi-Oceanic Corridor. These will link Argentina and Chile. They will help to expedite shipping products from South America’s Atlantic countries to Asia without having to pass through the Panama Canal. The existing passes are insufficient to handle the traffic and the current options, the Panama Canal in the north and the Strait of Magellan in the south, are costly alternatives.
Dams. Brazil is building what will be the third largest dam in the world: the Belo Monte Dam on the Xingu River, in the Brazilian Amazonia. The work is part of a project that involves construction of 60 dams in the Amazon Basin over 20 years. Belo Monte’s estimated cost will be more than $13 billion and the dam will have an installed capacity of 11,233 MW. When it’s finished in 2019, it will deliver 40 percent of the domestic consumption of electricity in Brazil. Argentina has given the green light to the Chihuidos, Cepernic and Kirchner projects, all three in Patagonia, which will deliver 2,300 MW to the strangulated national energy grid.
The Central American Electrical Interconnection System (SIEPAC). SIEPAC, which is well advanced, will link the electricity networks of six Central American countries through a common regional electrical transmission line, reducing costs and increasing reliability of the service.
Gas pipelines. A number of gas pipelines are being built in various parts of the continent. The most recent one tendered is between northern Mexico and the United States. Work is underway on the Southern Peru Gas Pipeline, which will be 704 miles long, and on the Juana Azurduy, between Bolivia and Argentina. It will be linked to another large complex, the NEA, more than 870 miles long, that will supply gas to six provinces in northern Argentina.
Fiber optics. The Seabras-1, an underwater fiber optics cable, will unite São Paulo with New York to increase broadband services in Latin America.
Projects that can be added to this inconclusive list include the Nicaragua Canal, new airports, underground trains and highways.
Élida Bustos reported from Buenos Aires.