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The poor state of infrastructure in Latin America threatens future economic development.

BY WALTER T. MOLANO

Endless queues, insufficient port facilities and dwindling oil reserves are some of the many problems facing Latin America due to a lack of public sector investment. Although the rise in commodity prices improved external positions, boosted GDP growth rates and reduced external vulnerabilities, the region needs significant increases in infrastructure spending in order to retain global competitiveness and increase productivity.

A close look at Latin America reveals the poor state of infrastructure and the threat it creates for future economic development. On the Colombian Atlantic coast, for example, cargo ships are forced to load low-sulfur coal, bound for Europe and the U.S., on the open seas due to a lack of adequate port facilities. Tugboats pull coal-laden barges several kilometers offshore to floating cranes which scoop the black cargo onto the vessels—in the process dumping some of it overboard. Not only does the spillage increase costs and reduce efficiency, it pollutes the coastline and contaminates the water. The coastal pollution of the Santa Marta is one of the reasons why it has not seen much investment in tourism and real estate, despite having ideal meteorological conditions. The contamination of the coast also led to the decline of the fishing industry, fueling one of the highest unemployment rates in the country.

A similar situation exists a thousand kilometers to the south, where the absence of an oil pipeline connecting the refinery at Villavicencio and the megapolis of Bogota means that gasoline must be trucked to market. A large fleet of tankers transports the refined products up the new highway, choking roads, creating hazards and significantly raising production costs. The long line of oil tankers displaces the transportation of other products, such as cattle and grains. It also deters tourism, preventing the development of the grasslands (llanos) as a major tourist destination.

In southern Brazil, endless queues of grain-laden lorries, some stretching 90 kilometers, wait their turn to load their cargo at the port of Paranagua. The lack of a modern transportation system, storage facilities and loading machinery means that Brazilian farmers must employ teams of lorry drivers days on-end in order to get their crops to market. In north-western Argentina, many farmers allow their crops to lay fallow, due to prohibitive transportation costs. Inadequate roads, defunct railroad lines and rudimentary barging services raise transportation costs geometrically, rendering such exports ineffective—regardless of the rise in commodity prices.

ENERGY SECTOR MOST ACUTE

The energy sector is where the problem is most acute. Most of the state-owned oil companies in Latin America, with the exception of Petrobras, are suffering from lack of investment. Consequently, they are witnessing large declines in production and oil reserves. The damage incurred by the 2002 oil-workers’ strike and lack of sufficient investment reduced PDVSA’s output by more than 25 percent. The damage was mitigated by the rise in oil prices, but the decline in output is the main reason why the Venezuelan government is abrogating operating contracts and trying to gain access to the marginal oil fields.

The situation in Mexico is more serious. After peaking in 2004, Pemex’s oil production began to decline due to a lack of investment. The Fox Administration emptied Pemex’s till, and diverted most of its investment funds as a way to compensate for the lack of economic reforms—in the process leaving the oil company loaded with debt and dwindling reserves. Pemex needs $34 billion of investment in order to turn the tide. Mexican oil production is falling by 14 percent per year, and, at the current rate, output will drop 80 percent by 2015.

Although Latin America’s fiscal accounts improved dramatically since the start of the decade, tax collections are low by developed-country standards — with Brazil again being the exception. Moreover, the Latin American governments are heavily burdened by bloated public-sector payrolls and pension benefits. The pension benefits of senior state-owned company executives, military officers, politicians and civil servants are unrealistically high, and represent a constant drain on government resources — diverting money away from investment, social services and security. The recent capture of FARC documents revealed that the guerillas are operating with a budget similar to that of government forces. Unfortunately, Latin America needs to overhaul its fiscal accounts and determine its priorities. Otherwise, it will fail to take advantage of the opportunities that lie ahead.

Walter Molano is head of research at BCP Securities.

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