Infrastructure in Latin America

Items

• Introduction

  Patrick de Courcy 02 November 2022 Hits: 1198

  Infrastructure provides the basic physical structures and facilities that allow society to function, whether that is the water that comes out of your bathroom tap or the railway line that gets you to and from the office.

  LAC countries saw investment in infrastructure severely restricted during a period of economic contraction in the 1980s, resulting in a significant infrastructure gap with other developing regions that exists to this day. To close this gap, studies suggest that regional economies would need to invest 4-7% of GDP in infrastructure over a sustained period, but the region is today facing economic constraints caused by persistent low growth and the fallout from both the Covid-19 pandemic and Russia’s invasion of Ukraine, restricting governments’ ability to invest at a time when there is an urgent need to do so. 

  Infrastructure investments have been shown to facilitate international trade and reduce inequality, both of which are key factors in shaking off a period of low economic growth. Plus, many countries are committed to cutting greenhouse gas emissions targets under the Paris Agreement on climate change and thus need serious investment in green infrastructure such as renewable energy and low-carbon transport in order to hit those targets. This need for investment has led to the increasing involvement of China in the region’s infrastructure projects, opening a new arena for great power competition as the US attempts to discourage governments from working with companies such as Huawei.

  Here we consider trends in Latin America and the Caribbean (LAC) for three main areas of infrastructure – transportation, telecommunications, and utilities – as well as great power competition in infrastructure, megaprojects, and the investment climate.

• Trends in transportation

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  Transport infrastructure has a huge effect on economic growth and development, whether that be through logistics that allow goods to move freely, or urban transportation that allows people to easily access jobs and healthcare.

  Unfortunately urban transportation is a longstanding problem in Latin America. From the 1990s to 2010s, the poor quality of public transportation caused a decline in usage and encouraged the use of private cars, even as the number of journeys made by walking and cycling have increased. By way of comparison, over the same period Europe has seen decreased use of private transport, a slight increase in public transport, and a large increase in walking and cycling. More journeys made by car have combined with inadequate roads to worsen congestion in many Latin American cities, increasing commuting times. Four LAC cities feature in a list of the world’s 10 most congested, and congestion causes losses of 5-10% of regional GDP. In response, a number of cities – including Bogotá, Medellin, Mexico City, Quito, and Santiago – have imposed licence plate restriction policies with the aim of reducing traffic. 

  Many cities are also trying to encourage people to leave their cars at home by improving public transportation, as well as walking and cycling infrastructure. Recent developments include the start of construction on the Bogotá metro; work on a third line of the Panama City metro; and the impending opening of the Quito metro. However in Costa Rica, plans for an urban light railway were cancelled by President Rodrigo Chaves in July, just two months after he took office. Chaves instead plans to revive an alternative light railway project that was developed by former President Guillermo Solís (2014-2018). 

  This is just one example of how political changes can affect long-term planning in the region, as new leaders swap out schemes that are already at a relatively advanced stage for their own pet projects. On the flip side, developments can be rushed through by politicians keen to cement their legacy. One example is Mexico’s Tren Maya railway, which is being fast tracked without adequate environmental impact studies by President Andrés Manuel López Obrador. Mexico is also developing the Tehuantepec isthmus rail corridor (Corredor Interoceánico del Istmo de Tehuantepec - CIIT) to create a “dry canal” linking the Pacific and the Gulf of Mexico with a 300km freight line across the narrowest point of the country. 

  Railways are expensive to build, but various countries throughout the region have regained enthusiasm for them after decades of decline. In December 2020, Argentina signed four rail sector agreements with China worth US$4.69bn, and in September 2021 Paraguay signed a memorandum of understanding with South Korea for the development of a 44km commuter railway linking Asunción and the town of Ypacaraí. Guatemala and Mexico have also discussed reviving rail links between the two nations, and the construction of a rail link has been floated as one possible solution to ongoing social conflict around the Las Bambas copper mine in Peru.

  Another significant trend is the increasing number of electric vehicles, particular buses, as governments work to cut greenhouse gas emissions by modernising fleets. There were 3,701 e-buses in the region as of September 2022, according to the E-Bus Radar monitoring platform, representing just 4.25% of the total number of buses in cities in the region. On a national level Colombia leads the way with 1,589 e-buses, representing 11.36% of its total number of buses. Next up is Chile with 849 buses, or 8.88% of the total, but then there is a huge drop off to Brazil in third place with 371 buses, or just 1.95% of the total. Chinese manufacturers dominate the market, with BYD (2,152 buses) and Yutong (341 buses) the two largest firms, followed by Brazilian manufacturer Eletra with 274 buses. While e-buses continue to proliferate, these numbers show how far there is still to go to decarbonise public transport in the region. 

  When it comes to logistics, airports and ports are hugely important to enable the free movement of goods in and out of the region. However Latin America has long suffered a shortfall in airport capacity, with many airports saturated prior to the Covid-19 pandemic, including Mexico City, Cancún, São Paulo, Bogotá, Lima, and Santiago de Chile. In the years since we have seen the opening of a new Terminal 2 at Santiago’s Arturo Merino Benítez International Airport (SCL), boosting capacity to more than 30m passengers per year, as well as the inauguration of the new Felipe Ángeles International Airport (NLU) serving Mexico City. Colombia is working towards significant upgrades to its airport infrastructure worth almost US$1.8bn, with new airports planned for Cartagena and Manizales as well as upgrades for Bogota’s El Dorado airport; José María Córdova airport in Rionegro, which serves Medellín; and Alfonso Bonilla Aragón airport in Palmaseca, which serves Cali. In Peru, a new terminal that would expand Jorge Chávez airport in Lima to handle 37m passengers per year is scheduled to open by January 2025. 

  According to the IDB, an estimated US$548.3bn needs to be spent on new roads, airports, and mass transit to achieve SDGs 9 and 11. 

  As for ports, the number of containers passing through LAC more than tripled from 2000-2013. This huge increase poses significant challenges, and many countries are set to surpass recommended saturation levels. In 2019, Brazil handled the largest number of containers of any LAC country, followed by Panama, Mexico, Chile, and Colombia. Interestingly, under President Jair Bolsonaro, Brazil has embarked on a privatisation plan of its ports and has even committed to auctioning the 35-year concession for the country’s biggest port – Santos in Sao Paulo state – by the end of 2022. Other significant developments include the opening of the Posorja deepwater port in Ecuador in 2019; the start of construction on a US$3bn new megaport in Chancay, north of Lima; and the announcement of Central American Bank for Economic Integration (BCIE) funding for the first stage of construction of Amapala port in Honduras. This is part of a scheme to develop the Gulf of Fonseca, which is shared between Honduras, El Salvador, and Nicaragua on the Pacific Coast of Central America.

  International cooperation is also evident in South America’s bi-oceanic corridor, which has seen significant progress recently. The plan is to link the port of Santos in Brazil with the ports of Iquique and Antofagasta in Chile with a huge new road and eventually a railway. One significant development is the construction of the Ponte da Integração Brasil-Paraguay, currently under construction between Foz do Iguaçu in Brazil and Presidente Franco in Paraguay, which is due to be completed later this year. Another is the inauguration in February this year of 276 km of road between the city of Carmelo Peralta, in the department of Alto Paraguay on the border with Brazil, and Pozo Hondo in the department of Boquerón, on the border with Argentina. The importance of infrastructure for future economic development is underlined by growing disquiet among Bolivian businesspeople that the current route would exclude the landlocked country from a potential trade bonanza. In response, the country’s public works ministry released a statement in June insisting that it would be involved in the scheme.

  It is also worth mentioning that infrastructure projects continue to be associated with corruption in a region that was rocked by the Odebrecht scandal that unravelled in the 2010s. Bolivia’s highways authority (ABC) is one of a number of government agencies in the region currently under investigation for corruption. There is also a political dimension to infrastructure spending, with the poor state of roads and schools contributing to protests in Ecuador in June, and growing discontent at persistent inequality in many countries throughout the region.

  How is the Bogota metro coming along?

  More than 70 years after it was first proposed, and following a litany of false starts, the Colombian capital, the fifth most populous in Latin America with more than 11m inhabitants, is set to get its first metro line.

  In November 2019, after years of debate and discussion, a US$4.5bn contract was signed with Apca Transmimetro, a consortium consisting of China Harbour Engineering Company (CHEC), Xi’an Metro, and Canadian partner Bombardier, for Line 1 of the Bogotá metro. The 24km overhead line will run north-south through some of the most densely populated areas of the city, with 16 stops.

  Initial progress was limited by the Covid-19 pandemic and a wave of protests in the Colombian capital, but ground was officially broken in late 2021. Some local residents along the route have complained about a lack of consultation and inaccurate information on the impacts of construction, while some have also accused current mayor Claudia López and former mayor Enrique Peñalosa over alleged irregularities in the contracting process. The pair have dismissed the allegations, and on 14 October Jorge Mario Tobón, executive director of the Primera Linea del Metro de Bogotá (PLMB), revealed that work on Line 1 is 16.78% more advanced than planned. 

  There are also plans to develop a second metro line, announced by Mayor López in June 2021. Line 2 will run underground over 15.8km, with 11 stations, and cost an estimated US$3.5bn. On 4 August this year a co-financing agreement worth 34.9bn pesos (US$7.2bn) was signed between the national government and local authorities in Bogotá for Line 2. Speaking at the same event on 14 October, Tobón said that the tender process for Line 2 will begin in 2023, with winning bids expected to be chosen in October that year. Construction is expected to start in August 2025, he added.

  With construction of Line 1 underway and financing in place for Line 2, it looks like Bogotanos can expect some respite from long commutes. Line 1, which has 10 stations connected with the existing TransMilenio bus rapid transit system, is expected to come online in 2028, and Line 2, with four TransMilenio connections, is projected to start operations in 2032.

  The metro is part of wider plans to improve mobility in the Colombian capital, which was found to have the most traffic congestion in the world in 2019 in a ranking put together by analytics company Inrix. In June 2021, Mayor López decreed a new land use plan for Bogotá which includes plans for a total of five metro lines, new tram routes, cable cars, and improved walking and cycling infrastructure. Political opponents fought the plan in the courts, but in August their complaints were dismissed. Despite this legal wrangling, Bogotá has already been recognised internationally for its mobility plans, winning the Institute for Transportation and Development Policy (ITDP) Sustainable Transport Award in February 2022. The organisers hailed the creation of emergency bike lanes at the beginning of the Covid-19 pandemic; the assembly of a fleet of electric buses; and the deployment of traffic calming measures and speed management programmes.

• Trends in telecommunications

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  Ensuring digital connectivity is key to boosting economic development as the digital transformation gathers pace. LAC governments are demonstrating an increasing awareness of the importance of guaranteeing mobile and broadband internet connections to their populations, which proved essential during the early stages of the Covid-19 pandemic.

  Across LAC 244m people have no internet access, according to a 2020 study by the IDB, which considered 24 of 33 countries in the region. Access varies widely from country to country and between urban and rural communities, with 71% of urban populations enjoying connectivity options compared to 37% of rural populations. Household income also has a huge effect on access, with 81% of the highest income households connected to the internet compared to 38% of the lowest income households, due in part to the high cost of internet services and digital devices.

  Disparities are particularly evident in the telecommunications sector because the majority of investments come from the private sector, which prioritises the densely populated areas where there is more money to be made. This means that access to mature technologies such as mobile phones is nearly the same as in OECD countries, whereas access to newer technologies such as 4G and 5G mobile internet lags behind. This has knock-on effects on the use of digital technologies and their benefits in terms of productivity and quality of life.

  Less than half of the regional population has fixed broadband, and less than 10% has high-quality fibre broadband in their home. Mexico is one of a number of countries pushing connectivity, with President Andrés Manuel López Obrador committing 30bn pesos (US$XX) in spending to the Internet Para Todos (Internet for All) programme, which aims to fulfil a campaign promise of bringing internet connections to the whole of Mexico. The López Obrador administration also bailed out the bankrupt telecoms firm Altán Redes, which had been focusing on remote areas, in order to secure internet access.

  There are several challenges for regional governments to confront. The first is the high upfront capital costs of connecting rural areas, particularly those in challenging terrain such as mountains and rainforests, through fixed broadband. The second is the ‘South Atlantic Anomaly’, a weak spot in the Earth’s magnetic field covering most of South America, which affects the operation of geostationary satellites that could be used to provide internet access.

  One standout is Chile, which has the fastest fixed broadband speeds in the world and a more complete rollout of fibre optic broadband than the OECD average, according to the Speedtest Global Index. The country is also part of a growing trend for the development of subsea internet cables, with plans to connect Valparaíso to Sydney, Australia, with the possibility of a branch to Antarctica. Given its huge coastline Brazil is also a key player in subsea cables, with connections to South Africa, Portugal, and French Guiana.

  Brazil and Chile are also at the vanguard of the move towards WiFi 6, releasing the 6GHz band to WiFi in a move which should boost connection speeds and reduce bandwidth congestion. Chile was the first country in LAC to do so in October 2020, and Brazil followed suit in February 2021. In general the region is adopting WiFi 6 quickly, with Peru moving to allow access in May 2021 and Colombia following suit in October. Mexico has issued a public consultation on the matter but so far postponed the decision, as has Argentina.

  Competing for use of the 6 GHz spectrum is 5G mobile internet, which could be a transformative technology for the region. While investments in the 4G network continue to be important as coverage and adoption grows in many countries, attention is increasingly turning to 5G. That said, a strong 4G network is important for the first stage of 5G deployments, and some countries still need to build out these capabilities. Development of 5G has been uneven so far due to the impact of the Covid-19 pandemic, and in some cases pressure from the US to exclude Chinese telecoms firm Huawei due to alleged security concerns, but progress is being made.

  Brazil auctioned its 5G spectrum in November 2021, and interestingly it required the winning bidders to invest in network infrastructure. So far it has made fairly slow progress in building out the network, with 27 cities connected by the beginning of October. Chile has managed to grow its network quickly with Movistar providing 5G services throughout the country, and Entel completing the first stage of its rollout on schedule, while in Mexico both AT&T Mexico and América Móvil are pushing forward with the rollout of 5G networks. The Dominican Republic already has 5G coverage in a third of the country after a rollout that was expected to take three years was completed in just 12 months, and in Guatemala several telcos are offering 5G connectivity using existing 4G LTE infrastructure as the government has not yet auctioned the 5G spectrum. The situation in Peru is similar. Costa Rica has passed legislation facilitating the installation of telecoms infrastructure, with an eye on the 5G rollout, but a spectrum auction is not expected to take place before 2024. Uruguay was in fact the first LAC country to launch a commercial 5G network, in 2019, but it only covered the Barra de Maldonado area. Coverage in the rest of the country is still being built out.

  What is certain is that the number of 5G connections is forecast to explode in the next five years, from 22m at the end of 2022 to 398m by 2027. This deployment provides significant development opportunities with the potential to increase competitiveness and boost regional GDP by more than 5%. However, these benefits depend on a strong rollout through the region, and according to the IDB, LAC countries need to invest US$293.7bn in telecommunications in order to meet the infrastructure goals in SDG 9. 

  If LAC can get the 5G rollout right it could unlock myriad economic benefits for the region. But telecommunications infrastructure has found itself part of a struggle between the US and China, specifically telecoms giant Huawei, which has already affected policies.

  Case Study: Huawei and the 5G rollout

  Chinese technology company Huawei is a leading provider of equipment for telecommunications networks and has been heavily involved in LAC for around two decades. 

  The company has made significant investments throughout the continent in various generations of mobile internet technology, but recently more attention has been paid to the strategic implications of using its products in the 5G rollout, at a time of increasing great power competition between China and US.

  In 2012, US companies were banned from using Huawei equipment, and in 2019 former President Donald Trump labelled the company a security threat and passed a bill barring Huawei from US networks, which has not been reversed since. Washington also used its ‘Clean Network’ initiative to underline Huawei’s links to the Chinese government, encouraging the UK and other US allies to follow suit and ban the company, but its attempts to highlight the risks of allowing Huawei to be involved in developing 5G connectivity in LAC have largely failed.

  One contributing factor is the existing presence of the company and the quality and competitive pricing of its products, as well as the increasing importance of China as a trading partner for many countries in the region and a resulting unwillingness to sour relations with Beijing. Another is the fact that in 2014 perceptions of the US were severely damaged by revelations that its security agencies ran a surveillance programme throughout LAC. Huawei has also lobbied LAC authorities and taken out large advertising campaigns to counter US pressure. In addition, Professor R Evan Ellis of the US Army War College told the US-China Economic and Security Review Commission that China had used the promise of faster access to Covid-19 vaccines to persuade the Dominican Republic to reverse its decision to exclude Huawei from its 5G network, and it allegedly did the same in Brazil.

  Brazil was a major flashpoint in the struggle over 5G given the size of the market and the country’s strategic importance. After much wrangling, and delays to the 5G rollout, the eventual solution was to create a non-Huawei network for government and federal agencies, but allow the company to be involved in consumer networks. Mexico has allowed Huawei to be involved in networks in south and central regions, but it has awarded networks near the US border to Swedish competitor Nokia. Telecom Argentina worked with Huawei and Nokia on the country’s first 5G network, which deployed in June 2021, and the Chinese firm is also partnering with the federal government on a scholarship programme offering courses in 5G, artificial intelligence, and big data. Elsewhere, Huawei is involved in the 5G rollout in Uruguay and Chile, and the company took part in pilot projects in Peru and Colombia in March and May 2020 respectively.

  Ecuador is the country where US pressure to exclude Huawei has paid off to the greatest extent. In November 2020 former president Lenin Moreno signed on to the Clean Network initiative, and in January 2021 the US agreed a deal that would reduce Ecuador’s debt with China in return for shutting Huawei out of the country’s 5G rollout. Two months after that announcement, Nokia was announced as the network contractor, even though previous testing had used Huawei equipment. However, the difficulty of these decisions for LAC countries is illustrated by subsequent worries among Ecuadorian business people that trade with China would suffer as a result.

• Trends in utilities

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  In this section we will consider the provision of utilities such as water, sanitation, and electricity, as well as progress in the energy transition.

  Latin America has made great progress in improving access to water and sanitation services in the last 20 years, but issues remain. While access to running water has improved, far fewer people receive piped water into their home, and access in general is far lower in rural areas. Access figures for sanitation services are lower than for running water, but notable success stories in recent decades include Chile moving from 21% waste access in 2000 to 100% in 2012, and Mexico improving from 23% to 63% for the period. However, the proportion of the region’s wastewater that is actually treated is lower even than waste access, at just 30-40%. This contributes to high levels of water pollution that affect the amount of usable resources that remain.

  Persistent shortfalls in water and sanitation services contribute to high rates of inequality in the region, which remains the most unequal in the world. Some 36m people still lack piped water to their homes, and 15.9% of businesses report insufficient water supplies. In addition, 60m people only have limited access to sanitation services. To achieve the UN Sustainable Development Goal (SDG) number 6, which guarantees safe universal access to drinking water and sanitation services, by 2030, the region needs to build US$256bn in new infrastructure, according to the IDB.

  Water stress is also an increasing concern. Despite possessing around 30% of the world’s freshwater resources, Latin America is suffering increased water insecurity due to factors including mismanagement and climate change. Sixteen of the largest 20 cities in the region are facing water stress, with notable examples including Lima, São Paulo, and Mexico City. Water-related issues have already sparked protests in various countries and been linked with increased emigration from Central America’s Dry Corridor, while a 13-year megadrought in Chile has seen entire lakes dry up. These issues are forecast to worsen due to climate change, meaning that governments need to build more infrastructure to make better use of the available resources.

  Electrification is another key area, and one in which LAC has made strong progress in recent decades compared with peer developing regions. Most countries in the region now have electricity access rates of more than 90%, with Peru, Nicaragua, Honduras, and Bolivia making particularly impressive gains in the last 20 years. However there is still work to be done in rural areas, which also tend to have lower quality access through decentralised solutions, such as small solar arrays, that can only power a few appliances and do not provide power around the clock.

  Another concern is the robustness of electrical grids, which suffer more interruptions than in developed nations, leading to significant disruption for households and businesses. More than 30% of businesses said that blackouts are a “prime difficulty”, causing annual estimated losses of 2.3% of total sales. Central America is an interesting case study in this regard, with energy distribution governed by a 1996 framework treaty integrating systems throughout the subregion. However transmission systems aren’t strong enough to deal with faults in the 1,800km Central American electrical interconnection system (Siepac), leading to frequent blackouts. Fixing the issues would require huge infrastructure investment, and such is the dissatisfaction with the system that Guatemala triggered a 10-year notification period to leave the regional electricity market in July 2021.

  For the region as a whole, the IDB estimates that US$577.1bn in investment is needed to guarantee universal and sustainable access to electricity as stipulated by SDG 7 by 2030.

  LAC countries are also working to shift their energy matrix towards renewables as part of commitments to reduce greenhouse gas emissions under the Paris Agreement. The region has the potential to be a renewables powerhouse, with abundant solar and wind resources, and its renewable energy markets are among the most dynamic in the world.

  As things stand many countries in the region are highly dependent on hydropower, with Brazil, Chile, Colombia, and Peru particularly standouts. This reliance causes issues when conditions are dry. For example, Brazil experienced one of its worst droughts on record in 2021, reducing electricity generation at hydropower plants and necessitating the use of expensive and environmentally-damaging thermal power plants to ensure electricity supplies. Colombia currently generates almost 70% of its electricity from hydropower, and is working to diversify its energy matrix.

  Countries throughout the region are attempting to do so, and much of the forecast capacity growth will be generated by renewables. Chile is a shining light, aiming to generate 70% of its electricity from clean sources by 2030 and be carbon neutral by 2050. Last year thermal plants contributed 55% of energy generation as severe drought affected hydroelectric plants, but 4GW of non-conventional renewable capacity was added to the system and a further 4.5GW is expected in 2022-2023. This will help the country achieve plans to shut down eight of 28 existing coal plants in the next five years.

  Chile is also positioning itself as a regional leader in developing green hydrogen technology, publishing its national green hydrogen strategy in November 2020. Paraguay is another nation betting on the technology, with a pilot project expected to produce 450kg of green hydrogen per day from April 2023. In Colombia, Ecopetrol, the largest energy company in the country, is working with Promigas and the national government on a pilot project. Argentina, Brazil, and Uruguay are also working on green hydrogen projects. The International Energy Agency (IEA) believes that the fuel has the potential to reduce emissions; decarbonise transport, in particular heavy-duty and public transport; and eventually bring in revenue through exports. The agency has called for regional cooperation to maximise opportunities.

  One notable exception to the regional trend towards clean energy is Mexico, where President Andrés Manuel López Obrador has doubled down on fossil fuels. Since coming to power in December 2018, López Obrador has pushed through the construction of the Dos Bocas/Olmeca oil refinery in Tabasco state, which will reportedly start operating in 2023, and moved to shore up ailing state-owned oil company Pemex. He has also prioritised the state-owned utility Comisión Federal de Electricidad (CFE), which has low renewables penetration despite abundant natural resources, disincentivising private investment in renewables projects. Despite this, renewables share of total electricity generation increased from 18% in 2019 to 20% in 2020 and 24% in 2021, and more renewables capacity is expected to come online through private companies over the next couple of years.

  Panama’s plans to solve water scarcity

  Panama may receive the second-highest amount of rainfall of any country in the Western Hemisphere, and boast freshwater resources of almost five times the global average, but the country remains at risk of water insecurity. 

  One issue is that many people live in homes without access to running water, relying on deliveries from tanker trucks to meet their daily needs, and another is that the country has been affected by droughts since 2019, which was the fifth-driest year in seven decades. In fact, a January 2020 press release from the Panama Canal Authority (ACP), the government agency that administers the canal, noted that rainfall in 2019 was 20% less than the country’s historic average, while water evaporation levels increased by 10% due to a 0.5- to 1.5-degree Celsius rise in temperature. This poses problems for the continued operation of the Panama Canal, a hugely important contributor to the national economy, as falling water levels in the lakes that fill the canal’s system of locks affect navigability, as well as affecting agricultural production.

  The response to such a complex issue is multifaceted. In 2016, the government published its national water security plan 2015-2050, which aims to provide running water to every Panamanian; restore and maintain river basins; maintain functioning water and sewerage infrastructure; and develop a culture of responsible water use. The document mentions that only around a quarter of Panama’s freshwater supply is used, and therefore problems arise due to mismanagement of resources. Then in 2021 the government published a national drought plan, which promotes better monitoring of hydrological resources; the development of new and alternative sources of water; water conservation programmes; and legislation and planning around land use. In addition, the government has embarked on a well-digging programme on agricultural lands, and moved to improve water supplies in urban areas under a US$225m plan financed by the Inter-American Development Bank (IDB). And in June 2021, President Laurentino Cortizo sanctioned a law establishing Panama’s meteorological and hydrological institute (IMHP), an autonomous entity which he said would enable Panama to begin a “new path towards climate resilience”.

  The ACP is also incredibly important in terms of water supplies. Not only does it manage the passage of ships through the canal, the agency controls dams and water-treatment plants that supply freshwater. In September, the ACP announced that work to enlarge the Mendoza water-treatment plant would start in Q3 2023, increasing its production capacity from 40m to 60m gallons per day. Increasing water stress has seen the ACP introduce a number of water-saving measures, including the suspension of energy generation at the Gatún hydroelectric plant; the elimination of hydraulic assistance at the Panamax Locks, which use high levels of water to ease vessel passage; the use of water-saving basins at the Neopanamax Locks; and the use of tandem lockages, which allow two vessels to pass the canal at the same time. Other measures include a freshwater surcharge on vessels over 125 feet, adjustments to the booking system for all shipments, and a vessel handling fee.

  Panama now has plans in place to save water where possible while making better use of its existing resources. The issue is of primordial importance to the country’s economy, given the huge contribution of the Panama Canal to the national budget, with forecasts predicting direct contributions to state coffers of a record US$2.5bn in fiscal year 2023. With that in mind, it should come as no surprise that authorities are being proactive in searching for solutions to water insecurity.

• Megaprojects in Latin America

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  The term megaprojects refers to large scale, complex programmes with a cost in excess of US$1bn. They have a long history in Latin America, with iconic examples including the construction of Brasilia, an entirely new capital city for Brazil, in the late 1950s.

  However megaprojects are associated with controversy and social conflicts due to their impact on the environment and local communities. The majority run over budget, and construction delays are also commonplace. One example is the metro system for Salvador, Brazil, which started to be built in 2000 but didn’t carry its first passengers until 12 years later. There are also tensions between recovering money spent on a project and the amount of social impact it delivers, with a lack of financing holding many necessary developments back.

  Dams are a common source of power generation in Latin America given the region’s rich hydrological resources, and many of them qualify as megaprojects. For example, the Itaipú dam between Paraguay and Brazil is one of the largest hydroelectric plants in the world. Construction started in 1971 and it started generating electricity in 1984, but the dam didn’t operate at full capacity until 2005. For a time Itaipú provided almost 90% of Paraguay’s energy needs, but in 2021 the dam recorded its lowest output in 16 years due to record low levels of rainfall linked to climate change. Water shortages due to melting glaciers, increasingly unpredictable weather conditions, and other climate change-related factors are posing problems for hydroelectric projects throughout the continent, increasing energy prices and encouraging the development of renewable energy projects such as wind and solar.

  Assessing other kinds of projects as hits or misses depends largely on perspective. For example, the US$2.7bn Camisea pipeline transports natural gas from the Peruvian Amazon to the Pacific Coast, and the project is a huge contributor to the country’s energy matrix. It has also allowed Peru to become an increasingly important exporter of the fuel. For many this constitutes a huge success, and it has encouraged further gas exploration. However the project has also caused increased pollution, declining fish stocks, and encouraged migration and settlement along new roads built to service the project, all of which have had negative effects on the environment and local indigenous populations. These kinds of issues are commonly raised by projects in the Amazon and other previously undeveloped areas of the region.

  Increasing urbanisation in recent decades means that many cities need better transport infrastructure, and the poor state of public transport has encouraged private car journeys, increasing congestion. To combat this, a growing number of cities have built or expanded metro systems. The Quito metro is scheduled to open this year, while construction on Line 1 of Bogotá’s system has begun and financing has been agreed for Line 2. Contracts have been signed for a US$2.5bn fully automated line on the Santiago metro, and a third line of the Panama City metro is scheduled to start operations in 2026. Metro systems face the same issues as other megaprojects, but they can be truly transformative in terms of productivity and quality of life for city residents.

  In summary, executing megaprojects successfully is difficult, and institutional weaknesses in the region make it even harder to do so. Projects are often cancelled when political periods change, as was the case with Costa Rica’s proposed train project, or rushed through to reduce the chances of this happening, as is the case with Mexican President Andrés Manuel López Obrador’s signature projects.

  Mexico’s megaprojects causing concern

  In Mexico, each president tends to promote a particular infrastructure project during their six-year term. The incumbent Andrés Manuel López Obrador (AMLO), who came to power in December 2018, has pushed ahead with three signature projects – the Maya Train, the Dos Bocas/Olmeca oil refinery, the Felipe Ángeles International Airport (AIFA) – each of which have proven more expensive than planned and sparked controversy in some way. 

  The AIFA airport, located 50km north of Mexico City at the existing site of the Santa Lucía military airbase in Estado de México (Edomex), was inaugurated in March. The first issue is that only 14 of a planned 28 gates were built, and when the airport opened there was a lack of transport links to the centre of the city. Second, official costs increased from M$75bn (US$3.74bn) to M$80bn, and a media investigation found that the real cost had in fact reached M$104.5bn. So far, the airport has struggled to attract airlines, and López Obrador has given responsibility for the airport to the armed forces, an area in which they have little experience, raising doubts about its future viability.

  In July, López Obrador also inaugurated the Dos Bocas/Olmeca oil refinery in the state of Tabasco, although the facility remains incomplete and operations are not expected to start until 2023 at the earliest. While the original budget was set at US$8.9bn, state oil company Pemex requested nearly US$5.6bn in additional funding in August, which would increase the price tag to US$14.6bn. In addition, serious flooding was reported at the site in October, which some blamed on poor planning and the fact that the refinery is being built on top of a mangrove forest. The refinery is the first to be built in Mexico in over four decades and is part of López Obrador’s goal for Mexico to become self-sufficient in terms of energy supplies. However its construction comes at a time when the vast majority of countries are moving away from fossil fuels, and the refinery has been criticised by environmental groups. Even US President Joe Biden has tried to encourage López Obrador to commit to the energy transition, but Dos Bocas/Olmeca demonstrates the Mexican president’s commitment to swimming against the tide.

  López Obrador’s other main project, the Tren Maya, is a 1,500km railway designed to connect tourist hotspots in the Yucatán Peninsula. The president says that the train is part of a plan to bring economic development to the southeast of the country, but local residents along the line have complained about a lack of consultation, and there have been a string of environmentally-motivated challenges in the courts that have slowed construction. Costs have spiralled, with López Obrador admitting that the train could cost up to US$20bn, nearly three times the original budget of US$6.8bn. And while he has remained bullish on the progress of the project, in October he admitted for the first time that part of the line near Chetumal, Quintana Roo state, may not be built due to local opposition.

  The Mexican president has also promoted the Interoceanic Corridor (CIIT), a major logistical and industrial investment project that will link the Pacific seaport of Salina Cruz (Oaxaca state) with the port of Coatzacoalcos (Veracruz state) on Mexico’s Caribbean coast. Plans also include connections to the Tren Maya and a line to Guatemala via Tapachula, Chiapas state. However construction of container terminals at the two ports has been delayed.

  Mega projects are known for running over budget and affecting the environment and local communities, and López Obrador has taken a huge risk in attempting to transform the southeast of the country with two massive infrastructure projects, as well as betting against the prevailing winds on fossil fuels and handing the armed forces a huge role in Mexico City’s airport infrastructure.

• Great power competition in infrastructure: BRI and B3W

  Patrick de Courcy 04 November 2022 Hits: 654

  China’s Belt and Road Initiative (BRI)

  Beijing’s Belt and Road Initiative, which aims to improve infrastructure connectivity, is the flagship of President Xi Jinping’s foreign policy. Initially launched in 2013, the scheme was only extended to LAC in 2018. Panama was the first of a raft of nations to sign onto the BRI that year, and since then the involvement of Chinese companies in logistics, electricity, and construction centres around the strategically important Panama Canal has raised concerns in the US, which sees the BRI as a challenge to its hegemony in LAC. At the latest count, 20 LAC countries are part of the initiative, with many smaller nations among that number, but Brazil, Mexico, and Colombia have not formally joined. However each of these nations has still seen significant Chinese activity because their large, diversified economies make them more attractive destinations for investment. 

  Recent developments include Nicaragua and Argentina formally joining the initiative in January and February 2022 respectively. Nicaragua joined the BRI shortly after ending diplomatic relations with Taiwan, which is a requirement for members as China uses the BRI to further its goal of isolating the island state on the international stage. That said, a Chinese-backed rival to the Panama canal had been planned in Nicaragua, with a concession granted in June 2013, but the project seems to have been put on hold indefinitely. In the case of Argentina, the country had already received massive Chinese investment in infrastructure projects, including the largest solar energy plant in Jujuy, which is funded by the China Development Bank. Beijing has also invested in developing lithium mines in Argentina as it moves to secure supplies of the metal, which is used in batteries for electric vehicles and is therefore essential to the energy transition.

  The attraction of the BRI is obvious in a region in which a serious infrastructure gap is seen as a major drag on economic performance. However it is worth pointing out that Chinese activity in LAC started growing since Beijing joined the World Trade Organisation (WTO) in 2001, and there is no evidence of a significant uptick since the BRI came to the region. Indeed, state-to-state loans were in fact higher prior to the BRI, and in 2020 their value fell to zero. 

  “None of the cooperation priorities of the BRI are novel compared to earlier Chinese policies towards the region,” reads a December 2021 academic paper assessing its impact. “There has not been a step change in Sino–LAC economic relations compared to the trends that have been observed since the Global Financial Crisis a decade earlier nor has there been any systematic differences between those countries that have signed BRI MOUs with China and those that have not.”

  The Build Back Better World Initiative (B3W)

  The B3W was announced by the Group of Seven (G7), an informal grouping of advanced economies, in June 2021. It is defined as “a values-driven, high-standard, and transparent infrastructure partnership led by major democracies to help narrow the $40+ trillion infrastructure need in the developing world, which has been exacerbated by the Covid-19 pandemic,” and Latin America is the first region in its sights.

  B3W activities kicked off in September 2021 when US officials visited Colombia, Ecuador, and Panama, with some small agreements announced including a US$150m loan to help small businesses in Ecuador deal with the fallout from the pandemic, but there has been little activity since. Details on how financing would work have not been released, but the aim is to leverage the US Development Finance Corporation (DFC), USAID, and EXIM Bank to encourage private investment from G7 member states. This is similar to the America Crece initiative announced under former US President Donald Trump, which has since been cancelled. It is likely that loans and investment deals would come with stricter conditions than those offered by China.

  With B3W still at a nascent stage it is difficult to assess its impact in the region, but its stated aims demonstrate a greater consideration for climate and the environment, social inclusion, labour standards, and anti-corruption compared to the BRI, with transparency and sustainability at the forefront.

  Given the differences in priorities of the two projects it is possible that they could be complementary rather than competitive. Chinese officials have suggested that there is space for cooperation, but direct cooperation seems unlikely.

  However focusing entirely on the BRI and the B3W to assess great power competition in infrastructure projects in LAC misses out on some important aspects. As outlined previously, Chinese activity in the region is not necessarily linked to the BRI. In addition, the drop off in state-to-state loans has been compensated for by investment through other channels, such as the purchase of companies and participation in public tenders, according to Margaret Myers, head of the China and Latin America programme at the Inter-American Dialogue.

  Under President Joe Biden, who led Latin America policy when he was vice-president to Barack Obama (2009-2017), the US has spoken of strengthening its partnerships in LAC to counter the influence of China. However the actions of his administration have not matched his rhetoric. There remains a lack of real detail underpinning the B3W initiative, and other commitments have been lacking. Some were expecting significant funding commitments to be announced at the Summit of the Americas (SoA) in Los Angeles in June 2022, but they were left disappointed after commitments for just US$1.9bn in private investment were announced for El Salvador, Guatemala, and Honduras. 

  It is difficult to envision a world in which the US can outcompete China in spending on infrastructure projects or loans to LAC countries. For one thing many LAC countries would not accept conditions such as those envisaged by the B3W initiative and its commitment to certain values, and US plans are reliant on private capital, with investors not willing to outbid state-backed Chinese rivals which can overpay for strategic reasons. 

  In general, there has so far been less resistance to Chinese investment than in some other parts of the world, as LAC governments know they need to seek foreign cash to carry out significant projects. Beijing has also proven willing to work with governments of all political stripes, rather than excluding ideological opponents, and it maintains a policy of not getting involved in domestic politics, which makes it an easier partner than Washington. 

  The US is trying to sell itself based on values such as human rights and care for the environment in a region that is desperate for cash to chip away at its infrastructure deficit. And, as demonstrated by the response to US attempts to talk LAC nations out of using Huawei telecoms equipment over security concerns, regional governments have proven that they are willing to put economic considerations above any notion of shared values.

• Infrastructure investment outlook

  Patrick de Courcy 02 November 2022 Hits: 613

  Infrastructure projects tend to require large capital investments which can be difficult for developing countries to make, particularly in tough economic times. 

  Public investment in infrastructure has fallen since the 1980s, which is often referred to as LAC’s “lost decade” due to a foreign debt crisis and a shocking decline in regional GDP growth from 6.7% in 1980 to -1.9% in 1983. The knock-on effects mean that public investment in infrastructure, which was around 3.1% of GDP in the early 1980s in the region’s six largest economies, plummeted to 0.8% of GDP from 1996-2001 due to structural reforms imposed by the IMF, as well as austerity programmes. This led to the deterioration of infrastructure throughout the region.

  More recently, public investment as a share of total spending on infrastructure has been falling as private involvement increases, and total spending “is not sufficient to maintain growth rates, handle increasing populations or improve sustainability”, according to the IADB. Public investment in infrastructure has been around 2% of GDP for the last five years, falling from 2.07% GDP in 2017 to 1.97% in 2018 and 1.93% in 2019, and transport accounts for around 60% of this spending. Of the remainder, spending on water infrastructure accounts for 0.3% of GDP, energy 0.4%, and telecommunications 0.2%. From 2015-2019 the countries that made the largest public investment in infrastructure as a percentage of GDP were Bolivia (6.9%), Nicaragua (3.7%), and Panama (2.6%), while the lowest were Brazil (0.5%), Guatemala (0.6%), and Mexico (1.1%).

  Public investment falls when the economy suffers, and the tight budget constraints and high debts that characterise the regional economy have been worsened by both the Covid-19 pandemic and the fallout from Russia’s invasion of Ukraine, limiting governments’ ability to act. And fiscal positions are worsening, with an average fiscal balance of -0.4% of GDP in 2008 forecast to become more than -3% in 2025, according to the IMF, which added that gross public debt is also set to increase from 40% of GDP in 2008 to 68% in 2019 and 74% by the end of 2025.

  A lack of investment disproportionately affects societies’ poorest members, who rely more often on public infrastructure. Another issue is that public spending has recently been focused on short-term measures such as cash transfers to vulnerable populations, rather than long-term projects like infrastructure. At the same time, the majority of infrastructure spending is still funded by the public sector, and only around 20% of spending, approximately 0.5% of GDP, is funded by the private sector. By way of comparison, this proportion is higher than in China, India, or Russia, and there are also wide variations by country: private sector investments are almost zero in Argentina, but are equivalent to more than 1% of GDP in Chile and Brazil. 

  The benefits of spending on infrastructure are clear. Every dollar spent has a multiplier effect of 1.5x in terms of GDP over five years, according to the IDB, which adds that each US$1m invested also creates 36,000 new jobs. Targeting infrastructure spending to reduce commercial costs would also boost trade, according to the IDB, which says that reducing logistical costs by 1% would increase exports from the Pacific Alliance countries (Mexico, Chile, Colombia, and Peru) by as much as 4.5%. The problem is that regional governments do not have the fiscal space to make huge investments at a time of increasing economic strife, and private capital tends to gravitate towards certain kinds of infrastructure that are more profitable, such as telecommunications towers in densely populated urban areas.

  Prospects for ‘green infrastructure’ spending

  Green infrastructure refers to projects related to renewable energy, low-carbon transport, sustainable water management, and other technologies linked to the energy transition. According to the IDB, investing in green infrastructure will help to drive economic growth while also improving LAC’s ability to deal with climate change in the long term.

  According to Climatescope, a market assessment by BloombergNEF that ranks 136 countries in terms of attractiveness for energy transition investment, Chile is the highest scorer in LAC. The country ranks 26th in the world in the index, which gives each country a score based on fundamentals such as key policies and market structure; opportunities and growth potential; and experience in relevant fields to date. Brazil is the second-highest scorer in the region, followed by Colombia, Argentina, Dominican Republic, Panama, Peru, and Guatemala.

  Climatescope also found that while global investment in the energy transition increased despite the economic impacts of the Covid-19 pandemic, investors turned away from emerging markets, which saw a 9% fall in investment, to focus instead on safer, developed markets, which saw a 24% increase. This means that the investment gap is growing despite pledges made at the COP26 climate change conference.

  Unfortunately the outlook remains complicated as economic headwinds mean emerging markets are generally performing poorly. The US Federal Reserve has increased interest rates as a response to rising inflation, stoking the value of the dollar and making it more expensive for emerging economies to borrow. This makes it even more difficult to make large investments in infrastructure projects. According to World Bank analysts, LAC is not at risk of suffering another “lost decade” because regional economies are better prepared to react to macroeconomic shocks, such as the fallout from Russia’s invasion of Ukraine, than they were forty years ago.  However they say that there is a risk that growth remains “tepid” after average per capita GDP growth close to zero in the last 10 years. LAC needs to find a new engine of growth in order to head off social unrest at a time when rising debt levels mean fiscal adjustment is necessary, they write.

  Some assistance comes in the form of funding from development banks such as the IDB, Development Bank of Latin America (CAF), Caribbean Development Bank (CDB), and the Central American Bank for Economic Integration (CABEI), which signed a joint agreement to finance climate action to the tune of US$50bn through 2026. In addition the IDB and the United Nations' Green Climate Fund (GCF) announced the creation of the first regional fund to promote electric mobility and green hydrogen at the end of July. This is expected to see US$450m in concessional loans and grants paid to nine nations. For its part, CAF renewed an infrastructure partnership with the US Trade and Development Agency (USTDA) in July. 

  While these schemes are important, the sums involved are a drop in the ocean compared to how much needs to be invested in green infrastructure to properly advance the energy transition in LAC.  Much more ambitious action will be necessary in order to do so, with less reliance on private capital. This is demonstrated by the difference between China’s state-backed BRI initiative and the G7’s B3W initiative, which is reliant on private capital.

• Conclusion

  Patrick de Courcy 02 November 2022 Hits: 615

  In conclusion, LAC countries are attempting to deal with a huge infrastructure gap caused by long-term underinvestment at a time of persistent low growth and worsening fiscal conditions.

  Despite these issues, progress in transportation includes a raft of metro systems designed to reduce reliance on private vehicles and thereby reduce traffic congestion, while railway systems are seeing renewed investment after decades of decline. Another key shift is the nascent attempt to decarbonise public transport using e-buses, in which countries such as Chile and Colombia have made particular progress.

  In logistics, there remain serious shortfalls in capacity at both airport and container ports. While Colombia’s US$1.8bn airport modernisation programme appears to be a move in the right direction, attempts to increase capacity in Mexico City using the new Felipe Ángeles International Airport have got off to a sticky start. In terms of container ports, a new facility at Posorja, Ecuador, is a significant development, and the planned megaport at Chancay, north of Lima, will rival the existing facility in Callao. Another interesting trend is international cooperation in constructing a bi-oceanic highway between Brazil and Chile, with both rail and road connections planned to connect the Atlantic and the Pacific. 

  In telecommunications there remain large divides between rural and urban populations, as well as between high- and low-income families. However one standout performer is Chile, which has better fibre optic broadband connectivity than the OECD average and already boasts national 5G mobile internet coverage. More generally, the 5G rollout has been complicated by wrangling over the involvement of Chinese firm Huawei as the sector became part of geopolitical manoeuvring between Beijing and Washington. Encouragingly, as a region LAC has been quick to adopt WiFi 6 standards, which should have benefits in terms of connection speeds and provides evidence of forward-thinking regulators.

  Access to water and sanitation services have improved in recent decades, but water stress is increasing throughout the region and the situation is forecast to worsen due to climate change. Many countries are diversifying their energy matrix and attempting to end an overreliance on hydropower, which is vulnerable to falling water levels due to climate change, but Mexico is a notable exception in this regard and is doubling down on fossil fuels. Under President Andrés Manuel López Obrador the country is also making big gambles on transformative megaprojects such as the Tren Maya, which are being pushed through by the president despite significant opposition.

  With such a huge amount of investment needed, it should come as no surprise that LAC countries have been receptive to China’s increased involvement in infrastructure projects in the region, both as part of the BRI and more widely. The US and its allies may now be attempting to counter this with the B3W initiative, but with serious fiscal constraints affecting government spending LAC nations need concrete support in order to be able to build back better.