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EXECUTIVE SUMMARY Latin American economies require substantial improvement to physical infrastructure to raise potential GDP growth. As macroeconomic stability has been achieved in the largest economies, the public sector now aims to prioritize microeconomic issues. The region’s major economies must address inadequacies in the years to come, focusing on the quality of roads, railroads, bridges, airports, and ports. Governments have started to prioritize the urgency of closing the infrastructure gap, by allocating more public resources for infrastructure and pursuing public-private partnerships. Recently, there have been important strides made, with private capital increasingly attracted to investment opportunities in infrastructure projects in the region. e Infrastructure Challenges in Latin America - December 2013 TRENDS + VIEWS JAMESTOWN LATIN AMERICA Real Estate Private Equity www.jamestown-latam.com Contact: Bret Rosen – Managing Director, Research +1 212-652-2141 [email protected] Rio de Janeiro • Bogotá • Atlanta • New York

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Latin American economies require substantial improvement to physical infrastructure to raise potential GDP growth. As macroeconomic stability has been achieved in the largest economies, the public sector now aims to prioritize microeconomic issues. The region’s major economies must address inadequacies in the years to come, focusing on the quality of roads, railroads, bridges, airports, and ports. Governments have started to prioritize the urgency of closing the infrastructure gap, by allocating more public resources for infrastructure and pursuing public-private partnerships. Recently, there have been important strides made, with private capital increasingly attracted to investment opportunities in infrastructure projects in the region.

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Page 1: Jamestown Latin America | Trends + Views | Infrastructure Challenges in Latin America - December 2013

executive summary

Latin American economies require substantial improvement to

physical infrastructure to raise potential GDP growth.

As macroeconomic stability has been achieved in the largest

economies, the public sector now aims to prioritize microeconomic

issues.

The region’s major economies must address inadequacies in the

years to come, focusing on the quality of roads, railroads, bridges, airports, and ports.

Governments have started to prioritize the urgency of closing the infrastructure gap, by

allocating more public resources for infrastructure and pursuing public-private partnerships.

Recently, there have been important strides made, with private capital increasingly attracted

to investment opportunities in infrastructure projects in the region.

The Infrastructure Challenges in Latin America - December 2013

TRENDS + VIEWS

JAMESTOWN LATIN AMERICA

Real Estate Private Equitywww.jamestown-latam.com

Contact:

Bret Rosen – Managing Director, Research+1 [email protected]

Rio de Janeiro • Bogotá • Atlanta • New York

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When one considers the major impediments to

faster economic growth in Latin America, inadequate

infrastructure is often cited as one of the chief causes

mentioned. Here are just a few examples and images

of infrastructure constraints that occur throughout Latin

America. Transporting a good from the Colombian port

city of Barranquilla to the capital of Bogotá, a distance

of approximately 1,000 kilometers, can cost more

than sending it the 15,000 kilometers from China to

Barranquilla.1 Trucks containing agricultural exports

often line up for miles, unable to enter Santos port in

São Paulo state of Brazil, as the port is at overcapacity.

Isolated communities in Peru are often economically

and socially disconnected from the rest of the country

because paved roads do not reach these villages.

However, there have been important advances in the

physical infrastructure of Jamestown Latin America’s

target countries (Brazil, Colombia, Peru, Mexico, and

Chile). Airports, such as Eldorado Airport in Bogotá

and Jorge Chavez Airport in Lima, were both recently

renovated; indeed Lima’s airport has won numerous

awards for the quality of its service.2 The Brazilian

government recently privatized a majority stake of

several large airports, which should improve service.3

The interoceanic highway now connects São Paulo state

with the western coast of Peru. Governments in Brazil,

Colombia, and Peru have committed billions of dollars

to infrastructure projects and in many cases are seeking

to follow the emerging public-private partnership (PPP)

model that has achieved some success, both in the

region and internationally, in the past. Furthermore,

private capital from abroad has allocated substantial

resources recently to solving the infrastructure gap, with

private equity firms having dedicated record amounts to

infrastructure in the region this year.

This paper addresses the issue of infrastructure in Latin

America, with a focus on Brazil, Colombia, and Peru. We

divide the note into the following sections: 1) arguing

that infrastructure is vital to economic development;

2) discussing what Latin America needs to do to

improve its physical capital; 3) highlighting what is

being accomplished to improve the infrastructure in

the various target countries; 4) noting the challenges

encountered in addressing the infrastructure deficit.

Finally, we describe the potential impact on the real

estate market from the infrastructure deficit and

initiatives to improve it.

To begin, we must define infrastructure for the purposes

of our discussion. Definitions vary for describing a

country’s infrastructure, but typically include roads/

highways, railroads, bridges, ports, airports, and public

transport such as subway systems. Additionally, one

can include electricity/power generation and quality of

telecommunications.

There is clearly a

high correlation

between economic

d e v e l o p m e n t ,

competitiveness, and

GDP per capita and the

quality of a country’s

infrastructure; this

correlation is not

a perfect one however, as the United States is clearly

suffering from infrastructure deficiencies that have

been increasingly exposed in recent years. The World

Economic Forum’s Competitiveness report defines

12 pillars of competitiveness for an economy, with

infrastructure listed as one of the most prominent.

PagE 2

Latin american governments are recognizing the necessity of addressing the infrastructure deficit in the region.

1 According to StratFor, a consultancy, it costs US$30 on average to ship a ton of merchandise from the interior of the country to the coast, but half this amount from a Colombian port to Asia. The total cost of exporting a shipping container from Colombia costs on average 20% more than from Argentina for example.

2 Skytrax, a UK based commercial aviation consultancy named Lima’s airport the top rated airport in South America in 2012, for the fourth consecutive year. Edward Plaisted, Chairman of Skytrax, stated, “A perennial favourite with passengers, other airports in the region must be wondering what they have to do to unseat Lima from this top position.” http://www.worldairportawards.com/Awards_2012/bestairport_samerica.htm

3 In November 2013, two additional stakes in major airports were sold: Rio’s Galeao airport, and Belo Horizonte’s Confins. R$20.8 billion were raised.

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According to the 2012-13 report, “Extensive and efficient

infrastructure is critical for ensuring the effective

functioning of the economy and is an important factor

in determining the location of economic activity and the

kinds of activities that can develop within a country.”4

The report goes on to state that quality infrastructure:

1) reduces the effect of distance between regions; 2)

integrates the national market; 3) connects an economy

at a low cost to markets in other countries and regions;

4) is a prerequisite for access of less developed

communities to core economic activities and services.

Efficient modes of transport, whether via rail, highway,

or water, enable businesses to get their goods and

services to market in a secure and timely manner.

Judging the quality of a country’s infrastructure can be

subjective; the aforementioned World Competitiveness

Report ranks 148

countries on the basis

of a number of inputs

presumed to influence

the competitiveness

of an economy.

Infrastructure is

one of the pillars as

mentioned above.

Unfortunately Latin America does not stack up well

compared to the other regions across the globe in terms

of infrastructure. Brazil is rated 71st for its infrastructure,

Colombia 92nd, and Peru 91st. While this report should

not be considered the only means for judging a country’s

infrastructure, it does add credence to the view that

the quality of Latin America’s infrastructure falls well

short of developed country standards, even possibly

Emerging Asia and Europe.

Turning to the country rankings, Brazil rates well on air

travel capacity and telecommunications, but is rather

woeful in most measures of the quality of its physical

infrastructure, which is a key component of the “custo

Brazil,” or cost of doing business in the country. As the

country’s economy has grown impressively over the last

two decades, bottlenecks have formed on a large scale,

thanks in part to the issues in the table below:

Similarly, Colombia rates well in terms of availability

of air seats, but the ratings highlight the country’s poor

roads, railroads, and ports.

PagE 3

4 http://www.weforum.org/issues/global-competitiveness

Latin american countries rank low in global surveys that measure the quality of infrastructure.

CoUNTRY RANKING

QUALITY of ovERALL INfRASTRUCTURE 114

QUALITY of RoAdS 120

QUALITY of RAILRoAd INfRASTRUCTURE 103

QUALITY of PoRT INfRASTRUCTURE 131

QUALITY of AIR TRANSPoRT INfRASTRUCTURE 123

AvAILABLE AIRLINE SEATS (Km/wEEK) 9

QUALITY of ELECTRICITY SUPPLY 76

moBILE PHoNE SUBSCRIPTIoNS PER CAPITA 45

fIxEd TELEPHoNE LINES PER CAPITA 52

ovERALL RANKING 71

Table 1: brazil

Source: World Competitiveness Report, 2012-2013.

CoUNTRY RANKING

QUALITY of ovERALL INfRASTRUCTURE 117

QUALITY of RoAdS 130

QUALITY of RAILRoAd INfRASTRUCTURE 113

QUALITY of PoRT INfRASTRUCTURE 110

QUALITY of AIR TRANSPoRT INfRASTRUCTURE 96

AvAILABLE AIRLINE SEATS (Km/wEEK) 39

QUALITY of ELECTRICITY SUPPLY 63

moBILE PHoNE SUBSCRIPTIoNS PER CAPITA 87

fIxEd TELEPHoNE LINES PER CAPITA 84

ovERALL RANKING 92

Table 2: Colombia

Source: World Competitiveness Report, 2012-2013.

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meanwhile the rankings in Peru reflect a similar situation:

The world Bank also publishes data on a number of

infrastructure-related categories, which allow a further

quantitative assessment of how Latin America stacks up

versus the rest of the world and its Emerging market

peers. Here is a sampling of statistics:

• The percent of total roads that are paved in Brazil is

14%, as of 2010. This compares to 23% in Chile, 36%

for mexico, and 100% in the UK and USA. Some

other Emerging markets: Turkey (89%), Poland (70%),

and malaysia (80%) display much higher percentages

than Latin American countries.5

• for rail lines, Brazil has 29,000 km of tracks, Colombia

under 2,000, and Peru slightly above 2,000. In

comparison, China (a similar landmass to Brazil) has

66,000 km of tracks, India (with 20% less GdP than

Brazil) 64,000 km, while Poland (similar geographic

size as Colombia and Peru and 20% larger GDP than

Colombia) possesses 20,000 km. In fact mozambique

has more rail track, at 3,100 km than Colombia or

Peru.

Clearly, Latin America has a major infrastructure deficit,

a reflection of decades of underinvestment in the

physical capital base of the countries. In prior decades,

low levels of public investment were a function of

economic underdevelopment, and incapable and

inefficient public administrators. When these countries

lacked macroeconomic stability, it was impossible

to attract meaningful private capital to infrastructure

development projects; furthermore, when sovereign

balance sheets were overly leveraged, the public sector

had limited capability to dedicate resources to the

building of roads and ports. More recently, the macro

backdrop has changed, and governments can be more

active in infrastructure development. Cost of capital for

the public and private sector in Latin America has fallen

markedly, allowing for deeper and more varied methods

of financing infrastructure projects.

As Latin American countries have become wealthier,

with established middle classes, world class exporters

of commodities to Asia, and larger populations, the

deficit has become particularly pronounced – and the

necessity to address the deficiencies has become more

urgent. In the cases of Colombia and Peru, there is

ample space in future

government budgets

to dedicate resources

to public investment;

Brazil faces a more

challenging fiscal

backdrop to direct

more resources to

this need. In all cases,

financial resources

are still limited, which speaks to the need to carry forth

with PPPs.

The opening paragraph of this note provides some

examples of the infrastructure deficit, but the issue

PagE 4

macroeconomic stability equates to lower cost of capital and flexibility on the fiscal side to fund infrastructure projects.

CoUNTRY RANKING

QUALITY of ovERALL INfRASTRUCTURE 101

QUALITY of RoAdS 98

QUALITY of RAILRoAd INfRASTRUCTURE 102

QUALITY of PoRT INfRASTRUCTURE 93

QUALITY of AIR TRANSPoRT INfRASTRUCTURE 85

AvAILABLE AIRLINE SEATS (Km/wEEK) 40

QUALITY of ELECTRICITY SUPPLY 73

moBILE PHoNE SUBSCRIPTIoNS PER CAPITA 93

fIxEd TELEPHoNE LINES PER CAPITA 87

ovERALL RANKING 91

Table 3: peru

Source: World Competitiveness Report, 2012-2013.

5 http://data.worldbank.org/indicator/IS.Rod.PAvE.ZS

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extends beyond some of the interesting anecdotes

mentioned there. A casual visitor to any of the region’s

capitals is of course overwhelmed by traffic congestion,

which while obviously annoying, also entails a large

economic cost (in terms of lost man hours for the

workforce, additional costs of transporting goods, etc.).

Traffic jams in cities such as São Paulo, Lima, and Bogotá

are legendary. In fact many senior Brazilian business

executives hop from meeting to meeting in helicopters

rather than face the

unpredictable traffic

patterns of São

Paulo, which may

be the only city in

the world where the

total amount of traffic

congestion, known

as lentidao, is almost continuously broadcast on the

news and in elevator videos, and can sometimes

total into the hundreds of kilometers.6 While traffic

congestion is a symptom of a growing middle class,

with access to credit, stable jobs and hence the ability

to purchase autos, it is also a result of insufficient public

investment in infrastructure and a major detriment to

economic productivity in urban areas. Clearly the pace

of construction of bridges, subway lines, and highways

in a city such as São Paulo has not been sufficient to

keep pace with population growth, economic vibrance

in recent years, and the number of autos on the road.

Beyond the topic of economic costs related to the

absence of urban infrastructure, one can also observe

the consequences of poor connectivity within countries.

Colombia faces massive geographical obstacles, as

within its borders there are Andean mountain ranges,

dense jungle, and ultimately coastline with the Pacific

and Atlantic. for example, it takes 3-4 hours for an

item that arrives at Buenaventura port to reach Cali,

even though the distance is just 78 miles. driving from

medellin to Bogotá, the country’s two largest, cities

separated by 274 miles, takes approximately six hours. In

other words, road quality is highly inadequate; decades

of internal conflict with the FARC and other guerrilla

movements have made it unfeasible to develop much

of the country’s national transport infrastructure but as

the security situation has stabilized, capital is flowing

into this area. When economists explain the recent

subpar performance of Colombia’s manufacturing

sector, among the reasons cited – along with the

appreciation of the peso – is that transport infrastructure

is inadequate and this inadequacy is highly detrimental

to the competitiveness of industry. On the positive side,

however, a city such as Barranquilla has seen substantial

development in recent years as the city’s last two mayors

have emphasized infrastructure investment, focused on

public roads, facilitating transport, and encouraging

trade promotion.

The challenges that Peru faces in terms of improving

its infrastructure are massive, due in part to the vast

socioeconomic divide that exists between the coast

and the more remote jungles and sierra regions. Given

that nearly half the country’s GDP is concentrated in the

metropolitan area of Lima, the quality of the country’s

infrastructure is weighted toward the capital and its

immediate surroundings. Similar to Colombia, Peru’s

geography presents a major obstacle to connecting

disparate regions of the country while it also faced

security issues in prior decades (namely from the

Sendero Luminoso, i.e., Shining Path movement), which

made development of large-scale projects in certain

parts of the country unfeasible.

6 on November 14, 2013, a record of 309 km in total traffic congestion occurred in São Paulo, as Paulistas headed out of town for a three day weekend. http://www.tribunahoje.com/noticia/83853/brasil/2013/11/14/so-paulo-tem-lentido-recorde-com-309-km-de-filas.html

Geographical obstacles toward improving infrastructure are substantial.

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The Challenges – country by country

brazil

Ask any Brazilian economist what is most needed to

raise the country’s potential GDP growth, and improved

infrastructure ranks high on the list of responses. In

short, Brazil has invested well short of what is necessary

to update and modernize its physical infrastructure, and

this has created important bottlenecks that affect all

major sectors of the economy.

Domestic demand has been strong for years, and

combined with incentives provided by the government,

has led to a massive surge in car ownership. Yet as any

visitor to São Paulo or Rio can attest, traffic congestion

has worsened dramatically because the pace of urban

infrastructure development, i.e., roads and subways,

has not kept pace with the population growth and

increased number of cars on the road. Meanwhile as

Brazil has become an export powerhouse in recent

years, the port capacity has also not kept pace with

this growth. Given the large geography of the country,

in the best of times it would be a challenge to link the

various regions of the country by rail and highway; but,

as demand for agricultural products from the hinterland

has soared, exporters have encountered greater

challenges moving their goods to market. Perhaps the

most instructive example of infrastructure deficiencies

relates to mining giant vale, which actually built its

own railroad in the northeast region of Brazil to move

its iron ore to port rather than relying on government

to do so. In a nutshell, for Brazil to burst through the

low GDP growth equilibrium that it now experiences,

infrastructure improvement is the number one priority;

a massive program to improve roads, ports and so on

would lift potential GdP, remove bottlenecks, lower the

custo Brazil and also reduce inflation.

The Financial Times recently published a survey

describing some of the challenges that Brazil faces

regarding infrastructure.7 Below are some telling figures

and statistics from this report and other sources:

• The asset stock of Brazil’s infrastructure is equal

to 16% of GDP versus the global average of 70%,

according to a mcKinsey study.

• On an annual basis, Brazil invests just 2% of its GDP

in infrastructure which, according to Credit Suisse

economists, is half the amount needed to sustain 4%

annual GDP growth. In comparison, China invests

13% of GDP in infrastructure, Colombia 6%, and India

5%.

• São Paulo has a

population 40%

greater than

London yet its

metro has 1/6 the

capacity of that in

the UK capital.

• On average it

takes a container

ship 21 days to

clear Santos port in São Paulo state; in comparison,

according to global shipping company maersk, in

Rotterdam it takes just two days.

• Over the last decade, annual light vehicle sales rose

by 2.5x, yet the number of paved roads increased by

just half.

It is estimated that Brazil has double the dependence

on road transport that the United States does, due to

its inadequate railroad infrastructure. In fact President

Dilma Rousseff, when recently officiating at a railway

project in Mato Grosso, stated that Brazil was “two

centuries” behind with regard to building rail networks.8

PagE 6

7 http://www.ft.com/intl/reports/brazil-infrastructure-2013. September 9, 2013.8 http://www.ft.com/intl/cms/s/0/f2296aa8-2373-11e3-98a1-00144feab7de.html#axzz2l6cRf8xI. September 9, 2013.

For years, Brazil’s investment in infrastructure has been inadequate, a prime cause of GDP growth below the regional average in recent years.

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As the economy has expanded and developed over

the past decade, the government has recognized the

inadequacy of the current infrastructure. In 2007, the Lula

administration launched PAC (Programa de Aceleracao

de Crescimento), a program with a four-year budget

through 2010 equivalent to R$650 bn. The Rousseff

administration followed up with PAC 2, a R$965 bn plan,

of which over 1/3 has already been invested. However,

according to the Financial Times survey, just R$33 bn

of PAC 2 has gone into infrastructure, with a greater

focus on energy and housing. Since the initiation of the

first PAC program, only R$101 bn has been dedicated

to infrastructure, a reflection of the government’s

inability to properly execute investment plans related to

infrastructure.

More recently, the government has moved forward with

a program intended to allow greater involvement of the

private sector in infrastructure development. Its R$133

bn intended concessions program is meant to construct

7,500 km of toll roads and 12,000 km of railroads. other

tenders will also include light rail and bus lines. There

have been examples of success so far via the auctions

of participation in

various airports. In

2012, majority stakes

in airports in São

Paulo, Campinas, and

Brasilia were sold

to private operators

who assumed shares

from Infraero. These

auctions raised

R$24.5 billion in 2012, attracting prominent international

bidders. more recently, on November 22nd, control of

Rio’s international airport and Belo Horizonte’s were

successfully auctioned. Singapore’s Changi Airport

Group, which operates, according to some surveys,

the highest quality airport in the world in Singapore,

paid R$19 billion, (for a 51% stake) or four times the

minimum bid, for Rio’s Galeao Airport.9 The Aerobrasil

group formed by Brazilian construction company CCR

and the operators of the Zurich and munich airports paid

almost R$2 billion for Belo Horizonte’s Confins airport,

or double the minimum bid for the 30 year concession.10

One issue that the government has faced with regards

to the auction of highway concessions relates to

allowing adequate rates of return; to attract private

investment, the government faces a tug of war between

keeping tariffs low on toll roads and allowing the private

sector an ample internal rate of return. One auction in

fact attracted no bidders since the government did not

allow an IRR deemed sufficient by potentially interested

parties.

for Brazil to make inroads will require involvement of

the private sector and improved implementation from

the notoriously bureaucratic public sector. The current

PT government has had, at times, a less than amicable

relationship with parts of the private sector; but there

are signs that the current Administration is looking to

provide adequate incentives to encourage more private-

sector involvement in infrastructure development.

Delays are natural for these types of projects. But on the

positive side, as Itau's economic team writes:

“There is no shortage of investment opportunities.

In addition to large sports events such as the World

Cup and the Olympic Games, there is the need for

infrastructure updates and crude oil exploration in

pre-salt fields. Favorable dynamics in government

debt create room for increases in public investment.

Additionally, equilibrium interest rates are lower than in

the past. Hence, investments (as a share of GDP) should

increase to about 20% of GDP and the expansion in the

PagE 7

9 The Economist, “Taking off at last: Some serious private money for airports and roads,” November 30, 2013.10 http://www.aviationpros.com/news/11247976/brazil-gets-9-billion-in-airport-auction, November 25, 2013.

The current administration has had some recent successes, especially the privatization of several airports.

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capital stock will likely be the main driver of growth in

the next few years.”

peru

Peru’s economy has been the region’s fastest growing

over the last decade, among major economies, despite

– not due to – its infrastructure. A sampling of figures

provides some information which highlights the urgency

of the matter:

• According to national statistics agency INEI, 88% of

homes in rural zones lack adequate sanitation.

• over half of rural homes lack access to clean water.

• The country’s estimated infrastructure needs

between 2012-21 amount to US$88 billion, over 1/3

of annual GDP.

• While for 2007-12 the budget for infrastructure grew

17% on an annualized basis, the country has a history

of inefficient execution of public investment. Notably

36% (total of 69 bn soles) of the resources intended

for public investment projects between 2005-12 were

never utilized according to the Ministry of Economy

and Finance.

Along with a lack of financial resources until recently,

Apoyo Consultoria, a local economic consulting firm,

also notes lack of human capital to carry out projects,

and inadequate rules and regulations to attract capital.

Apoyo recommends that the state moves from providing

infrastructure to becoming a purchaser and regulator

of infrastructure services while also following the PPP

model.11

However, there are some signs of improvement, as Peru

has a long list of infrastructure projects in its pipeline.

Apoyo Consultoria provides a list of 17 major projects

– nine highways, four ports, one airport, and two

railroads – that are either in phases of construction or

on which construction is expected to be initiated within

the next couple of years. The total investment required

is over US$12 billion for these projects. They include

electric trains in Lima that would presumably alleviate

congestion in the capital, docks at Callao port near

Lima, which would

facilitate the transport

of minerals, and a

number of highways

that would penetrate

the less accessible

regions of the

country. From a real

estate perspective,

improved capacity at

the port of Callao can result in substantial demand for

warehouse space and logistics. Over the 2013-16 time

period, public investment in infrastructure is estimated

to total over US$43 billion, equal to 20% of annual GDP;

this compares to US$27 billion in the prior four years.

Peru’s improving economic track record should help it

attract more foreign capital for infrastructure projects

under its PPP framework. The country’s senior economic

officials have held numerous roadshows throughout

Europe, the US, and Asia, in recent months, in a bid

to further deepen relations with institutional investors.

While there are questions about the ability of public

officials to carry out these projects, the overall macro

backdrop and business environment in Peru looks to be

supportive of the attempts to attract private capital into

infrastructure projects.

Colombia

Colombia faces major geographic obstacles to

improving its infrastructure. For years, the interior of

the country faced security issues, causing the country’s

major cities to lack the internal transport links that

PagE 8

11 Apoyo Consultora, “Cuatro medidas para incentivar el uso iniciativas privadas confinanciadas,” September 2013.

Peru’s economy has been fast-growing, despite major bottlenecks related to subpar ports and roads.

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exist in most other countries. Meanwhile geographical

barriers add to the complexity. Colombian territory

includes the Andes mountain range, dense jungle, and

inaccessible coastlines. According to a recent survey of

the Colombian economy by the Financial Times, Luis

Carlos villegas, the head of the national industry group,

likens the infrastructure deficit to a 10%-15% tax on

business.

While the Colombian

government has been

investing only 0.6%

of GDP in transport

and communications,

this percentage is

rising and the level

of execution of

infrastructure projects

is showing some signs of improvement. According to

the Agencia Nacional de Infraestructura, between 2011-

14 investment in infrastructure should reach 1.2% of

GDP by the public sector alone. While 3 trillion pesos

were invested in infrastructure in 2010, it is expected

that up to 9 trillion will be dedicated to infrastructure

investment this year overall.

The country’s infrastructure plan focuses first on

highways as roads account for 80% of internal

transportation in Colombia. According to the Ministry of

Transportation, the next generation program to develop

highways would add 8,000 km of roads, 1,200 of which

would be two-laned. A four-lane road from Bogotá to

Buenaventura, which will cost US$4 bn is a highlight of

this plan. Another top priority is connecting Medellin

directly to Pacific and Caribbean ports. As these

highways are constructed, the government estimates a

1%-2% direct and indirect influence on GDP over the rest

of the decade, with potential growth likely to increase

from 4.6% currently to 5.3% by 2024 as a result.12 With

the improved highway network, according to official

sources, the estimated time to transport items from

Bogotá to medellin would be reduced by 28%, while

from Bogotá to Cali there would be a 27% improvement,

26% from Cartagena to Bogotá, and 33% from Cali to

Cartagena.13 vehicle transport costs between cities

would fall between 16%-30%. Currently the government

is looking to move forward with these concessions in

the next few months.

Aside from the planned improvements to roads,

there are also expectations that the country’s minimal

railroad system will be expanded. The government’s

plan includes railroads from Bogotá to the Caribbean

coast, theoretically linking the economic center of the

country with the main ports serving the United States

at Barranquilla and Santa Marta (and a function of the

accompanying free trade agreement between the two

countries).

Overall the government aims to invest US$100 bn in

infrastructure by 2021, and as Luis Fernando Andrade,

director of Agencia Nacional de Infraestructura says,

“Nowhere else in the world is there such an ambitious

program.”14 Fortunately as the security situation

improves, the government can divert resources away

from defense toward more productive uses such as

capital projects.

In addition, there is a focus on improving the infrastructure

along the country’s rivers. Semama magazine recently

described plans to invest 2.1 trillion pesos, or around

US$1.1 billion in new ports along the Magdalena River,

Colombia’s most important, as well as on maintenance

of canals and on dredging of them. River transport in

Colombia can be a more efficient method of transporting

PagE 9

12 At a seminar around the IMF meetings in Washington in October 2013, Finance Minister Mauricio Cardenas also mentioned that potential GDP for Colombia could increase by 0.7% per annum if certain infrastructure projects were realized.

13 The aforementioned fT survey quotes a truck driver who states that the 410 km between Bogotá and Cali can take 14 hours, on one of the “better routes.”14 www.ani.gov.co provides information on the country’s infrastructure plans.

The current santos administration is dedicating increased resources to infrastructure, especially roads and highways.

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goods, given the aforementioned challenges that the

country’s geography presents. Semana reports that it

costs US$3,200 to move a container from the center

of the country to the Atlantic ports, but just US$1,800

if transported by the Magdalena River. A concession

will be auctioned, via a PPP format with the national

government, local governments, and state oil firm

Ecopetrol to make these improvements. Investment in

ports is also a prime focus for the Caribbean coastal

cities of Cartagena, Santa Marta, and Barranquilla,

thanks to the emergence of the free trade agreement

with the United States. For example, the port capacity

at Cartagena is expected to double by 2017, to move 5

million containers per year, thanks to expansion plans.

Investors in the industrial space are already expressing

growing demand for warehouses to attend to this

increase port capacity.

Additionally, the government is looking to privatize

assets as a way of financing infrastructure development.

In the first half of 2014, the government intends to

sell-off its participation in utility firm Isagen, which is

expected to raise US$2.6 billion. The proceeds of the

sale would then be transferred to the National fund for

Infrastructure development (foNdES), a vehicle which

can then spend the proceeds on infrastructure without

negatively impacting the central government’s fiscal

position.15 Eventually funds raised from potential sales

of the government’s stake in Ecopetrol could also fund

foNdES.

According to a recent Global Source report, foNdES

will become a crucial vehicle to support the success of

the upcoming wave of road infrastructure projects to be

developed through public-private partnerships, better

known as the “4G program”; the main goal of the 4G

initiative is to give Colombia a set of strategic highways

through which trucks will be able to travel at a speed

of at least 60 km/h. on top of funding from foNdES,

private capital will be invested alongside, via debt and

equity, from the firms that win bidding processes, as

part of a PPP model.

Final thoughts and impact on the real estate market

For Latin American economies to increase their level

of productivity and potential GDP growth, lifting the

quality and quantity of infrastructure is a necessity.

Inadequate infrastructure has become a political issue

too, as the recent protests in Brazil showed. The next

half decade will be crucial as governments have drawn

up proposals for improving infrastructure; whether

private sector concessionaires will provide the capital

remains to be seen.

Furthermore, efficient

public administration

is mandatory for these

projects to be carried

out in a timely and

transparent manner.

There is a long path

ahead. Logistics costs

as a percentage of GDP for the region dwarf those in

other major economies: for Peru 32%, Brazil 26%,

Colombia 23%, mexico 20%, and Chile 18% compared

to 10% for the United States and 9% in the OECD. The

upside for the region is that if even semi-adequate

infrastructure can be established, the potential returns

over the long run can be huge in economic terms.

despite the mixed outlook on infrastructure, there are

impressive achievements occurring. For example, Rio

de Janeiro’s landscape is changing, in anticipation of the

World Cup and Olympics. Specifically, the city accounts

for over R$2 billion of funds earmarked for urban

transport from the government’s credit line for World Cup

PagE 10

15 Escobar, Andres and veronica Navas. Global Source Partners monthly Report. “Boring Race, Known outcomes.” Section titled “Selling assets to build new ones,” december 2, 2013.16 Financial Times, “Rio’s Olympic deadline forces transport upgrades,” September 10, 2013.

Positive strides are being made, but investments take years to mature and impact economic outcomes.

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transport projects.16 The state government is investing

R$8.5 billion to double the capacity of underground rail

that connects Barra, which will host the Olympic village,

with the rest of the city. The city of Rio has dedicated

another R$5.6 billion to an express bus system which

will connect disparate areas such as the Galeao airport

with Barra and Santa Cruz. In Lima, the city government

is also in the midst of an ambitious infrastructure

development plan. One new metro line is slated to be

completed in 2014, with other additions to Metro Linea

2 scheduled for 2019.

Additionally, the city

has embarked on the

construction of five

new lines of electric

trains, totaling 130

km of track, according

to Consorcio Tren

Eletronico.17 A

number of new

highways are under construction, many under the PPP

format, intended to ease the city’s notorious congestion

as estimates show that the number of autos in the

Lima metro area will reach 1 million by 2017, double

the level of 2002. one major project is the via Parque

Rimac requiring US$700 million dollars of investment

connecting the port area of Callao with Javier Prado,

one of the major thoroughfares in the central city.

while the track record of infrastructure improvements in

Latin America is poor, and skeptics can point to years of

failed attempts to improve roads, ports, airports, etc., the

next half decade will be particularly telling, to determine

if the region’s major economies reverse years of

disappointment in this area. One can point to a number

of ways to measure infrastructure improvements,

ranging from increased public investment to GDP,

growing capacity of airports, larger percentages of

paved roads versus total roads, more kilometers of rail

lines, and increased numbers of subway lines.

For the real estate investor in Latin America, closing

the infrastructure deficit has important ramifications—

both macro and micro. On the macro side, clearly if

infrastructure improvements are realized, potential

GDP growth will increase. Substantial improvements

to these countries’ capital stock would raise potential

GDP by 1% per year according to the estimates of

various economists. Higher GDP of course means

more productive businesses, more demand for labor,

additional job creation, and higher standards of

living; these all positively impact real estate demand.

Since these countries are starting from a low base,

even marginal improvements to infrastructure can

have outsized benefits for economic activity – and

hence demand for real estate. Improved business

competitiveness and productivity, all things equal,

should boost real wages.

On the micro side, greater connectivity within cities would

also result. Better urban transport can enable people to

live further away from their jobs. For example, in São

Paulo there is great demand for finance professionals to

live near Faria Lima, the financial district. If there was a

better urban transport network, this could allow finance

professionals to live further away and hence the trends

of demand for real estate could shift as a result. Urban

plans and zoning could be potentially adjusted, and the

idea of suburbs would develop further.

If urban infrastructure could be improved, we would

expect lower price differentials between locations with

proximity to the central business district and more

dispersed locations. For example in São Paulo, prices

of residences near the central business district can

command prices 2x-3x those located 10 kilometers away

due to the massive challenges of public transport and

PagE 11

17 Apoyo Consultoria, “Inversiones en Transporte en Lima,” December 2012.

infrastructure improvements can literally change the face of certain cities and shift trends of demand for real estate to certain areas.

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traffic. The same phenomenon occurs in Lima where

prices in San Isidro and Miraflores have appreciated

dramatically, in direct correlation with the increase

in traffic congestion in that city. Thus far, these urban

agglomerations have centered around the business

and financial centers and extended outward; aside from

Santiago and Buenos Aires, where public transport is

generally better than the rest of the region, we have yet

to see true suburbs emerge in major Latin American

urban areas. In the United States, we see that cities with

good urban connectivity tend to exhibit smaller price

gaps between central business locations and suburbs.

This is not to suggest that all suburbs of a city such as

New York exhibit prices similar to manhattan. But for

example, Greenwich, CT which has a train that connects

professionals to Grand Central Station in New York in

under 45 minutes has an average home price of $1.1

million (versus $1.6 million for an average dwelling in

Manhattan).18 vienna, vA is connected to washington

dC by that city’s metro line. The average home in vienna

sells for $865,000, compared to $480,000 in the nation’s

capital, and $1.2 million in Georgetown, the ritziest

neighborhood of Washington.

If infrastructure remains sub-standard, we can also

identify some impacts. As mentioned, traffic congestion

in major Latin American capitals is a major urban issue,

due in part to inadequate highways, roads, and public

transportation. If we see continued inability to improve

subways, roads, and other urban transport, there will

be even stronger demand from urban professionals to

live near their places of work, especially in a city such

as São Paulo. As mentioned above, those who work in

the financial center of Faria Lima tend to prefer to live

near their office, to avoid long commute times. This

has pushed up the value of property in neighborhoods

with close proximity to Faria Lima. Indeed homes

in the southwest region of the city, near the financial

and business districts of Faria Lima, Avenida Paulista,

and Berrini tend to be priced 40%-50% above the city’s

average, partially for their proximity to the workplace,

and this trend could be exacerbated further if urban

transport is not improved enough to meet demand. We

see similar trends emerging in cities such as Bogotá

and Lima; prices in higher end areas such as Rosales

in Bogotá and San Isidro in Lima have outperformed

the city average thanks to their close proximity to the

central business districts in each city; if infrastructure

constraints are aggravated we would expect this gap to

widen. Another trend that has evolved in São Paulo is

the increased demand for microapartments, as young,

urban professionals sacrifice space – these units are

typically 35-45 square

meters – for the ability

to walk to work, hence

avoiding extremely

long commute

times. A series of

m i c r o a p a r t m e n t s

has emerged near

the Avenida Paulista

business center.

Lack of infrastructure, and the resulting traffic

congestion, also impact zoning regulations. In São

Paulo, specifically, the current mayor has pushed in

the direction of fewer high density projects that are not

in close proximity to public transport. Furthermore, as

new transport nodes are being developed over time, the

city’s urban plan will allow for higher density projects

that are near these points. Consequently, there may be

fewer new developments in the future in areas without

immediate access to public transportation, while more

supply can be expected in zones that are located near

18 Based on figures provided by Zillow.com.

Given poor standards of urban transport, residents of certain cities pay large premiums for proximity to offices.

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subways, bus lines, and other transportation. This concept has been implemented in a number of cities across the

globe, such as Los Angeles, where new high density development zones are placed around transport hubs.

TRANSPoRT modE FROM/TO% of woRK COMPLETE

COST (R$ mN)

BUDGET ExECUTED (R$ mN)

TRANS oESTE BRT (express bus) Jardim Oceanico / Santa Cruz 100 900 700

TRANS CARIoCA BRT (express bus) Barra / Deodoro 70 1,600 800

TRANS oLImPICA BRT (express bus) Int'l Airport / Ipanema 0.5 1,550 70

TRANS BRASIL BRT (express bus) Santos Dumont Airport / Santa Cruz 0 1,500 0

vLT Light rail Downtown area 0 1,164 0

LINE 4 Metro Connects to line 1 at Ipanema 32 8,500 2,600

Table 4: planned infrasTruCTure improvemenTs To rio de Janeiro

Source: Rio Negocios, Rio municipal Secretary. Rio 2016.