Growth in Latin America: The Colombian Model by Adrian Massuet W'24
Today it seems that any economic discussion would be incomplete without considering the effects of coronavirus and the policy responses its spread has stimulated. While the disease’s reach is global, this summer Latin America acquired the status of being the “new hotspot”. The toll has been steep, with the World Economic Outlook Update estimating a 9.4% shrink in real GDP for 2020: the region’s worst recorded recession. However, Latin America has faced economic challenges long before the imposition of mandated shutdowns and strict capacity limits.
In the first fiscal quarter of 2019, as the world enjoyed strong trends of expansion, the region fell behind with wide scale contractions and underperformances by its larger economies. Thus, a startling truth is evidently revealed; even in global conditions conducive to solid growth, Latin nations can stumble. Although attributing regional sluggishness to a single cause risks simplicity, the lack of adequate infrastructure cannot be overlooked.
Of the six regions of the world, Latin America ranks fifth in terms of infrastructure quality, only ahead of Sub-Saharan Africa. This comes as a damaging consequence due to the region’s historical pattern of scant investment in the sector. In 2018, the region spent only 2.8 percent of its GDP on development. For reference, South Asia and the Middle East/North Africa spent 5.0 percent and 6.9 percent respectively. As a result, businesses may find their operations strained from a lack of cheap electricity and interconnectivity among telecommunications grids.
Another harmful impact comes in the form of exorbitant logistical costs. Trucks waiting to unload soybeans in a line often stretching fifty kilometers in Paranaguá, Brazil is a particularly telling example. Such inefficiencies increase consumer costs but also prevent opportunities for high growth. To remediate many of the obstacles to the regional economy, financing for infrastructure development as a percentage of GDP must increase. But with high debt and tight budgets, Latin nations are hardly in a position to front these costs. Herein lies the role of a public-private partnership (PPP).
In basic terms, a PPP is a legal vehicle for the mobilization of private capital for public projects. The advantages commonly espoused for such an arrangement include the ability to leverage additional financing and expertise, the diversification of risk, and the incentive for efficiency. Colombia, more than any other Latin country in the past decade, has taken bold and comprehensive steps towards infrastructure development through the use of PPPs, as evinced in recent initiatives and policies such as the fourth-generation roads concession program (4G) and the introduction of Law 1508 in 2012 .
The fundamental vision of 4G is the construction of a nationwide road network providing for “5,000km of roads, 775 bridges and 41 tunnels,” requiring some $13 billion and 29 PPP projects. The emphasis on road networks comes as a result of the fact that over 80% of internal transport relies on this medium of infrastructure. To facilitate such ambitious designs, Colombia has relied on critical partnerships with nonprofit partners such as the International Finance Corporation for equity and debt investment and the Multi-Lateral Investment Guaranteed Agency for the creation of political risk insurance packages in an effort to secure foreign investors.
Even more critical to the success of 4G have been the landmark policy changes set forth by the previously mentioned Law 1508. The legislation introduced a uniform framework and evaluation criteria for PPPs, required that value-for-money analysis be prepared prior to the execution of projects, and capped the increase in public expenditures to no more than 20% of the original contract value , among other measures. These improvements allow for more transparent interactions between public and private entities and less transaction costs, demonstrating the commitment of Colombia’s leadership to such initiatives.
Given that many Colombian PPP related projects and policies, such as 4G and Law 1508 discussed above, were created earlier in the decade, it seems appropriate to provide an update on the current state of the nation’s infrastructure to measure their effects. As of late this year, an estimated 40% of 4G is complete. Progress has been delayed, however, due to flaws in contract design and the repercussions of a region-wide political scandal known as “Lava Jato.” Nevertheless, work continues with over 30 major road improvements linking main ports to major cities, such as the Prosperity Corridor and the Sun Route.
Additionally, PPP activity includes a recent multimodal approach with investments in airports, seaports, and riverine ports. The focus of airport development primarily lies in metropolitan areas where the expansion of the El Dorado Airport in Bogota and the creation of a new airstrip in Cartagena are the most notable prospects, all of which are to be structured as concession agreements. Seaports in Colombia now operate at full capacity and receive continuous upgrades including the expansion of container yards and the implementation of green technologies. Seventeen new port terminals, still in the planning phase, are to be distributed on both sides of the coast. Further, an ambitious riverine port project valued at $1.3 billion aims to dredge over 600 miles of the Magdalena River in an effort to reduce transportation costs by an estimated 20% for goods being shipped to Caribbean ports.
Infrastructure is vital to an economy, in large part because it facilitates the basic transportation of goods and commodities. Recent projections from the World Bank Group estimate an impressive 28% reduction in transport costs and a solid 1.5% in GDP per annum at the completion of the 4G program. In addition to significant benefits for job creation, rural poverty is also forecasted to decline due to Colombia’ s infrastructure initiatives. This comes because of increased agricultural productivity and revenue from interconnected, high quality roads.
A reliance on the PPP model, however, has not come without its headaches. Issues such as fragmented coordination across levels of government, frequent and costly renegotiations of contracts, and the possibility for political corruption plague infrastructure development projects. While this dose of realism may temper the optimism set forth by much of this article, it should not negate the commendable advancements made towards a secure and prosperous economy as a result of these initiatives.
Overall, Colombia’s prioritization and strategy of diligently pursuing infrastructure development will result in lower logistical costs, higher productivity, and overall economic growth- putting the Latin nation on the path to global competition. Leaders from across the region would be wise to take a page from the policy book of Colombia.
Adrian Massuet is a freshman in the Wharton School intending to concentrate in real estate and finance. His interests include international development and political affairs. He enjoys playing sports, reading historical non-fiction, and discussing current events.