Hot Chile

Over the summer Chile announced a massive infrastructure plan, but will it enable the country to adequately compete with its neighbors, asks James Kenny

Beginning her second term as president, Michelle Bachelet quickly announced her return over the summer by unveiling an ambitious infrastructure plan for the country that will see almost $30bn spent up to 2020.

While encouraging, Bachelet’s time in office has not been without controversy in the infrastructure arena. In May, 10 high profile hospital P3s were cancelled.

Launched by her predecessor Sebastián Piñera’s administration, the projects were part of a $1.9bn concession plan to build or rebuild the hospitals, adding 4,300 beds to the health system. The projects had been warmly greeted by investors in the country and were seen as an indicator that Chile was serious about moving ahead with a diversified P3 program.

But then the brakes were applied with alarming force. Bachelet’s health minister Helia Molina asked the audit office to halt other projects in the process of being awarded, claiming hospital concessions have not proven to be efficient. According to Molina, a health ministry analysis shows construction costs of hospitals under P3 in the country are 77.9% higher than those built directly with public funds.

Since taking office the new government has cancelled two hospital tenders, and has withdrawn two other projects about to be awarded from the audit office. Two further projects – Salvador Geriátrico and Santiago Occidente – were awarded in spite of health ministry criticism. Added to this has been a growing controversy in the sector in general, with communist congresswoman Karol Cariola – who belongs to the government coalition – announcing plans to totally ban all hospital concessions.

Such decisions and controversy can make external investors nervous despite the country’s obvious investment potential.

James Davie, associate director for Latin America at Altra Capital, says although he is optimistic on the country as a whole, this controversy and political vagueness on some projects is worrying. “The country has so much potential and we plan on getting involved in the long-term,” he begins, “but the mixed messages coming from government and the political support are big challenges.”

Nonetheless, the $28bn 2014-16 infrastructure plan is good news for the country’s progress, and Chile’s current economic position means it is almost impossible to imagine that all the money would come direct from government.

Indeed, the plan includes provision for private investment in projects. P3s will feature, and do so quite heavily, if Chile is to match its ambition with action. The infrastructure plan is seen as an important shot in the arm for the country’s flagging economy, which began to falter in 2013 and has continued to struggle ever since. At August 31 2014, the country recorded just 0.3% economic growth over the 12 months previous. It is a figure that has been labelled “not a good number” by Finance Minister Luis Felipe Cespedes, who admitted: “We are not happy.”

In fact, most of Latin America has fallen into what the International Monetary Fund has described as “mediocre” growth rates, but Bachelet sees new infrastructure projects as a key stimulus to get the country outperforming its neighbors.

Bachelet has said the program will increase public infrastructure spending to 3.5% of GDP from the current 2.5%, although the investment still falls short of the $58bn recommended by the Chilean construction chamber over the next four years.

Enrique Marijuan, country manager for Chile at Spanish infrastructure giant FCC, believes that even though the investment is not as much as some would like, it will nonetheless provide an important boost to the Chile economy.

“It will increase GDP spending on infrastructure which will be very beneficial to Chile, addressing the short and long-term infrastructure needs, which will allow it to become a fully developed country,” he says.

The plan covers $9.9bn in new concessions until 2020 and $18bn in public works projects until 2021, with the former set to include new highways, airports and reservoirs to be procured and financed alongside the private sector. It includes the $655m Arturo Merino Benítez international airport expansion, the $1.98bn Costanera Central highway, and the last stretch of Américo Vespucio Oriente urban highway, all located in Santiago, which are being procured under a P3 framework.

In early November, the president reaffirmed her commitment to the sector, outlining a $4.2bn transport plan covering 14 new projects, including an expansion of Santiago’s underground train system and a cable car for Antofagasta in the north. Overall, the transport initiative includes $1.9bn in new concessions and $2.2bn in works directly funded by the government.

“Roads are an important step in improving the infrastructure in addition to building dams and upgrading ports and airports,” continues Marijuan. “Foreign companies, including Spanish companies, are already present in Chile operating toll roads and this is a good opportunity to increase their investment in the country.”

Noisy Neighbors

For a relatively small country like Chile, however, the key issue for the government is how to attract investment away from its larger neighbors like Brazil or the increasingly strong Colombia. Davie argues it is not simply enough to build a pipeline of P3s, but building new projects to a higher standard than surrounding neighbors will enable the country to attract investment.

“That is the big debate in the region now, especially with Chile. You have nearby countries like Brazil, Peru and Colombia. But also now they are competing with other countries around the world or in Europe. Investors don’t just look in one region at projects, they look globally.”

Roads might play an important role here. Chile has 90,000km of roads, of which only 25% are paved. Improving connection in this way could have a huge impact on the business environment, and help to create Chile as a destination for international investment more broadly. Such a possibility is likely to entice investors into its infrastructure plans, as they recognize that playing this long game and getting a foothold in the country now could offer some bigger prizes in the future.

“Transport in general in Chile is an area for investment,” says Marijuan. “Chile already has a passenger per capita ratio of one, which is the highest on the continent and it has now said that airport traffic will double by 2030.”

Another area that there is plenty of potential for infrastructure development and P3s in the future is energy. Currently in Chile, 70% of electricity is imported and the industry is very concentrated. Tariffs are higher than in the rest of the region and this negatively affects productivity and competitiveness. A new energy strategy was unveiled in June 2014, which targeted more private investment, lower fuel import dependency, more emphasis in renewables and regional integration.

Shane Martin, chief executive of Chilean-based wind energy company Torbellino, says the potential for investment in renewable energy infrastructure is high and something the country is coming round to.

“The energy prices are high here so alternative energy is a viable option. As a market it’s still in some respects easier to set up projects in terms of costs and permits compared to developed markets,” he explains. “Solar and wind energy projects show a lot of potential, with recent analysis by the EU and elsewhere confirming onshore wind energy as the cheapest on the planet.”

Nonetheless, the investment community would still like to see Chile recommit to social infrastructure programs. Notwithstanding the problems faced by the health sector in the region, many in the industry believe that a new round of social infrastructure P3 deals could be what is required to put Chile on a par with its neighbors.

“We’re looking at everything but we would like to see more work in the social sectors and projects done,” says Davie. “If you look at the UK with PFI and PF2, this is the type of example that should be followed and brings better chance of success.”