Andean Building Boom

September 29, 2013

It’s time to start building

At present, the Colombian government currently spends 1% of its budget on infrastructure. That’s shockingly low. The European average is 5% of GDP while the Chinese invest around 9% of GDP.

Colombian producers need a quicker way to port

The lack of spending is exacerbated by the country’s challenging geography. The Andes mountain range, thick jungle and a tropical climate in places make it extremely difficult to transport goods and people around. As Juan Carlos Roncario, managing director of Ferrocarril del Pacifico, a Colombian rail firm, told LatAm INVESTOR : “It costs more to send bulk goods within certain points in Colombia than to ship them to Europe!”

But now Colombia is addressing the problem with an extensive range of road, rail and air links. According to Vanessa Buendia from the Infrastructure Journal, “the ten-year development plan is estimated at circa $20 billion”.

It’s difficult to get across how important these infrastructure works are for the country. Unlike Britain, where we’re debating a new railway to shave minutes off the journey from London to Manchester, Colombia’s plan will link thousands of remote communities. As Antonio Navarro Wolff, a former leader of the M-19 guerrilla movement and now a politican, pointed out in the FT, infrastructure matters because “guerrillas start when roads end”.

Another serious problem for Colombia is displaced people. During the violence of the 80s and 90s, many Colombians were forced from their homes. As a result, there are now an estimated five million displaced people. Solving the problem completely will be complicated, because there are many conflicting claims for land.

However, one step the government is taking is to build massive housing projects – ‘Mega Proyectos’. To give you a sense of scale, the Ciudade Verde project on the outskirts of Bogotá will have 350,000 apartments and houses. It is basically a mini city and will include hospitals, schools and the hydroelectric plants needed to provide power.

In total, the projects are likely to increase public spending on infrastructure to 3% of GDP. But the government isn’t planning to pick up all of the tab itself. It’s keen to attract private-sector backing, and has drawn up concessions for major projects. For example, by 2014, the government expects to concession 100% of the four-lane road network and 50% of railways.

It’s a Peruvian problem too

Peru also has a massive infrastructure deficit. In fact a report from the World Economic Forum calculated that Peru has the second-biggest infrastructure gap in the region, just behind Bolivia. That’s partly a product of challenging geography and decades of underinvestment. But it’s also because Peru’s economy has grown far more quickly than the infrastructure supporting it.

Like Colombia, Peru has a $20bn plan. But it is even more ambitious – aiming to spend it all in the next five years

$11bn will go towards upgrading transport routes across the jungle and mountain regions. It will involve building 7,000km of new road and paving 85% of the existing roads, so that they can withstand seasonal weather changes.

Meanwhile, $8.3bn will be spent on railways linking towns in the mountains to ports on the country’s Pacific coast, and on a new commuter line in the capital, Lima. There will also be money for new airports, telecommunications systems and river management.

Again, government spending is only part of the story as the Peruvians have a good record of involving the private sector. Since 2006, pending private investment in Peruvian infrastructure is up 300%, hitting $7bn last year.

Just as in Colombia, the infrastructure plan also has a strong social element. For left-wing president Humala, extending railways, roads and power lines is a very tangible way for him to spread the benefits of the country’s economic growth to some of its poorest people.