Roads to Prosperity: Fixing Argentina’s Crooked Infrastructure

Nicolas Blog Post

Hello There by Flickr user mzagerp under an Attribution 2.0 Generic license.

By Nicolas Berlinski

The province of Jujuy, located in Argentina’s most northwestern corner, is heavily reliant on the cultivation of sugar cane and its exportation to the domestic Argentine market. Regardless, it takes 22 days to move that sugar to the national capital, Buenos Aires— the same amount of time it would take to move the sugar from Jujuy across the Atlantic to Hamburg, Germany.

Jujuy is no anomaly as poor transportation networks and connectivity have restricted long-term economic growth throughout Argentina for some time now. Subpar infrastructure has hampered the efficiency of Argentina’s supply chains and significantly increased the transportation costs of goods – Argentina’s shipping costs are twice the OECD average for example. Furthermore, the country ranked 81st out of 137 in the World Economic Forum’s 2017-2018 infrastructure index, mainly due to the lackluster quality of its roads, ports, and notably electricity supply (ranked 113th out of the 137 economies surveyed). Buenos Aires regularly faces summertime power blackouts as air conditioning in the city’s buildings strain the local power grids past their breaking point, shutting off traffic lights, office computers, and everything in between. Poor infrastructure is a threat to public health too as 22% of the country isn’t connected to public water networks and around 40% are not connected to sewage, making many Argentines, particularly children, vulnerable to parasites.

Considering the long distances between the country’s cities and resources, the energy needs of its largely urban population to function in daily life, and its economic status relative to most countries with similar infrastructure woes, Argentina’s long-term growth prospects largely rest on an infrastructure overhaul. There is little debate that Argentina must boost domestic investment in infrastructure from the insufficient current rates of 3% of GDP to 6% in order to match the needs of its society. President Mauricio Macri and his electoral coalition, Cambiemos, pledged to address the issue in his 2015 presidential campaign with the announcement of sweeping infrastructure plans across the country and the much-anticipated Plan Belgrano, an infrastructure plan for Argentina’s 10 Northern provinces. Marcos Peña, President Macri’s cabinet chief, described Plan Belgrano as “the most ambitious [infrastructure project] in Argentina’s history.”  Infrastructure projects were conceived without a specific budget. Instead, the Macri administration sought to facilitate contracts mostly through a range of Public Private Partnerships (PPPs) since Argentina has regained access to international capital markets following the resolution of a standoff between the country and holdout funds due to previous debt defaults and the elimination of harsh capital and import controls imposed by former president, Cristina Fernandez de Kirchner.

Unfortunately, like in so many other Latin American countries, Argentina’s infrastructure plans have struggled to live up to expectations and have an uncertain future, hindered by macroeconomic woes, a corruption scandal, and the possibility of a new president in October’s election. The lessons Argentina has learned thus far are demonstrating the challenges of financing infrastructure in the developing world. The importance of institutional strength and transparency, stable finances, and both the benefits and pitfalls of PPPs to build the infrastructure that the developing world needs have come to light in Argentina.

In 2018, the Argentine peso lost half of its value, its interest rates reached world highs, inflation creeped up on 50 percent, and the IMF had to grant Macri’s government a record-breaking $57.4 billion bailout, portending harsh austerity. The public purse is being gripped tight and private investors are obviously hesitant to engage in new projects. Fitch Solutions, a consultancy arm of Fitch Ratings, forecasts weak progress in 2019 for Argentina’s PPP infrastructure projects with multiple projects that were approved in 2018 struggling to attract investors.

Argentina was able to attract funding for 1325 km of road construction with the help of the Overseas Private Investment Corporation (OPIC) and China’s State Construction Engineering Corp-subsidiary China Construction America (CCA). However, another 2,028 km of road projects that were awarded in 2018 appear in jeopardy as private finance has become hard to find during these turbulent times. It is unlikely that the government will issue new PPP tenders for previously planned projects like a large-scale passenger tunneling project in Buenos Aires, the construction of a freight rail line between Neuquén and the port of Bahia Blanca, and another seven road corridors, among others. For now, the end of the construction slowdown is hardly in sight. Lending rates are unlikely to ease up soon as Argentina’s central bank battles to maintain tight monetary control.

Argentina’s high public debt is another hurdle – it’s back on the rise after it peaked during the country’s 2003 sovereign debt crisis. PPPs seem to be Argentina’s only option. On the one hand, publicly financing large projects at this moment in time seems impossible considering the country’s historic current account deficits and the conditions of the IMF bailout. Likewise, the country’s infrastructure needs are as immediate as the job of balancing the books.

Unfortunately, as President Macri is beginning to learn, PPP agreements aren’t a panacea. They still require assets from the government and are costly when something inevitably goes wrong. Although PPP agreements and their liabilities can be written off the books, project costs must be paid off to the private sector down the line and extra costs end up on the government books eventually. All may seem fine today, but Argentina is taking on potential debt, whether or not it’s on the books, as an infrastructure project of this scale is bound to have complications along the way that will need government financial intervention. To ignore this fact would be foolish, especially considering the country’s fiscal history and knack for volatility.

Whether Argentina will be able to tackle the costs that will likely appear down the line is unclear to say the least. Argentines have been consuming at high rates and saving very little. National domestic savings and investment have tumbled since 2008 and the country faces a deeper current accounts deficit than ever before. Gross savings in the country as a share of GDP in 2017 were 13.5%, among the lowest in Latin America, let alone the rest of the world where developing countries like India, Indonesia, the Philippines, and Thailand have saving rates between 30-40%. Argentina’s infrastructure needs are immediate but so are its fiscal issues.

With little available investment capital, high public debt, and a challenging investor environment, it is no wonder that infrastructure projects have moved along at a fraction of the pace President Macri’s campaign seemed to promise.

As if Argentina’s economic situation wasn’t complicated enough for infrastructure development, a wave of corruption allegations leveraged on the Kirchner administration have rocked the boat and fueled distrust of PPP agreements. The Lava Jato investigations which revealed continent-wide political graft by Brazilian construction conglomerate, Odebrecht, in public works projects led to around $35 million in bribes being paid to Argentine government officials. These investigations also prompted the publication of journals documenting bribery by many Argentine firms of government officials between 2005 and 2015, which has led to drawn out court dealings, political infighting, and skepticism about ongoing public works projects. Owners of some of the country’s largest construction firms have been implicated, including President Macri’s cousin and ally, Angelo Calcaterra, the former owner of construction company, Iecsa, which has been recently accused of receiving unfair preferential treatment on the “Ruta Nacional 8” project, linking Buenos Aires to the provinces of Santa Fe, Cordoba, and San Luis.

Fitch Solutions argue that public wariness and skepticism as a result of the scandals, have made elected officials hesitant of pushing PPP infrastructure too hard, exacerbating the challenges caused by the macroeconomic situation in the country. President Macri’s administration is currently trying to strengthen laws and regulations so that only individuals that are involved in corruption are penalized while companies must simply pay fines in order to avoid cancelling already awarded projects and to avoid blanket bans on PPPs. “The government is adopting regulations to save the companies, while executives and shareholders face the consequences of their actions,” Marcelo Etchebarne, country head for consultancy DLA Piper Argentina, said.

Corruption is an institutional blight to infrastructure development and has made infrastructure projects in Argentina costlier and more inefficient for as long as it has permeated the country’s public institutions. When unfair competition for government contracts arises through corruption and bribery for government officials, the public good is compromised by personal gain. A recent study by researchers at the University College of London and Central European University sought to quantify the average cost of corruption by looking at a large dataset of public procurement announcements from 2009 to 2014 of 27 European Union countries. The researchers measured corruption with an index of a country’s corruption risk and estimated that a one unit increase in the corruption index, equivalent to the difference between Hungary and Sweden, was associated with a 35% increase in road costs when controlling for other factors.

A final cause for concern for the future of Argentina’s infrastructure efforts, is the possibility of a new president being elected in this year’s election. President Macri’s approval ratings have been low and volatile amidst the economic crisis of 2018 and haven’t cracked the 40 percent mark in a while. The nightmare scenario for President Macri would be former president Kirchner, or a similar firebrand candidate, winning the presidency. That could mean a re-implementation of the capital controls that Kirchner put in place prior to 2015, once again constricting Argentina’s access to foreign capital and investments for infrastructure.

Argentina’s stuttering efforts to improve infrastructure resemble similar narratives throughout the world and Latin America, where public and private infrastructure investment is lower than every other region in the world except Sub-Saharan Africa and the share of paved roads is lower than anywhere else. Argentina is emphasizing important lessons of infrastructure development. On the one hand, the balance book must be in check. Stability is the key to an investor’s heart and, with a global financing gap for infrastructure projects, private investors will be key. A country’s institutions must be fortified to weather the temptations of bribery too, and they must be staffed by public servants who have the public good in mind. In the face of high public debts, harsh investment environments, widespread graft, and political uncertainty, many developing country’s infrastructure ambitions are falling short of reality.

So where does the country go from here? Any serious discussion about infrastructure in the country must revolve around normalizing the country’s fiscal troubles. Obviously, that is part of Argentina’s larger economic picture. Macroeconomic policy needs to be directed both towards short-term sustainability while also addressing the immediate needs of Argentines, especially the most vulnerable. When the books are in order, then large-scale infrastructure projects will be easier to manage, and investors will be more willing to engage in Public Private Partnerships.

Tackling corruption is another challenge that can be addressed in the immediate future. Laws that demand greater transparency regarding the bidding and approval process of PPPs will help but the broader issue at play is restoring the justice system that has become highly politicized and ineffectual – only 2% of the indictments filed by state attorneys in the past decade have resulted in concrete penalties. Moreover, PPPs require private investment and private investment yearns for stability and rule of law. Tackling political graft will ease the concerns of investors in the short run, at least slightly, reduce costs of infrastructure development, and improve the final product.

Longer paved roads, vast railways, and modern airports can provide a structural boost to Argentina’s economy to provide for long-term growth while providing plentiful employment. In order to achieve this though, the economic ship must be steadied, and corrupt leaders from the public and private sector banished from power.

 

 

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s