Monday, Dec 18, 2017
Transport | South America | Argentina

Reinvigorating Infrastructure

$33.2 billion for transport infrastructure through 2019


4 months ago

Minister of Transport Guillermo Dietrich and President of Argentine Freight Trains Ezequiel Lemos oversee the arrival of new locomotives for the reactivated Belgrano Freight Line
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The new National Transport Plan aims to close Argentina’s infrastructure gap to make the economy regionally and globally competitive.

Ranked a paltry 87th out of 140 countries in the world by the World Economic Forum for competitiveness in infrastructure – behind Ivory Coast and just ahead of Albania – Argentina’s creaking infrastructure, from unreliable power distribution to poor transport links, is holding it back. Meanwhile, Chile and Brazil rank 45th and 74th respectively, demonstrating the extent to which Argentina lost out to its neighbors in terms of foreign direct investment under the mismanagement of previous administrations.

The country’s infrastructure woes are multiple: during harvest time, Argentine farmers struggle to get their crops to market along clogged roads. Getting products out to export markets is an exercise in patience, given cargo trains are both unreliable and limited, and international links via air and land are less than optimal. Meanwhile, the country’s natural gas pipelines have no more capacity as demand outpaces domestic production. Power outages have become a fact of life, particularly during the summer months. Unless Argentina addresses its infrastructure deficit, it will be unable to reach its full economic potential.

“The infrastructure deficit hampers the productive development of the country. We see that for the first time in many years there is a government that wants to improve the productivity and competitivness of the economy by investing in infrastructure and not through means such as manipulating monetary policy,” remarks Francisco Ortega, Director of McKinsey Argentina.

“The most difficult part of the job has been done,” says Horacio Reyser, Secretary of International Economic Relations at the Foreign Ministry, referring to Argentina’s progress in boosting competitiveness through measures including freeing capital controls and lowering subsidies to curb inflation and cut the fiscal deficit. The next step is to close the infrastructure gap.

Realizing that tackling the issue will require an enormous amount of investment which can only be met by tapping all possible sources, President Macri launched the National Transport Plan, which aims to invest $33.2 billion in infrastructure between 2016 and 2019. This will include a large contribution from the private sector. Projects range from airport upgrades to new roads and railway lines, as well as tunnels through the Andes to create transport links with Chile. And with new legislation in place, optimism abounds about the chance of completing all the work needed.

“The public-private partnership law is quite important for boosting long-term investment from the private sector,” says Mr. Reyser. “Argentina has almost zero participation from the private sector in infrastructure, as opposed to countries like Colombia that have $30-40 billion destined to finance infrastructure. This is a level that Argentina could certainly achieve with this PPP law.” The government’s objective is to attract more than $5 billion a year in investments through these partnerships, which are widely seen as more attractive to investors than the previous system in Argentina, which managed private participation in public projects through a concession scheme.

For Minister of Transport Guillermo Dietrich, who is leading the president’s ambitious plan, the potential is enormous. “We are connecting the whole country with highways, railways and airports,” he explains. “There are over 1,116 kms (693 miles) of highways currently under construction, however we target to build a grand total of 2,800 kilometers (1,739 miles) across the country by 2019. This is the most ambitious road plan in the history of Argentina.”

While Minister Dietrich feels the palpable interest in the scope and speed of his projects, investors and observers know that historically, public works projects have been a cesspool of corruption and inefficiency. In response, Mr. Dietrich is outlining his new case for transparency.

“We are working every single day in order to rebuild trust,” he says, adding that the government has changed completely the way in which tenders are held. “They are now published online, so everyone has access to them. Rules are now the same for everyone, and all stake holders have access to the conditions for any tender.”

For the neglected North of Argentina, there is a special program which aims to tackle the geographic inequity which has plagued the country – and threatened stability – for so long. “Despite the North’s integral role in the foundation of our country, it has consistently been neglected by all governments ever since. This is why we have gotten to work on Plan Belgrano,” said President Macri while visiting Salta province.

Plan Belgrano includes $16 billion of infrastructure investment over the next decade. The idea is to bring roads, railways and air routes up to international standards as well as invest in water and sanitation. The World Bank has recently approved a $125 million loan as part of the initiative, to which the government is adding a further $25 million. This will be used to build new and rehabilitate existing water infrastructure. The private sector has reacted to the government’s opening to investment. “We also have large investments and continuous improvements in Tucumán, Iguazú, and Jujuy. In the medium term, our idea is to focus on Formosa and Catamarca,” says Matías Patanian, CEO of Aeropuertos Argentina 2000 (AA2000), the country’s largest airport operator.

Meanwhile, in a bid to put Argentina firmly back on the trade map as a link between Mercosur and the Pacific Alliance, the country is set to start work on the Agua Negra cross-border tunnel project to Chile. The project, which will connect Argentina’s San Juan province to Coquimbo in Chile, will open up a new trade corridor between the Atlantic town of Porto Alegre in Brazil and the Pacific port of Coquimbo.

 Sergio Uñac, Governor of San Juan, sees enormous economic potential for Argentina’s producers as a result. “Chile has free trade agreements with various countries. Those agreements cover 7,000 products, while at the moment they are only exporting 4,000. Through the tunnel, we can provide them the 3,000 remaining products for re-export,” adds Mr. Uñac.

Benefits to Agribusiness
Perhaps the largest beneficiaries of Argentina’s renewed focus on infrastructure development will be its farmers. “Historically, Argentina has been a champion for food production. However, due to the lack of investment, the sector has lost its competitive edge. Our infrastructure investments are aimed at recovering our competitiveness and achieving the objective of feeding 600 million people by 2019,” says Ricardo Buryaile, Minister of Agribusiness.

Last year’s floods devastated vast tracts of farmland, leading to a surge in the price of soybeans, and were widely attributed to the building of clandestine irrigation canals in the absence of proper water infrastructure. The government’s plans to invest $10 billion over four years in projects including canals, storm drains and warning systems should mitigate the impact of floods in the future. What’s more, better road, rail and air infrastructure linking farms not only with the rest of Argentina but to the rest of the world, mean more farmers can export their goods.

Today, the country is estimated to produce around 100 million metric tons of soybeans, corn, wheat, and related crops. Analysts predict that the combination of cuts in export taxes and other economic measures coupled with better infrastructure in the northern provinces will see this figure jump to 160 million metric tons by 2025.

Little by little, public reforms are opening the way for private sector investment in agribusiness. Roberto Urquía, Director of Aceitera General Deheza (AGD), one of the country’s most prominent value-added agribusinesses, says, “We are working on the logistics aspect, as it is a significant proportion of the final cost of our production. As a consequence of the reduction of taxes on maize exports, we are building and inland elevator in Pampa del Infierno, in Chaco province. Since taxes on soybean and its derivatives were lowered but not eliminated, there will be a larger production of maize which has come down to zero export tax. One hectare of land produces 6,600 pounds of soybean but 17,600 pounds of maize.”

Aviation Sector Growth
Boosting air transport is a major factor of the country-wide infrastructure development plan. “Argentina is a remote country, away from the normal routes of connectivity. For our own development, it is vital that we develop our domestic connectivity, as well as our links to the region and the world. Currently, Argentines fly much less than our neighbors, even with a larger population. Argentina does not have a strong network,” says Mario Dell’Acqua, President of national flag carrier Aerolíneas Argentinas. The airline is currently going through a major transformation by putting in place professional management and establishing processes in order to reduce its dependence from government subsidies. While the Macri-era leadership has been able to cut the airline’s budget deficit in half in the first year, Aerolíneas Argentinas will still cost local taxpayers around $180 million in 2017, according to local press. However, the government is confident that with the new management they can turn the company around.

He adds that Argentines drive three times longer distances than people in other countries in the region, with all of the consequences that that brings – from lost working time to higher risks of accidents. But as a result of the new government’s deregulation of air transport, which brought with it the entrance of low cost airlines, and the massive investments in airports across the country, Argentines are set to take to the skies.

“Brazil used to have just one main airline, but after they opened up to competition, the network became stronger. Brazilians who were not used to flying started doing so, and the Brazilian market more than doubled within 10 years. Our vision is to be the leader in the market in a five-year period, losing market share but in a market that is twice the size. Instead of having 80 percent of our current eight million passengers per year market, we would rather have 60 percent share of a 15 million passenger market,” says Mr. Dell’Acqua.

Minister Dietrich adds that international airlines have already started to react positively to the changes in Argentina’s aviation sector. “They are showing it by improving frequency. They are all analyzing how to improve their business in the country.”

Righting past wrongs is key for the air transport sector. Mr. Dell’Acqua recalls that during the previous administration, the destination of Córdoba was ignored due to political differences between the national and provincial leadership. The result left Argentina’s second-largest city without an air hub, instead concentrating flights in and out of Buenos Aires. “When Aerolíneas Argentinas started increasing the flight frequency to Córdoba, the city responded quite well. We doubled both the flight frequency and passenger numbers,”  adds Mr. Dell’Acqua.

New investments from AA2000 will see further expansion. “We are making large investments in airports such as Córdoba and Mendoza, and we want to see new companies setting up there, as well as in [the Buenos Aires airports of] Aeroparque and Ezeiza,” says Mr. Patanian.

These investments have been made possible by the company’s successful international debt placement on the capital markets of $400 million at a rate of 6.95 percent, the lowest interest rate achieved recently by any Argentine corporation to date. “There was an enormous amount of investor interest and the placement was oversubscribed to the extent that for a placement of up to $400 million, $2.6 billion in offers were received,” says Mr. Patanian.

Of course, the focus is not solely upon opening up new routes for the country’s flag carrier. AA2000 plans to open up a purpose-built terminal at Ezeiza airport for low-cost airlines, and also aims to keep on investing in the capital’s airports to bring in more international and regional players.


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