Infrastructure lessons from Colombia

Road-building is a classic tool to boost a flagging economy. But as Luis Fernando Andrade, president of Colombia’s national infrastructure agency, tells it, it isn’t plain sailing.

Colombia began working on its so-called 4G toll-road project in late 2011. With Colombian growth then around 5%, the aim was for the 40 separate road projects to combine to boost GDP growth to around 6.5%. However, with the Colombian economy suffering from falling commodity prices – particularly from the fall in oil – the effect of this infrastructure initiative is likely to keep Colombian growth to about 5%.

The president of Colombia’s national infrastructure agency, Luis Fernando Andrade, explains how the project has developed and what it might mean for other Latin American nations.

As lots of Latin American countries begin to look for infrastructure-led growth to replace commodities, what do you think are the keys to success for those countries considering such an economic pivot?

There are a couple of fundamental considerations for those thinking about using infrastructure as a means to propping up the economy. First: what is your starting point? Colombia has one of the poorest national infrastructure networks in terms of performance, which means our logistics costs are very high and therefore the economic impact from solving those bottlenecks is also very high. It’s different if you already have decent infrastructure. For example, Spain’s latest round of infrastructure projects really wasn’t productive. The investment Spain did in 1986 and going into the 1990s when it joined the EU really made a difference, but the last 10 years were a waste. So the starting point is a basic point but very important.

In Latin America you have countries like Mexico and Chile that have infrastructure on a par with developed countries. And then you have Colombia that is in bad shape – and I think Brazil is also in bad shape.

The second point is that it is a poor countercyclical tool. Usually recessions last about two or three years; it takes at least that to prepare and start a project. First you need an idea, then an engineering design, the bidding time, as well as discussions with environmental organizations and communities. And once you have awarded a project, it takes at least six months to get a shovel into the ground. So from making the decision to start planning an infrastructure project to beginning work takes a minimum of three years.

So starting from now, Latin American countries wouldn’t see any GDP benefit until late 2018 or 2019?

I won’t name names but other Latin American countries have been asking what we are doing, and we point out that we started the 4G project in late 2011 – so we’re almost four years into the process. I ask those countries: Have you hired engineering companies? Have you done environmental studies? Have you talked to communities? And the answers are no, no and no. There is only a desire to do these projects – and intention – but you can’t get billion-dollar projects going on that alone. So, I think most countries in Latin America are not ready to start constructing projects in a big way.

What do you think the economic impact of the 4G project will be for Colombia?

I have seen an independent study and the impact is huge. We are talking about increasing the growth rate of the Colombian economy by 1.5 percentage points during the construction period. And once all the roads are finished, because of the lower transportation costs the impact will be a 0.7pp increase in the non-inflationary growth potential of the economy. In terms of unemployment, the impact will be 200,000 direct jobs and another 200,000 indirect jobs, which will be a total of a reduction of once percentage point in the unemployment rate.

What is the fiscal cost?

I showed our projections to the finance minister – they showed that from a fiscal point of view, the cost to the country is zero. It’s fiscally neutral. And he had to agree with me. And why is that? Well, construction generates a lot of taxes: in Colombia VAT is 16%, so that adds up to 22% of the total fiscal cost during construction. And then you have the additional activity in the economy – and less unemployment – and the way we set up the contracts the government subsidy only kicks in once the companies hand over the projects. So this means we get a tax benefit with little cost. Once we start paying these availability payments there is a cost – and there is a period when the fiscal cost is negative – but over time, when the tolls from the highways grow and the operators are paying income tax, there becomes a point when the contribution turns positive again; in total it’s almost zero. So it allows us to grow our infrastructure and our economy with very little cost to the finance ministry.

For the full interview visit Euromoney’s website

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