COLOMBIA AND PERÚ: BOOSTING GLOBAL COMPETITIVENESS BY INVESTING IN INFRASTRUCTURE

(Part 1 out of 2)

by Cristina Camiz, Troy Ford, Matheus Schmidt, and Daniela Toleva

The political stability achieved by Colombia and Peru over the past 15 years, along with accelerated economic growth, have led to a significant increase in total trade (the sum of exports and imports) from US$125 billion in 2008 to US$188 billion in 2012. In addition to stability and economic growth, another key factor is both countries’ success in establishing free trade agreements (FTAs) with major economies such as the U.S.,China, and the EU. Nevertheless, for Colombia and Peru to compete with these countries and truly benefit from free trade, they must narrow their infrastructure gap to increase their competitiveness.

One of the primary limitations in both countries’ competitiveness rankings is their infrastructure, particularly in the transportation sector. According to the Global Competitiveness Report, prepared by the World Economic Forum in 2012,Colombia and Peru were ranked 114 and 97, respectively, among 144 countries and territories in terms of transportation infrastructure — below Puerto Rico (45) and Rwanda (67).

The Colombian Infrastructure Chamber published a study in 2012 showing a deficit of more than 30,000 kilometers of paved roads in the country and a lack of roughly 1,000,000 containers in port capacity. This study also highlighted the poor conditions of existing roads, where only 10% to 15% of secondary and tertiary roads are considered to be in “good” condition. One of Peru’s primary newspapers,La República, estimated that, in order to maintain its current level of competitiveness,Peru would need US$88 billion in infrastructure investment between 2012 and 2021. Transportation accounts for almost 25% of the deficit, with the primary transportation areas being roads (roughly US$13 billion) and railways (US$7 billion).

As a consequence of poor infrastructure,Colombia and Peru face extremely high transportation costs. Xavier Duran, a professor at Universidad Los Andes in Colombia, noted that logistics costs in Colombia and Peru represent 23% and 32% of their GDP, respectively, compared to 9% on average in OECD countries. Other evidence from the World Bank’s 2012 Doing Business report shows that the cost of exporting a commodity is approximately US$2,270 per container in Colombia and US$850 in Peru, much higher than the cost in countries such as Malaysia (US$435) and South Korea (US$695).

Both the Colombian and Peruvian governments are aware of the current situation and the need to invest in order to improve their global competitiveness. Colombian President Juan Manuel Santos stated in 2012 that, “Only with major investments and ambitious projects will we be able to recover and provide the productive sector with an infrastructure that allows us to be truly competitive.” What are the root causes of poor infrastructure in these countries? What is the role of government in addressing the challenges? What progress has been achieved, and what lies ahead to ensure that increased investment will close the infrastructure gap? What are these governments doing, and what do they still need to do to close the gap?

Origins of the deficit.

Indirectly emphasized by President Santos, one of the primary factors that explains the gap in transportation infrastructure is the historical lack of ambitious projects and investment. During the 9th National Congress of Infrastructure in 2012, Leonardo Villar, president of the Foundation for Education and Development in Colombia (Fedesarrollo), argued that over the past decades,Colombia and Peru had each invested about half a percent of their GDP on infrastructure, whereas developed countries invested more than 2% and emerging countries invested roughly 9%.Origins of the Deficit 

In Villar’s view, part of the problem is that the constitutions of both countries create strong distinctions between productive and social investments, with an emphasis on the latter. He argues that some social investments are misclassified. For example, large pensions paid to former government officials are often categorized as social investments, while new road construction connecting an impoverished village to a commercial center might be classified as a productive investment and, thus, deprioritized.

This view is also shared by other experts, such as former Colombian Minister of Finance Juan Carlos Echevery. In a 2012 interview with The Wall Street Journal, he stated that, “for years,Colombia has not paid attention to the infrastructure. We paid attention to education, health care and pensions — and the war. Now we are getting back to building the infrastructure.”

According to Carlos Casa, a professor at Universidad de Los Andes in Peru, the limited access to capital has also played an important role in constraining investments in infrastructure. The government has not had sufficient funds to make the necessary investments, nor has the private sector been properly incentivized to support projects of public interest. For example, a 2012 study by Apoyo Consultoría showed that of all private investment projects in Peru slated for 2013 and 2014, only 5% will be allocated to infrastructure; of these projects, the vast majority (62%) will be directed toward mining and hydrocarbon. In the public sector, there is also a misalignment of government incentives, creating an unwillingness to make investments that benefit future governments, as seen in the lack of investments for road maintenance and rehabilitation.

In addition, Carlos Parodi, a professor at  Universidad de Los Andes, highlights two important aspects in Colombia and Peru that contribute to low-quality infrastructure: corruption and a lack of human capital. In the World Economic Forum’s Global Competitiveness Report for 2012-2013, Colombia and Peru are ranked among the countries with the highest rate of diversion of public funds (130 and 103, respectively, out of a total of 144 countries). In Parodi’s opinion, corruption not only discourages private investment, but also leads to low technical standards and poor prioritization of infrastructure projects. With regard to human capital, there is a shortage of qualified professionals at all levels within these governments, which makes infrastructure projects unmanageable.

Other factors that explain the high cost and low competitiveness of the transportation sector in these countries are their challenging topographies and geographies. According to Villar,Peru and Colombia are marked by a mountainous topography that increases distances between cities. By land, it takes more than 15 hours to go from Lima to Cuzco, another major inland city in Peru. The situation is even worse in Colombia, where there are three distinct mountain ranges and the largest cities are far from the coast. For example, it takes roughly 10 hours to go from Bogota to Medellin by land, a stretch of only 270 miles. Dario Londoño, a professor at Universidad Javeriana in Colombia, writes that the average distance from a primary city to the nearest port within Colombia is three to eight times greater than the distance in comparable countries such as Chile (3.2 times), Brazil (3.6 times), and Argentina (8.0 times).

Fuente: KNOWLEDGE@WHARTON

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