Chile’s growing affluence derives largely from its mineral wealth. The country produces a third of the world’s copper, which contributes about 14 percent of the country’s Gross Domestic Product (GDP) and half its exports. There continues to be high demand for red metal around the world, especially from China. Not surprisingly, therefore, Chile’s state-owned Codelco now ranks as the world’s largest copper producer and all of its earnings – more than US$7 billion in 2012 – flow back into the country’s treasury.
Keeping up with demand
The country’s Ministry of Public Works is charged with defining infrastructure investment priorities for the nation.
“Our country has made important advances in public infrastructure in recent decades as we have established clear policies focused on Chile’s infrastructure needs,” says Carlos Plass, Director of Concessions for the Chilean Ministry of Public Works (MOP). “We know that investing in this area is vital for any country to achieve economic development.”
Chile’s economic buoyancy has created a growing middle class that expects its governments to develop efficient public infrastructure. Combined with the ongoing demand to keep commodities flowing smoothly in and out of the country, Chile’s governments have instituted robust policies to ensure its infrastructure can keep pace.
“By the end of the current administration, we will have invested some US$14 billion on public infrastructure projects,” the Director explains. “This translates into bigger and better connectivity for the country’s people and resources – not just through new highways, freeways, ports and airports, but with significant investments in basic roads, improvement of smaller airports and other connectivity projects that have a great social impact.”
Water is one of Chile’s primary challenges – particularly in the north, where the vast Atacama Desert is widely regarded as the driest place on Earth. Desalinating Pacific seawater is a viable option for mining and other industrial uses, but for human consumption and agriculture, Chile needs to move clean water to areas of the country that are in deficit.
“We have addressed the topic of water with renewed vigor,” says Director Plass. “We drafted the 2010-2025 National Strategy of Water Resources, a plan through which the construction of 16 new dams will be prioritized over the next decade. We expect this will enable us to increase our water storage capacity by 30 percent.”
Not only are these investments positioning the country for future success, they are helping to meet the challenges of a vulnerable geography. Chile’s 2,700-mile coastline sits atop the “Ring of Fire”, a band of frequent earthquakes and volcanic eruptions that encircles the Pacific Rim.
In February 2010 Chile was rocked by an 8.8 magnitude quake and a resulting tsunami that tore into the coastal towns of south-central Chile and damaged the port at Talcahuano, home to Chile’s main naval base. While the death toll was relatively low at just 525 killed, expert observers agree that recovery efforts were hampered by the country’s limited highway routes. And the quake inflicted over US$30 billion in damage – nearly a fifth of Chile’s annual GDP.
Following the earthquake, the government announced a US$2.5 billion investment to re-build 300,000 houses, as well as hospitals, schools and roads. In the municipality of Licantén, which suffered heavy damage from the tsunami, the federal government and Universidad Mayor collaborated with a global engineering firm to design new infrastructure – including evacuation corridors, sewage and waste management plants, and a new civic center – that would be safer in the event of a future tsunami impact.
This kind of private involvement has been central to the development of Chile’s public infrastructure. Nowhere is that more evident than in the country’s concessions industry.
Chile’s concessions system was launched in the early 1990s, when Public Private Partnerships (PPPs) converted Highway5, the north-south spine of Chile’s road system into a four-lane highway. More than 120 companies, including foreign investors from at least eight countries, have participated in concessions bids for projects ranging from US$8 million to US$850 million. All told, the program has injected US$570 million a year into Chile’s infrastructure.
“It is clear to us that after almost twenty years of implementing the concessions system in Chile, this industry continues to be increasingly valued by both users and the private sector,” says Director Plass. “In 2013 we will tender more than US$3 billion in new projects, including the Vespucci Oriented urban freeway project, the rebidding of Santiago International Airport, several new hospitals, a new bridge over the Bío Bío River and the Punilla dam.”
A relatively safe harbor
As far as PPPs are concerned, Chile is a benchmark in the region – one that fellow Latin American tigers should look to for inspiration.
“Foreign investment has been central to the development of our country’s public infrastructure, and a very good example of this is the concessions industry,” he says. “A lot of important international consortia saw opportunities when our local concessions system was still nascent, and now they are among the most important investors in the national economy.”
“One of the strengths of Chile’s open economy is the development of a set of financial tools and guarantees to attract new investors in the area of construction and infrastructure,” the Director explains.
“The concessions system has provided clear signals of diversification and has developed accordingly over time. In turn, the incorporation of new areas has been part of the system’s natural evolution.”
The Minimum Income Guarantee (MIG) system and the Revenue Distribution Mechanism (RDM) enable concessionaires in Chile to stabilize their income expectations in exchange for participation in additional government projects. MIG was designed to help reduce risk for lenders and lower the financial costs of projects, and has been used in nearly every highway concession project. RDM, meanwhile, guarantees that a pre-fixed amount of revenues – measured in present value – will be received by the concessionaire. Another important element is the Infrastructure Bond, which facilitates the participation of private long-term financing agents.
Maintaining Chile’s leadership
For its prosperity to continue, Chile must forge ahead with PPPs to fulfill the needs of its businesses and citizens alike. KPMG’s infrastructure professionals expect Chile’s infrastructure future to feature increased diversification in the concessions business, with contracts relating to projects such as prisons, dams, hospitals, bridges and tunnels.
“The objective is to invest and trust in our system of public works concessions, in the strength of our institutions and in our country’s legal stability,” the Director concludes. “We must continue our joint leadership in this successful system that has contributed both to the country’s development and to improving Chileans’ quality of life.”
By Santiago Barba, KPMG in Chile