The Hindu : Opinion / Leader Page Articles : Attracting FDI, Chilean style

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Thursday, Dec 16, 2004

Opinion

Opinion - Leader Page Articles

Attracting FDI, Chilean style

By Jorge Heine

To attract the FDI India needs, it can follow the Chilean model of developing a public concessions system to build infrastructure.

A RECENT editorial in The Hindu (Dec. 8) highlighted India's foreign direct investment (FDI) needs and the lessons to be drawn from the Chinese experience. Special mention was made of India's infrastructure demands, responding to which is seen by Prime Minister Manmohan Singh as sine qua non for India to keep growing at 7-8 per cent a year. China, of course, is in a category of its own attracting $50 billion a year in FDI, much of it from the overseas Chinese community. While there is no objective reason why India, with a suitable strategy in place, should not be able to reach such levels in the long term, in the short term, an incrementalist approach, that is, one especially targeted on key sectors, would seem to be the most promising to increase its relatively low levels of FDI.

Because of its "ripple effect" on the economy, building up physical and digital infrastructure is particularly fruitful. According to one estimate, infrastructure deficiencies were costing India between $7 billion and $14 billion a year in the mid-1990s, a figure likely to be much higher today. Given the high traffic flow volumes and projected increase in vehicle numbers (both critical indicators for investors in this field, though there are others), some of the crucial building blocks for infrastructure are very much there.

What have other developing countries done to build up their roads and highways, ports and airports?

The case of Chile, recently singled out by the World Economic Forum's Growth Competitiveness Report as "having made impressive strides over the past decade and a half", is especially interesting. Over the past 15 years, it has attracted $55 billion in FDI, putting it, despite its relatively small size, among the top 10 emerging economies in total FDI. And at one point, it was confronted with a challenge similar to India's (albeit on a different scale).

After several years of high growth in the second half of the 1980s, its then spindling roads (to call them highways would have been misleading) were bursting at the seams, and much the same was true of the rest of its infrastructure. The sorry spectacle of the terminal at Santiago's Comodoro Arturo Merino Benítez (AMB) International Airport, built on a temporary, makeshift basis in 1967 and still in use in 1990, with all the inconveniences that entailed, was emblematic of the country's condition.

The problem was daunting. Average spending on public infrastructure averaged $250 million a year for most of the 1980s (hardly enough for the upkeep of existing facilities), whereas $1.5 billion a year was needed to respond to the enormous strain that was being put on it by an export-led economy, adding 10 per cent more vehicles a year to its existing stock.

Until then, of course, all public infrastructure was built the "old way", that is, by the Ministry of Public Works — either with its own crews or by contracting it out to private construction companies. In the end, it all came out of the public purse, by definition very limited. The notion that the Ministry of Public Works could obtain a six-fold increase in its budget, at a time when the country also faced a serious "social debt" was beyond the pale.

Inertia has its own imperatives, and the possibility of "doing nothing" loomed large. Yet some imaginative thinking took place, and the notion of "user pays" took hold. In principle, there is no reason why everybody (or at least every taxpayer) should pay for the roads or airports only some use, which is what happens when all infrastructure is built and paid for by the Ministry of Public Works. Once that concept percolated, the next step was easy: a public concessions system.

Legislation needed to be put in place, all sorts of complex mechanisms had to be devised to make investing in public infrastructure attractive to investors, trust needed to be built between the public and the private sector, road-shows abroad to spread the word had to be organised — in other words, a considerable effort was put into making this work. For the first three or four years, the response of investors was tepid and only one or two projects got off the ground. After all, one could ask, why should a company put in $300 million of good money into a road on the strength of recovering it (and some reasonable profit) after 20 or 30 years through tolls? What if the government changes its mind? If it freezes the tolls? If the currency is devalued?

These were all fair questions, all answered in due course. A closed-bid tender system is the only way such a system can work. A two-step process allows, at first, for businesses to qualify for any given tender (thus weeding out rogue elements), and then, for the qualifying companies to participate in it. Contracts must be enforceable and tamper-proof. Insurance on currency exchange fluctuations can be taken. Government can provide guarantees on certain minimum traffic flows.

A learning curve was also observed. Whereas at first concessions were awarded on the basis of the lowest tolls in the shortest period of time, this later changed to the "present value" formula. The company indicates the capital it will invest and the return it expects, and the concession ends (and the road devolves to the public sector) the moment this goal is reached — which may be shorter in years of economic expansion, and longer in recessionary ones.

All of this sounds terribly complicated, but, as in all public policies, "the proof is in the pudding", and at some point in the mid-1990s the programme took off — with a vengeance. Between 1995 and 2003, and under the initial stewardship of the then Public Works Minister and now President Ricardo Lagos (scheduled to visit India in January) a total of $6 billion (generated by FDI, loans from Chilean banks and local and foreign bond emissions) was invested by private investors (many of them foreign, mostly Spanish and Mexican) in 46 different projects in Chile's public infrastructure, leading to its dramatic upgrading.

Chile's Panamerican Highway, the backbone of its road system, after eight separate concessions programmes invested $2 billion in 1,500 km of its total length, now looks in parts like a German four-lane Autobahn, including the overhanging green and blue signs.

Santiago's AMB airport, formerly an "ugly duckling", now after a $170-million 1997 concession programme to a consortium of two Spanish construction companies, a Canadian airport operator and a local group, serves 3.5 million international passengers, as well as 2.4 million local ones, and is ranked in surveys as Latin America's safest and best airport (even more so than Miami's).

Santiago itself today looks like one giant construction site, among other things because six urban highways with a total of 228 km are being built, at a cost of $2.4 billion, including the longest road under water (below the Rio Mapocho). Tolls are collected electronically.

Branching out to less predictable areas, irrigation systems are also being built privately (the El Bato reservoir at a cost of $37 million), and so are prisons. As of March 2004 three concessions programmes to build eight new prisons had been awarded, creating additional capacity for 13,000 inmates (no, inmates are not charged rent— the government will pay a fee for each).

Total spending on public works, from private and public sources, has now reached $1.4 billion a year. Chile's territory (much of it, in the longest country on Earth, traditionally quite inaccessible from the main population centres) has suddenly become reachable by most Chileans, giving a boost to internal and foreign tourism. The Southern Lake Region, at some 700 km, is now only eight hours away from Santiago. The cost of doing business has gone down, as the time to get to the ports and airports has been cut.

From the Government's perspective, this massive private investment has not only supplied capital that would otherwise be unavailable, but has also freed resources for traditionally underfunded areas, such as rural roads and fishermen's wharfs. Chile has also been able to increase spending in health and education (where it reaches 4.6 per cent of GDP in primary and secondary education, more than many European countries).

The point is, a policy-driven development strategy can make a huge difference for economic growth and competitiveness. But these things do not happen by themselves. The question is not simply "for the government to get out of the way" to let "the animal spirits" of enterprise take hold. There is no reason for a businessman to build a road, a bridge or an airport. The enabling conditions for such things to occur must be created, and they can only be created by the government. However, this means "thinking outside the box". Public concessions for infrastructure are one of the most promising areas for public-private partnerships to flourish and to attract the FDI India needs.

(Jorge Heine is the Ambassador of Chile to India.)

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