In light of the recent Plan of the Alliance for Prosperity in the Northern Triangle, there is a clear emphasis on improving the coverage and quality of multi-modal transport infrastructure (roads, ports, airports and railways), focusing on projects that strengthen regional integration. The policy also indicates that ‘Infrastructure upgrades will be complemented with improvements in the institutional framework, including an updating of the regulatory frameworks… the development of national transport and logistics policies…’.
While the status of Central America’s infrastructure was comparable to, if not higher than, East Asia’s in the 1970s, by 2010 the quality and quantity of East Asia’s infrastructure had surpassed Central America’s. Developments in infrastructure have contributed to East Asian’s growth in the last three decades – from 1970 to 2010, East Asian output grew 250% more than that of the Central America region.
An earlier post looked at government institutions that fund road infrastructure – given administrative complications and funding shortfalls, these institutions have had their effectiveness compromised. This post will look at infrastructure allocation of funds under government budgets, and external funding models. Ultimately, establishing effective framework for external investment is pivotal in underwriting a successful land transport plan, which has a multiplier effect for productivity and reduced input costs of goods and services.
Public monies for public roads…
Transparency of government budgets has resulted in significant research in itself to derive base data – whilst Guatemalan and El Salvadoran figures have been fairly transparent since 2010, Honduran data has proven to be more challenging. The Center for Global Development calls for infrastructure spending to increase to 4% of GDP, secured by both public and private investment – historically the Northern Triangle has fallen short of this target. Budgets remain under pressure due to numerous factors, including the significant proportion of budget funding directed towards debt servicing.
Up-to-date statistics on the percentage of paved roads in the region have also been difficult to locate with the last available World Bank data from 2011 – undermining initial ideas of reviewing correlations in government spending to gauge effectiveness of public funding. Nonetheless, sifting through ministry of finance sites for respective governments indicates a declining trend in infrastructure spending, both as a percentage of GDP and percentage of total budget – and well below the 4% as indicated by the Center for Global Development. The bulk of Guatemalan spending allocated to ‘transport’ relates to highway expenditure; El Salvadoran transparency in recent years provides for more detailed commentary of specific allocations within sector budgets.
Figure 1: El Salvadoran and Guatemalan public funding of road and Public Works initiatives (NB: Guatemalan budget awaiting approval for 2015)
Whilst transparent data for Honduras has proven difficult to locate, the regional trend in deteriorating allocations to infrastructure persists, with government funding for roads cut by 60% in recent years. Additionally, the bulk of funds allocated to roads are raised under fuel taxes which are among the highest in the region and are the third biggest source of tax revenues for the government (19.9-26.1%), which adds volatility to government revenue forecasts. Some 63% of the 2015 budget is forecast to be covered by tax collection from Hondurans, with the balance being sourced from debt and aid (thereby restricting future spending).
Partnering with the private sector
Laws facilitating public-private partnership (PPP) structures for infrastructure projects were passed in Honduras in 2010, and several smaller scale projects initiated under this structure to date. This has included road projects totalling USD95.6 million, and an additional USD500m dedicated to development of the sea port container terminal at Puerto Cortes. Of the USD95.6 million PPP road projects, the bulk of this (USD90.6 million) relates to the 392km long Goascoran Logistics Corridor, which runs from Villa San Antonio to Puerto Cortes. Concession for this project has been granted for 20 years from 2013, to a partnership formed by Ecuadorian Hidalgo e Hidalgo and Peruvian Construccion y Administracion. According to The Helios Corporation, the project is expected to add 1.1-1.2% to the Honduran GDP in 2015-16.
In Guatemala the National Agency for Infrastructure Development Partnerships (Agencia Nacional de Alianzas para el Desarrollo de Infraestructura Económica ‘ANADIE’) was formed in April 2010, although the Agency only officially launched tenders for PPPs in September 2014. ANADIE currently has a pipeline of USD1.46 billion in projects for PPP tenders (including ~USD440 million road related projects) – the first project under the PPP framework, being the construction of a highway between Tecún Umán (Mexico) and Escuintla valued at USD 40 million, has generated interest from 8 companies in Mexico, Spain, China and the USA. Other pipeline projects include the construction of six buildings housing government offices (USD150 million), a train line from Guatemala City to the Atlantic and a motorway connecting the Atlantic highway to the El Salvador highway.
A more recent implementation of the PPP legal framework, El Salvador approved the PPP structure in May 2013 (excluding social infrastructure areas such as sanitation, education, health, prisons, public safety). A key criticism of the initial framework is the red tape in the approval process – the requirement for projects to be passed by the Legislative Assembly at least three times, with the first hurdle for any contract valued over USD10 million needing approval by Congress (and any below this threshold governed under other public administration regulations). The key project under this structure is the USD150 million expansion of the airport – although given legal uncertainty to date, the effectiveness of the framework has been compromised with no works commenced at this point.
All roads lead to… prosperity?
Despite the well-intended goals of the Plan of the Alliance for Prosperity in the Northern Triangle – the practicalities of improving several target areas with already stretched public funds and inadequate framework for participation of the private sector in infrastructure projects has resulted in a standstill in improvements to infrastructure. Whilst safeguards to ensure transparency and fairness in the tendering process are essential, there is a fine balance in ensuring fairness whilst pursuing development goals in an efficient way that minimises bureaucratic delays.
Roads play a particularly important role in regional trade and prosperity and have a clear multiplier effect through productivity gains and lowering input costs. Ensuring this sector gains the much needed investment to underwrite future growth is of key importance in contributing to the region’s overall development…