TMCnet News
Argentina risk: Infrastructure risk(RiskWire Via Thomson Dialog NewsEdge) COUNTRY BRIEFING FROM THE ECONOMIST INTELLIGENCE UNIT RISK RATINGSCurrentCurrentPreviousPreviousRatingScoreRatingScoreOverall assessmentC52C53Infrastructure riskC53C47Note: E=most risky; 100=most risky.SUMMARY Argentina's infrastructure improved significantly during the 1990s, as a surge in investment made up for years of neglect during the 1980s. Standards are relatively high for a developing country. However, until individual disputes over utilities tariffs (which were pesified and frozen by emergency decree in 2002) are resolved with the companies' owners, investment in maintenance will stagnate, leading to a deterioration of standards and the possibility of sporadic energy shortages. The road network is extensive and currently mostly in reasonable repair, but the rail network has been run down. Under the Kirchner government responsibility for investment in roads and highways has been restored to the public sector, with private contractors responsible exclusively for maintenance works. This may create uncertainty, deterring some private sector interest and slowing modernisation of existing infrastructure. Airports will receive new private investment in the forecast period. SCENARIOS Power shortages curb industrial activity (Moderate Risk) The electricity generation system is operating close to its limits. A past lack of investment in all parts of the system, ranging from generation to transmission (no new power plant has been opened since 2000) has been exposed by rapid growth in demand, driven by the recovery in manufacturing. The peak demand comes during winter; in the southern hemisphere winter, depending on conditions, there is a risk of electricity rationing. Negotiations between the government and the privatised utilities over new contract agreements, and agreement with the distributors, which would imply a rise in the cost to the final consumer, will take time. A new system of residential tariffs will be delayed until after the October 2007 presidential election; until then the government will use incentives to encourage consumers to save energy. Additional generation capacity will come online in the medium-term. In the short-term businesses will be exposed to sporadic shortages, depending on weather conditions and technical problems. Potential investors in energy-intensive industries need to consider whether sufficient investments in power are envisaged in the parts of the country in which they plan to operate. Quality of infrastructure deteriorates owing to inadequate investment in maintenance (Moderate Risk) Comparatively large investments in the 1990s expanded and modernised the physical infrastructure. The new model of public utility concessions that the government has been implementing since October 2003 consists of leaving repairs and maintenance in the hands of the private sector, while assuming control of strategic decisions on where new investment should be directed. Over the medium term, the success of the new regime will require a clear delimitation of responsibilities between the private and public sectors in order to prevent the kind of disputes that plagued concessions during the 1990s. In cases where the government takes over a concession from the private sector, as appears possible in a few cases where foreign investors are negotiating new contracts with the government, investment is likely to fall. Companies should make provision for deterioration in the quality of the physical infrastructure if investment fails to rise in the medium term. BACKGROUND (Updated: June 25th, 2007) Natural resources and the environment Argentina is at the southern end of the South American continent and has a total surface area of 2.8msqkm. The country is 3,800 km in length, and the climate varies from subtropical in the north to cold in the south. Most of the country is in temperate climate zones, one-third is in humid zones and the rest is in arid and semi-arid zones. More than 70% of farm land is devoted to extensive or semi-extensive cattle breeding, 4% is used predominantly for arable crops, 18% is of mixed use and 5% is devoted to other uses. The yield per hectare in cereals production is higher than Australias and similar to Canadas. The use of fertilisers and pesticides is low but has been rising. Argentina is a mineral-rich country, with most deposits being located along the Andean range in the western part of the country. However, only one-fifth of the country has been surveyed. The development of mining projects is relatively recent; the weak peso boosted the exploration activity in the period 2003-05. In this period the number of projects passed from 40 in 2003 to 200 in 2005. There are large natural-gas reserves, and Argentina exports natural gas to Chile. Argentinas main environmental problems are pollution (mainly in urban areas), deforestation, soil degradation (resulting from intensive agricultural practices) and overexploitation of fisheries. According to the first Inventario Nacional de Bosques Nativos (National Inventory of Native Forests), there are currently only 34m ha of native forest, compared with 105m ha in 1914. The expansion of the agricultural frontier is devastating native forest at 500,000 ha per year, a rate that is estimated to be higher in northern provinces. At present there is a conflict with Uruguay as a result of the installation of two pulps mills on the Uruguay River shore, which according to environmental groups would pollute the river basin. Transport, Communications and the Internet In the 1990s privatisation, deregulation and decentralisation improved transport and communications services after many years of decline. Railways, the Buenos Aires underground network, most ports, the airports network and a large proportion of highway construction and maintenance were transferred to the private sector through concessions. However, the modernisation of infrastructure has been concentrated in the most profitable areas and infrastructure has continued to deteriorate in areas where the population is small and traffic scarce, partly as a result of fiscal constraints faced by central and local government. Following the collapse of the currency board public utility charges were pesified (that is, converted into pesos at an exchange rate of Ps1:US$) and frozen. This hit profitability and deterred investment. The authorities sought a wholesale renegotiation of contracts as a precondition for any adjustment in tariffs. According to the government, operators did not always abide by the terms of their concessions. Many concessionaires began dispute settlement procedures abroad. While most charges remain frozen (particularly for residential consumers), some have increased, in certain cases following an agreement between the government and operators that implied a suspension or cancellation of the demands presented in international courts. On the other hand, in a scenario where the state has increased its intervention in the economy, the government now has a major role in the construction of infrastructure. In the early 1990s, maintenance and improvement of around 10,000km of main highways was transferred to the private sector through a toll system, where levels of traffic made this practicable. The state of the roads improved, and nearly 30% of the total 231,374-km road network is paved. Following the devaluation, chargesmany of which were previously set in US dollars or indexed to the US dollarwere pesified. In 2003 the government allowed 13inter-urban road concessions to expire and awarded new operation and management contracts to private firms: while the concession holders are in charge of tolls collection and maintenance works, investment works are mostly in the hands of the state. At present the most important projects are the construction of a highway between Rosario and Cordoba (extending the one that already exists between Buenos Aires and Rosario), and the construction of another one that connects Buenos Aires with the Brazilian frontier in Corrientes: both should be finished by 2008. The 35,753-km rail network is the largest in Latin America, but much of it is out of service and will need large investments in order to restore traffic. In 1993 the cargo system and the urban, suburban and profitable intercity passenger services were privatised. The improved quality of services raised the number of passengers on urban networks in the second half of the 1990s as the economy grew. The recession caused passenger numbers on the intercity, underground and suburban rail networks to drop by more than one-third in 1998-2002, and although passenger numbers resumed growth in 2003-05, they have not yet reached 1998 levels. Rail freight traffic has increased from 17m tons in 2001 to 23.5m in 2005. One of the main projects is the reconstruction of the Ferrocarril Transandino Central (which connects Argentina with Chile through the Andes) to alleviate the intensive road cargo traffic between the two countries. The government also plans to construct a high-speed train that would connect Buenos Aires and Cordoba (710 km) with speeds of up to 100 miles per hour. Construction on the first stagebetween Buenos Aires and Rosariois expected to begin in 2007. The airport network was awarded for 30 years to a private operator in 1998, but there have been frequent disputes between the concessionaire and the government. In early 2003 a new 25-year contract was signed with the concessionaire Aeropuerto Argentina 2000 (AA 2000), involving a variable fee related to the level of traffic and committing the private operator to investments totalling US$2.6bn. In mid-2006 the state acquired 20% of the shares of AA2000, as part of the cancellation of the debt that the concessionaire owes to the government. Infrastructure in the industry has already been improved in Buenos Aires, and there has been some progress in the rest of the country, where the volume of air traffic is relatively light. During the 1990s deregulation eliminated the monopoly granted to Aerolineas Argentinas (AA) and Austral (both of which were then privatised, although AA later absorbed Austral) and triggered the expansion of national private airlines, such as Lineas Aereas Privadas Argentinas (LAPA), and the emergence of new ones (Southern Winds, Dinar and Aerovip), operating mainly as regional airlines. The devaluation of the peso increased operating costs as a result of higher fuel prices, the dollarisation of fees charged by airport operators, and higher maintenance and leasing costs. In early 2003 financial difficulties forced LAPA and Dinar to shut down, followed by Aerovip in 2004. The government reacted by creating a state firm, Lineas Aereas Federales (Lafsa), to absorb some of the airlines employees. Southern Winds shut down in 2005, after a drug trafficking scandal. In 2003-05 the airline industry expanded rapidly, with the number of passengers transported within the country increasing by 30%, encouraging new airlines to enter the market. LAN (Chile) entered the market in 2005 and, following an agreement with the Argentinian government, it took over Lafsa and Southern Winds. In 2006 the government authorised the operation of eight new regional airlines: three of them mainly operate in Patagonia, while another three are based in regional airports such as Cordoba, Rosario and Mendoza. In September 2006 AA announced a three-year investment plan to double its fleet by acquiring 37 new aircraft. LAN Argentina, for its part, will operate 37 new domestic and international routes, competing intensely with AA for market share. In October 2005 Argentina regained category 1 status from the US Federal Aviation Administration (FAA), giving domestic airlines the go-ahead to add new routes to the US. Argentina had been rated in category 2 since July 2002, allowing domestic carriers to continue operations at current levels under heightened FAA surveillance, but expansion or changes in services to the US were not permitted. More than 90% of total foreign trade is carried by river and maritime transport, and Argentinas ports therefore play a vital role in the economy. Decentralisation and privatisation have reduced costs, particularly in Buenos Aires port, Argentinas largest. The Parana-Rio de la Plata waterway has been upgraded through signalling and dredging, making it navigable by larger vessels and reducing transport costs. This is expected to stimulate private investment in port infrastructure and vessels. During the 1990s important changes occurred in the media sector, leading to increased concentration in television, radio and printed media. Foreign investors operate in all market segments. Legislation allows diversified media conglomerates to own companies in various market segments. Since 1998 the market has undergone rationalisation owing to the recession. Telecoms The fixed-line telecommunications network improved in quality and coverage during the 1990s after privatisation. Telecom (now owned by a consortium of Italys Telecom Italia and local investors, following the exit of France Telecom in 2003) and Telefonica (owned by Spains Telefonica) operated a duopoly, until complete deregulation beginning in 2000. Despite the granting of new licences, deregulation has not translated into lower fixed household charges, as the provision of the service continues to be dominated by the two incumbents that made the network investment. As in other privatised utilities, the devaluation of the currency and the pesification of rates in 2002 damaged profitability. The recession caused usage levels to drop. Telefonica and Telecom, which still account for 90% of total sales in the industry, recorded losses of Ps8bn (US$2.6bn) in 2002. However, revenue recovered strongly in 2003 once the recovery got under way, and the industrys return to profit will undermine claims for compensation for the effects of the devaluation and the pesification and freezing of telephone charges. In February 2006 Telefonica and Telecom reached an agreement with the government, through which they suspended the demands against the Argentinian government at the International Centre for Settlement of Investment Disputes (ICSID). In return, the government authorised them to increase tariffs at certain hours. In October 2006 Telecom announced investments worth PS1bn to improve the internet broadband service and the mobile telecoms network. Telefonica also announced investments of a similar amount in 2006. Mobile communications have thrived in recent years, although the growth in mobile telecoms was interrupted by the recession and the decline in real incomes (although these have since recovered somewhat). Prices for mobile telephony were unaffected by "pesification", and there has been a boom in the sector since 2002. The rapid expansion was reflected in the number of calls, which grew by 166% in 2003-05. The penetration rate has reached an estimated 64% in June 2006, among the highest in Latin America. In mid-2006 there were 25.9m mobile subscribers, more than half of total population. The main players in the mobile-phone market in Argentina are Movistar (owned by Telefonica Moviles of Spain); the market leader, Telecom Personal, (the mobile unit of Telecom Argentina); and CTI Movil (100% owned by America Movil, the mobile arm of Telmex of Mexico). The number of residential Internet users reached 2.8m in mid-2006, of which 35% have free-access connection, 46% have high-speed connections and 19% have dial-up connection. Broadband services are gaining ground: between 2002 and mid-2006 dial-up connections contracted by 39.8%, while high-speed connections expanded sevenfold in the same period. Many Internet users access the network through public access points, such as telephone centres, cyber cafes or libraries. After Brazil and Mexico, Argentina leads in the use of Internet services such as banking, commerce, business and telephony in Latin America. An increasing proportion of users make purchases over the web: in 2005 sales through the Internet reached US$5bn. This is expected to double in 2006. Energy Oil was discovered in Argentina in 1907, and the southern province of Santa Cruz, where the first discovery was made, remains one of the centres of the oil industry. In 2004 over three-quarters of oil production originated from the southern provinces of Santa Cruz, Neuquen and Chubut. In 2005 the country produced 665,640 barrels/days, down by 11.6% since 2003, while proven reserves were around 2.2bn barrels, down by 11.5% since 2004. The state-owned firm, Yacimientos Petroliferos Fiscales (YPF), was acquired in 1999 by Repsol of Spain, becoming Repsol YPF. Petroleum production increased by just over 50% between 1990 and 2003. Since then, production has fallen owing to a lack of investment. The imposition of special regulations and export taxes has reduced the windfall to the sector provided by the devaluation of the currency. Electricity sector Electricity generation, transport and distribution are in private hands, as are the oil and natural-gas sectors. Energy demand increased steadily in the 1990s in line with economic growth, but supply kept pace owing to the start-up and expansion of thermal plants and new hydroelectric power-generating stations. Electricity generation continued to grow in 1999-2001 despite the recession, but contracted by 6.4% in 2002. The expansion of industrial activity led to a sharp rise in electricity demand in 2002-05, highlighting the need for more investment. In 2003-05 electricity generation increased at an average annual rate of 7% to reach 96.9m mwh in 2005. Installed capacity is mainly thermal (57.9%) and hydroelectric (38.4%), with 4% supplied by nuclear plants and 0.1% from wind energy. There is vast hydroelectric potential, estimated at 170,000 gwh per year. Over three-quarters of that potential is already identified, but only 22% is exploited. Sizeable natural-gas reserves add to the potential for electricity generation. The privatisation of nuclear-power stations has not been completed owing to the low level of private-sector interest in nuclear-power generation. As the electricity sector is working at full capacity, the government has announced that two new thermal plants will be constructed. They will add 1,600 mw to the system and will be partially operating by the first half of 2008. The government also plans to raise the level of the Yacyreta dam (thereby adding 300 mw of capacity), and is considering extending the useful life of existing nuclear stations (Atucha I and Embalse). Atucha II (another nuclear plant) is expected to come on-stream in 2010. Like other public utilities, the electricity sector suffered from the devaluation of the peso and the pesification of domestic utility rates in January 2002. Since the electricity sector had borrowed abroad and many of its inputs are imported, the devaluation adversely affected its cost structure. Moreover, revenue was pesified and frozen. While residential tariffs have been frozen since 2002, tariffs for commercial users have increased. However, under these conditions investment has been insufficient and the electricity generation system is operating at its limits. In June 2006 electricity demand reached a peak of 17,037mw, close to the capacity limit of 18,000 mw. This has led to generation facilities increasing their reliance on gas oil and fuel oil to produce electricity. However, the price of these fuels is approximately five times higher than that of natural gas. Natural gas is increasingly used in power generation. With electricity supply under strain, since 2004 the government has implemented a programme to encourage consumers to save energy, called the Programa de Uso Racional de Energia Electrica (the Rational Use of Electricity Programme, or PUREE). This rewarded households that reduced their electricity consumption and fined those that consumed above a certain level. In 2004 energy savings reached 220 gwh, equivalent to nine days worth of the annual consumption of energy in the metropolitan area of Buenos Aires. The government plans to encourage self-generation in industries, hoping that this will release around 1,700 mw to residential users and retailers, equivalent to 10% of the current electricity generation capacity. Electricity generation is a competitive market, but transport and distribution are highly regulated. To promote competition in the distribution business, the authorities gradually dismantled the barriers faced by large electricity firms wishing to enter the wholesale market. Distribution services have improved since privatisation, but the electricity transmission system remains stretched to its limit as no major investment has been made to accompany the expansion in generating and distribution capacity. The Plan Federal de Transporte Electrico (Federal Plan of Electricity Transport) aims to construct five new high-tension lines in 2005-08, for a total of 4,750 km, an increase of 43% over the current transmission network. The lines will connect existing high-voltage corridors, which radiate out and would allow regions with excess supply to export power to those with excess demand. This would improve the efficiency of the system and stop regions with an electricity deficit from having to rely on local, often high-cost, generators. The estimated cost of Ps2.66bn will be met by the Fondo Fiduciario para el Transporte Electrico Federal, a federal government fund, and augmented by contributions from the private sector and multilaterallenders. By the end of 2005 one of the new tension lines connecting the Patagonian towns of Choele Choel and Puerto Madryn with a 354-km link had been completed. Gas sector The country is dependent on natural gas for almost half of its energy needs. Higher natural gas consumption is mainly the result of increasing demand from electricity-generation plants, other industrial users and refineries. Argentina produces 51.2bn cu m per year. Natural-gas output increased during the 1990s at an average rate of 6.5% per year (much of it destined for export to neighbouring countries), but this growth was interrupted in 2002, when production fell by 0.2%, although it recovered afterwards, growing by 12% in 2003-05. At end-2005 proven reserves of natural gas were 439bn cu metres, down by 19% on 2004. The reserves/production ratio fell to 11.7 years in 2005 from 17.3 years in 2000. Argentina has also become an exporter of natural gas, as well as oil. Together, energy accounted for 17% of export earnings in 2005, slightly lower than 18.6% in 2000. However, export volumes have contracted by 27% since 2002. Chile is an important outlet for Argentinas natural gas exports. However, in contravention of its agreements with Chile, Argentina has cut back exports of gas to it since 2004 in order to meet domestic demand. In addition, it has increased gas imports from Bolivia. The maturity of existing gas fields (concentrated in the Neuquina, Noroeste, Cuyana, Golfo San Jorge and Austral basins) makes it imperative to extend exploration to more risky areas: probable reserves are estimated to reach 249bn cu metres, around 57% of proven reserves. The pesification of natural gas prices temporarily halted exploration and drilling, although this began to recover in 2003. While tariffs for commercial and industrial users have increased, those for residential consumers have yet to be adjusted. Following the devaluation of the peso in 2002 petrol prices increased by nearly 90% and diesel prices increased by 130%. Lower prices for natural gas temporarily led to a faster rate of conversion of car engines from petrol to compressed natural gas (CNG). There are 2m vehicles fuelled by natural gas, of which 1.5m are private cars and 500,000 are taxis, passenger buses and trucksmaking Argentina the country with the most CNG-propelled vehicles. However, the authorisation of price increases for CNG in 2005 led to a slowdown in the rate of vehicle conversion. There are many projects for the production of alternative fuels such as bio-diesel plants and ethanol, including a project to construct two bio-diesel plants oriented towards exporting their production, each one with a monthly capacity of 20,000 tonnes, and a project to construct ethanol plants to export around 4m cu metres in the next five years. Copyright 2007 Economist Intelligence Unit |