Paraguay special report 2014: Diversification: building a broader-based economy

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An ambitious infrastructure plan is central to the government’s plans to diversify the economy away from agriculture and increase its capacity to export.

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When, in June 2014, Standard & Poor’s raised Paraguay’s sovereign rating to BB (from BB-) its rationale led with the government’s "recent steps … to boost investment in infrastructure … [which] will sustain economic growth and gradually diversify the economy, reducing its volatility". This infrastructure building programme will not only strengthen the construction sector, but will also boost the competitiveness of all sectors – including agriculture – while bringing in new companies and generating new industries.

"We have very ambitious and proactive plans for the development of the infrastructure in roads, rail, airports, the waterway and electricity projects," says José Molinas Vega, minister of planning. "We are basing this programme on government money but also with the new PPP [public-private partnership] law, approved in November 2013 and another new law [Law 5074] that allows public money to go to financing private sector works."

The two laws are designed to be complementary, with the possibility that the financing and construction of a project could begin under Law 5074, while feasibility is being studied for a transfer to PPP for the operation and sharing of the performance risk. "The key element is that works under both laws will be open to international competition," says Molinas Vega.

International companies have already begun work on the programme: South Korea’s Il Sung Construction won the contract to build 'Highway 8’ through a public tender process. More will come, with the aim of private companies investing between $800 million and $1 billion within a couple of years. When public money is added – and most of the proceeds of the 2013 and 2014 international bond transactions are being channelled into infrastructure projects – the investment rate on infrastructure should peak at about 3.5% of GDP, from 0.6% in recent years.

This huge acceleration in investment will create issues of capacity. "It’s a big challenge for our construction companies, our engineering capacity and our project management – everything is being put to the test," says Ramón Jiménez, minister of public works. "The target of infrastructure spending of 3.5% of GDP is in line with sustainable GDP growth of 7% and we want to move to that level as quickly as possible. We are preparing to do that in an orderly fashion."

Jiménez says international consultants are advising the public sector about how to increase its capacity to manage projects effectively, including gaining the expertise to manage PPP projects. "PPP projects will be new to the ministry and we will also be working with leasing contracts and project finance across a wide variety of sectors. Road construction is the key priority – we have $3.5 billion worth of road infrastructure development over the next five years, as well as $1.5 billion of water projects and electricity works of about $2 billion."

Taking to the water

Part of the integrated infrastructure plan, which incorporates construction projects for the next 20 years, is the development of the Parana River to boost export and import capabilities. The river will be dredged: at present, low water levels mean barges cannot be loaded to their full capacity. A series of signals will also enable 24-hour navigation: currently there can be little or no movement out of daylight hours. These projects should cost around $150 million and take three years but will vastly improve productivity. The road between the two main cities – Asunción and Ciudad del Este – is being increased from two lanes to four. The airport will be modernized and its capacity increased. A light train network, with 44km of track, will be developed in the capital to reduce congestion and improve the efficiency of the road network. In rural areas, $1 billion of roads will be built in the next five years.

Jiménez estimates that Paraguay’s construction industry will require 1,000 qualified engineers every year for the coming years. Currently, the country produces 150 and Jiménez is working with colleagues responsible for education and training to improve the quality and quantity of graduates coming from technical colleges. He has also been in discussions with foreign governments to enable Paraguay to bring in teams of qualified workers. "We are talking to the ambassador of Spain and to other countries where we believe there could be an expert labour force that could come to Paraguay and participate in this process," he says.

Paraguay is taking capacity issues in the construction industry seriously because the sector holds the key to growth in other industries and further diversification of the economy. For example, it is projected that the development of the waterway will lead to a boost in river transport that will require an extra 2,000 barges. At $1 million a barge, that equates to a $2 billion industry, in purely domestic terms, and was part of the logic behind Japanese company Tsuneishi Group opening its first Latin American operations in Paraguay. The company opened in 2011 and made its first delivery in 2013. This year it should produce 32 barges. Kenshu Okano, commercial manager, says the company was attracted to the low cost base – with only 10% income tax – and its low level of bureaucracy. The company now employs 300 – plus providing local subcontractors with business – and has plans to export barges to the region and as far away as the US and Germany.