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Chilean mega-projects offer opportunities for investors
Development Business / December 31, 1997

By Larry Luxner

SANTIAGO, Chile -- A new survey released by the Chilean Investment Committee has identified the 10 infrastructure sectors which will have the most impact on Chile's economic well-being over the next decade. They are: energy, water, railways, private cities, airports, mining, ports, telecommunications, forestry and highways.

According to the Santiago-based government agency, energy projects such as the GasAndes pipeline project are far and away the most important, because they will provide Chilean consumers with less expensive electricity, while cutting down on contamination now caused by the burning of fossil fuels by power plants.

Sociedad de Fomento Fabril (Sofofa), a Chilean trade association, predicts investors will pour $27 billion into 230 Chilean industrial, mining and infrastructure projects between now and 2015. Of that total, private investment will account for $23 billion, falling into these sectors: mining (25%), manufacturing (19%); telecom (18%); energy (14%); transportation (12%) and others (12%). Likewise, state-owned copper giant Codelco will contribute 58% of the $4 billion to be invested by government over the next 18 years, while transportation/infrastructure projects will comprise another 34%.

Another key factor is the effort being made by both the public and private sectors to speed up the modernization of infrastructure and services through concessions -- for water-treatment plants, airports and the country's port system, which is now being privatized.

The fact that Chile's economy has remained healthy through all the international currency fluctuations of the past few months certainly doesn't hurt. "Once again, Chile has been deemed the region's safe haven," says a Dec. 4 report by Santander Investment. Although lower economic activity worldwide in 1998 could cut prices for main Chilean exports such as copper and pulp, Santander still predicts GDP growth of between 3.6% and 6.2% for next year.

That, in turn, will fuel investment in Chilean infrastructure -- particularly as per-capita incomes rise and people demand better highways, water systems and airports.

"It would be an illusion to think that Chile, by the year 2000, will have several high-velocity trains and highways. Nonetheless, Chile is unwilling to remain behind the times," comments the U.S. Embassy in Santiago. "In spite of the growth shown by other sectors of the economy, the mining industry will head the list of mega-projects, but some changes might take place. Private-sector investment in the sector will surpass the public sector as far as amounts invested and production levels. Mining investors are discovering places other than northern Chile's Region II, well-known for its copper production. Private investors are looking for larger copper and gold mines in other regions of the country."

ENERGY: After several years of confrontation and large investments, the $325 million GasAndes project and the $250 million Metrogas distribution company began operations. These two projects will enable Chilean consumers to use natural gas, which is expected to trim residential electric bills by 10-20% and industrial costs by nearly 50%.

In addition, Chilean officials celebrated the Nov. 18 groundbreaking on the $750 million GasAtacama pipeline, which will bring gas over the Andes from Argentina to Chile, saving money for Chilean consumers and reducing smog over Santiago. "We've made significant progress in the last several months, with most of the steel pipe sections manufactured and delivered, rights-of-way secured and approvals received from the Chilean government," said Victor Fryling, president of CMS Energy Corp. CMS and Endesa each own 40% of the project; Argentina's Astra holds another 4%, while Astra's Pluspetrol subsidiary owns the remaining 16%.

Finally, Chilean utility Edelnor, a subsidiary of Southern Energy Inc., will participate in construction and ownership of the 682-mile Norgas natural gas pipeline. The company will also finance a 240-megawatt, gas-fired power plant in Mejillones that'll receive fuel from the $850 million pipeline, to run from Argentina to northern Chile. Construction will begin next March, with completion set for March 2000.

WATER: Despite of the relatively high percentage of Chileans with access to drinkable water (98%) and sewage (86%), the sanitary sector is sorely lacking in another area: wastewater treatment. The government itself says only 15% of the population is being served adequately by treatment plants, and that investments of $2.2 billion will be required to meet the government's 52% goal.

Observers say that by selling off the two most profitable sanitation enterprises, Emos (Santiago) and Esval (Valparaiso), the government could easily reap $1 billion, which could be spent on less profitable companies throughout the country. Esval alone has 350,000 customers needs $250 million in investment over the next five years.

"In spite of the urgency of investing in this sector," says the U.S. Embassy, "the law which will authorize the privatization of up to 65% of each enterprise has been waiting for Congressional approval during the last two years, and passage remains unclear."

PRIVATE CITIES: Over 60 families have recently taken up residence in the satellite city of Curauma, near Valparaiso. This development -- a project of Chile's Grupo Cruzat -- represents an investment of $5 billion over the next 20 years. So far, Curauma is Chile's largest real-estate development; it's expected that by 2016, it'll house over 180,000 people.

Likewise, another project near Santiago's international airport is being developed at a cost of $1.5 billion. This one, owned by the Enersis affiliate Inmobiliaria Manso de Valsco (55%) and the Guzman Nieto family (45%), aims to create an urban complex integrating offices, housing, services areas, commerce and light industry; construction is set to begin next month.

In a similar project, Valle de la Piramide is rising on Santiago's outskirts. This $650 million endeavor consists of 18 high-rise apartment and office buildings. In addition, the $800 million San Luis project -- located in one of Santiago's trendiest areas -- is to include a five-star hotel and apartment and office buildings.

AIRPORTS: "If no investments are made very soon at Santiago's Arturo Merino Benítez International Airport," warns the U.S. Embassy, "by the year 2005, passengers will have to walk on top of other passengers."

That's an unlikely scenario, however, now that SCL Terminal Aero Santiago has won a $150 million bid to construct passenger gates, taxi runways and a new control tower. Future expansion plans envisi on 26 new check-in counters, 42 immigration booths, longer runways, 16 new luggage conveyor belts and six security electronic scanners.

SCL is a consortium made up ot Chile's Agencias Universales (47%), Spain's Dragados y Fomento de Construcciones (29%), Chilean investment firm Sbabco (13%) and Canada's YVR Airport Services Ltd. (10%). As part of its plan, SCL will slash fees for non-aviation service (including retail concessions) by 70%, but will add a $1.40 debarkation fee.

By year's end, the Frei government will also call for proposals to expand and modernize Aeropuerto Carriel Sur in Concepción; total estimated investment is $20 million. The project consists of building a 6,000-square-meter, $12 million passenger terminal, and expanding aircraft parking space to 21,250 square meters to accommodate up to six Boeing 737s. That'll enable Carriel Sur airport to receive larger jets which are frequently diverted from Santiago due to thick fog.

MINING: In addition, state-owned Codelco will soon award majority control of its San Antonio copper project to a multinational company sometime in early 1998. The mine, located near Potrerillos in Chile's Region III, could reach production of 50,000 to 60,000 tons of fine copper a year -- requiring an investment of $250-400 million. The mine has an estimated life span of 14 years, and contains proven reserves of 229 million tons of copper oxide and 310 million tons of copper sulphur.

Codelco's participation in San Antonio will be as a minority partner, the same way it operates in other ventures such as El Abra, where it owns 49% and Cyprux Amax 51%.

TELECOMMUNICATIONS: Chile's dominant phone provider, Compañía de Telecomunicaciones de Chile (CTC), has allocated $3.1 billion in resources for the 1997-2002 period, of which 65% will be spent on boosting the number of telephone lines by over a million, while improving basic service. During this time, Chile's "teledensity" is expected to jump from 14.7 lines per 100 inhabitants to 22.7.

Competitor Entel also has big plans, having earmarked $600 million over the next five years -- especially in the personal communications services (PCS) area. Entel recently signed a $110 million contract to implement Latin America's first GSM cellular network. Another company, Startel -- a $700 million joint venture between CTC and VTR S.A. -- is the country's first nationwide digital mobile network. Andrew M. Geisse, executive president of Startel, says his company already has over 200,000 cellular, 50,000 paging and 8,000 trunking customers.

FORESTRY: The Chilean forestry sector, long an important source of foreign exchange, will receive a boost with the completion of the Forestal Valdivia cellulose plant. This endeavor by Celarauco (an affiliate of Compañía Petróleo de Chile), covers 130,000 hectares of forest and will be the largest factory of its kind in South America, representing a $1 billion investment. Production of kraft cellulose is expected to reach 550 million tons once up and running, not to mention a $90 million annual payroll and thousands of jobs. Nevertheless, the project faces considerable environmental opposition.

HIGHWAYS: By 2000, Ruta 5 -- the Pan-American Highway -- will still be Chile's most important route, but it will no longer be the only important one. The highway has been allocated $2 billion for improvements and widening throughout its entire 1,500-km length, of which 60% has already been awarded to private construction firms.

By 2000, the government is also planning to build a coastal highway parallel to Ruta 5. This coastal highway will run from Arica in the north to Puerto Montt in the south -- linking Chilean port cities along the way. Some $112 million has already been invested in portions of this route.

The government has also assigned $444 million for improving urban roads and streets in major Chilean cities, and $156 million to develop international connections and border checkpoints with neighboring countries, particularly Argentina.

Finally, after decades of isolation, the 116,000 people of Chiloé Island in extreme southern Chile may soon be linked to the mainland via a $300 million suspension bridge.

Recently, a pre-feasibility study to build the bridge was completed by the Cuatro consulting firm and handed to President Frei through the Ministry of Public Works. Sources say the 2,650-meter bridge will be profitable by 2005, by which time over 3,400 vehicles are projected to be crossing the channel daily. The bridge will be "absolutely necessary and profitable" by 2010, when the traffic flow is expected to reach 5,360 vehicles a day.

About 60 Chilean and foreign companies have presented proposals for the bridge, which would be built via private concessions; companies would recoup their investments through toll charges of $10.50 per vehicle. The bridge itself is to have three lanes for traffic, and a fourth reserved for pedestrian transit. It'll have one or two steel beams from which the main structure will hang at a height of 70 meters over the Chacao channel, allowing larger ships to pass through.

At present, the only way to get from 9,600-square-kilometer Chiloé to Puerto Montt on the Chilean mainland is by ferry -- which during the summer holidays isn't enough to keep up with demand.

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