Is infrastructure Costa Rica’s Achilles’ heel?

Ricardo Chacon
11 August 2016

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Latin America

Costa Rica may be a small, developing country but it has many benefits, including a life expectancy that is nine years more than the world’s average. Its infrastructure however is holding back the country’s development, says Ricardo Chacon.

Costa Rica is a small country about the size of Taiwan, located between North and South America; between the Pacific Ocean and the Caribbean Sea. It is known for been a green Country. In fact, it is the only developing country capable of competing with developed nations such as Sweden and Norway.

The energy we Costa Ricans produce is clean. In 2015 we spent 285 days producing electricity using only renewable resources such as hydroelectric, geothermal and eolic power. Furthermore, this service reaches more than 99% of our households.

San José, our capital, provides shelter for 2.4 million inhabitants out of the 4.7 million that represent the whole population of the country. We are the oldest democracy in Latin America, as well as the first country that abolished the army in 1949, and eight out of ten Costa Ricans have never seen a soldier. Our democracy is one of the strongest on the planet and every four years we have presidential elections where we vote secretly and universally.

Our health system is exemplary and has allowed Costa Ricans to have an average life expectancy of 80 years, which is about nine years more than the world’s average. In the north west of the country in the region called Nicoya, locals have four times more chance to live over 100 years than the rest of humanity.

Regarding the perception of corruption, Costa Rica is also exemplary as according to Transparency International, it is rated the third country in transparency of Latin America, right behind Chile and Uruguay.

So why do all these numbers matter?

Well, we are talking about competitiveness. According to the Global Competitiveness Report 2015-2016, Costa Rica is the third most competitive country of Latin America. It ranks 52nd among 140 nations, behind Chile (ranked 35th) and Panama (ranked 50th). 

The icing on the cake is that, on top of everything, we are the happiest country of the world!

So, what could go wrong? The Achilles’ heel is infrastructure.

Costa Rica has great obstacles to overcome on its race towards improving its economy. The most problematic factors for doing business are: 1) inefficient government bureaucracy and 2) an inadequate supply of infrastructure. These two factors are entangled and have caused a major delay in our public infrastructure.

To put the conditions of its infrastructure on perspective, we can look at similar countries in the region, such as Panama, which ranks 40th and Chile 45th. By comparison, Costa Rica ranks overwhelmingly 26 countries behind in the 71st position. To give more detail, we rank 103rd in our overall infrastructure quality, 60th in air transportation, 95th in railway transportation, 109th in port infrastructure and lastly - and worse - 115th in road infrastructure.

In order to find the causes of this lag, we can first look at the investment the government is making in infrastructure. So far, it has reached 1.1% of the annual GDP, whereas the required amount to overcome such delay is estimated at 3.7%. Therefore, we have to close a gap of 2.6% of our GDP in order to catch up with our infrastructure needs.

So what actions have we undertaken?

The only way to finance such demand is by promoting private investment in the development of public infrastructure. The government launched the Concessions Law in 1998 in order to promote and regulate the private investment done through the concession model. Nevertheless, even though we are about to reach 20 years after its creation, the approach towards this model remains lacking as only five projects have been developed using it.

From the five projects aforementioned three are already in operation - the toll road Ruta 27 San José - Caldera, the port Terminal Granelera en Puerto Caldera, and the International Airport Daniel Oduber Quirós. Another is under construction - the port Terminal de Contenedores de Moín, which in fact will be one of the greatest ports in the region, with investment to the project reaching USD $1 billion.

The fifth project, the USD $650 million toll road Corredor San José - San Ramón, had its contract rescinded in 2013 by the then president Laura Chinchilla. Poor communication strategies from the government created a snowball that grew up in form of social commotion and strikes up to a point that obliged officials to take such decision in order to preserve social peace. 

The government had to pay approximately USD $34 million to compensate the concessionaire for that intervention. Currently, in 2016, there is still a lack of design or construction underway. The cost of rescinding the project and the cost of all opportunity related to it are enormous and the social aversion towards the concession model has become a high stake for the rest of the portfolio. 

There is hope, however.

Despite the apparent large number of obstacles towards the development of infrastructure, there are still leaders in the political sphere, like the former President José María Figueres, and also the technical sphere, like the economist Federico Villalobos, that are openly promoting the development of infrastructure through private investment. In my opinion, their leadership along with other influential figures remains the only possible solution that would move Costa Rica’s infrastructure up to the world’s first leagues.

Ricardo Chacon is a civil engineer who is currently researching trends of risk allocation in PPP infrastructure projects and current industry practices of Costa Rica.