A New Frontier
"Go west, young man." It’s been the mantra of
those seeking their fortune in the U.S. for generations. American pioneers
headed west to the frontier land to build new lives. During the mid-19th
century, fortune seekers looking to strike it rich headed to California in search of gold. People from all
over the country packed their bags and laptops and headed to Silicon Valley when the dot-com craze hit.
Well, I have a change I’d like to make to that old adage.
Go south, young man (or woman, for that matter.) Far south. South of the
border, to be more precise. I think a region in South America is poised to be one of the next great
new frontiers. And it’s growth could have a
tremendous impact on the U.S. economy.
The region I’m talking about includes western Brazil, southern Peru, Bolivia and northern Chile. Isolated by mountains, jungles, and a
subsequent lack of infrastructure, the region doesn’t get a whole lot
of air time in the press, except to talk about border disputes, Bolivia’s cocaine trade and travel
videos of trips to Machu Picchu, the walled city of the Inca Empire in
Peru. I wanted to write about the area last
year when I was traveling in South America but my visit coincided with the events of Sept. 11. In fact, I
was in Puno in the heart of southern Peru when the attacks occurred.
I’m sure you’ve read the headlines about this region:
collapsing currencies, impending debt default, foreign investment being
withdrawn, governments in turmoil. Remember, I’m talking about
frontiers, real ground-floor opportunities that will develop over a period of
years, not weeks or months. The American West wasn’t made overnight but
look at it today.
There’s certainly much to recommend this region in South America. The leaders in the surrounding countries
are trying all the right things to develop their respective economies,
privatizing state-run industries, bringing down inflation and reducing
tariffs. They’re all natural-resource-based economies, which faithful
readers know always attract my interest. There are certainly problems in the
capitals of all four just as the US had lots of problems “back
East” in the 19th century. One attraction of a frontier is
to escape the problems of the “Establishment”. And, boy, is this “frontier” about to change!
The key to this region’s growth is the recent development
of its infrastructure -- roads and highway systems, farms, pipelines and the
like. Much of western Brazil and eastern Bolivia, for instance, lie in the Amazon basin
and have rich resources like timber, iron ore, soybeans, coffee and cocoa.
For companies with operations in this part of the world, the problem has
always been finding a cheap and efficient method of delivering the fruit of
their labor to the rest of us. The only possibilities were problematic roads
to the Atlantic
2,000 miles away.
That’s starting to change. Construction already has begun
on a Trans-Oceanic Highway that would link both coasts, filling
in the gaps and connecting existing highways in western Brazil and connecting it all to roads in Peru that lead to the Pacific Ocean. This is certain to benefit both the
Brazilian and Peruvian economies and provide plenty of jobs. The Peruvian
government recently announced a $130 million investment over the next two
years to construct stretches of this Trans-Oceanic Highway in the Southeastern province. Many of
the towns in Brazil’s interior, like Manaus and Rio Branco,
are experiencing a kind of renaissance, too. Imagine going to Denver or Omaha or even San Francisco just when the transcontinental
railroad was being put in. These kinds of transformations don’t happen
The development of Bolivia’s natural-gas industry boasts
even more potential. Proven and probable gas reserves in Bolivia jumped from 9.8 trillion cubic feet in
1998 to 70 trillion cubic feet in 2001. The second-largest producer (Venezuela is first) of natural gas in South America, Bolivia already exports natural gas to its
neighbors. This year alone, Bolivia is expected to export 10 million cubic
feet of natural gas -- $425 million worth -- to Brazil. (Keep in mind that Bolivia’s economy is tiny, with a gross
domestic product of about $8 billion.) That number is expected to swell by
250 percent by 2005.
Like Brazil, the problem has been getting the gas
out of the jungle. Large, multinational companies have been pouring into the
region, salivating at what they feel could be a potential cash cow. In fact,
a consortium of energy companies, which includes Spain’s Repsol, British Gas, and British Petroleum, have proposed
spending $5 billion to build a pipeline from the fields to a port on the
Pacific coast. Two American companies, Sempra
Energy of San Diego and CMS Energy Corp. of Michigan, have agreed to purchase the gas,
which would be marketed in California and Mexico. Evidently, enough gas could be
shipped from Bolivia to fill 15 percent of California’s daily energy demand. Now
understand why this region could have such a large impact on the U.S. economy?
Naturally, the plan must clear a few hurdles before it is put in
motion. Jorge Fernando Quiroga Ramirez, the former
president of Bolivia, was supposed to award the pipeline
contract before he handed over the reins of office in early August.
He’s since passed on that task to his successor, Gonzalo Sanchez de Lozada, an American-educated businessman who narrowly won
the recent elections. This may delay the process a little while.
The pipeline plans are also muddied by dated political disputes.
Bolivia, after all, is a landlocked country.
In order to get the natural gas to the Pacific, the pipeline needs to run
through another country, either Chile or Peru. The hydrocarbon companies feel the
pipeline should feed through northern Chile because that would be the shortest and
most economic route. Local Bolivians, who still aren’t on speaking
terms with Chile since losing coastline territory to
their neighbor in a war more than 125 years ago, think the pipeline should
run through Peru, which has even provided a port town, Ilo, on its southern coastline so Bolivians can have
access to the Pacific. It’s become a major sticking point and an issue
of civic pride for locals in Bolivia.
My feeling: They’ll work it out, one way or another. The
financial windfall expected for all parties involved is too great to let such
an opportunity pass. It’s certainly in Bolivia’s best interest. Experts
estimate that a Pacific pipeline could produce $300 million in revenue for Bolivia, equal to what’s expected next
year from the country’s Brazilian pipeline.
The region has lots more to offer. Chile’s infrastructure is one of the
most impressive I’ve seen in a developing country, second only perhaps
to China. Bolivia’s road system is expanding. Most
of the highways will be toll roads, built by private companies. All four of
these countries have stock markets, although Bolivia’s is still fairly small. (It
won’t be for long.)
Tourism opportunities abound, from gorgeous coastline to lush
rainforest to snow-covered peaks to cosmopolitan cities. I’d love to
move to Cochabamba in central Bolivia. It’s known as the city of
eternal spring because the temperature always sits around 70 degrees.
It’s a beautiful place that reminded me of a European city, except that
everything was cheap. Peru was in the midst of a civil war when I
was there in 1991; tourists were afraid to visit. Now Cusco, a city in Southern Peru, is considered one of the trendiest
towns in South
businesses are booming. A sure-fire, get-rich recipe is to start businesses
in countries where a war has just ended.
With the American economy still teetering and the possibility of
war lingering over us, this may seem like an odd time for me to talk about a
new frontier in South
its various problems. But I think
it’s exactly at a time like this that investors (and citizens) need to
look outward rather than inward. I’ve said it before and I’ll say
it again: Closing off from the rest of the world only hurts us, both
politically and economically. I spend my time studying and traveling the
world looking for unexploited regions that are on the cusp of change. New
frontiers, I’ll tell you, are hard to come by. In the U.S., none really remain, except perhaps Alaska. This may be one opportunity you
don’t want to miss.