9 August 2002 - 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 MachuPicchu, 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you’ve read the headlines about this region: collapsing currencies, impending debt default, foreign investment being withdrawn, governments in turmoil.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 Braziland 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 Ocean some 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 every day.

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 America and 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 America with 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.