Guatemala is on the verge of a new government term - having concluded its electoral process in 2019 - and is facing many challenges in 2020. Current infrastructure conditions in Guatemala are pressing concerns for the government and the private sector as continued economic prosperity and sustainable development depends on local investment and foreign direct investment for these projects.
According to the World Economic Forum’s Global Competitiveness Report of 2019[1], Guatemala is currently ranked 98th of 141 countries in the Global Competitiveness Index, ranking 102nd of 141 in infrastructure competitiveness. Furthermore, confidence and competitiveness of the country’s government institutions scores a low 42 out of 100.
President Elect, Alejandro Giammattei, and municipal authorities have expressed their intention to develop capital intensive projects particularly focused on the development of road systems, transport projects, ports and regional airports. These projects will be executed through the use of Public-Private Partnership schemes or general Public Procurement Procedures outlined by law and are designed to attract foreign direct investment.
Lessons learned by the Guatemalan government and the private sector in recent years have created a shift in mindset to enhance integrity, promote transparency and good management, prevent misconduct, and avoid corruption by ensuring proper management of public goods and the effective provision of public services.
Due to the nature and magnitude of the different projects in the country, for which development is being sought, local capital and technical expertise will not be enough for their completion. Foreign direct investment will be pivotal for the success of the projects.
These investors need to understand the legal and political landscape of the country in order to make an informed decision about investing in these projects.
Most public projects will be held through a public procurement bidding process. Foreign investors must have a deep understanding of each stage in the development of the projects and the risks that each stage carries. As proven by various corruption scandals of recent years in Guatemala, there are many related forms of corruption that can, unfortunately, affect the different stages of the procurement cycle.
Most investors focus on the risks involved at the tender and post-tender stage. However, important precautions must be taken during the pre-tender stage of the bidding process, which will help investors navigate Guatemala’s business and legal landscape.
Prior to any announcement of a major infrastructure project, a ‘needs assessment’ should be performed by the relevant government authority, which will help identify why a project should be considered and developed. A ‘real need’ must be justified with technical, commercial and financial studies that support the investment of the purchase of goods, services or works. The identification of the need must have adequate specification of the technical requirements and a clear line of budgeting. Foreign investors should be mindful of perceived ‘created needs’ for a project as opposed to ‘real needs.’ A created need is a red flag that usually demonstrates that a project is being tailor-made to serve the interests of a particular bidder.
The project should serve a strategic priority outlined by state policies. Red flags may be spotted when reviewing requirements that are not adequately or objectively defined, or when the indicated necessity has not been sufficiently reviewed by a significant number of players in the industry for purposes of market studies. In many cases, government entities could invite potential interested investors to have an opportunity to help draft specifications of the project prior to a bid process. In this case, companies should avoid being sole participants in evaluating the needs. The process should be an open invitation to all interested bidders to participate, integrating different views of the industry and facilitating exchange of information useful for the project. A recent example of a potential project that was questioned in Guatemala for lack of objectively defined studies related to a bidding process was initiated by the National Institute of Electrification -INDE - for the construction of a photovoltaic plant worth between US$100 and US$120 million dollars[2]. The lack of technical and financial studies and selective criteria for potential bidders generated questions from the private sector. The project came under heavy scrutiny by public authorities, including public prosecutors - this created risky and uncertain conditions for potential investors[3].
Once needs are assessed, the relevant government authority should make a financial evaluation on the cost estimate of the goods, services or works. Large-scale infrastructure projects, such as those being evaluated by the Guatemalan government, usually require prior budget approval and planning to determine if funds are available (particularly in the case of Public-Private Partnerships). In this stage, it is important for investors to ensure that the project has a sound financial assessment from its planning and that the project has been realistically budgeted and/or is not deficient in its considerations. Projects should have realistic estimates for all the phases of procurement, based on sound forecasting methods that take into consideration possible variations over time that could have an impact on the contract.
A recent example of the effect of a poor pre-tender planning process in Guatemala, is the construction of highway ‘Libramiento de Chimaltenango.’ This project was inaugurated on April 2019 and collapsed only 5 months after its opening. The collapse of the project is creating additional costs in repairs and companies affected by the collapse. According to reports, poor environmental studies[4] and financial planning have made this project even more expensive than initially reported. The project’s cost is about Q600 million quetzals without current repairs. The original award of the project indicated that it would cost Q451 million, however due to delays, the project ended up costing an additional Q139 million[5]. Current problems with the project will most likely result in greater costs that overvalue a poorly executed procurement process. The economic and reputational damages for the current administration and companies participating in the project are significant.
As the process evolves, selection criteria for evaluation for potential bidders will be relevant for the upcoming stage of the procurement cycle. In Part II, we will discuss further the importance of identifying risks during the bidding stage of the process, which is crucial for stakeholders of companies that seek to be involved in the development of infrastructure projects.
- World Economic Forum
- https://republica.gt/2019/05/07/rechazan-justificaciones-del-inde-en-millonaria-licitacion/
- https://elperiodico.com.gt/nacion/2019/08/17/fiscalia-pide-informacion-al-inde-sobre-licitacion-de-energia-solar/
- https://www.prensalibre.com/ciudades/chimaltenango/civ-no-cumplio-con-especificaciones-tecnicas-ambientales-en-el-libramiento-de-chimaltenango/
- https://www.prensalibre.com/guatemala/comunitario/ministro-de-comunicaciones-minimiza-derrumbes-en-el-libramiento-de-chimaltenango/
