Argentina: Overcoming Debt Challenges and Rebuilding with Infrastructure and Innovation

Of all the countries in the world, perhaps no country more embodies “debt trap” and then “default on sovereign debt” than Argentina. Argentina’s national banks defaulted on their first loan only a few years after independence from Spain in the 1820s when the Minister of Finance obtained loans to pay off war debts. The loans were considered usurious, and the ensuing crisis resulted in a 33 percent devaluation in 1827, and then 68 percent in 1829 (Argentina Country Risk Report, 2019). Unfortunately, these were not to be the only loans that quickly became unmanageable due to high interest rate and impossible terms, and which deeply damaged the Argentine economy.

Later, however, the time from 1850 to 1930 was very prosperous for Argentina, which, thanks to its prosperous agricultural sector, and the infusions of investment capital into infrastructure (railways) and industries. At one point, Argentina was the seventh largest economy in the world, and its inhabitants were the 10th wealthiest.  In addition, the country benefited from being perceived as a safe haven for money and resources fleeing war-torn and newly communist countries in the world.

However, there was a slowdown in the 1930s, inspiring in 1943 a coup d’etat by Juan Perón, whose goal was the empowerment of the poor and working class. Argentina was not invited to the 1944 Bretton Woods conference that established the International Monetary Fund and the World Bank because Argentina had not yet joined the Allies in World War II. In fact, Perón was against joining the group and considered the effort "imperialistic.” Perón was overthrown in a rival coup in 1945. In 1946, he was narrowly elected President. His government was accused of repression.

Argentina finally officially joined the International Monetary Fund in 1956. In the meantime, the Argentine government continued its idealistic utopian socialist transformation through modernization approach which so typified the first half of the century in rebuilding nations. There was an emphasis on large infrastructure projects and in state-owned industries that employed many thousands of people in the administration of the nationally owned utilities and social services.  The ensuing deficits led to a need for liquidity, and then the first waves of large loans. Waves of economic problems were accompanied by protests and activism, resulting in repressive governments.

Source: Wikipedia. https://en.wikipedia.org/wiki/Provinces_of_Argentina

Economic Decline: In such a situation, economic growth was difficult if not impossible. Between 1975 and 1990 real gross domestic product feel by almost 20 percent, which had a very negative effect on the entire country, but most pronouncedly on manufacturing, which entered into continuous decline in the 1970s. The government attempted to level the playing field by creating a wall of tariffs and by instituting protectionist policies. Instead of incubating the domestic companies, the result was a lack of investment, a loss of competitiveness, and finally a loss of markets.  Argentina, which was once known for the high quality of its manufactured goods, began to shutter factories as they could no longer stay open, even when heavily subsidized.

Almost every decade has been marked by a dramatic economic crisis, often marked by devaluation, hyperinflation, a default in national debt, with corresponding erosion of credit-worthiness.
As of September 2019, Argentina's external debt stood at around $101 billion (The Times, 2019). The currency has been devalued again, resulting in an exchange rate of $US 1 to 56 Argentine pesos, from 25 to one US dollar a little over a year before.

 

What is it like to try to have a business in Argentina during times of devaluation of the currency? What is the impact on the supply chain? 

Argentina has a history of high external debt, and it has been borrowing for infrastructure projects and also to service existing debt.  According to many analysts, Argentina "is almost certain to default on its $100 billion of debt again" (Aldrick, Sept 3, 2019, The Times). South America's second largest economy has been in trouble financially many times since it joined the IMF in 1956.

Specifically, Argentina has been bailed out an astonishing 22 times since 1958 and has defaulted on its  loans nine times since independence in 1816. Slow or reduced payments to investors have been “de rigor” since the 1960s until even September 2019 when the maturity on short-term government loans was extended without negotiation (Sanders 2019).

President Macri's initial strategy involved having Argentina reenter global markets, pay off "vulture funds," and ask the IMF to audit funds (with the idea of more loans).  He also tried to balance the budget by increasing the amount paid to the government for services (utilities, etc.), and to restrict the flow of capital out of the country. The resulting devaluations made Mr. Macri extremely unpopular, and his loss in the primary elections further weakened confidence in a challenged economy.  The goal in early September 2019 was to refinance the debt. However, the country remains deeply divided between Macri's reformist party and the socialist / populist party (Kirchner, etc.) which has been accused of corruption and mismanagement (Argentina Country Risk Report, 2019).

What happens when the IMF requires the country to service its debt?  Usually there is an austerity plan with the goal of a balanced budget (prioritizing paying off debt). However, IMF austerity plans in Argentina have an unhappy history.  What has happened in Argentina is a devaluation of the peso, lack of buying power, poverty, lack of capital investment, and labor insecurity.  The country falls to an even lower level of productivity, due to uncompetitive products, falling productive capacity, obsolete and inefficient factories, lower level of human capital (due to lower social and education services (Mariza, 2019)), falling levels of confidence, and widespread financial institutional instability. But, faced with few options, the country tends to accept "loans of last resort" in order to service debt and avoid wholesale seizure of assets (Koch & Perreault, 2019).

Infrastructure Leveraged for Economic Growth:  Investing in infrastructure and marketing support for innovative products offers an alternative.  First, productivity must improve in the short run. There are a few ways to do so, which include conducting bid rounds in order to develop mineral and petroleum resources.

While it can be argued that the country often receives insufficient proceeds for licensing multinational companies to develop mines and oil fields, this is often the best approach in the short run. Indeed, this is an approach that Argentina has used, with success.  They have attracted investment in the Vaca Muerta shales, and five separate provinces are currently seeking investment in order to develop their oil and gas. In a recent international oil and gas congress (AAPG's International Conference and Exposition), executives from ExxonMobil, Equinor, Shell, and others were unified in their message that they were increasing their investment in Argentina and would continue to do so if the government could assure positive conditions. They also suggested maintaining Argentina's policy of maintaining a posted minimum price of $75 per barrel of oil, which de-risks the investment a great deal.

Second, boosting agricultural production in order to increase exports and facilitate import substitution is a possible strategy. However, years of neglect in the infrastructure have made transportation, processing, and warehousing difficult (Berlinski, 2019). Supply chain coordination is lacking, and so the fail-safes and protections that could be implemented to help de-risk the enterprise and protect against extreme weather, harsh conditions, and the need to store and hedge, are not possible.

A third strategy has to do with creating a global platform for Argentine innovation. The "Silicon Pampas" can develop new products to license, including such innovations as new systems for intelligent oil and gas operations. In fact, Yacimientos Petroliferos Fiscales (YPF) has created a spin-off company, YPF Tecnología (https://y-tec.com.ar/Paginas/home.aspx), which invests in start-up and mid-development products. New technology and innovations include innovative pumps, control systems, smart operations systems, and more. Intellectual property has been protected by means of patents. In addition to technologies used in drilling, completing and producing oil and gas, Y-TEC has developed alternative energy solutions, new process for processing and purifying contaminated water, and new approaches for developing monitoring systems using satellite and remote sensing for better management of the arid, fragile environment where many of Argentina’s oil and minerals are found.

The strategy is not without its own difficulties. Devaluation and inflation, along with protectionist policies regarding imports (extremely high duties) make it difficult to import the raw materials and equipment needed for the startups, and it becomes necessary to obtain painfully complicated licenses and exceptions.

Loans for Infrastructure:  Many of Argentina's loans have been for infrastructure, and in fact the so-called "vulture loans" (ones where the loaning entity refused to renegotiate or restructure, thus requiring Argentina to repay the entire principle and interest, often at a high rate of interest), have been for infrastructure. 

Unfortunately, there has been a long history of problems with loans for infrastructure projects; first, the interest rates can be very high, and second, there can be cost over-runs and excesses; third, additional affiliated fees, permits, and licenses can slow development.  The World Bank currently has a number of infrastructure projects in Argentina on the books:

Selected Examples of 
World Bank Projects and 
Operations for Argentina   
                                                                 Total Cost           World Bank Commitment   Approved
Northwestern Road Development
Corridor Project                                       $US 311.00 million      US$ 300.00 million    2017

Metropolitan Buenos Aires Urban
Transformation                                        $US 125.00 million      $US 100.00 million    2019

Salado Integrated River Basin
 Management Support Project                 $US 375.00 million     $US 300.00 million    2017

Argentina Renewable Energy
for Rural Areas Project                             $US 240.09 million    $US 200.00 million    2015

Matanza-Riachuelo Basin Sustainable
Development Project (Sewers in BA)        $US 1000.00 million    $US 840.00 million    2009

Urban Transport in Metropolitan Areas     $US 187.60 million    $US 150.00 million    2009

Argentina First Inclusive Growth
Programmatic
Development Policy Financing                 $US 500.00 million    $US 500.00 million    2018
           
(The World Bank, 2019. http://projects.worldbank.org/)           

Challenges:  It is very difficult to keep politics out of economic development, and so some of the investments may be more politically expedient than truly productive in terms of economic development.

An often failed strategy has been privatization of the long-condemned as inefficient, state-run monopolies (utilities, etc.).  However, while privatization did have the effect of reducing the country's overhead, many of the state-run monopolies eventually can run the risk of becoming de facto private monopolies (or oligopolies).

Laws designed to protect workers are sometimes circumvented because they carry with them high taxes and severe penalties for letting a person from their job. As a result, an underground labor market has begun to supplant the formal labor supply. Much work is done off the books and consists of short-term employment. Not only do the employees not receive the benefits of a regular employee, they have no assurance of regular employment, and the pay tends to be much lower.

Conclusion
Recovery Plan: A recovery plan can leverage infrastructure projects and combine them with innovation (new technologies and communication), supply chain improvements, and productive linkages with local and international markets.

Now that there are certain sectors of the population that are facing food insecurity, and there are serious issues of hunger, an economic recovery plan will need to incorporate provision of nutrition and basic health coverage for the vulnerable (children and elderly), as well as nutritious meals for the workers.

A recovery plan should include the following items:
1.  Improved infrastructure, beginning with roads and sustainable electricity.
2.  Coordination between production (agriculture and extractive) and needed infrastructure.
3.  Targeted innovation and new technology developing in conjunction with infrastructure and production (agriculture, smart operations, mining, oil and gas, medicine, tourism, pharmaceuticals, marketing).
4.  Collaboration and partnering with global marketing networks for developing short-term and long-term markets for products and services.
5.  Private-Public Partnerships to help develop infrastructure, but in a way that protects workers and markets, and generates local employment (avoid importing all the workers, etc.).
6.  Restabilization of the financial sector, in order to attract investment as a "safe haven" investment, which may need development of cryptocurrencies.
7.  Innovation in supply chain operations, and the use of blockchain for assuring integrity, source, supply.
8.  Leverage the geographical position of the Tierra del Fuego, etc. to develop high-tech surveillance, monitoring, and strategic operations, in conjunction with allies.

Once the key elements of a recovery plan have been identified, steps can be taken to build out a critical path and a workflow. Using as many new techniques from supply chain management and risk management can be quite helpful.  In addition, it is useful to develop probabilistic models that can help one simulate the outcomes of different scenarios and then develop plans. 

References
£83 billion towering debt pile crippling Argentina’s economy. (2019, August 31). Daily Mail, p. 105. Retrieved from http://search.ebscohost.com.ezproxy.lib.ou.edu/login.aspx?direct=true&db=n5h&AN=138348395&site=ehost-live

Argentina Country Risk Report. (2019). Argentina Country Risk Report (pp. 1–59). Retrieved from http://search.ebscohost.com.dbproxy.tamut.edu/login.aspx?direct=true&db=bth&AN=137086139&site=eds-live

Berlinski, N. (March 19, 2019). Roads to prosperity. Fixing Argentina's crooked architecture. Prosper: Notes on the Future of Development from CSIS. https://csisprosper.com/2019/03/19/roads-to-prosperity-fixing-argentinas-crooked-infrastructure/

Country Reports - Argentina. (2019). Argentina Country Monitor (pp. 1–59). Retrieved from http://search.ebscohost.com.dbproxy.tamut.edu/login.aspx?direct=true&db=bth&AN=133895584&site=eds-live

Koch, N., & Perreault, T. (2019). Resource nationalism. Progress in Human Geography, 43(4), 611–631. https://doi-org.dbproxy.tamut.edu/10.1177/0309132518781497

Mariza, Nazla. (August 19, 2019). The future of low-skilled manufacturing labor in Industry 4.0. Prosper: Notes on the Future of Development from CSIS. https://csisprosper.com/2019/08/19/the-future-of-low-skilled-manufacturing-labor-in-industry-4-0/

Mexico Infrastructure Report. (2019). Mexico Infrastructure Report, (3), 1–60. Retrieved from http://search.ebscohost.com.dbproxy.tamut.edu/login.aspx?direct=true&db=bth&AN=137341628&site=eds-live

Sanders, P. (2019). Argentina Seeks to Extend Debt Maturities as Reserves Tumble. Bloomberg.Com, N.PAG. Retrieved from http://search.ebscohost.com.ezproxy.lib.ou.edu/login.aspx?direct=true&db=bsh&AN=138321238&site=ehost-live

The World Bank (2019) World Bank project. The World Bank, 2019. http://projects.worldbank.org/)

Flared and Stranded Gas Solutions: Mini LNG Plant

--> First, there was horizontal drilling, then massive multistage hydraulic fracturing. Then "smart oilfield" with factory drilling and remotely operated operations dramatically improved productivity.

This was good, except that production outstripped pipeline capacity, especially for gas. It also glutted already saturated markets, resulting in a price collapse. The best thing to do with gas was either to flare it or not produce it all, and neither option was good for companies that counted on cash flow from operations to pay for their capital expenditures and private equity financing.

Martin was in a bind. He raised money for two different projects. One was a plan to go into the Panhandle Gas Field and drill horizontal wells to liberate the gas left behind by vertical drilling.

"Fish in a barrel," he gloated inwardly. And, it worked.  What he had not counted on was the terrible condition of the 40-year-old pipelines that had weathered price collapses and negligent owners.  He had "stranded gas" unless he wanted to pay the midstream company to update the system.

"Good grief," he said.  "I might as well buy my own midstream company." But, buying a pipeline did not make sense. After all, he did not know how long the gas production would hold up. or at what production volume.

Martin's other project was equally challenging. He drilled horizontal wells in the Antrim Shale in Michigan, which was really close to the hungry market of Chicago. But, the field was not huge, and there were no nearby pipelines. Given that the wells had a productive life of about 36 months, he could continue to time the development of the new wells to compensate for the depleting ones for at least 5 or 6 years. But, after that, unless they found another field, there would be nothing to produce into a pipeline.  Given those conditions, no midstream companies would touch him.

Martin found a solution:  small-scale, portable LNG facilities

He decided to contact the company and find out how to put in portable LNG solutions, and instead of putting the produced gas into a pipeline, the produced gas would go to the LNG plant, and then they'd put the liquid natural gas in bottles to sell or put in a warehouse (rather than flaring or not producing at all).

• Texas and Oklahoma Panhandles (old Panhandle Gas Field)
• Marcellus (remote parts of West Virginia and Pennsylvania)
• New Mexico stranded gas
• Utica (remote parts of New York and Ohio)
• Antrim (Michigan)
• New Albany (Indiana)
• Mancos (remote parts of Colorado
• Haynesville (Louisiana, East Texas)
• Fayetteville (remote parts of Arkansas)
• others...

Now Martin is looking for more available gas fields.
Contact me him if you'd like to explore the economics of getting a mini-LNG plant on your property.

Hed Kandi Sayulita Beach House: Travel-Tourism Economic Development Using Social Media

I love Hed Kandi’s chill and house mixes and eagerly look for them. They evoke a beach and surf vibe and even if I’m squeezed into an economy seat on a sold-out regional jet flight, I am immediately transported to gorgeous places and climates. 

For example, I imagine Sayulita, a bohemian coastal village in the Nayarit Riviera in Mexico close to Puerta Vallarta, famed for its surf and Stand Up Paddle Board (SUP)  competition in May.

In certain times of the year, Sayulita is a mellow place of pink sunsets and glassy waters.

However, according to blog posts and reviews, Sayulita was pure enchantment 30 years ago, but has been sullied by crowds and poor infrastructure, as well as a failure to enforce sanitation laws.

This is disappointing to me, and I wonder how many others are like me – they’d love to spend an extended amount of time in a beach community, and perhaps even invest in a house or a business.

Accelerating Private Infrastructure Investment for Economic Development

Perhaps the problem is that of a lack of private investment for infrastructure which is uniformly administered by a board that follows an approved development plan.

Personally, I think it would be a good idea to use templates already in place for development plans. For example, the “Pueblo Mágico” concept in Mexico has resulted in gorgeously maintained villages which are charming and clean. Examples that come to mind in the state of Jalisco are Tapalpa and Tequila.

It would be a good idea to share infrastructure improvements in order to encourage development via social media:
•    tweet new developments
•    post photos of prize winners on Instagram & share
•    use LinkedIn to connect owners of businesses / services
•    post videos of contests & the implementation of new infrastructure on YouTube
•    develop weekly shows to post on YouTube

While it might be tempting to try to shame people into not erecting fences that encroach on public roads, disregarding property lines, leaving piles of mangos and fallen branches to rot, and to letting their dogs run free in the streets and beaches, putting up ugly photos on the web is a very inadvisable strategy that will certainly have unintended negative results. It’s much better to encourage and envision positive change, and reward steps made in the right direction.

Strategic Decision-Making and Current Problems: An Online Course

Technological breakthroughs which have enabled companies to recover oil and gas that was previously unrecoverable have transformed the U.S. energy industry, and have helped lower dependence on imported oil. Some economists have predicted energy independence by 2020 (Citigroup, 2013, Energy 2020: North America, the New Middle East?). We can already see a change: in 2005, the U.S. imported 60% of its oil, while in 2012, only 40% was imported (U.S. Energy Information Administration, August 2013, http://www.eia.gov/forecasts/steo/pdf/steo_full.pdf).

Understanding the opportunities and gaining knowledge of the multiple challenges that accompany the goal of sustainable expansion of oil and gas supplies (via exploration, production, transportation) and the appropriate / effective use of new technologies are vital. To that end, here is a course which one can take (open courseware), or receive certification and credit in an instructor-led e-learning setting (AAPG -- American Association of Petroleum Geologists). It can also apply toward an MBA with an emphasis in Energy Leadership (Texas A&M Texarkana). For information contact snash@aapg.org 

Energy Strategy, Technology, and Current Issues in the Oil Industry

Energy Overview / Current Issues in Energy

Learning Objectives: 
Upon successful completion of this course, the student will be able to list current issues that can impact growth and sustainability of oil and gas ventures. They will also be able to explain the reasons for the potential problems, and evaluate possible solutions. 

Who Should Take this Course?
This course will help energy professionals, investors, geoscientists, engineers, business owners, managers, and service providers a clear view of many of the issues that accompany the rapid expansion of oil and gas supplies. It will place them within a strategic context that will help identify specific opportunities, and also places where changes can be made.

Overview:
The future of oil and gas ventures is complex due to a number of challenges facing the industry. Although demand for oil and gas remains high, especially in the new giants, India and China, complications have emerged, particularly in the U.S., where the “shale revolution” has resulted in an oversupply of natural gas, and plunging natural gas prices. In the meantime, lack of infrastructure in some of the major plays (the Bakken in North Dakota, the Eagle Ford in south Texas), has made it necessary to employ expensive methods of transporting liquids-rich petroleum such as hauling via truck and rail, vs. pipelines. Further, the lack of natural gas processing and transportation infrastructure (gathering systems, pipelines, compressors, conditioning) has made it difficult to get natural gas to market. Water management remains a challenge as well, particularly in times of drought and public sensitivity to environmental issues.

At the same time, enormous opportunities abound, primarily due to the emergence of transformational technologies, which have allowed previously unproductive and unproducible resources to be exploited. Further, new technologies are making it possible to return to mature fields and to recover oil and gas that has been left behind.

In order to make strategic decisions in all industries, it is very important to have an understanding of the issues facing the energy sector. 

Course Units (Issues):  

Select four issues, click on the links for access to the readings and course materials. Then read the materials and respond to the Guiding Questions by writing responses. Support your ideas with information from the readings and also by conducting your own research using reliable sources. 
1.  Current oil and gas exploration / production efforts hampered by insufficient cash / undercapitalization.

2.  Skyrocketing costs in energy technology. 

3.  Environmental challenges.

4.  Shortages of qualified personnel.

5. Bubble Economies and Carbon Economies / Fire sales and “vulturing”.

6. Alternative Energies: Easy-to-find, cheap-to-produce oil no longer exists.

7. Health and safety issues are increasingly complicated. 

8. “Green” energy must combine with oil and gas.

9. Geopolitical power shuffles.

10-11. Non-renewables are “dirty” and difficult; Renewables are expensive. 

12.  Global outlook: Sustained, worldwide growth. 


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Susan Smith Nash, Ph.D.
- 2013 -