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Why Latin American Business May (Finally) Be Ready for Growth

Bernardo Vargas Gibsone, CEO of the Colombian utility and construction company ISA, sees opportunity emerging from turmoil.

Latin America is showing signs of growth following a six-year downturn. One factor is a rise in commodity prices, the backbone of economies across the region. Another is renewed vitality in some Latin American business sectors, and a third is the prospect of stability after years of turbulence. The International Monetary Fund is particularly bullish about Argentina and Chile, but growth is expected across the region.

For Bernardo Vargas Gibsone, this is all good news. Vargas is CEO of ISA (Interconexión Eléctrica S.A.), a leading utility and technology company headquartered in Colombia, with businesses in power transmission, communications technologies, and roads, operating in its home country plus Argentina, Bolivia, Brazil, Chile, Ecuador, Panama, Peru, and Central America. ISA is a public–private company; the Colombian national government owns about 62 percent of the shares, and private investors own most of the rest. It is also increasingly recognized for its sustainability-oriented practices and its commitment to transparency. Improving the region’s poor infrastructure will be key to ISA’s economic success, and the company is well placed to benefit from a growth economy.

The U.S.-educated CEO — he has an MBA from Columbia University — is under no illusion that the next few years will be easy. Businesses in the region will have to navigate the challenges of political uncertainty and institutional weaknesses. In 2018, Brazil, Chile, and Colombia will all go to the polls for national elections, and Argentina has important midterm elections. Another factor is the unpredictable foreign policy direction of the U.S. and its rocky relations with its southern neighbors under president Donald Trump. Moreover, Brazil’s recent corruption scandals have paralyzed some economic activity, affecting companies throughout Latin America, including those like ISA with no direct connection to the scandals. Finally, although Colombia’s civil war ended in 2016, the country is still dealing with its impact and has a continuing need for more power lines, roads, bridges, and other forms of physical infrastructure.

For Vargas, whose background is in financial institutions and who took over the top job at ISA in 2015, the opportunities for reinvigorating the region’s economy are clear, even with these headwinds. In December 2017, he met with strategy+business in his company’s Medellín headquarters to talk about the strategies for success that any leading emerging economy company could adopt today.

S+B: Decision makers are increasingly optimistic about global economic growth. What is your view?
VARGAS:
I’m generally optimistic because of a couple of factors that are now at play, which were not as clear a year ago. One of them has to do with the economic growth in the U.S. and the European Union, which is countering the slowdown of sorts in China and other countries in Asia. Given our proximity to the U.S., the fact that the U.S. is growing at more than 2.5 percent is very interesting. We are also seeing European countries like Spain doing better than they have in the past.

For Latin American countries, 2015 and 2016 were terrible years because of the commodity bust. Countries in general, starting with Brazil, should do a little bit better in 2018. That includes Argentina, Colombia, Peru, Chile, and even Mexico. In that respect, I am optimistic about the future, at least for the next year or two.

S+B: Is this growth still tied to commodities, or are the economies becoming more diverse?
VARGAS:
Unfortunately, Latin American economies are still very much tied to commodities. But having said that, the economies that suffered through the commodity downturn have made some fairly strong adjustments, especially fiscal adjustments, which will be favorable. In Brazil, we expect that anti-corruption laws and the pension reform law under consideration will lead to improvement. Colombia had a very tough year in 2017, clouded by the corruption scandals in Latin America. Now, the good news is that there are positive adjustments, and the commodities prices are improving.

But the 2018 elections in Colombia and Brazil may not have positive impact. And of course there is political uncertainty in Peru. I think 2018 will probably be a mixed bag, but it will be, in my opinion, a little bit better than 2017. If we have governments that favor business interests, 2019 will look even better.

S+B: A power utility by definition is involved in developing quality of life and creating opportunities for people. What opportunities exist for your industry now to further economic improvement in Latin America more generally?
VARGAS:
ISA has three lines of business in Latin America. The largest is the transmission of electricity and power lines. If you look at the different countries where we are present, there are still major opportunities.

“Even though I might make less money with net neutrality in the short run, I think it’s for the better.”

There was an auction at the end of December for power lines in Brazil that produced enormous competition; companies were willing to accept returns of just 4 to 5 percent. We unfortunately didn’t win any lots, because we were not prepared to go that far. But it shows there’s so much electricity infrastructure to be done in Brazil. In Chile, Peru, and Colombia there are similar opportunities, including a very large line proposed for Guajira, a northeastern Colombian province that borders Venezuela. It will produce energy for urban centers from wind and photovoltaic sources in that province.

Argentina has been absent from real infrastructure investment for the past 14 years. So the opportunities there are big. There are opportunities in Mexico as well, although the political scenario is more daunting.

It’s the same story for our two other lines of business: toll roads and telecommunications. In telecommunications, the jump from 4G to 5G will require huge investments for data transmission and digital connection. And long-distance fiber lines will get more and more usage. There are also a lot of toll roads to be built, at least in the countries where we do business.

An infrastructure company like ISA cannot grow if it can’t produce a certain level of returns. But I think that governments are beginning to understand that in order to do real, large infrastructure well, they need to be partners with infrastructure developers. That’s happening in Brazil and Peru. There’s work to do in Colombia, and especially in Chile — where community opposition to new infrastructure projects is making it difficult to launch them — but opportunities are there. Any capital projects company will be well prepared for them if it can keep its costs low, enhance efficiencies, and be careful in taking on debt.

S+B: The businesses you’re talking about are all cross-border. Yet the world appears to be moving away from globalization toward more fragmentation, nationalism, and tariffs. How do you see this evolving?
VARGAS:
During the past hundred years, the world has gone back and forth between economic openness and closed-off nationalism. I’m reading a book on the Russian revolution; Stalin closed the doors on the Soviet economy in the early 20th century. Today, we have a more inherently connected world. It’s very difficult, even for extreme politicians like those in Venezuela, to block communications between countries when people can talk easily across borders on their cell phones.

I don’t worry about short-term political leanings toward nationalism. If companies like ISA do their job well, it will be in the interests of even inward-looking politicians to have us provide the best services for the people and communities. That means operating in a globalized world. We will still be pursuing opportunities within that framework and will not, in my view at least, be cornered by short-term political views that tend toward narrow nationalism.

S+B: According to advance reports, the Edelman Trust Barometer says that trust in companies and their chief executives reached an all-time low in 2017. But in PwC’s 21st survey of chief executives, respondents said they were confident about their company’s reputation. What do you think it takes for a business to build trust?
VARGAS:
When the Brazilian scandal broke into the news, people realized corruption is not only present in public-sector entities, but also in well-reputed private-sector companies. The related corruption investigations have brought the perception of business to an all-time low. It’s hard to think of a time in the past when the perception of corruption has been so widespread.

This makes it imperative for us to instill in our companies the values that are needed. At the end of the day, if you have the right values, and the right controls within the company, you can overcome this hurdle. The lesson for CEOs is that one little blip in terms of a corruption scandal can affect your reputation and even destroy your company, and it will happen even if you pay attention to costs, or invest in innovation and efficiency. Companies have to invest in internal controls, in audit and compliance.

The good that has come from these scandals is that the judicial areas in Brazil and other countries are strengthened. Of course, in Venezuela it’s going the other way — and everybody is looking at that as a great example of how not to do things.

Within ISA, this difficult atmosphere is pushing the bar higher. We have to spend more money on controls, and of course, much more on educating our people and those working with the company on ethics and values. We already had a fairly strong audit service within the company, but now we’re building a compliance section across borders that will be stronger and more robust. We conduct an anonymous employee survey regularly, and it shows that people in ISA are convinced that they are working for a positive purpose. In that environment, it’s harder for corruption scandals to happen.

S+B: You’re talking about building habitual new ways of thinking and acting within your company. Do you do this through training or through setting examples with your top leaders?
VARGAS:
I don’t want to be tooting my own trumpet, but it’s leadership. People perform well when they’re happy. To be happy, you need to love what you do, and you need to know why you do what you do. That part of the culture is something that only leadership can push. Leaders have to be pushing fervently for better values, in addition to having internal rules or regulations, and ethics training.

S+B: What challenges and what opportunities are on the top of your mind with respect to digital technology? For example, are you concerned about disruption, cybersecurity, artificial intelligence, or talent recruitment?
VARGAS:
Unfortunately, all of the above. Every company is more and more digital. As a business leader, you not only have to use the digital economy to your advantage, for commercial or technical purposes; you have an obligation to build a digital organization within your own company. And that is a huge challenge. It is costly. It requires significant amounts of [capital expenditures and operating expenditures]. It has to be orderly and the money has to be spent in the right ways, because the temptation is to overinvest in things that you’re not going to use. You won’t just invest in AI or big data for one year; you will invest every year, and you need a plan and a target. When you ask, “What is a digital corporation, really?” you get different answers from different people. So you need to be very clear about what you understand a digital corporation is and go toward that.

S+B: Latin America has large cohorts of young people. What role should an emerging economy company play in general training and education, and in building the workforce you need?
VARGAS:
Let me first refer to our own workforce at ISA. We spend immense amounts of money on our people. For example, very few people in our company are really bilingual. We’re working on that for English, which is the global language, but we also need to be fluent in Portuguese because 40 percent of our revenue will soon come from Brazil.

ISA people are very technically adept, but people who will lead the company need more cross-disciplinary knowledge, and more emotional intelligence. So we’re building on that, as well. And, of course, we can’t ignore the fact that for 50 years, there has not been a great engineering education system in Colombia. So we are partnering with universities across the country to offer better programs to our employees. We have also had an agreement with MIT for the past two years to do innovation training. We think that we are going in the right direction, but we still have a lot of space to cover.

More broadly, companies have a great potential impact on the education of the communities that they touch. We take that role very seriously. Infrastructure companies like ours will have to support others in enhancing better education in the countries that they reach, especially poor countries. With telecom services in particular, we try to support connectivity as much as possible. In general, we try to be an example of commitment to education and to continually restate its importance in our messages — to employees and customers.

For the past six years, we have run a program in small schools, especially in rural areas where our lines go in Colombia, and we’ve been training teachers to be better teachers. We’ve had a 15 percent improvement in the results from those rural schools.

S+B: Do you think any Latin American countries have the potential to develop a kind of Silicon Valley–like community with software engineers, hardware engineers, probably artificial intelligence, and universities all working together?
VARGAS:
There is a lot of very interesting innovation going on in Colombia and in other countries. Medellín in particular has been named as an innovation capital. But the U.S., Europe, and even China have an advantage in their access to venture capital and other capital markets. Latin America needs much more focus on this — especially because of the huge number of young people here looking to innovation as a way to grow their businesses.

Every two years ISA holds a competition on innovation, and young people submit entries. We had close to 600 entries for our last one. Sixty of them received awards. In 2015 our subsidiary in Peru submitted six papers. In 2017, it submitted 200 papers. So, it’s growing, it’s pushing forward.

S+B: What other issues are important to business today?
VARGAS:
You mentioned that economies are looking inward. In Latin America, there’s been a reaction on the opposite side. The Alianza (the Pacific Alliance trade bloc of Chile, Colombia, Mexico, and Peru) and Mercosur (the Latin American trade bloc) have to work more diligently to counter the drive to close off economies. If this effort works, it can create a true mutually supportive group of economies that would foster regional growth.

In the commodity downturn, we learned that there is a real need to improve productivity and add value to the products we export. That is why innovation is so important.

The loss of net neutrality will have a big impact. If it creates a different playing field for different services or customers, that would be to the detriment of the general public. Even though I might make less money with net neutrality in the short run, I think it’s for the better.

I see all of these debates, hopefully, producing improvement and progress in the end. I’m a born optimist.

Author Profiles:

  • Art Kleiner is editor-in-chief of strategy+business.
  • Santiago Uribe is PwC Colombia’s clients and markets senior manager.

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Why Latin American Business May (Finally) Be Ready for Growth