AFPs, Roads, and Capital Markets

By Joshua Goodman
[Extract from Business Week, May 31, 2004]

SANTIAGO. Drivers in Chile don't have to wait until they're 65 to enjoy their pension benefits. Every day thousands do so when they speed from Santiago to Viña del Mar along the Rutas del Pacífico toll road, which opened on Apr. 13 with funding from the country's deep-pocketed pension funds. A billboard reminds passing motorists: "Your savings are financing this highway, and this highway is financing your retirement."

Indeed, this year alone, the privately managed Pension Fund Administrators, or AFPs, expect to buy nearly $1 billion in locally issued bonds to fund projects such as the new highway. And the AFPs expect to earn a healthy return on that investment: Annual real returns have averaged 10% for the last two decades. "It's a perfect circle for everyone involved," says Alvaro González, local manager for Sacyr, a Spanish construction company that operates the highway.

The new expressway is the latest perquisite of a 23-year-old government-mandated but privately managed pension system that oversees some $50 billion in assets. That's the largest such pool of funds in Latin America, even though Chile is only the region's sixth-largest economy. The pension system's kitty has grown so fast, in fact, that the government relaxed its pension laws in 1996 to allow money to be invested outside Chile and to fund public works. Among the big-ticket projects funded recently: the extension of Santiago's highly efficient subway system, hundreds of miles of highways, and construction of nearly 500,000 homes for low-income families. "Without the AFPs, it's unlikely Chile would have the modern infrastructure it does," says Axel Christensen, an executive with Santiago-based Moneda Asset Management....

Chile's pension system has generated a critical mass of capital that has made the country's financial markets the most sophisticated in Latin America. Hundreds of Chilean companies -- from retail chain Falabella to airline LANChile -- today depend not on the whims of foreign investors but on the AFPs, which control 70% of the local equity and bond market. The only downside appears to be the local markets' dependence on the AFP funds -- and the possibility of an asset bubble at some point.

But the bottom line for most Chileans is that they're living better than ever in their golden years. And their economy is all the better for it.



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