Almost every week, a new infrastructure project is announced in Latin America. Roads, wind farms, hydroelectric dams, rapid transit systems, water and sanitation plants, you name it. How many of these become a reality? Sadly, only a few. The reason: while the region’s ambitions and needs are vast, government budgets are tight (falling commodity prices such as soy and oil don’t help) and the private sector is not playing an important enough role in these projects.
Latin America invests roughly 2 to 3 per cent of its gross domestic product in infrastructure. We need at least double that to reach the region’s infrastructure goals. Part of the solution lies in finding new and better ways to promote private sector participation. There are vast sources of private funding to be leveraged, not to mention technical and managerial expertise. By some accounts, pension funds, an essential source of domestic savings in Latin America, are investing only 1 per cent of their portfolios in infrastructure around the world. Similarly, only 2 per cent of global insurers’ assets are allocated toward infrastructure.
Countries in the region must answer a key question: what role should the private sector play in delivering public infrastructure services? While the answer may vary depending on each country’s needs, a few steps can go a long way towards boosting private sector investment. There are some hopeful signs in the region, but much more still needs to be done.
First, governments need to provide stable regulatory conditions and assure investors that the rules of the game will not change once they’ve committed to a project. For example, over the past 20 years Peru has established a comprehensive legal framework geared toward attracting private capital as part of its broader development agenda. Peru’s 1993 constitution guarantees the same rights for foreign and domestic investors, and equal access to incentives, such as tax exemptions. In transportation, one of its priority sectors, Peru has achieved private investment commitments worth $14bn in 31 projects.
Second, infrastructure projects require careful preparation. Often countries struggle to execute a project quickly. However, speeding through the preparation of a port or a highway that may have a lifespan of 100 years is short-sighted and usually backfires. For infrastructure to be done right, it needs to be sustainable – from the engineering to the environmental and social considerations to the allocation of long-term financial risk. Related to this, the region must also make the most of existing infrastructure through better maintenance and efficient management of current assets.
Lastly, Latin America needs to develop more effective private participation to close its infrastructure gap, improve productivity and grow local economies. Tapping into new funding sources – such as insurance companies, pension funds and sovereign wealth funds – is essential.
Mexico, for example, is enacting far-reaching reforms in its energy sector at a time of budgetary constraints, when oil revenues have dropped sharply. It has turned to an innovative solution, known as FIBRA E, to raise private sector funds which can be directed to infrastructure projects. Operating as a publicly traded trust fund, this vehicle allows private sector players such as pension funds to invest in existing cash-generating infrastructure projects, freeing resources that the original owners can use for other infrastructure projects.
Legal and institutional frameworks can provide the right incentives and help reduce financial risks. Colombia’s 2012 law on public-private partnerships (PPPs) helped level the playing field for companies investing in infrastructure by improving bidding mechanisms and promoting transparency and objectivity in how contracts are awarded. Specific skills are needed to prepare, launch and manage PPPs. Many countries in the region – such as Guatemala and Honduras with Anadie and Coalianza, respectively – have consolidated oversight for PPPs by creating agencies with the resources to improve their procurement and selection processes.
Sound legal frameworks should also be flexible enough to avoid cumbersome and repeated approvals for projects. Colombia’s National Infrastructure Agency was able to streamline the complex bidding process and has been successfully awarding concessions for its ambitious $25bn road-modernisation programme. Presenting a holistic infrastructure programme encompassing several projects – with standardised contracts and a unified bidding processes, as Colombia did – is more effective in attracting private sector interest than a project by project approach.
Chile, which has a mature and competitive market, has taken it one step further, with “unsolicited proposals” that originate within the private sector rather than the public sphere. During the process, companies spend their own money to develop and present technical studies and project specifications. It has proven successful and been replicated in Peru, Colombia, Brazil and Mexico to varying degrees.
Multilateral development banks can help governments think through the trade-offs of these decisions and bring global knowledge to Latin America, particularly in areas that have proven successful in other regions. This includes early-stage risk capital and project development support for companies operating in challenging markets where private investment is constrained.
All too often, infrastructure is seen as an expense. In reality, it is an investment that allows people to get to work quickly, children to study in the evenings with reliable electricity, and families to stay healthy with affordable water and sanitation. In Latin America, the needs are heightened by the fact that it is the most urbanized region in the world (with about 8 out of 10 people living in cities) and its middle class is growing with 50m people lifted out of poverty in the last decade. Let’s tap into the power of the private sector and help Latin America achieve its dream of greater prosperity for all.
Gabriel Goldschmidt is the Head for Infrastructure in Latin America and the Caribbean at the International Finance Corporation (IFC).
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