Latin American and the Caribbean (LAC) countries have a large, and increasing, infrastructure quantitative, qualitative and efficiency gap. The lack of sufficient physical assets, inadequate maintenance and poor service provision negatively impacts the quality of life of its population and the competitiveness of its economies.
Over the last three decades public investment remains low at less than 2% of GDP, half of what East Asia invests in infrastructure per year. During the COVID-19 economic crisis, although the need for increasing public investment has grown this hasn’t translated into reality. Historically public investment will not increase because the region is characterized by a bias against infrastructure assets in favor of current expenditures during economic crises. Additionally, investment in infrastructure in LAC is perceived as a risky proposition in times of fiscal imbalances and debt growth. The average fiscal package to mitigate the impacts of COVID-19 was 8.5% of GDP and deficits increased by an average of 5.3% of GDP in 2020, propelling the public debt from 58% of GDP in 2019 to 72% in 2020 and it could continue to rise to 76% in 2023. Preliminary estimates confirm that governments in LAC invested less than 1.5% of GDP in infrastructure in 2020, not a promising scenario for a major shift in public investment to close the regional infrastructure gap.
A fertile ground for private participation
Recently, the Global Infrastructure Hub’s Infrastructure Monitor 2020 showed how over the past decade, LAC experienced the highest growth in the number of private infrastructure transactions. Ongoing policy reforms since the mid-1990s increased private sector investment from a negligible amount to 1 percent of regional GDP.
Important progress has been achieved on the institutional framework for public private partnerships (PPP) in Latin America with 16 countries having dedicated agencies to promote PPPs, provide technical support and supervise the performance of private sector participation in infrastructure. PPPs have proven to be a source of savings from efficiency gains and better service delivery in many sectors and industries in the region, most likely as a result of a better institutional framework during their implementation.
Despite these advances in private investment, infrastructure needs in LAC remains large and unable to keep up with the demand to foster competitiveness and achieve the United Nation’s Sustainable Development Goals. More and better investment is necessary for maintenance of existing assets and the development of new and higher-quality assets and services. According to recent IDB studies, not expanding capital stocks in infrastructure sectors in the region costs, on average, about one percentage point of GDP growth in the first year - a figure that could increase up to 15 percentage points of lost growth if the policy persists over 10 years. Similarly, not investing in infrastructure is regressive. On average, households in the two poorest quintiles of income distribution lose 11 percentage points of real income over a period of 10 years.
How can countries understand what attracts private sector participation?
The most promising way to close the quantitative, qualitative, and efficiency infrastructure gap in LAC is to increase investment efficiency by generating the conditions to effectively attract more private sector investment.
One way in which countries can learn what conditions will attract the private sector is through analysing available data. For the LAC region, from researching different data tools, like GI Hub’s Monitor and Infrascope, three areas stand out as drivers to accelerate private sector participation in infrastructure:
- Improving infrastructure planning and prioritization – this conveys there is a national mandate to develop projects that are socioeconomically viable, fiscally responsible, and with a life-cycle cost perspective. A portfolio of well-prepared and bankable infrastructure projects, and the publication of project information is key to promote accountability and ensuring transparency.
- Promoting project preparation facilities to expedite efficient and sustainable project delivery – understating that proper infrastructure project development requires enough resources to technically, economically, financially, fiscally, and sustainably prepare projects that are attractive for the private sector and socioeconomically profitable. This is even more necessary with the current fiscal restrictions and uncertainty generated by the pandemic as it is increasingly likely investors will prioritise well-structured projects in sound regulatory and fiscal environments.
- Aligning the infrastructure plans and programs with investors incentives given a more sophisticated infrastructure financing market– taking advantages of both primary and secondary markets. Private infrastructure investment conducted in primary markets have been declining in the last ten years. This trend continued throughout the COVID-19 pandemic, with private investment in primary markets falling to around USD 80 billion in 2020, the lowest in over a decade. This contrasts with the increase in secondary market transactions which accounted for 75% of all private financing in infrastructure in 2019.
Today, maybe more than ever, it is crucial to understand how we can make public and private sector work together for infrastructure development. Let us keep digging into data and advocating for infrastructure data development, management, and analysis to be a key priority for LAC’s governments agendas. As infrastructure development is the engine for economic growth and equality, data analysis constitutes the fuel to drive it.
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