Jorge Arbache
Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-
Infrastructure is one of the most powerful drivers of recovery and a promoter of a more sustainable and sustained growth pattern in the region. There are plenty of reasons, such as the high multiplier of investment, the reduction of production costs, the boost in productivity and competitiveness, especially for micro, small and medium-sized enterprises, the promotion of the circular economy and decarbonization, and the fight against poverty.
But if the benefits are so evident, why does our region have a high and growing investment deficit in the sector? There are multiple explanations, and one of the obvious ones is associated with the fiscal difficulties that several governments were already facing, but that were exacerbated by the pandemic, which should further limit the capacity for public investment in the sector during the coming years. In this context, private sector participation in projects becomes even more necessary, even critical.
Although with a growing participation, the private and international presence in infrastructure projects in the region remains modest, due partly to the still incipient industry of Project Finance (PF) and PPPs, which still have a lot of potential and can close many of the gaps in our broad investment agenda.
Low interest rates in advanced countries and high liquidity in these markets, combined with the pursuit of diversification of global value chains and the exploitation of opportunities arising from the need to reduce infrastructure investment gaps, have encouraged international funds and investors to look more closely at markets such as those in Latin America.
Following the impact of the pandemic, when the number of new businesses in PF dropped significantly, the winds began to shift and, by the end of this year, business is expected to surpass 2019 levels, a pre-pandemic year, with a 32% hike globally. Statistics are also encouraging for the region, and funds involved in PF operations this year are estimated to exceed USD 20 billion, much higher than the previous year.
While there are already satisfactory experiences and results of private participation in projects in the region, much more will need to be done if we want to scale up and elevate the infrastructure agenda to the status of driver of transformation and growth. After all, PF and PPPs require adequate and proper conditions for risk identification and mitigation and to align projects to the guiding principles of many of the foreign investors and funds.
The good news is that governments in the region are increasingly aware of the need for a clear policy for the sector, the benefits of a modern legal and regulatory architecture, as well as the need to boost infrastructure promotion programs to attract the private sector. They also focus on issues such as the incorporation of the SDGs in programs and projects and the importance of controlling the pandemic and picking up the pace of vaccination as factors that attract investment.
In this regard, countries such as Brazil and Colombia are reforming and modernizing their regulations and strengthening the relevant authorities, while others, such as Panama, the Dominican Republic, Paraguay and Costa Rica, are introducing legal frameworks and developing the relevant systems.
What else can countries in the region do to accelerate private sector participation in infrastructure? International experience suggests some measures, including strong governance, which involves the creation or strengthening of a strong and well-prepared regulatory body and a central planning, coordination and decision-making unit, charged with developing strategies. This unit should also promote standardization of processes, procedures and documents and ensure transparency and accountability.
Other issues include ensuring that ESG principles and international best practices in environmental and social matters are incorporated into projects from the outset; ensure a continuous portfolio of well-structured and bankable projects to go to market; simple and easy-to-understand legislation to protect investors, projects and consumers; and incorporation of new technologies and digitalization. Such measures will help bring more confidence to everyone involved in the industry.
Attracting foreign investors is also converging with the need to promote and share knowledge about PF and PPPs in the region, develop specialized professional skills and attract financing and the global capital market, as local markets still do not meet all financing expectations, as necessary solutions, in particular for large and complex projects.
Multilateral financial institutions can also contribute to the formation and strengthening of the industry through training, technical cooperation for institutional development, financial advice and modeling of PPPs, attraction of non-reimbursable funds for the development of projects and policies of risk mitigation instruments, as well as through financial instruments such as debt and debt funds, guarantees, support in the issuance of bonds, operations in local currency, among other financial and non-financial instruments that can help increase the quality and qualification of projects and reduce costs.
We cannot get very far with only good infrastructure, but without it, we cannot get anywhere. The development of the sector requires new business models and new stakeholders, and forward-thinking ideas.
