Jorge Arbache
Vicepresidente de Sector Privado, CAF -banco de desarrollo de América Latina y el Caribe-
The huge gap in economic and social indicators between Latin American and industrialized countries is partly due to weaknesses in infrastructure. The IMF estimates that public capital stock per capita in the region is about one-fifth that of North America, for example. Difficulties in project financing, implementation and operation, governance issues and choice of unpromising projects are part of the reasons for low infrastructure investment.
Infrastructure challenges are great, but the region also needs to tackle new challenges associated with climate change and demographics, increasing urbanization, and infrastructure of the future, such as 5G, and smart cities.
This is a difficult agenda to be addressed in the short and medium term and whose magnitude and urgency require plenty of resources and coordination. Governments are traditionally the infrastructure investors and operators in the region. Many of them, however, face high indebtedness and fiscal adjustments that cripple their operational and financial capacity to continue investing, and state-owned banks have limitations for financing infrastructure in the required amounts. To move forward, the range of options will need to be expanded.
The best choice will be a greater participation of the private sector in financing, implementation and operation of infrastructure. But private sector participation has come only at a fraction of its potential, and with the current status quo, it is unlikely to increase significantly in the near future. This is because there are barriers to financing infrastructure, especially for the private sector, due to the high risk perception, banking regulation, the limited development of the financial sector, the modest size of the capital market and difficulties in identifying and mitigating risks and internalizing externalities.
As a result, major projects face difficulties in financing, attracting investors, and mobilizing funds in terms and costs that can be supported by the projects. This outlook disproportionately affects more structuring projects, which are the most needed in the region. But despite the difficulties, there is still room for maneuver.
One measure that can be useful is creating a project portfolio, which should be refundable by the concessionaire. In fact, well-studied projects are more attractive as they reduce risks and uncertainties and increase predictability and impacts. Other measures include any other actions that optimize investments and boost returns. In other words, more planning is needed.
Since it is not possible to tackle all fronts at the same time, investments with higher private and social returns need to be prioritized, especially those that add most value, diversify investments, promote synergies and productive complementarities and have a higher feasibility of implementation and operation. Investment-poor countries cannot afford to invest in fragmented and unsustainable projects, or those with uncertain return. International experience suggests that planning should ideally be integrated, and run by public agencies that are guided by the nation’s long-term interests.
Other measures include encouraging long-term domestic private savings and attracting international funds for infrastructure projects. Indeed, the sequence of reforms, the organization of public finance and institutional development are vital elements in creating an adequate macro- and micro-finance environment and increasing financial resilience, which are critical factors for mobilization of long-term investments. But additional help is needed, including regulatory modernization and legal certainty measures, which are changes that encourage institutional investors to allocate more funds in infrastructure, and measures to expand and modernize the capital market and integrate capital markets in the region.
The division of labor between government and the private sector is also an important dimension, especially for complex projects, with high regulatory risks that are difficult to identify and measure, and that depend on a high level of coordination. Such projects require financial engineering so complex that, in practice, are not feasible. In these cases, governments should take charge of the planning and development of projects and then grant them to private contractors.
Multilateral development banks (MDBs) can also play a role. In addition to providing medium- and long-term resources at attractive costs and offering reputational benefits, they can support the creation and expansion of project portfolios and use their international technical and regulatory expertise to support governments in infrastructure planning. MDBs are also prepared to support best practice deployment, capacity building, and improvements in the business environment. They can also offer financial instruments and asset classes that bring greater security and diversification of risk to investors, play a catalytic role with syndicate and subordinated financing, partial first-loss guarantees, and support the creation of special instruments and funds that leverage private funds for infrastructure. Finally, they can be instrumental for the convergence of technical and regulatory standards and for investments in infrastructures of binational or multinational interest.
These efforts can help improve the conditions of mobilization of private funds for infrastructure, which will be critical for sustained economic growth and social indicators. Infrastructure alone only goes so far. But without it, we cannot go anywhere.
