Private Investment Returns to Infrastructure Sectors

Infraestructure - Transport - Water

The infrastructure sectors in Latin America and the Caribbean have undergone very profound changes since the 1990s when various public services were opened up to private sector participation. Now, countries like Brazil, Chile and Peru are turning to private capital to finance major projects in electricity, highways and airports. The trend could spread to other countries. 

Electricity coverage reached 93% in 2009, up from just 70% in 1990, and telephones have expanded from a ratio of only six fixed lines per 100 inhabitants in 1990 to over one line per capita (including fixed and mobile) today. Coverage of water services has risen from 85% of the population in 1990 to 93% in 2008 and sanitation facilities from 69% to 79%. 

Not only did coverage improve, but quality too. For example, power outages have fallen 40% and damage to fixed telephone lines has declined to only a third of what is it was in the mid-nineties. The improvement in water quality in some cities such as Buenos Aires has been so substantial that gastrointestinal illnesses have decreased, along with infant mortality. 

All this has been achieved despite the decline in total investment in infrastructure: while in the 1980s between 3% and 4% of GDP was invested, in the last two decades investment has dropped to close to 2% of GDP. Improvements in public services were made possible in part thanks to enormous gains in efficiency but, unfortunately, the cuts in public investment have led to the neglect of some areas of infrastructure, such as transport. 

According to the World Bank, Latin American countries would need to spend between 4% and 6% of GDP to achieve, in 20 years, the infrastructure standards which South Korea and China had reached by the early 2000s. This is an ambitious but realistic goal, as evidenced by some recent events. 

First, public investment in infrastructure has recently increased following the fiscal stimulus packages adopted by several countries to tackle the international financial crisis. These packages included increases in investment in 2009 equivalent to 1.6% of GDP in Argentina, 1.3% in Peru, and between 0.4% and 0.8% in Brazil, Chile and Mexico. Thanks to these packages, investment in infrastructure in Latin America may have risen, at least temporarily, to 3-4% of GDP. 

Second, private investment in infrastructure projects has also increased. Brazil, the most successful country in mobilizing private capital for infrastructure sectors, obtained private investment commitments worth US$39.2 billion in 2009, equivalent to 2.5% of GDP. These include various megaprojects, such as the Santo Antonio and Jirau hydroelectric plants, the Dom Pedro and Raposo Tavares highway concessions, and the Acu superport. 

Peru and Chile, with private investments in 2009 equivalent to 1.4% and 1% of GDP, respectively, have also been relatively successful. The most interesting aspect of the new wave of private investments in infrastructure is the total absence of privatizations: instead of transferring ownership to the private sector, what governments are doing is developing public-private partnerships. These trends could strengthen and spread to other countries in the next few years, taking advantage of the renewed interest of international investors in Latin America and the relative fiscal robustness of the region’s countries.

The private sector is critical for improving the region’s infrastructure because of its capacity to contribute not only financial resources but also technical knowledge and management skills. In order to be able to count on the stable support of the private sector, governments have to start developing well designed regulatory frameworks and the institutional capacity to implement partnerships between the private and public sectors.

Naturally, engineering is part of a good design. But no less important are the legal and financial aspects which need to ensure that the risks involved in a project are clearly allocated between government and investor according to their respective capacities to manage them, and that there is no need to resort to renegotiations, which usually increase costs and delay projects. Essentially there have to be clear, predictable and stable rules in place; otherwise, it would be difficult to maintain the interest of the private sector on conditions which are beneficial for countries. 

Increased private participation in the infrastructure sectors does not relieve government of its responsibilities. On the contrary, the public sector will be required to concentrate more on what needs to be done –maintaining a good regulatory and financial framework, and addressing the social goals of coverage and access to subsidized services for the poor. 

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