Extensive and high-quality infrastructure is an essential driver of competitiveness, impacting significantly on economic growth and reducing income inequalities and poverty in a variety of ways. In this regard, a well-developed transport and communications infrastructure network is a prerequisite for the efficient functioning of markets and for export growth, as well as for poor communities’ ability to connect to core economic activities and schools; similarly, improved water infrastructure can considerably reduce child mortality rates and boost overall health levels. Indeed, a 1996 study found that over 30% and 40%, respectively, of the growth differential between Africa and East Asia and low and high growth countries could be traced back to differences in the effective use of infrastructure.
Latin America has made progress in the quality and extension of its infrastructure network in the last decade, especially in terms of improved access to water and sanitation, electricity and communication. However, at the same time, the region has lost ground with respect to other regions of the world, with the partial exception of water and sanitation. In 1980, Latin America displayed a more extended road, electricity and telecommunications infrastructure than the East Asian Tigers; in 2004, however, the latter had overcome the former by a factor of three to two. This important infrastructure gap hinders the region’s growth prospects and poverty alleviation strategies: it has been estimated that an upgrade of Latin America’s infrastructure to the level of South Korea would generate annual GDP per capita increases on the order of 1.1-4.8% and could reduce inequality by 10-20%.
The reasons for the widening infrastructure gap between Latin America and East Asia have much to do with the drastic fiscal adjustment programmes adopted in the region in the aftermath of the debt crisis of 1982. The governments in the region, faced with the necessity of reducing their expenditures, opted for significantly cutting their investment in infrastructure, politically easier than cutting salaries and pensions. As a consequence, public investment in infrastructure fell from above 3% of GDP in 1988 to 1.6% in 1998. Considering that the public sector had traditionally catered for the bulk of infrastructure investment for political and social reasons, the region found itself with the need to rethink the infrastructure financing model followed until then, by adopting regulatory and financial innovation that would allow delegation of financing, as well as infrastructure provision, to the private sector.
Public-private partnerships (PPPs) in infrastructure financing increasingly became the norm in the region, varying from full privatization to different degrees of private participation (concessions, management or lease contracts). In general, the region has been fairly successful in developing PPPs, attracting half of the total US$ 786 billion that went to the developing world in PPP financing between 1990 and 2003, and has significantly transformed the infrastructure provision paradigm. Indeed, by 2003, private utilities were managing 86%, 60% and 11%, respectively, of telecoms subscriptions and electricity and water connections. Still, the private investment flowing to the region was never enough to compensate for the fall in public funding and tended to benefit only selected countries (Argentina, Brazil, Chile, Colombia, Peru and Mexico accounted for around 90% of all investment in Latin America) and sectors (mainly telecommunications, followed by energy and transport) in the region.
Against such a background, it is estimated that Latin America needs to invest between 2.5% and 6% of GDP to upgrade and extend the regional infrastructure. Considering a substantial increase in government spending is limited by the still-high public indebtedness levels and low taxation capacity, and that lending from multinational development banks has recently been falling, it is of utmost importance for governments in the region and multinational institutions alike to promote and rethink PPP financing models, taking advantage of the considerable growth of private capital markets, which in 2003 accounted for 360% of global GDP.