Pritchett (2000) show evidence that investment
in infrastructure does not automatically translate into more infrastructure and
economic growth. An effective institutional framework is crucial for regulating
private investments, assessing and executing infrastructure projects. In LAC, the
quality of bureaucracy was actually found to explain one-fourth of the total
variation in the infrastructure performance. Therefore, the implementation of
sound fiscal and political reforms must be accompanied by complementary reforms
in public institutions. For instance, if Peru had the same institutional
quality of Chile, the infrastructure gap between the countries would narrow
down by 58 percent in paved roads and by 45 percent in electricity generation (Carranza, Daude, and Melguizo, 2014).

In fact, the
quality of institutions explains grand part of the resource misallocation in
Latin American countries. When public institutions fail to ensure a
transparent, inclusive and sustainable usage of resources, market distortions
eventually erode aggregate TFP since investments benefit less productive
sectors (Busso, Madrigal, and Pagés, 2012).
Several factors determine the impact of infrastructure investment on the
economy, including legal, procedural, and enforcement tools for public
investment management. Figure 15 illustrates
the quality of public institutions in the control group and in other regions
worldwide, during the 2007-2015 period. Argentina marks the worst institutional
system, while Brazil and Peru are relatively in line with the regional average.
Chile overperforms the average of other developing countries but it has still
room for improvement in relation to more advanced economies. Data are
provided by the World Economic Forum in its annual Global Competitiveness
Report and describe the efficiency of the administrative service and the stability
of the policy environment. The former implies the absence of unnecessary or
delaying bureaucratic processes; empirical evidence show that burdensome
bureaucracy decreases investments and firms’ efficiency. The latter may improve
productivity by reducing uncertainty about social and political future
scenarios; this is correlated with better resource allocation, including more
R investments and therefore greater technological progress (WEF, 2016).Latin American
institutions do not perform adequately in terms of project management,
administrative service and stability of policies. Often, phenomena of
corruption, clientelism and short-termism have affected the management of
public infrastructure projects and mistakes have been costly. In Chile and
Peru, the main issue concerns the renegotiation of concessions for
infrastructure projects. Bitran, Nieto-Parra, and
Robledo (2013) have studied the PPPs implemented in these countries
between 1993 and 2010, founding about 50 interurban concession contacts that
were renegotiated.These processes have
been by insufficient transparency and competition, leading to higher spending
for government and lower value for money. In Chile, they studied 21 interurban
concessions (2,400 km) awarded up to 2004, finding 60 contract changes which
led to additional costs up to $2.1 billion. They also discovered 17 years of extension
in the contract terms, which have impeded future administrations to sell those
contracts as brownfield concessions. In Peru, the study covers 15 road
contracts (5,500 km) up to 2010, which amounted $2.3 billion; these concessions
have been renegotiated 53 times. The cost of the renegotiations reached $300
million and 9 years of contract were added to the original concessions (Engel, Fischer and Galetovic, 2014).Institutional
issues have also affected the railway sector. In Chile, administration problems,
obsolete regulation and slow project planning and execution have undermined the
sector productivity. The railroad is mostly controlled by Ferronor, that has the monopoly in the northern region and operates
in arbitrarily selected segments of the market. The company only focuses on
large operations such as the transportation of minerals and sulphuric acid, and
upon long-term contract, practically eliminating small volume loans and general
cargo. This policy has generated significant losses in terms of productivity
and potential demand, and in several occasions large routes were temporarily
dismissed.In Peru, the
tailored fiscal framework and sound decentralization policies which favoured private
players were not backed enough by adequate renovation of the institutional
framework. The lack of stable and effective projects in the transportation
industry has represented an obstacle to the creation of second tier cities.
Exploiting additional agglomeration potentials with the creation of new
international gateways to the region would unleash productivity benefits that
have been dispersed so far (OECD, 2016).In Brazil,
instead, infrastructure management has been undermined by political
institutions of coalitional presidentialism and strong federalism. Politicians
have been accused to get incentives to distribute clientelist concessions,
which ended up creating sector-specific oligopolies. The weak private capital
markets and regulatory framework act as deterrents for investment (Armijo and Rhodes, 2016). In the mid-2000s,
politics was involved in a huge bribery scandal known as the mensalão1,
and more recently an even larger corruption disgrace beset the construction
giant Odebretch and its illegal
support to the Rousseff’s government.In addition to corruption,
a crucial issue has concerned the management of contingent liabilities. For
instance, an unfortunate case was the divestiture in 1998 of the electricity
company of Sao Paolo, Eletropaulo – Eletricidade de São Paulo S/A. After
the privatization, the entity was suddenly exposed to substantial regulatory
and exchange rate risk as a consequence of the industry reform. Company’s
liabilities severely worsened, especially because of the depreciation of the Brazilian
Real and the government rationing
program in response to the rainfall shortages in 2001. The losses forced the
company to undergo a significant debt restructuring strategy that included the
swap of debt to the national development bank (BNDES) for equity (Cerra et al., 2016).Another example
for Brazil can be the ICT sector. Entry costs for new telecom operators are
increased by several factors: no access regulation for internet services and upon
the resale of public fixed telecommunication services, absence of competitive
regulation on wholesale and retail of roaming rates, and absence of adequate
IPR framework for secondary trading of spectrum usage (OECD, 2016).Finally,
in relation the LAC average, Brazil also experiences the less favourable
business environment in terms of investment climate and regulatory framework (EIU, 2012).While the most
of Latin American countries have simplified their regulatory frameworks over
the last few decades to foster investments in various infrastructure sectors,
Argentina has moved in the opposite direction by endorsing public policies that
bring key resource-based industries under the state control (Penfold, 2014). Indeed, fiscal facilitation was not
accompanied by adequate improvements in terms of intellectual property rights
and transaction costs, hence offsetting potential investments, and the business
environment has been suffering and foreign investment have declined. This
context has further been damaged by a series of disputes regarding unsolved
privatizations.In 2006, Aguas Argentinas, the affiliate company
operating the water and sewage system in the Tucumán province, was privatized
for $300 million. However, the case was investigated by World Bank investment
disputes body, the ICSID, that in 2015 awarded the shareholders of the company
additional $383 million for losses on their guaranteed debt and equity. A
similar case saw the nationalization of the air company Aerolineas Argentinas in 2009. The Argentinian Government was
accused of expropriation and unfair market practice. Also in this case, the
ICSID arbitration ruled in favour of the claimants, declaring that the government
failed to ensure fair and equitable treatment of their investments. The
arbitration costed $320.76 million to the country (Lora, 2012).
More recently, another shock for the international investment community came
from the Argentina’s expropriation of Repsol’s
shares in the Argentinean energy company YPF
(2012).In conclusion,
institutional weaknesses in Latin America undermine stability and trust of
investors, and represent a clear impediment for infrastructure development
projects to function. Progresses have been made but the gap with other emerging
markets is still large; East Asian countries, for instance, are converging to
OECD standards at a much faster pace. In order to build infrastructure into a
solid growth model and accelerate productivity, LAC countries will need
specific incentives to review their regulatory frameworks and institutional procedures,
together with the depoliticization of investment decisions (World Bank, 2015)

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