Pritchett (2000) show evidence that investmentin infrastructure does not automatically translate into more infrastructure andeconomic growth. An effective institutional framework is crucial for regulatingprivate investments, assessing and executing infrastructure projects. In LAC, thequality of bureaucracy was actually found to explain one-fourth of the totalvariation in the infrastructure performance. Therefore, the implementation ofsound fiscal and political reforms must be accompanied by complementary reformsin public institutions. For instance, if Peru had the same institutionalquality of Chile, the infrastructure gap between the countries would narrowdown by 58 percent in paved roads and by 45 percent in electricity generation (Carranza, Daude, and Melguizo, 2014).In fact, thequality of institutions explains grand part of the resource misallocation inLatin American countries.
When public institutions fail to ensure atransparent, inclusive and sustainable usage of resources, market distortionseventually erode aggregate TFP since investments benefit less productivesectors (Busso, Madrigal, and Pagés, 2012).Several factors determine the impact of infrastructure investment on theeconomy, including legal, procedural, and enforcement tools for publicinvestment management. Figure 15 illustratesthe quality of public institutions in the control group and in other regionsworldwide, during the 2007-2015 period. Argentina marks the worst institutionalsystem, while Brazil and Peru are relatively in line with the regional average.Chile overperforms the average of other developing countries but it has stillroom for improvement in relation to more advanced economies. Data areprovided by the World Economic Forum in its annual Global CompetitivenessReport and describe the efficiency of the administrative service and the stabilityof the policy environment. The former implies the absence of unnecessary ordelaying bureaucratic processes; empirical evidence show that burdensomebureaucracy decreases investments and firms’ efficiency.
The latter may improveproductivity by reducing uncertainty about social and political futurescenarios; this is correlated with better resource allocation, including moreR investments and therefore greater technological progress (WEF, 2016).Latin Americaninstitutions do not perform adequately in terms of project management,administrative service and stability of policies. Often, phenomena ofcorruption, clientelism and short-termism have affected the management ofpublic infrastructure projects and mistakes have been costly.
In Chile andPeru, the main issue concerns the renegotiation of concessions forinfrastructure projects. Bitran, Nieto-Parra, andRobledo (2013) have studied the PPPs implemented in these countriesbetween 1993 and 2010, founding about 50 interurban concession contacts thatwere renegotiated.These processes havebeen by insufficient transparency and competition, leading to higher spendingfor government and lower value for money. In Chile, they studied 21 interurbanconcessions (2,400 km) awarded up to 2004, finding 60 contract changes whichled to additional costs up to $2.1 billion. They also discovered 17 years of extensionin the contract terms, which have impeded future administrations to sell thosecontracts as brownfield concessions.
In Peru, the study covers 15 roadcontracts (5,500 km) up to 2010, which amounted $2.3 billion; these concessionshave been renegotiated 53 times. The cost of the renegotiations reached $300million and 9 years of contract were added to the original concessions (Engel, Fischer and Galetovic, 2014).Institutionalissues have also affected the railway sector. In Chile, administration problems,obsolete regulation and slow project planning and execution have undermined thesector productivity. The railroad is mostly controlled by Ferronor, that has the monopoly in the northern region and operatesin arbitrarily selected segments of the market. The company only focuses onlarge operations such as the transportation of minerals and sulphuric acid, andupon long-term contract, practically eliminating small volume loans and generalcargo. This policy has generated significant losses in terms of productivityand potential demand, and in several occasions large routes were temporarilydismissed.
In Peru, thetailored fiscal framework and sound decentralization policies which favoured privateplayers were not backed enough by adequate renovation of the institutionalframework. The lack of stable and effective projects in the transportationindustry has represented an obstacle to the creation of second tier cities.Exploiting additional agglomeration potentials with the creation of newinternational gateways to the region would unleash productivity benefits thathave been dispersed so far (OECD, 2016).
In Brazil,instead, infrastructure management has been undermined by politicalinstitutions of coalitional presidentialism and strong federalism. Politicianshave been accused to get incentives to distribute clientelist concessions,which ended up creating sector-specific oligopolies. The weak private capitalmarkets 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 constructiongiant Odebretch and its illegalsupport to the Rousseff’s government.In addition to corruption,a crucial issue has concerned the management of contingent liabilities. Forinstance, an unfortunate case was the divestiture in 1998 of the electricitycompany of Sao Paolo, Eletropaulo – Eletricidade de São Paulo S/A. Afterthe privatization, the entity was suddenly exposed to substantial regulatoryand exchange rate risk as a consequence of the industry reform. Company’sliabilities severely worsened, especially because of the depreciation of the BrazilianReal and the government rationingprogram in response to the rainfall shortages in 2001.
The losses forced thecompany to undergo a significant debt restructuring strategy that included theswap of debt to the national development bank (BNDES) for equity (Cerra et al., 2016).Another examplefor Brazil can be the ICT sector.
Entry costs for new telecom operators areincreased by several factors: no access regulation for internet services and uponthe resale of public fixed telecommunication services, absence of competitiveregulation on wholesale and retail of roaming rates, and absence of adequateIPR framework for secondary trading of spectrum usage (OECD, 2016).Finally,in relation the LAC average, Brazil also experiences the less favourablebusiness environment in terms of investment climate and regulatory framework (EIU, 2012).While the mostof Latin American countries have simplified their regulatory frameworks overthe last few decades to foster investments in various infrastructure sectors,Argentina has moved in the opposite direction by endorsing public policies thatbring key resource-based industries under the state control (Penfold, 2014). Indeed, fiscal facilitation was notaccompanied by adequate improvements in terms of intellectual property rightsand transaction costs, hence offsetting potential investments, and the businessenvironment has been suffering and foreign investment have declined. Thiscontext has further been damaged by a series of disputes regarding unsolvedprivatizations.
In 2006, Aguas Argentinas, the affiliate companyoperating the water and sewage system in the Tucumán province, was privatizedfor $300 million. However, the case was investigated by World Bank investmentdisputes body, the ICSID, that in 2015 awarded the shareholders of the companyadditional $383 million for losses on their guaranteed debt and equity. Asimilar case saw the nationalization of the air company Aerolineas Argentinas in 2009. The Argentinian Government wasaccused of expropriation and unfair market practice.
Also in this case, theICSID arbitration ruled in favour of the claimants, declaring that the governmentfailed to ensure fair and equitable treatment of their investments. Thearbitration costed $320.76 million to the country (Lora, 2012).More recently, another shock for the international investment community camefrom the Argentina’s expropriation of Repsol’sshares in the Argentinean energy company YPF(2012).In conclusion,institutional weaknesses in Latin America undermine stability and trust ofinvestors, and represent a clear impediment for infrastructure developmentprojects to function. Progresses have been made but the gap with other emergingmarkets is still large; East Asian countries, for instance, are converging toOECD standards at a much faster pace. In order to build infrastructure into asolid growth model and accelerate productivity, LAC countries will needspecific incentives to review their regulatory frameworks and institutional procedures,together with the depoliticization of investment decisions (World Bank, 2015)