When it comes to drive infrastructure growth in LAC, using properfinancing mechanisms and improving the functioning of economic institutions isfundamental. Above all, Public-Private Partnership (PPP)1is considered a vital instrument for improving infrastructure efficiency inLatin America. PPPs have been present inLAC for almost three decades.
The first countries to implement this type ofarrangement were Mexico and Colombia in the early 1990s. Recently, Brazil becamethe leading country in terms of PPP, with over 310 projects implemented between2008 and 2014. Follow Chile (64), Mexico (58), and Peru (52).
Argentina,instead, is among the worst performers in this sense, with only 23 PPPsimplemented: about one third of the regional average (Cerra et al., 2016). Currently,PPPs account for about 40 percent of LAC annual infrastructure commitments,although there is great variation across countries both in terms of volume andregulatory frameworks.Especially afterthe global financial crisis, PPPs became a vehicle for building infrastructure,combining greater efficiency and innovation led by private sector, withsustainability of public services. When well implemented, PPPs help boostinfrastructure investments and strengthen the interaction among infrastructurestakeholders. This mechanism allows to split responsibilities among partners,based on the conception that actions must be taken by the agent who can manageit most.
From the government side, PPPs allow public sector to better focus onthe demand of public services, and in turn individuate the type ofinfrastructure to be improved. On the other hand, private sector compensateswith greater capacity to design, implement and monitor infrastructure project,bringing industry expertise and technological innovation. Moreover, thisinstrument contributes to tackle public fiscal constraints, and maximize infrastructurepotential impacts in terms of quality, spending efficiency and institutionaltransparency (Garcia-Kilroy and Rudolph, 2017).The mainadvantage of PPPs is to attain higher project efficiency and quality throughbetter risk diversification for public and private stakeholders. It alsocontributes to ameliorate the allocation of resources improving productivity ofpublic infrastructure and in turn economic growth. However, PPPs efficientlywork only when regulatory frameworks enable transparent distribution of risksand resources, and financial markets are developed and credible for attractinginternational institutional investors. In this sense, Brazil, Chile and Peruhave been moving toward more comprehensive public financial management of PPPs,while Argentina has made limited progress (Garcia-Kilroyand Rudolph, 2017). Having discussedthe causes of the infrastructure gap in LAC, with a brief mention of the roleof PPP as a possible driver of development, some policy recommendations arehereby presented to promote the dialogue upon this topic and shape theconditions for a more efficient management of infrastructure projects in thenear future.
It is widelyacknowledged that LAC needs more investment in infrastructure. Countries shouldinvest between 5-6 percent of GDP in infrastructure over the next decade inorder to narrow and potentially close the existing gap between infrastructuresupply and demand. More fiscal space for economic and social infrastructureprojects is needed to deliver improved public services and trigger virtuousmechanisms for trade, productivity and growth. However, long-term investmentsmust prioritize projects able to provide tangible and predictable results thatare economically, environmentally and socially sustainable. Investments ininfrastructure cannot neglect the exigence of ensuring long-term sustainabilityof debt, preventing the insolvency risks experienced in the past.Due to thefinancial restrictions experienced by Latin American policy-makers, thereliance on public sector investments is risky and no longer sustainable.Alternative instruments must be adopted to manage infrastructure projects andovercome the barriers that have constrained infrastructure development in thelast decades.
A greater appeal to PPP may foster investments in strategicsectors and achieve important results in terms of infrastructure project efficiency,quality and transparency, which in turn advocate greater productivity. In fact,PPPs may unleash important mechanisms of technology transfer, favouringentrepreneurship and infrastructure progress.Likewise,comprehensive institutional frameworks for PPP and infrastructure finance areneeded to offer an efficient risk allocation among stakeholders and attractinternational investors.
Reinforcing regulatory framework and institutionalquality are essential to develop an efficient pipeline of bankable projects anddeveloping the infrastructure ecosystem. LAC countries should adapt financialinstruments able to meet liquidity exigencies of investors. Concessions and PPPcontracts still suffer from daunting inconsistencies and heavy bureaucracy, andunderlying costs discourage investors.Only byconsidering all these aspects, LAC countries will be able to reinforce the infrastructureecosystem. Raising investments, improving collaboration between private andpublic sector, and upgrading the institutional frameworks, are all essential toreduce the infrastructure gap in LAC.
Political stability is also crucial tomaintain the preconditions for infrastructure investment to grow and implementsound macroeconomic policies. Especially, government intervention shouldcontinue in the direction of dismantlement of competitive barriers on trade andcapitals.