The hole in the heart of Latin America’s economic progress is all too easy to overlook when waxing lyrical about the region’s growth rates. But without urgent redress, decrepit roads and railways, congested ports and shaky power supplies threaten to grind Latin economies to a halt. The flow of private money for electricity, water and transport has dried up in many countries, partly because of political moves across large swathes of the region against privatization. What is more, total spending on infrastructure has averaged less than 2% of GDP – a legacy of the 1990s, when Latin governments cut back public investment to balance their budgets.
The difference is that then private investors flocked in to make up the shortfall: between 1990 and 2003, Latin America accounted for half of the total private-sector participation in infrastructure in emerging economies. Private capital has, so far, been less than hasty in its return. Over the next 20 years, $100 billion needs to be invested to bring Latin America’s infrastructure up to Korean levels. The statistics make for grim reading: 58 million Latin Americans lack access to potable water and 137 million lack sewerage, according to the World Bank. In Brazil and Peru, fewer than a quarter of the main highways are classified as good. The region will have to at least double its current spending to bring its infrastructure up to the level of that in East Asia’s economies, the Bank says.
CAF loans
Enrique Garcia, president of the Andean Development Corporation (CAF), reckons that against this backdrop, the need for multilateral lending – as a bridge between public and private sectors – is more urgent than ever. A generally benign macroeconomic picture, he says, can easily obscure the deeper economic needs of the region: “The idea that on a sunny day you don’t need an umbrella is misguided,” he says. “On good days, infrastructure financing is needed because there are more projects to finance.” CAF is one institution that saw lending reach unprecedented levels last year – $5.6 billion, 70% of which was concentrated in the Andean region, and it approved $2.8 billion for infrastructure projects, $2.4 billion (86%) of it to the public sector. Garcia adds: “We can work well with the private sector – we can finance a project within three to four months – efficient operational procedures.” CAF’s lending prowess isn’t going unnoticed: Vince McElhinny, Latin America programme manager at the Bank Information centre, describes the institution as “The ATM of the transport market”.
Governments, though, are increasingly aware of the urgent need to boost infrastructure spending. Witness the courageously dubbed Integration of Regional Infrastructure in South America (IIRSA) initiative – a bold plan to build 335 major infrastructure projects across the region at a total cost of $4.3 billion. New mixtures of public and private ownership and management are cropping up across the continent, signifying at least a fresh approach to infrastructure development. Despite the politically charged nationalizations in Bolivia and Venezuela, private investment is flowing into Brazil, Colombia, Chile, Mexico and, increasingly, Peru. This is largely because of private property rights, new concession laws and liberalizing markets across the region, according to the World Bank.
The development of local capital markets is also a potential boon to infrastructure finance. Phillipe Valahu, head of infrastructure operations at the Multilateral Investment Guarantee Agency (MIGA), says: “As sovereign and sub-sovereign public entities in emerging market countries develop their own capital markets infrastructure, they will make increased use of these markets to fund projects.” Local markets, of course, have tremendous potential. Colombia’s domestic market, for example, increased 740% between 2003 and 2005, with markets in Peru and Mexico returns increasing 335% and 270% respectively.
Pension plans
Other developments are equally encouraging. Pension funds are increasingly looking to infrastructure to diversify their vast allocations. “For institutional investors, infrastructure assets can provide longer-term, relatively stable returns that are less sensitive to business cycle fluctuations or stock market volatility,” says Valahu “Returns are often positively correlated with inflation, another important hedge for the portfolio.” Analysts such as Walter Molano, head of research at BCP Securities, argue that pension fund money could supplant multilateral lending to local projects since the former is “more committed long term in local currency in local projects”. Molano cites Chile, which saw an upsurge in infrastructure bonds with the privatization of its pension funds, which have to date financed $8 billion investment in infrastructure.
Yet despite a growing range of products for financing infrastructure, multilateral involvement is still key to ensuring that riskier projects (especially those which directly benefit the poor) remain commercially viable, says Franklin Santarelli, head of Fitch Ratings for Latin America. “For such projects, it is a lot easier to go to an organization like CAF than to go to the capital markets. When an MDB does get involved, it significantly improves the investor profile and lowers premiums.” Gabriel Goldschmidt, IFC’s manager for infrastructure in Latin America, puts it simply: “We provide funding where the real needs are and where the market does not.” In Brazil, IFC is sponsoring an initiative to build a road in an underdeveloped part of Bahia and an irrigation project in Pontal.
The use of partial credit guarantees “explicitly helps risk reduction”, Goldschmidt says. The instrument is being used to good effect: a road in central Mexico was financing thanks to a 130.5 million peso partial credit guarantee, under a new framework for public-private partnerships that provides greater concessions to the private sector. Even in the healthiest markets such as Chile, Goldschmidt notes a demand for the multilateral financing especially in their role as guarantors.