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Infrastructure finance: Closing the gap

Sep 1, 2013

If Latin America is to meet its demand for infrastructure, it must invest at least $250 billion annually over the coming years – double the amount of the last decade. This can only be done through multilateral cooperation

By Enrique García

Sound macroeconomic policies and the positive effects of high commodity prices over the past decade helped Latin America make important progress on a number of fronts: price stability, external balances, economic growth and poverty reduction.

Yet today, if the region wants to improve the lives of its citizens while becoming more relevant in the global economy, complacency is not an option.

The old comparative advantage approach, based on commodities and low wages, is no longer relevant. Governments must adopt a more sophisticated growth model based on efficiency, productivity, innovation, creativity and environmental sustainability.

Infrastructure, alongside education and institution building, is a central part of this new strategy to make economies more efficient, diversified and competitive. The process of developing infrastructure can help advance, and even internationalize, related businesses; physical infrastructure can also promote social inclusion by linking isolated communities; it can help the goals of both internal mobility and decentralization; and it is fundamental for both national and regional integration.

Unfortunately, infrastructure development in Latin America lags behind that of other emerging regions; in some sectors and countries, the gaps are acute. Although there is no single "hard" indicator that reflects the situation of all infrastructure sectors, data show that Latin America’s comparative performance is weak – only exceeding that of Africa.

The situation varies widely by sector, country, and even regions within countries. However, "The region’s infrastructure needs call for a minimum investment of 6% of GDP in the coming years – even without considering maintenance costs" This implies annual investment levels of between $250 billion and $300 billion, double what the region has invested in the last decade.

Neither the public nor the private sector alone is able to guarantee that such sums are mobilized. At the same time, national savings are inadequate. The solution, therefore, must lie in public-private efforts and national-international sources of financing. Here, cooperation between national and local governments and private investors will prove crucial. At the same time, countries must also be able to attract foreign investment and other sources of external financing.

National, regional, and global multilateral development banks can play an important role, not only in providing direct financing but in helping mobilize other relevant parties, for example, to implement and operate infrastructure projects. Across the life of a project, such assistance can take the form of technical cooperation, advisory services, co-financing and innovative financing mechanisms.

Regional integration infrastructure, particularly in South America, is of paramount importance. CAF has approved over the last decade close to $30 billion in loans, grants, guarantees, equity and other instruments to support infrastructure, including more than 60 regional cross-border integration projects in roads, ports, pipelines, energy and other modes of connectivity for an amount of $8 billion.

Over the next decade, Latin America must implement a comprehensive development strategy if it wants to converge more rapidly with the industrialized countries; infrastructure development is central to any such medium-term strategy.

In order to close the infrastructure gap, the following factors are essential: significantly increase investment in all types of infrastructure; frame policies and projects in a paradigm of sustainable development and territorial vision; strengthen institutions in their various dimensions; optimize the use of both national and international financing; promote the development of businesses linked to infrastructure; and promote the exchange of experiences between governments, regions, and cities.

CAF is ready to continue to support its member countries in responding to the challenge of regional infrastructure. Closing this gap in the next decade will help in building a more stable, efficient, integrated, sustainable and inclusive region. LF

Enrique García is president of CAF – Development Bank of Latin America



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