Latin American countries need to substantially boost their spending on infrastructure so the region does not lag behind China and other dynamic Asian economies.
That’s one of the central findings of a new World Bank report, titled Infrastructure in Latin America and the Caribbean: Recent Developments and Key Challenges.
The report says Latin American firms are losing competitiveness because of poor infrastructure, with its “lackluster” performance having severe consequences for the region’s ability to grow, create jobs and alleviate poverty.
“Today Latin America is falling behind other countries such as China and Korea, in part due to the lack of investment in infrastructure,” says Marianne Fay, World Bank Lead Economist in Infrastructure for Latin America and the Caribbean.
“When infrastructure services are not good, the poor always suffer the most,” says Fay, a co-author of the report.
Overall, Fay says in the past 10 years, there were some important improvements in infrastructure in water and sanitation and cell phones in the region.
“But progress in general has been lower than in other middle income countries, notably China. The result is that Latin America is falling behind in areas such as electricity, roads, and fixed phone lines.”
Private Sector Loses Appetite
The report says Latin American governments massively reduced their spending on infrastructure in the 1990s, driven largely by a need for fiscal austerity. Politically, it was much easier to cut spending on infrastructure, rather than expenditures such as salaries or pensions.
But while it was thought the private sector would make up for the shortfall – the results fell far short of expectations.
Bank data shows total investment in infrastructure – both public and private – fell from about 3.7 percent of GDP in 1980-85 to about 2.2 percent of GDP in 1996.
“What happened was that private investment was not able to offset the collapses in public expenditure on infrastructure,” Fay says. “The main lesson therefore is that both the private and the public sector have a role to play. Unless both are involved, Latin American countries will continue to lose ground.”
The report says the private sector’s appetite for spending on infrastructure has waned and shows no immediate sign of recovering, given investors’ disaffection with both infrastructure and emerging markets.
Negative Public Sentiment
The report also points out another issue – the need to improve public perceptions about private sector spending on infrastructure.
It says today, public opinion in the region has turned against private sector investment to such an extent that it has become ” a serious constraint” in most countries.
And it says winning back public opinion is probably one of the most pressing challenges of private sector involvement in the region today.
The report points out that public reaction is at odds with generally positive evaluations of the impacts of privatization – as in most cases efficiency has improved, and coverage and quality has increased. But it says that winning back public sentiment will require building on the lessons of the last decade to make privatization transactions more transparent, reduce renegotiations and ensure performance and coverage improve in a manner commensurate with price increases.
The Way Forward
While calling on governments in the region to spend more on infrastructure, the report points to the need for greater cost recovery, as there is only so much the taxpayer can or should fund.
Overall, Fay says spending would need to reach four to six percent of GDP per year for the region’s infrastructure to catch up or keep up with countries that once trailed it, such as Korea and China.
Such financing can’t come from the public sector alone so governments need to better leverage their resources to attract private financing. The report says attracting back the private sector will require stronger legal, regulatory and institutional frameworks, more transparency in contracting and innovative financing structures to make projects less risky and improve returns for investors.
Improvements in those areas would also help address the negative public sentiment about privatization by helping ensure quality; service levels and affordability are maintained especially for disadvantaged groups. Targeting public subsidies more toward those who really need them will also benefit the poor.