Infrastructure is critical for economic growth and development. Recent studies show how not expanding capital stocks in infrastructure sectors in the Latin American and Caribbean (LAC) region costs, on average, about one percentage point of GDP growth in the first year; this figure could increase to up to 15 percentage points of lost growth if the policy persists over 10 years (IDB Macroreport, 2019).
The region’s inhabitants are adversely affected by the lack of enough and high-quality assets and services such as roads, schools, hospitals, sanitation, water supply, transmission lines, ports, airports, and parks, among others. According to the World Economic Forum, the perception of the quality of LAC’s infrastructure services is, on average, behind all other regions of the world except sub-Saharan Africa. The need to provide more and better-quality infrastructure services is one of the main challenges currently facing the countries of Latin America and the Caribbean (Serebrisky, Suárez-Alemán, and Pastor, 2020).
Despite the urgency, the LAC region as a whole is not able to maintain a constant or growing investment in infrastructure. While it is true that since 2008 the total rate of investment in infrastructure (public and private) as percentage of GDP increased solidly during some years, from 2016 onward it plunged even behind the 2008 level. Between 2008 and 2017 total investment in infrastructure in LAC was, on average, 2.8 percent of regional GDP, with a 20 percent share coming from private investment. The total amount invested in infrastructure in LAC during this period was approximately US$ 1 trillion, which represents an average of US$ 180 per capita annually (Infralatam, 2020).
This level of investment in infrastructure in LAC is sizably smaller than it should be. Numerous studies suggest that LAC should invest between 4 and 7 percent of its GDP over a sustained period to close its infrastructure gap (Serebrisky et al., 2015; Fay et al., 2017). For example, in China–the country that invests the most in infrastructure globally–public investment averaged 6.3 percent of the GDP between 2010 and 2014 (Fay et al. 2019), which is more than double the investment per capita in LAC over the same period. If we compare LAC’s public investment in infrastructure with its levels a few decades ago, it is evident that the region’s infrastructure gap is widening. Current levels of public investment in infrastructure as a percentage of GDP (2.2 percent on average between 2008–2017) are much lower than in the 1980s, where almost 4 percent levels were attained. Beginning in the late 1980s, public investment in infrastructure declined dramatically due to structural reforms that were implemented in the 1990s to reduce public sector expenditures. Public investment levels never recovered.
Infrastructure investment trends do not show a very promising future. Historically, the public sector has been responsible for two out of every three dollars spent in infrastructure (Infralatam, 2019). However, the probability of a dramatic increase of public expenditure in infrastructure appears low, particularly in the context of fiscal constraints and unfavorable macroeconomic conditions. The evidence indicates a bias against public investment based on the region's spending policies. This bias has been the cause of a 9.7 percentage point decrease in the percentage of capital expenditure (which includes infrastructure investment) in total public expenditure between 1980 and 2016.
While the public sector may be limited in its ability to contribute more to infrastructure investment, the room for improvement in terms of better investment is substantial. A recent analysis (Suárez-Alemán, Serebrisky, and Perelman, 2019) shows how infrastructure investment efficiency levels in the region are far from those of advanced economies: one out of every two dollars spent by the public sector in infrastructure is wasted. The region could double infrastructure investment outcomes (that is, the provision of different economic infrastructure services) with the same resources spent today. Insufficient and inadequate planning, deficient project preparation, inexistent prioritization, and significant delays throughout the life cycle of projects together with large cost overruns largely explain the low efficiency levels (Serebrisky, Suárez-Alemán, and Pastor, 2020). Even relatively small increases in efficiency can yield significant benefits for growth. On average, a 5 percent efficiency increase would allow countries in the region to experience a 3.6 percentage point increase in GDP growth rates over 10 years (IDB Macroreport, 2019).
Another highly important efficiency improvement may come not only from better use of resources to develop new and better infrastructure but also from making more efficient use of existing assets. Once infrastructure is built, maintenance is needed to provide good quality services and to take full advantage of the infrastructure assets. If maintenance does not occur, infrastructure can deteriorate even up to the point that the damage cannot be reversed, requiring a higher investment for rehabilitation or rebuilding. For example, between 1992 and 2005, Peru spent seven times more to rehabilitate unattended roads than what there would have cost its routine maintenance (Cusato and Pastor, 2007). Besides higher costs to infrastructure providers, users are also affected. For example, a deteriorated road infrastructure is associated with vehicle depreciation, increased travel times, higher gas consumption, and more accidents. In the case of electricity, lack of maintenance increases electricity losses, power tripping, system instability, breakdowns, and fires.
Finally, given the current low levels of public investment, public investment inefficiencies, and fiscal challenges facing the region, the role of private investment in infrastructure must increase. Despite the active role of the private sector in infrastructure development in LAC, there is still huge potential for the participation of new actors that can contribute significantly to providing more and better-quality services. Historically, the private sector has been very active in investing in infrastructure sectors in the region, contributing around US$ 700 billion since 1990 to develop LAC’s infrastructure (compared to, for example, US$ 429 billion in the economies of East Asia and the Pacific, and $ US 73 billion in sub-Saharan Africa over the same period). However, LAC has not yet taken full advantage of the enormous potential that the private sector represents for the development of projects in its countries. Just to give an example, the volume of assets managed by institutional investors worldwide amount to almost US$ 85 trillion, of which US$ 3 trillion are in LAC. Of that amount, less than one percent is currently allocated to infrastructure projects in the region.
Private sector investment can have a strong positive impact on quality of life and economic competitiveness. So how best to attract the private sector to provide higher quality infrastructure assets and services? In some cases, the macroeconomic environment, regulatory impediments, and lack of adequate institutional capacity prevent available private financing from reaching infrastructure investment (Serebrisky, Suárez-Alemán, Margot, and Ramirez, 2015). Strengthening market conditions and the institutional and regulatory framework are key to efficiently attract the private sector.
A recent analysis of the readiness of the LAC region to implement sustainable and efficient Public-Private Partnerships (PPP) shows the importance of working particularly in two dimensions: project preparation facilities and infrastructure financing (Infrascope, 2019). Overall, the region has done only limited work on the development of strong regulatory and institutional frameworks, which are areas that sorely need attention. There is also pressing need to: develop infrastructure plans that prioritize projects and guide investment over the long term; adequately staff investment units and PPP agencies to properly assess project analyses and generate a portfolio of well-prepared infrastructure projects; publish project performance to promote accountability to ensure transparency; and include the sustainable dimension in project identification, selection, development, and financing.
Altogether, our analyses show that improving infrastructure assets and services in LAC–which entails moving from an environment of declining, insufficient, low-quality, and inefficient infrastructure investment in the region–will require a two-pronged approach: increasing the efficiency of public investment, and simultaneously, generating the conditions to efficiently attract the private sector. Just one of them will never be enough on its own.