How much investment is needed to salvage Latin America's crumbling infrastructure?
The quality of infrastructure in Latin American countries compared to other regions of the world is only better than that of African countries and is not even half as good as that of developed countries. According to the Latin America Development Infrastructure (CAF) report, published in 2016, the infrastructure gap remains significant. Taking into consideration current trends, it is estimated that the region would have to work for two decades to reach the current level of infrastructure in the OECD countries.
Several studies recommend that in order to catch up, Latin American countries must invest around 5% of annual GDP. In recent years, investment in infrastructure has oscillated between just 2.4% and 3.2% of GDP. In order to address this situation, involving both the public and private sectors is essential.
In Latin America, approximately 70% of investment is public and it has grown at the pace of GDP in recent years. Private and public-private investment, which accounts for the remaining 30%, has grown strongly in recent years due to large projects, especially in Brazil, such as hydroelectric power stations, airports and wind farms. This is a remarkable figure since the proportion is similar to that of OECD countries and is quite ahead of developing countries, where private investment represents only 10%.
Looking at sectors across the region, investment in the transport sector, while having diminished somewhat, continues to grow robustly due to a notable increase in demand driven by sustained economic growth. The increase in the motorization rate has generated pressure on local transportation systems despite a big increase in investment in public transport. This has led to the development of important metro networks in cities such as Panama City, Quito, Santo Domingo and Lima and the extension of metro systems in cities including Buenos Aires, San Pablo, Mexico and Rio de Janeiro.
The electricity sector has also seen a significant increase in demand in recent years. Yet unlike in the past when high availability of resources and price stability encouraged private participation, the volatility of recent years has forced more state involvement to ensure supply is available at reasonable prices. Within this framework, an expansion in investment in non-conventional renewable energies and the use of liquefied natural gas has been seen. Demand for natural gas in the region has increased eightfold over the last twenty years, which is leading to a huge amount of investment, especially in Bolivia and Peru.
The sector that has seen the best performance in terms of investment however, is telecommunications. The telco sector is advancing constantly, strongly driven by private investment. While considerable progress has been made in the access to water and sanitation services, large gaps remain between the reality in Latin America and that of developed regions.
While infrastructure in the region has shown improvements since the recent expansionary cycle, an increase in investment to reduce the infrastructure gap between Latin America and more advanced regions must be a priority. To this end, the CAF report recommends further deepening the public-private partnership model to garner greater private participation in infrastructure investment.
In terms of investment financing, domestic sources, which are fundamental, face certain constraints that are highlighted in the report, due to, "the low rates of domestic savings and low banking costs in the region." In addition, the "lack of maturity" of the sector in terms of risk measurement, which is fundamental in the financing of large infrastructure projects, is evident in an absence of loans due to lack of collateral. In this context, pension funds are an alternative, although restrictions on investment regimes are a limiting factor. Finally, the report considers that an improvement in institutional quality in the region would contribute to improved decision-making and faster financing processes.
Guest blog post from Latinoamerica21*
Jeronimo Giorgi, a Uruguayan journalist dedicated to international issues, is pursuing a master's degree in Latin American Studies. He has collaborated with various media outlets in Latin America and Europe, and has received distinctions such as the Premio Rey de España for Journalism.
Latinoamerica21 is a blog about current economic, political and social topics in Latin America that is currently published within the newspaper El Observador de Uruguay and Pagina Siete in Bolivia, and will soon be published in other media outlets within the region. The original version of this blog post is available in Spanish: ¿Que tan mala es la infraestructura en América Latina?
*Guest blog posts do not reflect the views of FocusEconomics.
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