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Latin America: more public-private partnerships needed to improve infrastructure

Jordan Schwartz's picture

Latin America: more public-private partnerships needed to improve infrastructure

There are three people in Latin American and the Caribbean who care about Public-Private Partnerships or PPPs as they’re widely known. You may have met them. You might even be one. In case not, let me introduce you...

First and foremost, please meet Madame Minister of Finance. She’s busy, she’s stressed and she’s always balancing two concerns that run counter to each other, at least in the short run: growth and budget. Private investment in services might help one without hurting the other.

Next, I introduce to you Señor Inversionista. He’s there to provide a service that produces a profit. Finally, there’s me—and a few fellow advisors in development institutions, service regulators, and PPP units. Once upon a time, we brazenly touted the religions of "principal-agent separation," and "full cost recovery." Now we speak with more humility about "shared risk."

The political economy has shifted, but it is hard to let go of the conviction that there is a structural arrangement out there that can draw together the best of government—as long-term planner and protector of public interest—with the best of the private sector—as innovator, operator and efficiency-maker. Ideological arguments about the appropriateness of the public or the private sector as service provider are passé. Our grand objective is—or should be—higher quality service delivery for the largest possible segment of society, at affordable prices, in an environmentally sustainable fashion.

When I started working on LAC’s concession programs twenty years ago, much of the region had lost faith in public service providers, and LAC’s finance ministers were responding to debt crises by cutting public investment. The expectation was that we could bring the private sector in to replace the public sector as the primary investor in infrastructure… and lock-in massive efficiency gains in the process.

Going back and looking at what happened—and what didn’t happen—might help us to refine our next steps. The first thing that didn’t happen was the replacement of public investment with private investment. Even as the telecom auctions and big power privatizations were coming to market in 1997 and 1998, LAC’s overall investment level in infrastructure was stagnating at around 2 to 3 percent of GDP. The thing that happened was that countries in East and South Asia began investing two or three times more than LAC in their infrastructure—particularly in network assets of transport, telecom and energy— with both public and private sources and have leapfrogged in connectivity as a result.

Of course, LAC did make gains lest we suffer from amnesia. But now is the time for a second push on the infrastructure side. Road quality and density indexes put LAC at a growing disadvantage. Railways continue to lose share in the region’s freight traffic. The push into rural electrification and telephony in our poorer countries remains lethargic. Mass transit is not keeping pace with urban growth. Most disturbing, the preliminary results of a database built by the World Bank of all urban water providers in the region suggests that growth in water and sanitation household connectivity has actually stagnated. And these are the riskier sectors, the second and third generation investments, those that offer great economic benefit but marginal financial returns. In short, they are right for PPPs.

The latest data on investment in private infrastructure projects from the World Bank’s PPI Database shows, paradoxically, that private infrastructure projects in LAC continue to grow, at least in value terms. There have been steady increases since 2005 through 2009—from US$21.5 billion in commitments to US$52.0 billion—levels that are nearing the 2008 peaks. But a deeper dive into the data reveals a more subtle truth: there has been growing concentration by sector and country, what financiers refer to as a "flight to quality." Brazil alone is now responsible for 80 percent of the PPP infrastructure deals of the last couple of years—and all of the growth in PPI over the last few years. This isn’t only due to the size of Brazil’s economy; investment flows into private infrastructure equal more than 2 percent of Brazil’s GDP. Only Peru and Chile are hovering around 1 percent of GDP while the rest of the region remains at less than 0.5 percent. Across the region, almost all investment is in a few big power and toll road programs. Water has "dried up," for lack of a better phrase.

Riskier countries are not part of the regional growth in infrastructure investment. Likewise, "riskier" sectors that really do require careful partnership building—water supply, sanitation, railroads, energy distribution—are not on the radar screen. To compete, to serve the public interest, to converge with OECD income levels, LAC needs more and better infrastructure. As Brazil is showing, more partnership between the public and private sectors might be the only way forward.