By Jorge Familiar
Jorge Familiar is World Bank vice president for Latin America and the Caribbean
As Latin America and the Caribbean begins to emerge from six years of economic slowdown, including two of recession, it is essential to find ways to nurture and strengthen this budding recovery.
Economic growth was the central factor behind the region’s striking social and economic achievements of the last decade, when Latin America cut extreme poverty by half, significantly reduced inequality, and greatly expanded the middle class. But we no longer enjoy the conditions that enabled all this. The drop in the prices of commodities and the slowdown in key economies, such as China, hit the region hard.
In today’s very different scenario, it is crucial to rebuild the foundations for economic recovery. Infrastructure stands out as one of the main enablers to enhance productivity and sustainably boost our domestic growth engines.
It is clear that Latin America and the Caribbean does not have the infrastructure it needs or deserves, and the accomplishments of the past decade make this contrast even starker. Low quality roads keep people from jobs and public services and increase the costs of small farms and exporters alike, making them less able to compete. Over 100 million people, almost a fifth of the population, do not have access to improved sanitation, and two-thirds of sewage goes untreated, spreading disease and degrading our rivers. In 2012 alone, this caused Latin Americans to lose a combined 900,000 years of life because of disability, ill health or death.
At the same time, much of our current infrastructure is not prepared for trends such as rapid urbanization, or to face the extreme weather events associated with climate change, that result in tragic loss of life and massive rebuilding costs. The recent floods in Peru and Colombia caused over three hundred deaths, and swept away more than 3,000km of roads and almost 300 bridges in Peru alone, isolating scores of villages. The poor and vulnerable bear the brunt of these impacts. They are also the first to suffer when infrastructure is simply not present, having no option but to resort to costly alternatives such as water trucks and electrical generators.
Traditionally, the region has tried to solve this by looking for more resources. There has long been talk about the investment gap in infrastructure—the difference between what we have and what is needed—with estimates around $180 billion per year. However, this hides a very complex and varied reality across the region. While the region as a whole invests less than 3 percent of GDP in infrastructure, compared to East Asia’s over 7 percent, some countries invest more than 4 percent. In addition, significant increases in public investment are not realistic in today’s tight fiscal context.
Two recent World Bank reports reveal that, rather than necessarily spending more, a lot can be done by spending better and by ensuring that the full potential of the private sector is tapped. The debate must shift from how much finance the region needs, and how to raise it, to what actually needs to be done, and finding the most efficient ways of achieving it.
Addressing the inefficiencies will require interventions at the sectoral level as well as more systemic ones, including tackling lack of institutional capacity for planning, regulatory uncertainty, as well as budgeting and implementation issues.
But spending more efficiently could have enormous benefits. In the case of the energy sector, where transmission and distribution losses are high, the region would need $23 billion per year if it were to follow the same investment path of the past. Costs would at least halve under an approach that favours efficiency, climate resiliency and renewable energy solutions.
With public resources constrained, involving the private sector is a necessity. Public resources should only be used when commercial financing is not an option. Public-private partnerships (PPPs) need to be part of the solution. While traditionally seen as a convenient complement to public investment, their main contribution should be to attain higher efficiency and quality of services to the public. Almost twenty countries in the region already have PPP legislation. However, to avoid the mistakes of the past, reforms to crowd in private financing must be designed taking social considerations carefully into account.
In the Caribbean, together with the Caribbean Development Bank, the Inter-American Development Bank and other partners, a regional Public Private Partnership Help desk was launched in Bridgetown to develop sound policies and transactions, and provide hands-on training to increase technical capacity among governments.
Latin America and the Caribbean’s new economic circumstances call for a new approach to infrastructure, which can unleash its power as a growth engine. The means to do it are within our reach, and the time to act is now.