Reuters/Panama City
Latin America is increasingly looking to the private sector to help fund a $200bn a year infrastructure investment gap that is dragging on economic growth and preventing the region from catching up to other emerging markets.
Financial officials attending Inter-American Development Bank meetings in Panama said better infrastructure, from roads to ports to public utilities, was one of Latin America’s most pressing needs.
But strained government budgets limit the amount of contributions from the public purse, leaving policymakers seeking more involvement from the private sector.
“There’s a tremendous potential,” Colombian central bank governor Jose Dario Uribe said. “One of the bottlenecks of growth that we have in Colombia is that we have inadequate infrastructure and this is not only a problem for growth.”
Mexican deputy finance minister Fernando Aportela said planned financial sector reforms would aim to improve the ability of development banks to work with the private sector. It was also important to involve pension funds - which in Mexico have assets worth more than $150bn - as well as development banks and other official funding sources.
“I think it’s very important to promote the participation of private sector investment in infrastructure using all the structures that we have,” Aportela said.
The IADB estimates investment in Latin American infrastructure needs to at least double from the current 2.5% of gross domestic product, with about half the increase coming from the private sector - worth about $100bn a year. If the region could double its infrastructure investment, potential real annual GDP growth could increase by as much as 2 percentage points, the IADB said.
If infrastructure investment rates of 4% to 6% of GDP were maintained over 20 years, the region’s infrastructure would finally catch up to average levels in East Asia.
Some money is already flowing in. China is partnering with the IADB to provide $2bn for a new regional investment fund, adding to a $1bn investment in the region last year, at least part of which is expected to flow to infrastructure projects.
Ratings agency Standard and Poor’s is seeing a boom in demand for infrastructure financing. Last year it rated a record number of project or infrastructure bonds with 25 issues, and in the initial months of this year has already received requests for ratings on 15 similar bonds, said Jane Eddy, managing director of Latin American corporate and sovereign ratings.
Itau BBA economist Ilan Goldfajn said countries seeking outside investment would have to balance their desire for cheap finance with investors’ desire for a reasonable rate of return.
“I don’t think it’s a far-fetched dream,” he said of the IADB call for a doubling in private sector participation. Over the past few years, there has been a tremendous growth in local banks funding infrastructure projects, said Mini Roy, head of agency loans at Sumitomo-Mitsui Banking Corp global trade finance department.
“The support of governments and the understanding of local players in the region is expanding very quickly,” she said.
Brazil, gearing up to host the Olympics and soccer World Cup in coming years, is capping the maximum rate of return on 30-year concessions, or leases, for infrastructure projects. But the sheer size of Brazil’s infrastructure needs presents opportunities for investors.
The government expects about 180bn reais ($94bn) in annual investments through 2017 to help the country overcome aging roads, soaring logistics costs and burdensome red tape.
IADB economists said Latin America was a pioneer in attracting private investment into infrastructure, but its share of investment has fallen recently.
Between 2001 and 2011 the region attracted only 29% of the total invested in developing regions, compared with 52% in the previous 10-year period.
Bolivia’s problems with water privatisation in the early 2000s may have given some countries pause for thought, as the country battled with protests about price increases.