By Tomás Serebrisky, Ancor Suárez-Alemán, Cinthya Pastor and Andreas Wohlhueter
from the Infrastructure and Energy Sector of the Inter-American Development Bank
Recent data from INFRALATAM (2017) – the open data portal about economic infrastructure investment in the region, developed by the IDB, the Development Bank of Latin America (CAF), and the Economic Commission for Latin America and the Caribbean (CEPAL) – shows that Latin America and the Caribbean (LAC) has on average invested 3.5 percent of GDP between 2008 and 2015, a lot less than the 5 percent of GDP that we often say is needed to close the infrastructure gap. However, our recent analysis shows that if we manage to improve public infrastructure investment in LAC, we can save about 40 percent of total project costs, or 1 percent of regional GDP. This would mean that the region’s investment would not have to increase much, in fact, it may mean LAC countries are already investing about the right amount. Simply put, instead of more, we should focus on better infrastructure investment.
Average public and private investment in infrastructure as share of GDP in selected LAC countries, 2008-2015.
So, what can be done to narrow the infrastructure gap? A study by the McKinsey Global Institute concludes that advanced and developing economies could save around 40 percent on infrastructure expenditure just by investing resources more efficiently. Our recent publication provides specific actions – and accurate figures – to improve the delivery of public infrastructure in LAC:
If we plan better, annual savings can reach about 2% of total investment
When we compare the available infrastructure investment data from cities of the Emerging and Sustainable Cities program, annual savings due to better planning – as compared to business-as-usual practices – can reach about 2 percent of total investment, or 0.05 percent of regional GDP. Selecting the right projects and optimizing infrastructure portfolios is therefore a key strategy to improve public infrastructure spending.
Estimated potential efficiency gains from better planning in selected cities
Cost overruns in LAC can be reduced by about 30%
While global cost overruns average 28 percent of the total cost of a project, in LAC they average 48 percent, and this percentage has been rising in recent years. In our sample of multilateral development bank (MDB) projects in LAC, cost overruns of IDB projects represented 22 percent of total costs, and 17 percent of World Bank projects. If we accept MDB projects as a lower bound for cost overruns, and subtract these numbers from the LAC average of 48 percent, we see that the remaining potential to reduce cost overruns in LAC is in the range of 26–31 percent, representing more than 0.65 percent of regional GDP.
Cost overruns in a sample of infrastructure projects in Latin America and the Caribbean funded by the IDB and the World Bank, 1996–2010
Improving the timely implementation of projects can save LAC up to 20% of total project costs
Cost overruns in infrastructure delivery usually get most of the attention, although project implementation delays can be just as important. After all, time is money. To illustrate this point, we used IDB projects and developed an optimal disbursement curve based on the assessment of IDB specialists. This curve indicates what percentage of the total loan value should be disbursed at any given time of the project implementation phase. We then compare the optimal with the actual disbursements of the projects.
While there is a clear gap between the optimal and actual disbursement curve, there has been a learning process in recent years. For infrastructure projects, the gap from the optimal curve is bigger than for other sectors, such as education and health. Additionally, we find that there is a bigger gap for Central American and Caribbean countries than for South American ones and Mexico. In our study, we calculate that if projects were implemented in a timely manner LAC could save up to 20% of total project costs, or up to 0.5% of regional GDP.
Optimal and actual cumulative disbursements of a sample of loans financed by the IDB, by infrastructure subsector and sector, 2003-2016
Appropriate maintenance might be the least-cost option to provide infrastructure services
Lastly, we should make the most out of our existing roads, ports, airports, plants and other assets. Maintenance could be the answer. We describe optimal maintenance strategies as the least-cost option to provide infrastructure services. Peru is a good example. The country spent 7 times more bringing neglected roads back into full operation than it would have spent if those roads had undergone regular maintenance between 1992 and 2005.
Summing up, LAC countries currently invest about 3.5 percent of their annual GDP in infrastructure, to which the public sector contributes with 2.5 percent of GDP. Our analysis concludes that efficiency gains can reach 40 percent of public investment in infrastructure, or 1 percent of GDP. History has taught us that increasing infrastructure investment to the levels required to close the infrastructure gap has proven to be an elusive reality. It might be time to change gears, and convince ourselves that when more investment is not possible, the priority should first and foremost lie on increasing the efficiency of infrastructure spending, from upstream planning to the appropriate maintenance of available assets.