A practical solution to finance urban transformations in Latin America

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In my last blog post I suggested that the most important challenge for our region over the medium term is to manage growth without compromising the environment, the economy, governance and quality of life. Sustainable growth will depend, in the coming years, on large investments in land purchases and infrastructure to mitigate environmental risks and manage urban dynamics (e.g. transport, mobility, public safety, etc.). Additional resources will be required to handle liquids and solid waste, to invest in public space, community services, housing and basic services and strategic rehabilitation operations, consolidation, conservation, improvement and expansion of urban land use.

_{Vivienda Social en Alquiler. Asturias, España. Foto por VISOREN}

Although urban areas in Latin America and the Caribbean have significantly contributed to the economic growth of the region, they face serious infrastructure challenges. Many of the region’s cities urgently need adequate infrastructure, specifically in the areas of water supply, sanitation, solid waste management, roads, transportation and housing.  The Inter-American Development Bank estimates that the region requires infrastructure investments totaling over $200 billion a year.

Unmet demands in infrastructure, goods and services to support the provision of services limit the region’s transformation and impede the competitiveness and economic opportunities of its urban areas. The lack of investment in goods and services dictates the quality of life of its citizens and does little to assuage the region’s vulnerability against natural disasters. Investment in infrastructure is critical to boosting economic growth and improving quality of life in our cities.

One way national and local authorities could promote economic growth and address the infrastructure deficit, is by leveraging the resources, experience, skills and innovative capacities of the private sector, to work together to deliver new and improved projects and services to urban communities.

A typical Public-Private Partnership (PPP) enables a private partner to assume financial risk and take on two or more phases of the development project’s life cycle. This could include design and construction phases, funding, subsequent maintenance, and/or operation of government facilities, as detailed under a comprehensive long-term contract.

Out of the range of possible PPP associations, the most advantageous is the type which allows the private sector to assume the risk of developing the project life cycle. This mode links payments to access to the good or service. Unlike typical production contracts, which tie payment to performance (partial deliveries) or final delivery of the complete work, this type of PPP evaluates project results in terms of quality and accessibility of goods and services during the contract period.

Any delay in meeting operational deadlines leads to the private partner, not the state, assuming higher costs. If at any time accessibility to the good or service is compromised, it is the private partner who does not receive the monthly payment, with a direct impact on their profits. If the private partner fails to provide or suspends service authorities can impose sanctions, prepare contingency plans and suspend payment, again impacting the private partner’s income. Therefore, the private sector has a financial interest and incentive to deliver the project on time (if not early) and ensure the project is accessible and operational 365 days a year for the duration of the long-term agreement.

Finally, this method frees up scarce public resources for investment, by creating a mechanism for affordable monthly payments over the long-term that are tied to the accessibility and quality of services provided by the private partner.

Multilateral agencies, such as the IDB, could act as guarantors in the event of currency devaluation or default in payments made by government authorities, ensuring permanent access to goods and services. The IDB, through its Emerging and Sustainable Cities Initiative, selects and prioritizes interventions and helps local government mobilize additional funding sources to implement the projects. This method could be a potential answer to those funding needs.