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    This blog highlights effective ideas in the fight against poverty and exclusion, and analyzes the impact of development projects in Latin America and the Caribbean.
  • Private investors and citizen engagement: Keys to a thriving, sustainable infrastructure sector?

    13
    Apr
    2017

    By

    Multilateral agencies can leverage their existing contribution by facilitating public and private investment to close the infrastructure gap.

    Infrastructure needs, port au prince, haiti

    Not only the roads of Port au Prince, Haiti, are in need improvement. Worldwide, it would take $1 trillion to $1.5 trillion annually to meet infrastructure needs.

    Many of the important challenges we face in development finance are abstract and difficult to grasp. But any citizen who drives on a dirt road, loses power once a week, or travels miles for health care, understands what we mean at the Inter-American Development Bank Group (IDBG) when we talk about the infrastructure gap in Latin America and the Caribbean.

    Just one example of this gap: an estimated 64% of the region’s road network remains unpaved. This compares to only 46% unpaved in Emerging Asia and 27% in the US and Canada. This likely comes as no surprise to those who struggle to get their goods to market.

    Years of research show that proper infrastructure boosts economic growth and mitigates income inequality, but even with that knowledge, we have been unable to close what has become a staggering infrastructure gap.

    To close the gap, Latin America and the Caribbean would have to spend between $120 billion and $150 billion a year, or 2.0% to 2.5% of the region’s GDP. Worldwide, it would take $1 trillion to $1.5 trillion annually. How can multilateral development banks (MDBs) like the IDBG address this gap?

    That is the focus of the upcoming Global Infrastructure Forum in Washington, D.C., where 10 multilateral agencies from around the world will gather on April 22. Two of the major questions we will seek to address are: where can we find enough financial resources to fill the gap? And, how can we ensure that these resources will fund sustainable infrastructure—in other words, infrastructure that respects the environment, is climate resilient and energy efficient, and takes into account the needs of local communities?

    In 2016, the IDB approved $2.8 billion in financing for public sector infrastructure, representing about 30% of the year’s sovereign lending. This is a substantial commitment of resources, but it’s dwarfed by the region’s needs. Governments can’t pay for it all, and the multilateral development banks (MDBs) have limited resources.

    One important source for more resources is looking inwards: as the economies of the region grow, infrastructure can serve as a stable long-term investment for the savings of the expanding middle class. IDB can help governments encourage domestic savings and investment by creating a favorable domestic regulatory environment and mitigating risk.

    A second domestic source of funding is tax revenues and user fees. We recently commissioned a survey, Infrastructure in the Americas, polling a representative sample of internet users from each of our 26 borrowing-member countries, the U.S., and Canada. We found 50% of respondents in Latin America and the Caribbean are willing to pay more for sustainable infrastructure while only 18% are unwilling. This underscores a key message from economic research: citizens are more willing to pay taxes when they are happy with the quality of services they receive and the management of public resources. Successfully executed infrastructure projects built with domestic savings have the potential to create virtuous cycles of economic growth.

    Finally, the private sector can help mobilize resources for projects. The survey shows citizens support private sector involvement in infrastructure: 46% prefer either private sector led projects, or jointly led PPPs—public-private partnerships–while only 33% prefer the public sector take the lead.

    The public and private sector windows of the IDBG are working jointly to attract private capital for infrastructure projects. This is being achieved by co-financing and by providing technical assistance to governments to create a favorable policy and regulatory environment for private investment. For example, to fund the Reventazón hydroelectric project in Costa Rica, the IDBG’s public and private sector windows provided financing and worked together to bring in outside capital. This project is the biggest hydroelectric plant in Central America and a critical step in Costa Rica’s goal of becoming carbon neutral by 2021. The $1.4 billion project financing needed to build the plant would have been too risky for a single institution; Reventazón was made possible by bringing multiple parties to the table to share the risk.

    While citizens seem to agree with policymakers on the direction of development, increasing their role in the process is critical. Looking at citizen engagement, we found an inclusion gap as well: In Latin American and the Caribbean only 23% of respondents said they had been consulted on infrastructure projects in the past, as opposed to 79% in the U.S. and Canada. Sixty-one percent of those surveyed in the region said they would like to be consulted in the future.

    As the region seeks to close the infrastructure gap multilaterals such as the IDB should continue leveraging their knowledge and technical expertise to help countries attract robust private sector investment and bring citizens to the table to ensure inclusive and sustainable development.

     

    About the author:

    Luis Miguel Castilla is the Manager of the IDB’s Office of Strategic Planning and Development Effectiveness

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