The adoption of the UN Sustainable Development Goals (SDGs) and the Paris Agreement principles on climate change provide a prime opportunity to promote a new form of development in Latin America and the Caribbean (LAC). Public investment in infrastructure and services can play a key role in LAC countries’ efforts to achieve sustainable and inclusive growth.
Sustainable infrastructure comprises works and services designed, built, and operated considering all the sustainable economic, financial, institutional, and socio-environmental aspects –including climate resilience– of the projects throughout their life cycle, according to an IDB Technical Note.
Although there is consensus on the need to expand sustainable infrastructure, one of the main obstacles has been a lack of instruments to embed this perspective in all phases of the project cycle. This is mainly due to the lack of long-term strategies that could serve as a framework to identify and plan new sustainable infrastructure projects.
Public investment management deficiencies hinder investments in sustainable infrastructure
Recent studies show[i] that very few countries in the region have medium- and long-term planning and policy instruments that provide the framework for the proper identification and selection of public investment projects, particularly those for sustainable infrastructure. This deficiency is present in all sectors and at all government levels, and is particularly acute when it comes to integrating climate change and decarbonization issues.
Costa Rica is the only country in Latin America that has published a Decarbonization Plan. Mexico has presented its long-term carbon emission reduction strategy to the United Nations[1], whereas Chile, Colombia, and Argentina are currently preparing their strategies and plans.
The weakness in the planning systems is compounded by the limited capacity of the public sector to tackle the contractual, institutional, methodological, and technical aspects of project preparation and execution. Mobilizing financing for sustainable infrastructure projects is also a daunting task.
Since 2008, LAC countries have invested an average of over 3.5% of their annual GDP on infrastructure. Several studies, including one issued by the IDB, estimates that to close the infrastructure gap, LAC needs to invest about 5% of its GDP over the next 20-30 years. This requires an additional investment of $100 billion a year. If climate change mitigation and adaptation investments are also factored into the equation, an additional $30 billion would be required each year.
Low investment levels have contributed to the deficit and low quality of infrastructure and services in LAC. According to the World Economic Forum, the infrastructure quality indicator reveals that LAC is lagging advanced economies and high growth Asian economies.
The public sector is expected to continue to be the main source of infrastructure financing in the region for the foreseeable future. Sustainable infrastructure is now recognized as a critical factor for achieving inclusive and sustainable growth while making progress on SDG and Paris Agreement commitments.
Therefore, the public sector has a key role in planning and implementing this type of infrastructure which, among others, includes investments in clean transport, energy efficiency, renewable energies, sustainable management of water and natural resources, land use and protected areas, and green buildings.
Public policies to promote sustainable infrastructure investments
Given their role in the process of strategic planning and public investment management, Ministries of Finance in the region can implement public policies oriented at promoting greater private and public investments in sustainable infrastructure. In this blog we have focused on four opportunities for action:
- Implementing long-term strategies and linking them to investment programming. The programming of sustainable infrastructure works should be carried out within the framework of national development strategies and plans, whether these are of a sectoral, or specific nature, such as decarbonization strategies. This approach should also be consistent with medium-term fiscal frameworks and with the government’s capacity to manage public debt levels that are sustainable in the medium and long term.
- Improving the public policy framework and financial regulations. This involves changing incentive structures to promote low-carbon infrastructure, while reducing or eliminating fossil fuel subsidies and incorporating the price of carbon into the assessment of public spending. The financial policy and regulatory framework must also be improved, facilitating investment in sustainable infrastructure under public-private partnerships (PPPs), which will become increasingly important as the public sector alone will not be able to cover the financing and will require private capital.
- Strengthening public investment management. Public investment is on a downward trend, widening the infrastructure gap, and underscoring the need to improve investment quality and efficiency. This challenge needs to be tackled by enhancing public management capabilities across all sectors and levels of government.
Some of these priority management areas include:- improving project planning and selection instruments by conducting basic research; revising project selection criteria; and improving investment proficiency and coordination mechanisms;
- improving investment programming support instruments, such as project banks and preparation of financing requirement plans or programs;
- enhancing project assessment capabilities, factoring the socio-economic cost of carbon into the ex-ante evaluation, establishing pre-investment funds and considering natural disaster risks and other eventualities;
- refining project implementation by adopting low-carbon emission technologies and paying attention to the operation and maintenance aspects to expand the useful lifespan of assets; and
- evaluating the achievement of project development goals to ensure the availability of inputs and best practices required to design new investments.
- Mobilizing financing. Through risk mitigation and other project financing instruments, it should be possible to achieve higher degrees of leverage of resources for sustainable infrastructure investments.
The multilateral development banks should play a key role in leveraging resources from large institutional investors who may have an interest in investing in green projects or other ventures that help eliminate or reduce carbon emissions. This is particularly relevant to those countries in the region where it is possible to innovate with financial instruments and deepen the development of domestic capital markets, or whose sovereign risk ratings are good enough to entice institutional investors.
This is the case in Chile, which is promoting the development of green assets to attract foreign investors to prop up its sustainable development plans and meet infrastructure needs. Chile has shown a strong commitment to climate change action as well as international leadership, and was the first green bonds issuer in the Americas and the first non-European issuer of those instruments in Europe.
The strategic role of finance ministries
In sum, the transition towards sustainable infrastructure will become more relevant every passing day for every country in LAC and will require increased institutional and financial capacity to develop projects that contribute to reducing carbon emissions.
This necessitates a major reform of the strategic planning and investment systems. It will improve investment allocation efficiency and promote more efficient use of existing resources. Ministries of Finance, which bear primary responsibility for the optimization of the resources assigned to sustainable infrastructure and green financing, should play a central role in this process.
[1] United Nations Framework Convention on Climate Change (UNFCCC).
[i] Armendáriz, E., & Contreras, E. (April 2016). El gasto de inversión pública en América Latina: cuánto y cuán eficiente (Not yet published). Lecture given at the Sixth Conference on Public Investment System Management in Latin America and the Caribbean. Costa Rica.
Eguino, H. (May 2020). ¿Cuán eficiente es la gestión de la inversión pública subnacional? Situación de los países de los países federales de América Latina. BID.
Dear Huascar, Marcia and Alosio. Congratulations for this very ready-witted article. I was specially struck by this paragraph: “Recent studies show[i] that very few countries in the region have medium- and long-term planning and policy instruments that provide the framework for the proper identification and selection of public investment projects, particularly those for sustainable infrastructure. This deficiency is present in all sectors and at all government levels,”
There are instruments for this, cheap to implement, with billions of dollars of benefits on sellecting the strategic investements to tak forward. Other Multilaterals are using them. Why not the IDB?
Dear Pedro,
See below the response of the authors to your question:
“Our paragraph is supported by strong evidence. Most importantly two recent research papers made by Armendariz and Contreras (2016) and Eguino (2020). The weakness is found at the country level and does not refer to the best practices promoted by IADB within their programs.”
All the best.