44 FUNDING DEVELOPMENTFigure 1 shows that the compositionof investment in infrastructure variessignificantly across countries. While inArgentina, Bolivia and Ecuador, investmentin infrastructure is mostly publiclyfinanced, in others such as Brazil andColombia, the major source of financingis private. Overall and throughout theregion, private sources of funding accountfor nearly half of the region’s investment ininfrastructure.According to several estimates, theinfrastructure gaps in LAC are high.For example, economists Perrotti andSanchez estimate that in order to closethe gap between demand and supply ofinfrastructure, the region will need toinvest an additional 5.2 per cent of GDPper year for more than a decade anda half. Investing this amount requiressignificant efforts that exceed publicfunds. In this context, the participation ofprivate capital in financing infrastructureprojects is key.The current view throughout thedeveloping world is that projects thatare managed and designed cautiously,involving the private sector, will leadto investments in which the benefitswill outweigh both the potential costsand risks of fiscal liabilities that maymaterialise during the investmentprocess. Because of this, the number ofinfrastructure projects in the developingworld involving the private sector hasincreased in recent years.As shown in Table 2, the preferred way toinvolve the private sector in infrastructureprojects in LAC is now through ‘greenfield’investments, a similar trend to the restof the developing world. However, thishas not always been the case. In the1990s the prevailing method for privatesectorinvolvement in LAC was throughconcessions (42 per cent of projects). Whilethe share of concessions has now fallen toless than 30 per cent of projects, greenfieldprojects have risen to 66 per cent.It is important to note that most of thegreenfield projects (91 per cent) take placein upper middle income countries, andthat 80 per cent of them follow one oftwo models:●●Build, operate and transfer (BOT),where a private sponsor builds a newfacility at its own risk, operates thefacility at its own risk, and then transfersthe facility to the government at the endof the contract period.●●Build, own and operate (BOO), wherea private sponsor builds a new facility atits own risk, then owns and operates thefacility at its own risk.A challenge for the region is to promotefinancing schemes involving the privatesector throughout the region and,where possible, to contain fiscal risks,particularly in lower-income countries,where private participation is scarceand can take place in a way that makesfiscal accounts more vulnerable. It isclear that public-sector risks may alwaysexist in infrastructure projects, but theseFigure 1: Investment in infrastructure (average 2008–2011)Total-LACBrazilColombiaPeruGuatemalaChileUruguayMexicoEcuadorArgentinaParaguayBoliviaPrivatePublic0 0.5 1 1.5 2 2.5 3 3.5 4 4.5% GDPSource: Barbero (2011) and own calculationsTable 2: Private participation in infrastructure (PPI) projects and PPItype in Latin America and the Caribbean1990-2000 2001-2012PPI Type Project Count % Project Count %Concession 376 42.15 227 27.92Divestiture 134 15.02 13 1.60Greenfield project 351 39.35 536 65.93Management and lease contract 31 3.48 37 4.55Total 892 100 813 100Notes: Concessions: A private entity takes over the management of a state-owned enterprise for a given periodduring which it also assumes significant investment risk. Divestitures: A private entity buys an equity stake in astate-owned enterprise through an asset sale, public offering, or mass privatisation programme. Greenfield projects:A private entity or a public-private joint venture builds and operates a new facility for the period specified in theproject contract. Management and lease contracts: A private entity takes over the management of a state-ownedenterprise for a fixed period while ownership and investment decisions remain with the state.Source: Author’s calculation using World Bank and PPIAF, PPI Project Database (2014).GLOBAL DEVELOPMENT GOALS 2014
FUNDING DEVELOPMENT45© Reutersneed to be strategically chosen, andcontracts should be designed to properlymitigate them. In cases where the selfsustainabilityof the project is uncertain,governments may need to provideguarantees, or design the contracts insuch a way that the government will takethe risk until the income streams of theproject are known for certain. Doingthis requires not only the will to involvethe private sector, but also ensuring thatinstitutions are knowledgeable and matureenough to handle the challenges.Investment in economic infrastructureand related services in LAC has beeninsufficient. Although several factors wereinvolved (such as high macroeconomicvolatility, the lack of comprehensivepolicies and regulatory and financingissues), the effects of these physicalconstraints are clear and seriously threatenfuture development. Involving the privatesector in funding infrastructure projects iscrucial for the region.However, the design of such involvementneeds to be carefully done to ensurethat the private sector participants areexperienced and have a demonstrable valuefor money; the outputs are clearly definedand measured by third-party performanceaudits; sound procurement policies areguaranteed; and the maintenance costs areconsidered and incorporated in the contract;among others.It is also important to consider thatsimply making the estimated investmentsrequired, and selecting the mostappropriate funding model, does notguarantee that investment will lead togrowth. Rather, as Rozas and SánchezConstruction of the innovative public escalator atCommune 13, one of the poorest districts in Medellin,Colombia. The huge 384m (1,260ft) long outdoorescalator helps the 12,000 residents get around themountainside slum(2004) state, investment in infrastructure isa necessary condition for development, butit is not enough on its own.The impact of infrastructure investmenton growth will also depend on otherfactors, such as the extent of human capitaldevelopment, the availability of naturalresources or the access to technology.In short, the challenges of the regionlie not only in securing the best possiblefunding for investment, but also inproviding an adequate institutionalenvironment for the investments to takeplace soundly and effectively.GLOBAL DEVELOPMENT GOALS 2014
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