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Infrastructure Development and Opportunities in Iberoamerica

I want to thank you for this invitation to speak to such a select group of business leaders, and to open what I believe to be a very interesting discussion of trends in Latin America and the Caribbean.

It is with great regard that I bring greetings to Antonio Fernández-Galiano and Cristóbal Montoro, as I do to the ministers with us today, and to all of you present here.

I have come to Spain almost every year to speak at various gatherings with private investors in Latin America and the Caribbean. Many of you have participated in these discussions.

Latin America is a key player in globalization. The benefits of trade flows and investment are clear. In 2004, for example, 50 percent of China’s foreign direct investment went to Latin America.

Latin America has shown itself to be sound financially, maintaining its position while being little affected by recent financial events. Although the epicenter of the current crisis has been mortgage-backed securities in the United States, the region’s securities markets have come out of the situation relatively well.

As you know, growth in the United States has slowed, and future prospects have been diminished. However, the outlook for Latin America remains solid:

  • Estimated growth for the region’s economies in 2007 is 5.3 percent—the fifth consecutive year it has topped 4 percent.
  • Exports will grow around 21 percent, the fourth year of growth.
  • Central government deficits are averaging just 0.3 percent of GDP so far this year, while their balances of payments have hit historic highs.
  • International reserves have increased to truly massive levels, more than three times the amount of short-term debt, which is enough to cover nearly seven months of imports.
  • Average inflation in the region is estimated at 5.3 percent, where it has been for more than a decade.
  • Economic growth for 2008 is projected at around 5 percent, triple the rate of population growth.

We can guess that these projections are built on the hypothesis that the rest of the world will continue growing and that the Asian countries’ demand for raw materials will remain strong—which is not at all certain.  Within this context, the main challenge to the region is to be sure it makes good use of this extraordinary period of world growth and high export prices. And that will depend in large part on the decisions made concerning infrastructure.

The rapid growth in foreign trade has highlighted the region’s serious deficiencies in infrastructure. Today, Latin America and the Caribbean invest just 2 percent of their GDP in infrastructure, while China invests 9 percent. Although there have been increases recently—particularly in electricity and telecommunications, which attracted some 70 percent of private investment—investments must be increased substantially in order to boost existing capacity. At the port of Paranagua in Brazil, for example, the line of trucks sometimes stretches for 50 kilometers as they wait to unload soybeans. These deficiencies also represent opportunities for investment.

It is estimated that the region’s economies must invest at least 10 percent of their GDP in financing infrastructure projects.

As it stands, Latin America is clearly far behind the world’s other regions in providing access to public services. More than 60 percent of companies that do business in Latin America report that electricity, telecommunications and transportation services present obstacles to their operations and growth.

Infrastructure has well-documented effects on competitiveness and economic growth. There is no question that Latin America and the countries of the Caribbean need to increase their investments in this area if they want to keep progress at an acceptable level, which would enable them to reduce poverty and capitalize on opportunities offered by growth in international trade

The region’s governments are taking notice of the lessons learned from the privatizations of the 1990s. They recognize that infrastructure is as much a public responsibility as a private opportunity, and will require significant resources. 

Overall, recent surveys by Latinobarómetro show relatively strong satisfaction with the privatization of companies throughout Latin America. 

The region’s governments are moving to implement frameworks that provide incentives for private investment and Public-Private Partnerships.  They are opening key strategic sectors and private-investment projects, despite rejection by a number of unions and by opposition political forces.

With the excellent news of Petrobras’s discovery of oil in the Atlantic Ocean, these types of plans will receive even more attention. Today Brazil is one of the top three countries in the world, along with China and India, for attracting private investment in Public-Private Partnerships.

Far from rejecting all forms of private participation and foreign investment in infrastructure, the public sector has a renewed understanding that partnerships with the private sector are, in many cases, the way to have the resources, know-how and skill for carrying out infrastructure projects.

The IDB has supported the infrastructure sector since its founding. In 2006, the Bank approved 21 projects valued at 1.8 billion dollars, including 16 public-sector projects for a total of 1.4 billion dollars and five private-sector projects for some 350 million dollars. From 1995 to 2006, the IDB allocated 16.7 billion dollars to finance 225 infrastructure projects.

We have been working on a range of initiatives in this sector and can point in particular to the Puebla-Panama Plan and IIRSA, reflecting the Bank’s involvement in sectors that are strategic for regional development. Most recent has been the InfraFund, created last year as a way to plan and develop sustainable projects in Latin America and the Caribbean. The [Bank’s] initial donation to the Fund was 20 million dollars, with the goal of promoting infrastructure projects that are essential for the region.

Other initiatives involve water and sustainable energy.

Spanish companies have traditionally collaborated with us and with other institutions in the region to develop these sectors. But I think they have a fundamental role to play in Latin America, especially now. They have recent experience that few European countries can offer; they have contributed—and continue to contribute—to creating a web of infrastructure in Spain whose size makes it the most important to date in the European Union. This has enabled Spain to boost income and competitiveness, with valuable experiences to analyze and share.

Moreover, another key aspect when looking at these types of projects involves the various formulas for financing and managing infrastructure. Here again the experience of Spanish businesses is paramount. In order to attract companies, the Public-Private Partnerships need enough public funding for the government to meet its payment schedule. They also need a suitable regulatory framework, judicial system and dispute-resolution systems to accomplish this goal.

I think that these conditions exist in most of the region’s economies at this time, although it is true that in certain cases some ground remains to be covered. The Bank is committed here as well, by supporting the creation of an appropriate climate for business.

At the Bank, we have identified a series of variables that have a significant impact at the time viability is discussed for infrastructure projects in general and for Public-Private Partnerships in particular. They are basically:

  • the legal framework
  • the political risk climate
  • macroeconomic factors
  • institutional capacity
  • the users’ willingness to pay for services (especially in such critical sectors as water and sanitation)
  • sustainability of rates
  • project size
  • and fiscal space.    

In order to meet these challenges to development, we have realigned the IDB. We had to do this in order to adapt ourselves to a region that is very different from what it was five years ago. We are becoming a bigger bank. This year we hit a record figure of 9 billion dollars in approvals, because the region is growing, and we are creating new financial products. We also want to seek out new members, both in the private sector and in other multilateral banking institutions: the market is so big that we must come up with new ways of thinking in order to meet these needs.

In the last 12 months, we have increased financing limits from 75 million dollars to 200 million dollars for projects without sovereign guarantees. Our goal is to finance 15 billion dollars in the next five years, in the public sector as well as in the private sector.

We are a Bank that understands the region and the enormous differences among countries. That is why we are decentralizing the staff in our country offices. We have changed with the times in order to respond better to our borrowing countries.

Infrastructure is not solely engineering, but a clear manifestation of our intentions with regard to development.  Luckily, despite the political differences among countries, this is one of the few areas in which there is consensus among governments: we need more infrastructure because we know that this is the best way to distribute opportunities. 

Foreign trade already represents 50 percent of Latin America’s GDP. But the potential for growth is enormous if the limitations on infrastructure can be resolved. Spain can play a fundamental role in this process, and the IDB is in a position to partner with Spanish businesses in order to help them capitalize on the enormous opportunities that characterize Latin America and the Caribbean today.

Thank you very much.