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Latin America must restore levels of investments in infrastructure to gain competitiveness, experts say

BELO HORIZONTE, Brazil – Latin America must improve its climate for business and restore its level of investments in physical infrastructure in order not lose even more ground compared to other emerging regions in the world, experts said today in a seminar organized by the Inter-American Development Bank.

The Climate for private sector investments in infrastructure in Latin America and the Caribbean seminar was held on the eve of the Annual Meeting of the IDB Governors' Assembly, which will be held in this city on April 3-5.

“We noticed a general drop in investments in infrastructure in Latin America and the Caribbean,” said Carlos Guimarães, IDB private sector coordinator, at the opening session of the seminar. “Even more worrying is the fact that other regions in the world have increased these investments, which are measured as a percentage of gross domestic product.”

“This means that we are growing more slowly, both because of lower allocations to infrastructure per worker and as a result of a loss of markets to competing regions that produce and transport goods at a lower cost and faster than many countries in our region,” he added.

In 2005, total investments in infrastructure (public and private, both to expand and to maintain it) amounted to $47 billion. This sum is equivalent to about 2 percent of the regional GDP, while investment rates in China and other Asian and East European countries are three times higher than those in Latin America.

In fact, the gap between these two regions has increased over the past two decades. The Manager of the IDB's Sustainable Development Department, Antonio Vives, said that Latin America and the Caribbean had an infrastructure stock 40 percent higher than that of the so-called Asian Tigers in 1980. In 2000, these countries enjoyed an advantage of 70 percent.

Everett Santos, president of the Latin American Investment Fund, expressed doubts about whether its financing fund for infrastructure works would once again raise almost $1 billion in private investments as it did in 1996.

Although conditions vary from country to country, Santos said, the region is facing more problems related to the high risk of political interventions that affect the stability and profitability of private investments in infrastructure. Likewise, difficulties persist that are caused by legal and regulatory uncertainties, exchange-rate risks, non-development of local capital markets and, in some cases, reappearance of inflation.

Another obstacle preventing a greater participation of the private sector in infrastructure development in Latin America is the opposition to privatization amongst citizens in the region despite the objective advantages afforded by this participation in terms of costs, coverage, access and efficiency, Santos added.

According to Diana Mondino, former director for Latin America of the risk assessment company Standard and Poor’s, the low rate of investments in physical infrastructure in the region reflects the fact that the State has been playing a role that could be played by the private sector, resulting in a crowding out process which often occurs in debt markets.

Paradoxically, Mondino said, the public sector invests in infrastructure where it is more profitable to do so in the very short term, instead of focusing its efforts on financing projects that could produce greater impacts in the long term, particularly on the productivity and quality of life of low-income people living outside urban areas.

“The State builds the main highway, but not networks of secondary roads. It builds ports, but not access routes to them,” added the Argentine economist.

Nicholas Stern, advisor for economic affairs to the United Kingdom government, said that investors should be assured of their right to reap the fruits of their participation in infrastructure projects. For this purpose, he added, the focus should be on ensuring comprehensive measures for reducing risks for investment revenue flows.

The new President of Brazil’s National Economic and Social Development Bank (BNDES), Demian Fiocca, provided an alternative point of view based, to a large extent, on the county’s recent experience.

According to Fiocca, during the past two years public investments in infrastructure have resumed their upward trend, after having fallen steadily during the three first years of this decade. This deceleration was caused by a drop in the economic activity during that period and by fiscal measures adopted for us to recover our macroeconomic stability, he said.

“We experienced tough moments in 2002 and 2003, but the future is looking up,” said Fiocca, who played a key role in structuring the law governing public-private partnerships in Brazil.

The BNDES president also praised the possibility that IDB will be granting loans in local currencies to borrowing countries as a measure to reduce exchange-rate risks for long-term investments, such as those faced in physical infrastructure projects.

Apart from facilitating financings in local currencies by developing domestic debt markets and risk transfer mechanisms, the region needs to rely more on public-private partnerships.

IDB, which lent $15.3 billion between 1995 and 2005 to fund 199 infrastructure projects in Latin America and the Caribbean, expects to increase its participation in supporting the regional infrastructure.

Among other steps, it is encouraging the creation of a tripartite infrastructure fund with funds from IDB, donor countries and private companies. Besides providing funds, IDB will also advise countries on how to improve the climate for business and will select proposed projects to provide more information about them to potential investors.

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