(Last segment of the series)
Discussions regarding development finance have traditionally focused on how international sources – including Official Development Assistance (ODA), remittances, and international private finance – are vital to ensuring developing countries achieve the United Nations Sustainable Development Goals (SDGs). However, it is imperative that we recognize the fundamental role domestic resource mobilization must play in closing the SDG financing gap currently seen in Latin America and the Caribbean (LAC). In this sixth and final chapter of our series “The Road to SDG Financing,” we discuss the challenges and opportunities surrounding domestic resource mobilization in LAC, with a focus on SDG-related infrastructure financing.
To begin with, it should be noted that infrastructure is a transversal theme that cuts across the 2030 Agenda, one that is recognized for its potential economic, environmental, and social impact. For instance, by reducing logistical costs and improving the use of factors of production, it can unlock economic benefits; by improving energy usage and reducing negative environmental impacts, it can unlock environmental benefits; and by enhancing connectivity and accessibility and reducing inequality, it can unlock important social benefits for communities around the world. Yet while its clear that infrastructure investments drive economic growth and sustainable development, as an asset class it has unique characteristics that can complicate investment. Specifically, infrastructure is a long-term investment that requires high levels of up-front financing, yet doesn’t provide alternative uses, has a slower period of maturity, and generates income in local currency.
Accordingly, the investment needed to close the region’s infrastructure gap (which is estimated to range between 3.7 and 7.4 percent of GDP annually), cannot be provided exclusively by the public sector. And in this context, institutional investors emerge as potential sources of domestic financing with the wealth in resources to make a dent in the infrastructure financing gap, particularly as the long-term lifespan of infrastructure investments lines up neatly with the longer terms of the portfolios they manage, in particular in the case of pension funds and insurance companies.
Yet while this alignment makes institutional investors an ideal solution to the challenge of financing infrastructure in LAC, mobilizing these resources at scale requires the existence of five structural elements which are, in many cases, absent or limited in LAC countries: (i) a solid macroeconomic landscape; (ii) clearly defined rules that facilitate investment; (iii) legal and financial instruments that limit the risk assumed by private investors; (iv) the institutional capacity needed for project execution; and (v) the elimination of corruption.
Fortunately, in LAC, we have seen firsthand how countries can boost private and domestic infrastructure investment by building up these structural elements. One example is Chile, the first country in LAC to implement an individually capitalized pension system. Currently, its Pension Fund Managers (known in Spanish as AFP) have accumulated resources equaling more than 80 percent of GDP, thereby increasing the availability of investable domestic capital. The participation of the AFP has helped enhance and deepen the country’s capital markets, which has also resulted in greater availability and diversity in capitalization for Chilean companies, particularly those dedicated to infrastructure management and construction. These results stem from regulatory changes, which have generated the conditions necessary to catalyze domestic resource mobilization through instruments linked to infrastructure investment.
Another example is Mexico, which recently implemented structural reforms that have facilitated private sector participation in infrastructure projects in energy and telecommunications, sectors traditionally been considered public domain. As such, in collaboration with the IDB Group, Mexico launched the “Proyectos México” (or “Projects Mexico”) platform, which publishes information related to infrastructure and energy projects that require private sector involvement, thereby facilitating private investment and improving the transparency of infrastructure investment opportunities.
In light of these success stories and taking stock of the persisting challenges across the region, the IDB Group is working closely with governments to address obstacles to domestic resource mobilization. Together, the IDB Group and these governments have the capacity and the opportunity to share various instruments – including guarantees, technical support, support to regulatory and other structural reforms – that help mitigate the risk of investing in infrastructure and facilitate the mobilization of domestic and private resources to fill the infrastructure gap in LAC.
Matias Bendersky is Chief of the Resource Mobilization Division at the Inter-American Development Bank (IDB), where he is responsible for forging and expanding the IDB Group’s strategic alliances with partners from the public, private, non-profit, foundation, and academic sectors. He leads a team of professionals that work to identify co-financing opportunities and mobilize resources. In addition, Mr. Bendersky’s team works to explore how to best leverage blended and innovative financing instruments as vehicles for achieving the sustainable development agenda in the region. Prior to joining the IDB in 2007, Mr. Bendersky worked for the World Bank in various sovereign guaranteed operations. Previously, Mr. Bendersky worked for 6 years as a corporate and transactional attorney in both Argentina and the United States. Mr. Bendersky holds a JD from the University of Buenos Aires and a Joint Degree Masters from Northwestern University’s Kellogg Graduate School of Management and Law School in Chicago.