The infrastructure that could save Latin America

Fifty years have passed between the completion of the Panamericana, the highway from Prudhoe Bay in Alaska to Ushuaia in Argentina, and the construction of the new Panama Canal. A gap of half a century in a continent that desperately needs major infrastructure works to recover from an economic crisis provoked by Covid-19.

The Economic Commission for Latin America and the Caribbean (ECLAC) estimates that the recession caused by the coronavirus could plunge 35 million people into poverty, out of a total population of 620 million. Prior to the epidemic, the IMF predicted 1.6% GDP growth for the region for 2020.

The inauguration in 2016 of the new Panama Canal, built by Salini Impregilo, was a symbolic infrastructure for an entire continent. It has not been followed by the launch of equally ambitious projects, apart from a few sporadic cases. 

The Inter-American Development Bank (IDB) said last year the lack of large infrastructure projects is weighing on the economies of Latin America. These countries could lose an average of 15% of their GDP over the next ten years if they do not step up their infrastructure investment spending, according to a study by the Inter-American Development Bank. This is a wake-up call for the continent about the impact this gap will continue to have on people’s well-being in the coming years. The World Economic Forum shares this alarm, and said in 2019 the perception of the quality of Latin America’s infrastructure services is, on average, behind all other regions of the world except sub-Saharan Africa.

To understand how far Latin America lags behind in the investment game, take a look at the numbers: between 2008 and 2017, $1 trillion was spent on infrastructure, on average $180 dollars per capita per year, according to a recent report from ISPI called “Latin America: Moving on From Low-Quality and Inefficient Infrastructure Investment.” Too little for such a vast area, which is home to some of the globe’s biggest megacities.

The Inter-American Development Bank has calculated the continent’s infrastructure gap at $150 billion, or 2.5% of the continent’s GDP.

Currently investment in the sector accounts for around 2.8% of GDP, while many international studies indicate that in order to bridge the gap, Latin American countries should allocate between 4% and 7% of total gross domestic product to this sector over a sustained period.

South American needs to stimulate growth to prevent ever larger strata of the population from becoming impoverished, and to make cities more livable for their inhabitants. The creation of sustainable infrastructures that reduce pollution and the impact on the environment are another increasingly widespread need.

The Inter-American Development Bank and the consulting firm Mercer have mapped some of the most important infrastructure projects launched in the last three years in South America, finding a potential $300 billion of announced investments in sectors with high potential to generate sustainable infrastructure projects, according to another study by ISPI. 

The Projecto Crescer Initiative in Brazil is a good example, which provides for the construction of new railway networks. Another example is the Fondo de Infraestructura de Chile, a fund set up to support the development of sustainable mobility.

In reality, however, major billion-dollar projects can be counted on the fingers of one hand: the Reguemos aqueduct in Chile; the coast-to-coast railway connecting Brazil, Paraguay, Bolivia and Peru; the Guatemala Interoceanic Corridor (which would like to compete with the Panama Canal); the Maya high speed train in Mexico, and the Bogota metro in Colombia.

The role of the private sector today seems increasingly decisive for the rebirth of large cities, an increase in strategic connections between countries and with maritime trade, and for major infrastructure projects.

Looking at the current geopolitical situation in South America, it is clear that the public sector alone is unable to meet the region’s need for investment.

Historically, private investors have always shown an interest in this region. According to the ISPI study, private investors have poured $700 billion into the region since 1990, compared to $429 billion in East Asian and Pacific countries, and $73 billion in Sub-Saharan Africa.

Ultimately, among developing economies, investors prefer South America. Between 2008 and 2017, of the $1 trillion spent on infrastructure, 20% came from private investments, ISPI said.

A propensity which, however, does not include institutional investors. “The volume of assets managed by institutional investors worldwide amount to almost to almost $85 trillion, of which $3 trillion are in Latin America. Of that amount, less than 1% is currently allocated to infrastructure projects in the region,” the ISPI study said.

The challenge for South America’s future is to convince institutional investors, and increase the role of private investors that are already interested in the region. This challenge can only be met by reforms like reducing red tape, making public procurement procedures more transparent, and improving the macroeconomic environment.