Will Latin America meet its infrastructure challenge?

Taken at face value, all signs indicate that Latin America is about to explode in a flurry of infrastructure activity. You need only browse the headlines to find encouraging examples of countries, governments and infrastructure investors making massive commitments and catalysing important change within the region’s infrastructure markets.

Big money, big plans

Take, for example, Brazil’s new Logistics Investment Program, which envisions $66 billion being spent on railways and roads, $30 billion going to ports and almost $18 billion to airports. Or consider Colombia’s $112 billion in planned infrastructure investments between 2012 and 2020. And Mexico has a list of about 1,100 projects totalling about $400 billion that need to be completed over the next five years.

Action on the policy side has been equally encouraging with many governments, which had been vehemently opposed to private participation in the infrastructure sector, busy drafting and promulgating new laws aimed at encouraging public-private partnerships (PPPs) and private investment. Colombia’s and Mexico’s 2013 passage of new PPP laws are clear evidence of change, as is Brazil’s recent efforts to improve its existing PPP law.

Making it work

While all this may seem good news for the region, the unfortunate reality is that huge investment plans and supportive legislation are simply not enough to catalyse the kind of transformative change that the region so desperately needs. There are three areas where Latin American governments must focus before these ambitious and much-needed infrastructure investment plans can truly start to be tackled.

Firstly, governments must start to shift their focus away from purely popular measures to prioritize and implement sustainable medium to long-term economic plans. The reality is that some (but certainly not all) Latin American countries are losing competitiveness and depressing productivity by putting popular opinion ahead of the – often hard – decisions that must be made for the good of their economies. Venezuela and Argentina have suffered significant economic decline since embarking on populist agendas; Chile and Mexico have enjoyed the opposite.

Secondly, Latin American countries will need to dramatically improve the professionalism and capability of their infrastructure programmes. International investors are looking for clear, transparent and well-managed programmes in which to invest. The problem is that few Latin American countries currently have the capability or capacity to manage the size and scope of the programmes currently on the table. This means programmes are often badly planned, poorly structured or laden with unmitigated risks and, as a result, do more to dissuade local and international investors than persuade them. There is an urgent need to improve the professionalism of these programmes – in the short term through support from experienced external advisers; and in the medium and longer term through a continuous programme of internal capability hiring, training and development.

Thirdly, Latin American leaders need to pay immediate attention to the financing markets. Few (with the notable exception of Chile) have developed any real private infrastructure financing markets to speak of, and most are struggling to develop the appropriate vehicles to support private investment. As a result, most activity in Latin America has been financed through either national development banks (such as BNDES in Brazil) or multilateral support. Given the massive investment targets and aggressive timelines articulated by leaders across the region, it seems fairly clear that private project financing, bond markets and effective investment vehicles will need to be developed quickly to achieve these lofty objectives.

Time for action

Thankfully, there are strong examples of Latin American countries that have already recognized these realities and have been aggressively taking action over the past few years. Chile, almost two decades ago, completely overhauled its infrastructure programme and market. PPP legislation is now well-defined, tested and understood; investment programmes are professionally prepared and well-received from international players; and commercial banks have been active in financing programmes. Colombia has also enjoyed much success in creating infrastructure markets and investment vehicles and – over the past few years – has rarely come up short for investment.

Others, however – Brazil chief among those – are standing on a precipice. The choice is clear: take positive action today and reap the benefits for generations, or maintain the status quo and allow the country and the economy to falter and ultimately fail.

The simple fact is that infrastructure investors and developers operate in a global economy where national programmes are compared with each other and competition is fierce. In this global war for investment, other regions are either moving faster or with more commitment. If things remain as they are, it would not be a surprise if Africa or South-East Asia were to eclipse Latin America as an investment destination within the next decade.

The bottom line is that governments across the region must take immediate action, both individually and as a group, if they hope to raise their countries to a world-class level. There is no time to waste. The actions taken today will reverberate for decades to come. Let’s hope they are the right actions and not just the easiest ones.

Author: Stephen C. Beatty is Member of the Board and Head, Global Infrastructure, Americas and India, KPMG LLP, Canada. He is participating in the World Economic Forum on Latin America 2014 in Panama City.

Image: Construction workers prepare the land for an upcoming rail track as part of a port project financed by Brazil in Mariel March 28, 2014. REUTERS/Jorge Luis Bano