Rethinking Infrastructure in Latin America and the Caribbean Public Disclosure Authorized Spending Better to Achieve More

Public Disclosure Authorized Rethinking Infrastructure in Latin America and the Caribbean Public Disclosure Authorized Spending Better to Achieve More Marianne Fay Public Disclosure Authorized Luis Alberto Andres Charles Fox Ulf Narloch Stephane Straub Michael Slawson Public Disclosure Authorized © 2017 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522- 2625; e-mail: [email protected]. Design by sonideas (www.sonideas.com) Acknowledgments his report is a joint product of the Latin America and Caribbean Region Vice-Presidency and the Chief Economist Office of the Sustainable Development Practice Group. The task team leaders are Marianne Fay and Luis Alberto Andres. Contributors to this report include Charles Fox, Ulf Narloch, Michael Slawson, and Stephane Straub. The following World Bank colleagues and consultants contributed background papers and substantive inputs: Daniel Benitez, Diana Cubas, Steven Farji, Xijie Lu, Maria Claudia Pachon, and Tatiana Peralta Quiros (Transport); Gabrie- Tla Elizondo Azuela, Jiemei Liu, Farah Mohammadzadeh, and Patricia Vargas (Energy and Extractives); Aroha Bahuguna, Christian Borja-Vega, Gustavo Perochena Meza, Diego Rodriguez, Gustavo Saltiel, and Virginia Ziulu (Water); Shohei Na- kamura and Carlos Rodriguez Castelan (Poverty); Kevin McCall and Juan Jose Miranda Montero (Environment); Beatriz Eraso, Catalina Marulanda, Emanuela Monteiro, and Carlos Perez-Brito (Social and Urban); Catiana Garcia-Kilroy, Cledan Mandri-Perrot, Heinz Rudolph and Fernanda Ruiz Nunez (PPP); Jorge Araujo and Naotaka Sugawara (Fiscal); Sebastian Lopez Azumendi (Institutions); Diego Dorado, Ian Hawkesworth, and Jens Kromann Kristensen (Public Spending Effi- ciency); Cesar Chaparro Yedro, Tania Ghossein, Khasankhon Khamudkhanov, Federica Saliola, and Mikel Tejada Ibanez (Procurement). Additional background papers were commissioned from KTH Royal (Oliver Broad, Mark Howells, and Gustavo de Moura), Fernando Miralles-Wilhelm, and Daniel Nolasco. The team is grateful for guidance provided by Jorge Familiar Calderon, Vice President of the Latin America and Caribbe- an Region, and Karin Erika Kemper, Senior Regional Adviser, as well as comments and helpful suggestions from Cecilia Briceno-Garmendia, James Brumby, Uwe Deichmann, Alfonso Garcia Mora, Ejaz Ghani, Jesko Hentschel, Jens Kromann Kristensen, Antonio Nucifora, Carlos Perez-Brito, Pablo Saavedra, Jordan Schwartz, Luis Serven, Carlos Silva-Jauregui, Stephane Straub, Marijn Verhoeven, and Jan Weetjens. Paul Holtz edited the report. The findings, interpretations, and conclusions expressed in this document are those of the authors and do not necessarily reflect the views of the Executive Directors of the World Bank, the governments they represent, or the counterparts consulted or engaged with during the informality study process. Any factual errors are the responsibility of the team. 3 Table of contents Acknowledgments 3 Executive summary 7 What is the goal? And how to set it? 9 How to improve services as cost effectively as possible? 11 Who should pay—and what does it imply in terms of financing options? 13 Part I. Infrastructure in Latin America and the Caribbean: Modest spending, uneven results 17 How much does Latin America spend on infrastructure? 18 What is the region getting for its money? 21 Transport: Unimpressive outcomes, but infrastructure is just part of the challenge 21 Water and sanitation: Good coverage for water, but sanitation an increasingly urgent challenge 29 Energy: A sector at a turning point? 35 Part II. What lies ahead for the region’s infrastructure? 43 Inefficient public spending may limit how much more can or should go to infrastructure 43 A tight fiscal stance limits how much more could be spent on infrastructure 48 Public investments in Latin America: Rising during the boom, but still much lower than in other regions 48 A “bifurcated” fiscal panorama in Latin America 49 Climate change is creating new challenges, but possibly new opportunities 52 Infrastructure needs to be more resilient and better adapted to the changing climate 52 Pressures will mount to reduce emissions from infrastructure 57 Urbanization and changing socioeconomics are complicating matters 62 Part III. The road ahead: spending better to meet “real” infrastructure needs 65 Focusing on priorities—setting the right goals is essential 66 Improving utility performance, and focusing public and concessional finance where it is truly needed 67 Commercial financing and the importance of making judicious use of public resources 68 Corporatization and the importance of improving the performance of utilities—public and private 70 Improving public investment management and spending efficiency 72 References 75 Annex 1. Public expenditure reviews examined for this report 80 Annex 2. Procurement performance of Latin American countries: relatively good, but with wide variation across countries and indicators 83 5 Executive summary atin America and the Caribbean (henceforth re- Mexico. Many others—Bolivia, Costa Rica, Honduras, Nic- ferred to simply as Latin America) does not have aragua, Panama, Peru—invest more than 4 percent of the infrastructure it needs or deserves given its in- GDP a year. Transport and wastewater are real challenges, come level. Infrastructure also falls short of what is but the region performs quite well in electricity and wa- needed to advance social integration and achieve ter. In fact, Latin America’s clean, sophisticated electricity Lhigher growth and prosperity. Moreover, the region’s in- sector could become a serious competitive advantage. frastructure does not correspond to the aspirations of its growing middle class. Second, the focus should be on the service gap, rather than on a notional, and largely hypothetical, investment Many argue that the solution is to spend more. With per- gap. To the question of, “how much is needed?” the re- haps the exception of Africa, Latin America does invest sponse should always be: “for what?” And the answer the least in infrastructure among developing regions as a should lie with countries’ aspirations of economic growth share of GDP—less than 3 percent compared with 4-8 per- and their social and environmental objectives, as well as cent elsewhere (table ES.1). So the story might seem sim- with their choices on the relative roles of infrastructure ple: the region underperforms on infrastructure and has to and other investments in achieving those aspirations. spend more to narrow its infrastructure “investment gap.” Third, the investment gap approach necessarily focus- But that story would not match the facts. es attention on the question of raising more resources. But closing the service gap should not—and, indeed, TABLE ES1: Latin America invests the least in cannot—be just about spending more. The service infrastructure among developing regions gap can be narrowed, if not closed, in two other ways: (public and private infrastructure investments, latest year available) by ensuring that spending (particularly of scarce pub- Region Percentage of GDP lic resources) is well targeted and that it is efficient. East Asia and the Pacific 7.7 This report has one main message: Latin America can Central Asia 4.0 dramatically narrow its infrastructure service gap by Latin America and the Caribbean 2.8 spending efficiently on the right things.It remains to Middle East and North Africa 6.9 be seen whether spending better will be sufficient for the South Asia 5.0 region to fully achieve what it aspires to. But there is suffi- Sub-Saharan Africa 1.9 cient evidence that spending better and focusing scarce Source: http://Infralatam.info; ADB 2017; own estimates. public resources on what matters would significantly nar- Note: No data was available for Eastern Europe. Applying these shares to 2014 row the service gap. GDP figures suggests Latin America accounts for about $180 billion out of total developing country infrastructure spending of about $1.5 trillion. The “spend better” message is also pragmatic. Most Latin American countries have limited fiscal space to increase public investments (total, not just infrastructure-related); First, the region’s infrastructure performance varies, both these have dropped to an average of about 3.4 percent across countries and sectors. The region invests little of GDP across the region. Historically, only about a third in infrastructure

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