Meeting The Infrastructure Challenge In Lac

The World Development Report 1994 (New York: Oxford University Press) demonstrates that infrastructure can support economic growth, reduce poverty, and make development environmentally sustainable. The economic returns on infrastructure investment and rehabilitation are high. In Latin America and the Caribbean (LAC), economic growth has, in fact, always been underpinned by the development of infrastructure. When the debt crisis of the 1980s forced the region’s countries to slash both current and capital funding, infrastructure suffered disproportionately. The result was physical deterioration of infrastructure, compounded by inefficient delivery of services. This has significantly eroded the region’s chances of competing in global markets. At the same time, pollution of air and water has reached crisis dimensions in major urban areas such as Mexico City, São Paulo, and Santiago. Traffic congestion in large cities has cut urban productivity. And the region’s extremely skewed income distribution has limited access to essential services for those who most need it—the poor. Inefficient public sector monopolies are widely blamed for the ineffective infrastructure services provision. A growing number of countries are now demanding alternatives, especially options involving the private sector. Three converging forces have created an opportunity to reverse the trend and accelerate the development of infrastructure. First, innovations in technology have combined with the regulation of markets to provide alternatives to inefficient public monopolies. Second, there is increasing acceptance of a wider role for the private sector in infrastructure. And third, there is greater concern about poverty reduction and environmental sustainability. In order to raise operating efficiency and catch up with the investment backlog, infrastructure funding would have to rise sharply. Annual requirements in the LAC region between 1991 and 2000 are estimated at $24 billion for power, $14 billion for transport, $12 billion for water supply and sewerage, and $10 billion for telecommunications. The sum of those investments, $60 billion, represents about 4.4 percent of regional gross domestic product (GDP) in 1993. This level of investment appears feasible on macroeconomic grounds, given that capital expenditure on infrastructure was 4.1 percent of regional GDP in the 1970s and 3.0 percent in the 1980s. The estimated investments could undoubtedly be reduced through greater private sector participation. The private sector generally makes better use of existing capacity by emphasizing preventive maintenance and rehabilitation, areas in which the public sector has been notoriously weak. The LAC infrastructure report proposes to expand sharply World Bank assistance for raising operating and investment efficiency in the infrastructure sectors; to improve services for the poor; to accelerate the effort to create the regulatory framework and policies that will enable the private sector to operate and invest; to coordinate more closely the push for more infrastructure financing with the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), the Inter-American Development Bank (IDB), and other public and private financial institutions; and to substantially increase direct infrastructure lending where warranted. The higher levels of infrastructure investment should be paralleled by the systematic development of domestic capital markets to increase the volume and improve the terms of domestic savings