3rd Annual Latin American Leadership Forum: Agenda
"Projects, Performance and Finance for Strategic Competitiveness"

Ritz Carlton
Washington, DC - March 22-23, 2005

Scaling up Support for Infrastructure

Good morning Ladies and Gentlemen.

Introduction

It is a great pleasure for me to be here today to support this forum for infrastructure investments in Latin America, a region that faces an acute shortage of private and public financing for projects. I would like to share a few thoughts today on how the World Bank Group is increasing its engagement in infrastructure in Latin America and, in particular, how MIGA—the arm of the Group that is responsible for catalyzing foreign direct investment—can play a role in providing support to investors and sponsors of infrastructure projects.

Importance of Infrastructure

The World Bank has renewed its focus on infrastructure development in recent years by increasingly recognizing the importance that infrastructure has in contributing to growth and thereby reducing poverty. Infrastructure does this by opening up opportunities for new businesses to develop; facilitates trade and expansion for existing businesses; and improves the economic welfare of people. But increasing access to infrastructure also leads to specific social outcomes that support the World Bank's development goals. For example, access to drinking water reduces the probability of child mortality by 55%.

The need in Latin America is therefore clear: it has been estimated that the lack of investment in infrastructure has reduced long-term growth by 1-3 percent, and, particularly in rural regions, lack of infrastructure, such as electricity and water, exacerbates the wide income disparities that already exist.

Infrastructure Financing

Let me briefly place in context where we are in terms of infrastructure investment in the region. It is well-known that FDI flows to emerging markets have declined since 1999, due to a host of factors that include depressed growth, conflict and financial crises. While, these levels are now starting to recover, it is in infrastructure where the decline in spending in Latin America has been most felt. And it has declined in all contributors of capital.

First, over the past two decades, the public sector has reduced its spending in infrastructure due to fiscal adjustment programs that many countries were implementing and due to anticipated increases in private sector participation. Some sources suggest that public investment in infrastructure has fallen to less than 1% of GDP in most Latin American countries. And it is equally estimated that these countries need to spend at least 5-6% of GDP to service their infrastructure needs.

Spending by multilateral organizations in infrastructure also declined for much of the 1990s, also in the belief that private investments would pick up the slack. However, this did not occur. Indeed, from the boom years of the privatizations of the 1980s and 1990s, private investment in infrastructure into the region has dwindled from a high of $71bn in 1998 to around $16bn last year. And it is in international investment in infrastructure that has seen the steepest decline. Indeed the region now has the lowest international investment of all regions globally, as a share to gross capital formation.

Scaling up Infrastructure Support

There are many factors that continue to dissuade foreign investors, not the least of which include a backlash against the privatizations of the past, weak institutions and regulatory frameworks and currency mismatches between investments and project revenues.

But the mobilization of private funds can and must play an important part in funding Latin America's infrastructure needs as they cannot be funded through the public budget. And the nature and demands of the private sector have changed. Smaller, regional players are increasingly active, while the larger US and European players, many of whom have been badly burned, are more reluctant investors. The question is how can the private sector be persuaded that the Latin American region represents a profitable investment opportunity?

First and foremost, the governments must lead the way in restoring investor confidence. Affirming the role of the private sector and persuading their citizens of the need for that role, increasing transparency and opening up new opportunities are key to this. For the private sector, a true understanding of the risks, the fair distribution of them, and the acknowledgement of the sensitivity of the sectors they operate in are paramount. For any project, the starting point must be its economic viability—that is, the provision of essential services at an affordable and profitable basis. Good documentation does not offset weak demand, which increases pressures to renege on commitments, such as take or pay contracts or commitments to raise rates.

The interaction between the private and public sectors is where the World Bank Group can and does play an important role. Key to this role is enabling the fair distribution of risks and returns to investors and host countries, not just providing financing. That is, mitigating the regulatory, currency, payment, sub-sovereign and other risks that investors face.

And the World Bank Group has a number of risk mitigation products that investors can use, including MIGA's political risk guarantees. For example, MIGA's Breach of Contract instrument, as well as the World Bank's Partial Risk Guarantee, can mitigate regulatory risk and performance risk, such as tariff commitments, non-payment by government etc.

Financial arrangements, such as public-private partnerships have frequently been cited as another way to level the playing field of risks between the private and public sectors. And we support and encourage the development of such types of investment. By way of example, the World Bank Group has been working closely with Brazil as it develops its PPP framework. And at MIGA, in what we hope is a sign of things to come, we are working with local investors from Brazil looking to invest elsewhere in the region, which may make up some of the gap left by traditional US and European investors.
With respect to devaluation risk, the World Bank Group, in conjunction with external partners, is looking at solutions, such as the World Bank/IFC municipal fund with aims to support projects at the sub-sovereign level, and local currency guarantee instruments.

MIGA's role within the World Bank Group's efforts to increase its support for infrastructure is fundamental. Our product offering has never been more relevant for today's investment environment. And we are one of the few organizations that can mitigate sub-sovereign risk, especially important for water projects. But just as important, we help the World Bank by bringing in the private sector. Investor demands have changed and we recognize the need for all parts of the World Bank Group to work closely together to come up with solutions that the private investor needs.

In conclusion, profitable, developmentally sound investment opportunities do exist in countries that need real investments, real jobs, and real incomes for people. A continuing effort by development organizations, the private sector and the host countries to effectively mitigate the risks and create a sound environment in which to do business is critical if the overall amount and distribution of FDI is to be increased, and to encourage investors not just to invest, but to invest and to stay.
I would like to thank you all for this opportunity to be here today and very much look forward to working with you to promote FDI into the region.

Thank you very much for your attention.