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The Rise of Public-Private-Partnership in Latin America

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BY DANIELA URIBE 8/10/2015

During the last two decades, Public-Private Partnerships (henceforth PPPs) have assumed an important role in bridging national infrastructure gaps in developing countries. Latin America and the Caribbean is no exception. According to the World Bank and the Inter-American Development Bank, regional investments in public infrastructure has lagged behind: whereas an annual investment in the transport sector equal to 5% of GDP is required to close the infrastructure gap, Latin America currently spends less than 2 percent  (The Economist, 2014). A combination of inadequate infrastructure and a lack of government commitment to improving it represents a key barrier to economic growth and an important constraint for human development. PPPs are emerging in a sustainable development arena as efficient models given the rising demand for a better provision of public services and physical infrastructure (WEF, 2014). In this context, there is significant potential for an expansion of the scope and number of PPPs in Latin America.

“Lack of government commitment to improving infrastructure represents an important constraint for human development.”

 

At this point, it may be helpful to to clarify what is meant by Public-Private Partnerships. There is not an internationally-accepted definition but, in essence, PPPs consists of a long term agreement between public and private sector to deliver services that are originally provided by the government in order to improve their quality and efficiency, and reallocate public resources into capital-lacking projects. (World Bank, 2014). In this light, a combination of private management and financing with public support and the sharing of risks and responsibilities becomes an innovative and alternative model to incentivise real efficiency gains in infrastructure. Particularly, in Latin America, the introduction of the PPP model  can arguably be linked to a number of successful projects which has contributed to a reduction of the infrastructure gap and higher rates of development.

Last April, the Multilateral Investment Fund (MIF) released the biannual report, ‘2014 Infrascope: Evaluating the environment for public-private partnerships (PPPs) in Latin America and the Caribbean’. The authors of the report present an index to evaluate the extent to which countries  are able to mobilise  private investments and carry out sustainable public-private partnerships in infrastructure. The Infrascope index comprises 19 indicators according to a country’s regulatory, institutional and financial conditions, and builds a ranking according to their performance in six key areas for specific sectors (EIU, 2014). In general, the findings show that most of the countries in the region have improved their ability to undertake PPPs. Chile, Brazil and Peru lead the ranking. Since the first edition of the MIF report in 2009, the average overall score has improved by almost 10 points (from 32.9 to 42.5) which suggests that Latin American governments have made efforts to improve their respective climates for private investment and strengthened their regulatory and institutional frameworks to support projects under this scheme.

“PPPs are emerging in a sustainable development arena as efficient models given the rising demand for a better provision of public services and physical infrastructure.”

Three key ideas can be drawn from this report: i) results shows that Chile remains as the leader of the region ii) regulatory and institutional improvements drive strong performances in Jamaica and Paraguay, and iii) select countries remain at the bottom of the ranking and recorded further declines in scores.

In the first place, Chile has demonstrated a strong PPP environment for a second consecutive time, achieving 76.6 out of 100 points. For years, successive Chilean governments have welcomed private participation in most of its economic sectors (Vittor, J. and Tim S., 2011). Helped by its well-structured investment evaluation system and improvements in the investment climate category and thanks to its success with PPPs, Chile has arguably become the regional leader in infrastructure. . Last year Chile presented its national infrastructure plan for the period 2014-2020 anticipating $9bn in new concession projects, including highways and airports (Lagorio, 2014) many of which, actively facilitates the implementation of PPPs.

“PPPs are emerging in a sustainable development arena as efficient models given the rising demand for a better provision of public services and physical infrastructure.”

Brazil and Peru, with 75.4 and 70.5 points, respectively, have also demonstrated huge improvements in business and political environments. Brazil is advancing rapidly on the top stop by prioritising investments at the subnational level to make PPPs more dynamic. The government has continued to develop its local capital markets as firms can issue local and foreign denominated bonds (Reuters, 2014; Vittor, J. and Tim S., 2011). Meanwhile, Peru  has strengthened capacity in the public sector to manage PPPs and increased the number of agreements implemented.. For instance, the Peruvian administration has developed a $5.7bn partnership contract for the capital’s first subway line in Lima  and, from 2011 to 2014, awarded nearly $11bn in PPPs (Quigley, 2014).

It is not surprising that in two years, Jamaica, one of the leading economies of the Caribbean region, has climbed five positions with the largest overall score increase of 14.1 points. Why? According to the Development Bank of Jamaica (DBJ), since 2009, they have developed more partnerships and facilitated over $1.1 billion in actual and projected investments in infrastructure, based on the implementation of specialised PPP units into their regulatory bodies. A joint effort with various multilateral partners has helped the quick building of robust PPPs and improved transparency in the bidding processes for public procurements (Collinder, 2015). Although this should enable more PPPs to move forward, it is necessary to supervise financing mechanisms to enhance the participation of private investors. Paraguay, meanwhile, has undertaken significant reform of the regulatory framework under which PPPs operate through the adoption of a new law for the promotion of investment in public infrastructure (Infobae, 2013).

“The new Latin America and Caribbean Infrascope report revealed a steady improvement in the region’s readiness for infrastructure PPPs”

 

The new Latin America and Caribbean Infrascope report revealed a steady improvement in the region’s readiness for infrastructure PPPs but there is still much to be done. The general agreement lies on the generation of long-term strategies which use the most appropriate skills of each party to rise “win-win” opportunities that help to build more inclusive societies. In that sense, Latin American governments can play a leading role by improving frameworks for Public Private Partnerships and thereby attract private sector funds to foster real efficiency gains and achieve higher standards of economic and social development.Further efforts are required to improve delivery of public services and to increase the access to infrastructures.

“During the last two decades, Public-Private Partnerships (henceforth PPPs) have assumed an important role in bridging national infrastructure gaps in developing countries.”

 

References:

Collinder, A.(2015, April 17) Jamaica gets a boost in PPP rankings, The Gleaner, available: http://jamaica-gleaner.com/article/business/20150417/jamaica-gets-boost-ppp-rankings

EIU (Economist Intelligence Unit) (2014) Evaluating the environment for public-private partnerships in Latin America and the Caribbean: The 2014 Infrascope. EIU, New York, NY, available: http://idbdocs.iadb.org/wsdocs/getDocument.aspx?DOCNUM=39560897

Infobae America (2013) “Paraguay: la cámara de disputados aprobó la ley de alianza público-privada”, available: http://www.infobae.com/2013/10/28/1519647-paraguay-la-camara-diputados-aprobo-la-ley-alianza-publico-privada

Lagorio, J. (2014, July 3) Chile presents US$28bn infrastructure master plan, BN Americas, available: http://www.bnamericas.com/news/infrastructure/chile-presents-us28bn-infrastructure-master-plan1

Reuters (2014, September 10) Financing for Brazil infrastructure projects hinges on BNDES-Fitch, available: http://www.reuters.com/article/2014/09/10/brazil-fitch-bndes-idUSL1N0RB2AS20140910

Quigley, J (2014, March 28) Peru awards rights to build $5.7 billion Lima subway line, Bloomberg Business, available: http://www.bloomberg.com/news/articles/2014-03-28/peru-awards-contract-to-build-5-7-billion-lima-subway-line

The Economist (2014, May 2014) The PPP: traffic jam, available: http://www.economist.com/news/americas/21602213-need-return-government-road-builder-ppp-traffic-jam

The World Economic Forum (2014, April 2014) Latin America Innovative Public-Private Partnerships. Report 2014, available: http://www3.weforum.org/docs/GAC/2014/WEF_GAC_LatinAmerica_InnovativePublicPrivatePartnerships_Report_2014.pdf

Vittor, J. and Tim S. (2011) PPPs and Latin America Infrastructure Markets: Brazil and Chile. Latin America, Law & Business Report, available: http://www.hoganlovells.com/files/Publication/ef6ff8d4-c4f0-4e0e-adf5-2e36ac1bbea1/Presentation/PublicationAttachment/882619d4-3efd-4f2d-ac28-5b7fa990fdf4/LALBR.pdf

World Bank (2014) Public-Private Partnership: How can PPPs help deliver better services? World Bank Group, Coursera

Daniela Uribe

is a BSc Economics student at Universidad del Pacifico, Peru and a former exchange student at King’s College London

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