Publish in Perspectives - Monday, August 1, 2016
The $5.5 billion Panama Canal expansion is an example of how development institutions can help fund very large and complex infrastructure projects without increasing public debt, the author points out. (Photo: World Bank)
Panama Canal expansion a smart route for boosting infrastructure in Latin America.
BY PHILIPPE H. LE HOUÉROU
Since it opened in 1914, the Panama Canal has been one of the world’s most important trade assets and a marvel of engineering. Its expansion has doubled the canal’s cargo capacity, adding a new lane and bigger locks that will shake up shipping routes and make seaborne trade less costly and more efficient.
Panama, already projected to be Latin America’s fastest-growing economy over the next five years, was the big winner when the expanded canal opened its locks on June 26. New port projects and related logistics hubs are in the works to attract global manufacturers and further enhance the country’s competitiveness.
In many ways the Panama Canal is unique: Its $5.5 billion mega makeover was funded by revenues from its tolls, together with a financing package from development banks, including the International Finance Corporation. The expansion is an example of how development institutions can help fund very large and complex infrastructure projects without increasing public debt. But what about the rest of the region?
Aging infrastructure hasn’t kept up with Latin America’s bustling urban centers. And it’s not just about congested ports and roads. Power plants and telecom networks that support connectivity are vital to the region's economic development and productivity. On average, Latin America invests 3 percent of its gross domestic product on infrastructure, or about $150 billion a year. It needs to at least double that to up to $300 billion to put Latin America on a path of sustainable growth to high income.
Government budgets are tight at a time when Latin America’s economic growth has stagnated. The growing public deficit in the region is reducing the space for government spending on infrastructure. According to the International Monetary Fund, Latin America’s deficit as a percentage of GDP has almost doubled in the past three years in large part due to a sharp drop in commodity prices.
The question is, where will the money for infrastructure investment come from? Part of the answer lies in finding new and better ways to promote private sector solutions.
This requires a commitment from the public sector to provide stable regulatory conditions and assure investors that the rules of the game will not change. Also important is the careful preparation of projects—from the engineering to the environmental and social considerations to the allocation of long-term financial risk. And finally, countries need to innovate and create platforms and instruments that can help tap into new funding sources, such as insurance companies, pension funds, and sovereign wealth funds.
MEXICO, BRAZIL, COLOMBIA EXAMPLES
Consider three interesting examples: In Mexico, a new electricity law has opened the country’s power sector to private participation. This includes a target of generating a third of the country’s electricity from clean sources by 2024. In March of this year, Mexico held its first long-term clean energy auction which resulted in contracts awarded to private sector companies with total expected investments of $2.6 billion by 2018. In addition to reducing carbon emissions, the new generation capacity will help lower electricity costs.
In Brazil, Aegea Saneamento, a water and wastewater services company, filled a fundamental public need without tapping public coffers. The company increased sewerage services in its concession areas from less than 30 percent in 2000 to close to 80 percent today, via private investment, including $80 million from IFC. Today it serves about 3.6 million people in over 40 municipalities, many in low-income regions of Northeast Brazil.
Colombia, which has been dogged for decades by an inadequate network of highways and roads, launched with IFC’s support a specialized finance institution, Financiera de Desarrollo Nacional, to mobilize funding from banks and institutional investors for critical infrastructure projects, including the Fourth Generation or 4G toll-road program. Under an innovative public-private partnership, the government is restoring and building over 7,000 kilometers of roads with an estimated capital expenditure investment of $24.4 billion.
International development banks can bring global knowledge and financing to help Latin America strengthen its infrastructure. In 2008, in the midst of the global financial crisis, IFC and four other development banks committed $2.3 billion in financing with no sovereign guarantees, to signal their confidence in the Panama Canal expansion. IFC provided financing under commercial terms. Our due diligence and environmental and social standards supported the Panama Canal Authority’s commitment to ensuring this complex project was carried out responsibly, and that impacts to the area’s natural resources were mitigated.
IFC’s support for the canal follows a history of financing trade infrastructure in Panama that began in the early 1990s. This included our financing to build the Manzanillo International Terminal on the Atlantic coast to establish a modern transshipment option for shipping lines, as well as the Panama Canal Railroad Company and the Corredor Sur toll road connecting Panama City and the airport.
When the expanded canal was inaugurated and a Neo-Panamax ship crossed the narrowest point in the Americas, we shared the pride of Panama’s people. We are optimistic that the continent can build on this opportunity.
Philippe H. Le Houérou is Executive Vice President and CEO of The World Bank’s International Finance Corporation (IFC). A shorter version was originally published in El Pais newspaper.
Republished with permission from The World Bank.