By Lucien Chauvin From Emerging Markets

Huge. Massive. Vast. Pick any of these words and it would more than adequately describe the need for infrastructure in Latin America and the Caribbean. But having failed to take advantage of the boom years to finance major projects, governments now need to look to the private sector to fill the gap.

New financial mechanisms are sprouting up that could help Latin American economies marshal the resources needed to address the gaping hole in infrastructure investment across the continent, leading experts have told Emerging Markets.

The level of investment required varies from 3% to 6% of GDP annually, depending on the organisation carrying out the research — but whatever the precise figure, the needs in Latin America and the Caribbean are clearly enormous.

It is a particularly daunting bill given that regional GDP stands at $5.7tr, according to World Bank data. Two projects alone — the Chinese-led new transoceanic canal in Nicaragua and a train linking Brazil to the Pacific Ocean through Peru — have a combined cost of $50bn.

Infrastructure is required across the transport sector, in all facets of energy, in water and sanitation, and in the social sectors, especially schools and hospitals. Countries did not invest to their potential during the boom years and now face greater constraints.

“The needs are so significant that there is space for different partners to work together to maximise benefits,” said Jorge Familiar, World Bank VP for Latin America and the Caribbean.

The two newest mass transit systems planned in South America, the metros in Lima, Peru’s capital, and Quito, Ecuador’s capital, have mobilised support from all the leading multilaterals working in the region, as well as bilateral resources.

In the case of the Lima Metro, the private sector is also involved through investment from private pension funds.

Familiar said that governments recognised resources were tighter in the difficult economic environment, so there would be a need to find resources from other sources.

“Public private partnerships will be key and transactions must be structured in such a way that risk is adequately considered both from a financial point of view but also from a project-specific point of view,” he said.

Work to be done

Private investment in infrastructure projects in developing countries worldwide in the first half of 2014 was $51.2bn, 23% more than the same period in 2013, according to the World Bank’s Private Participation in Infrastructure Database.

Latin America and the Caribbean led the list, with Brazil way out in front. It attracted $29.2bn of the total. Although that is a significant amount of money, it is dwarfed by the roughly $550bn for the governments’ listed tenders between 2015 and 2018 for infrastructure in eight categories, from airports to urban mobility.

Involvement of the private sector could also come through the markets, but work needs to be done. Paul Tregidgo, vice chairman, debt capital markets at Credit Suisse, said one of the challenges of the bond market was to adapt traditional bond structures of bullet maturities to accommodate project financing.

“We are beginning to see more structures in the bond market which adapt to accommodate cashflows of projects, grace periods, and completion risk,” he said.

“The bond markets have to engage, understand the risks, price them properly and develop an investor base for these projects.

“The need for infrastructure financing is vast and the multilaterals, governments, export credit agencies alone cannot handle it. All the actors need to be on the stage.”

For more on this story go to: http://www.emergingmarkets.org/Article/3440713/LatAm-must-look-to-private-finance-to-fill-yawning-infrastructure-gap.html