IDB preps new vision for LAC infra investment

As the globe gears up for a historic post-pandemic, the region’s most important multilateral lender, IDB, is working to promote a shift in infrastructure spending to close the infrastructure funding gap, which has widened in recent years.

A key part of this will be carried out under the IDB’s Vision 2025 program, the flagship project of president Mauricio Claver Carone (pictured).

Claver Carone, who assumed the IDB presidency in October, dubbed the program "a blueprint for reinvesting in the region” in a May 4 op-ed, calling for ramped up investment in five areas: integration and supply chains, digitization, gender equality, small and midsize businesses and climate change.  

In an interview with BNamericas, Tomás Serebrisky, principal economic advisor for infrastructure, development finance and regulation at the IDB, noted that the Vision 2025 goals are just one aspect of the real spend needed in Latin America and the Caribbean (LAC). 

To that end, Serebrisky said his team was currently working to develop a new comprehensive estimate of regionwide spending needed to extend roads, water, sanitation, electricity and internet to every one of LAC’s roughly 660mn residents. 

“The region would need 3.5% of GDP per year at least until 2030 to provide basic access needs, that is to comply with sustainable development goals, and to increase connectivity, road connectivity, improve airports, ports,” Serebrisky told BNamericas, although he stressed that the estimate is still highly preliminary and low-end.

“This is a beginning of the study… the first stone in the construction,” he said, “We will build this stone by stone, or step by step, [starting with] what we need to do to fulfill the basic infrastructure needs, anchored in the provision of universal services,” he added.

The region made average infrastructure spending equivalent to just 2.8% of GDP between 2008 and 2017, according to the IDB book, which Serebrisky recently co-authored, entitled “From Structures To Services: The Path to Better Infrastructure in Latin America and the Caribbean”, which can be seen at this link.

This is well below the levels seen in other emerging economies: 5.7% in East Asia and the Pacific, 4.8% in the Middle East and North Africa, and 4.3% in South Asia.

Making matters worse, the average for Latin America and the Caribbean has slipped closer to 2% in recent years, and while Serebrisky said that IDB does not yet have a full dataset on 2020 spending, long-term infrastructure spending is often the first item crossed off the list for funding when met with major crises such as the COVID-19 pandemic. 

With a combined regional GDP of US$4.41tn in 2020, according to the IMF, Serebrisky’s preliminary estimate would mean meeting basic infrastructure needs should require US$154bn annually at 3.5% of GDP, which the analyst recognizes is an enormous challenge for sovereigns, multilaterals, sustainable investors and the region’s development banks.

Source: IDB

“We’re close in the case of electricity, sorry, saying close, we still have 20mn people without access, and everybody’s relevant, so 20mn is a lot of people,” said Serebrisky, pointing out that access to power is particularly challenging in Honduras and Haiti.

“But we’re still way behind in water and sanitation, in particular in sanitation, where hundreds of millions of people still don’t have safe sanitation,” he said, adding that digitization is another area in which the region is lagging, although perhaps it is the most accelerated of the infrastructure priorities due to the pandemic.

The IDB book further suggests the total required spending on infrastructure to extend services and meet all sustainability goals and to catch up with peers after decades of lag, is likely closer to between 4% and 7% of GDP in annual spending.

With the ongoing study, Serebrisky said, “We’re working to add sustainability dimensions to that estimate, and that would increase in a significant way that number [3.5%].”

“That number doesn’t include some of the characteristics of sustainability,” he said. “For instance, it doesn’t include the rollout of electromobility for public transportation, that is, converting all the fleet of public buses to electric buses.”

“It doesn’t include the flood protection, which is required more and more to have more resilient infrastructure,” he added, noting the region’s high exposure to climate change impacts.

Vision 2025

Claver Carone, meanwhile, is actively promoting the Vision 2025 plan and hopes to expand annual lending at the multilateral.

The IDB president said that after the plan’s board approval in March, a bipartisan group of US senators introduced a bill last month to support a capital increase that would help boost annual IDB lending to US$20bn from the current US$12bn.

And even this level would be beneath the US$25bn per annum Claver Carone sees as necessary “just to address pre-existing conditions like poverty, inequality and violence, which all fuel migration.”

Increasingly, leaders in and outside the region realize we need to do more,” said Claver Carone. “But we must also do much more with the private sector.” 

The president said that 40 of the world’s leading companies have now pledged to work with the IDB to increase investment in the region, and more are looking to partner since the announcement.  

Claver Carone added that the economic and social toll on Latin America and the Caribbean is gaining granularity, with 31mn having lost full-time jobs in the region and 44mn have fallen into poverty, adding that COVID-19 continues to maul the region, which just saw its deadliest week since the pandemic began, despite vaccination efforts. 

“Neither the IDB nor its members have faced a challenge on this scale, but the pandemic has also created opportunities for the region,” he said. 

“The mad scramble for ventilators and other trade disruptions encouraged companies worldwide to relocate their supply chains,” Claver Carone wrote. “That opens a once-in-a-generation opportunity, amplified by the Suez Canal incident, for the region to attract foreign direct investment.” 

In this regard, the IDB chief cited a Gartner study showing that 33% of 260 companies surveyed have already moved sourcing and manufacturing activities out of China or plan to do so by 2023.