Investments in Crossborder Infrastructure: Lessons from Latin America

With the launch of Mercosur and Andean Community, South American countries have realized that intra-regional trade will not significantly mature until and unless they strengthen the region's physical infrastructure, particularly the crossborder infrastructure. In October 2000, 12 South American countries launched an unprecedented multinational, multisectoral, and multidisciplinary initiative whose main objective is to develop the region's infrastructure.²⁶ Supported by the Inter-American Development Bank (IDB), the Corporation Addina de Fomento (CAF), and the Financial Fund for the Development of the River Plata Basin (FONPLATA), the Initiative for the Integration of Regional Infrastructure in South America (IIRSA) pursues regional integration based on a hub strategy. It seeks to promote the development of transport, energy, and telecommunications infrastructure from a regional viewpoint, with the goal of the physical integration of the twelve South American countries and the achievement of an equitable and sustainable territorial development pattern. IIRSA has carried out joint work with the participating countries and multilateral institutions, focusing its efforts on three main areas: Building of a Strategic Vision for the Physical Integration of South America, Integration and Development Hubs, and Sectoral Integration Processes.

6.1.1 Integration and Development Hubs

Integration and Development Hubs, as outlined in IIRSA, are multinational territories involving natural spaces, human settlements, production areas, and current trade flow. South American countries have identified 10 initial hubs, namely, (i) Andean hub, (ii) South Andean hub, (iii) Capricon hub, (iv) Paraguay–Paraná Waterway Hub, (v) Amazon hub, (vi) Guianese Shield Hub, (vii) Southern hub, (viii) Central Interoceanic Hub, (ix) Mercosur–Chile Hub, and (x) Peru–Brazil–Bolivia Hub, for development of infrastructure and regional integration.

The rationale for IIRSA therefore goes beyond the need for infrastructure development. According to Moreira (2008), IIRSA is part of a broader case for South-South integration as a tool to promote higher productivity, equity, and growth. Infrastructure investments in IIRSA will create new opportunities for sustainable development for the population of these territories. This crossborder development and planning of South American territory aims to facilitate access to areas with a high potential productivity, which are currently either isolated or underutilized due to the deficient provision of basic transport, energy, or telecommunications services.

6.1.2 Project Portfolios

The 12 countries involved in IIRSA have agreed to 506 priority infrastructure projects with an investment of US$68.27 billion, of which US$6.4 billion, comprising 31 projects, will be invested in 2010 (Table 11 [ PDF 18.3KB | 1 page ]). The planning process was conducted from 2003 to 2006, and based on consensus, the Mercosur–Chile Hub and the Peru–Brazil–Bolivia Hub together will share half of the total estimated investment. Investments in remaining hubs have been less than 10% of estimated total investment in IIRSA. Except for the Southern Andean hub, where the technical works have not yet been developed yet in the framework of IIRSA, the rest of the IIRSA hubs are covered in the first phase of this project. According to the IIRSA (2007), investment in crossborder transportation appears to be 55% (about US$38 billion), and the rest is shared by energy pipelines and telecommunications infrastructure.

6.1.3 Sources of Financing and Implementation

Implementation of 31 projects, falling under eight IIRSA hubs in South America, is also moving fast. As shown in Table 12 [ PDF 20.1KB | 1 page ], about US$21.19 billion has already been sourced during 2003–2006 for financing these projects, including 14 that are being executed via PPP (IDB, 2006).

Table 12 also indicates that the majority of the infrastructure investments have come from governments of South America. They have agreed to invest about US$13.20 billion (62.29%), followed by the private sector (US$4.41 billion), sharing 20.79% of total investment. The rest has been sourced from multilateral funding institutions like IDB (US$1.67 billion), CAF (US$1.54 billion), and FONPLATA (US$0.17 billion). Proposed private sector investment in South America is almost four times higher than that of Asia, where private sector investment in crossborder infrastructure via PPPs was about US$5 billion during the last decade and a half.

6.1.4 Public Private Partnerships in IIRSA

IIRSA implies a long-term effort and therefore the countries have attached a high priority to the search for financial mechanisms and instruments suited for the purpose of developing IIRSA projects. In general, IIRSA has pursued three lines of action: the adoption of PPPs, the use of public investment in the budget (which is termed as fiscal margins or room), and design of financial instruments tailored to IIRSA's need.

The PPP has proved useful to all the participants of IIRSA (Carciofi 2008). Countries in IIRSA have been adopting a wide variety of approaches to private sector involvement. For example, Chile and Peru have had some experiences in PPPs, Brazil has passed novel legislation on PPP to support projects that could not otherwise be financed by its budget, and Argentina, which took a lead in PPPs in 1990s, has been experimenting with newer forms to encourage private sector participation in infrastructure projects. As the countries adopt PPP models for the development of their infrastructure, both public and private sectors gain better insights into this type of contract scheme. This broadened knowledge has in turn helped South American countries to pursue crossborder integration projects under IIRSA, which are more complex because of their crossborder implications.

6.1.5 Lessons for Asia

The experiences of Europe and Latin America, where the presence of crossborder infrastructure is comparatively high, and to a lesser extent, Africa, where the development of crossborder infrastructure has taken a new shape, suggest that regional cooperation has been promoting greater prosperity and stability for participating countries. A major success determinant is their ability to build regional initiatives that are based on a shared strategic vision, as shown in the Initiative for the Integration of Regional Infrastructure in South America (IIRSA) of Latin America (Carciofi 2008).²⁷

The IIRSA has been guided by two principles—open regionalism and PPP, which offer useful lessons for crossborder infrastructure development in Asia. Asia is considered a fully integrated geo-economic territory, in which it is necessary to minimize internal barriers to trade and bottlenecks in infrastructure as well as in the regulation and operation systems that support productive regional activities. While trade liberalization facilitates the identification of highly competitive productive sectors at the global level, viewing Asia as a single economy also makes it possible to retain and distribute more benefits from trade in the region and to protect the regional economy from global market fluctuations.

As regards PPPs, the region's development challenges call for shared leadership and coordination between governments (at their different levels) and the private business sector, including the promotion of strategic PPPs for funding investment projects, and consultations and cooperation for developing an appropriate regulatory environment to ensure significant participation of the private sector in regional development and integration initiatives. This notion of shared leadership sets the basis for permanent dialogue between governments and businesspersons to support the planning and guiding function of the former, and facilitates project funding, execution, and operation responsibilities on behalf of the latter.

The idea of development as a shared responsibility of governments and the business sector promotes the design of innovative funding, execution, and operation formulae for the so-called “structuring” projects (those that make other projects feasible), sharing risks and benefits and coordinating each party's actions.

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