# **<u>Recommendation 1: Latin America needs to spend more and better in infrastructure.</u>**

- _Latin America needs to spend ‘more’ in infrastructure_ . On average, countries in the region spend less than 2 percent of GDP in infrastructure, while 3 to 6 percent is needed to keep pace with other countries like China or Korea13. Regardless of the source of financing, infrastructure investment costs (including operation and maintenance costs) are ultimately borne by users or taxpayers. So, if infrastructure investment is to increase, users must cover a higher share of the costs. This requires changing the payment culture as well as protecting users who cannot afford to pay creating safety nets programs.

- _Latin America needs to spend ‘better’, including better project selection and much more emphasis on investments in maintenance._ Resources should be better allocated between investment and maintenance. Very little has been invested in maintenance, when the rates of returns there are enormous.  The temptation to build “white elephants” should be avoided; countries in LAC ought to conduct careful analysis of investment needs, eliminating biases towards investment in operation and maintenance of infrastructure. Much better selection of projects is needed, with units that provide careful analysis of the costs and benefits of projects.  New investments must focus on increasing productivity and competitiveness, though that does not need to be at the expense of social goals, since universal coverage of water, sanitation, and electricity could be achieved within ten years for less than 0.25 percent of GDP a year. Subsidies must be better targeted to those who need them. The most important concern when it comes to infrastructure investment in Latin America is project selection. The vast majority of countries lack the institutional set up to prioritize investment according to sound processes and cost/benefit criteria. Moreover, few countries have the institutions and technical skills to monitor the achievement of the outcomes sought by infrastructure projects. In summary, in order to increase the quality of their infrastructure, Latin American countries need to set up institutions capable of conducting adequate planning, cost benefit analysis and monitoring and evaluation.

- _Latin America needs to leverage its scarce public funds through increased use of PublicPrivate-Partnerships (PPPs)._ The private financing of infrastructure projects, along with its better know how and faster turn around are essential to bridge the large financial needs and improved efficiency of service delivery. At the same a better regulatory and oversight framework, as well as improved communications and transparency of processes, are needed, to avoid the problems and conflicts of the past, that led to a generic backlash against private participation. And always accounting for the possible adverse social effects, through social tariffs and connection, to the service, subsidy programs when applicable.

As an illustration of a cost/benefit analysis we present two cases prepared for World Bank investment loans. The rates of return and net present values obtained from these investments are

> 13 A recent World Bank study “Argentina: Infrastructure for Growth and Poverty Alleviation” indicates that Argentina would need to invest between 2.5 to 4% of GDP to cover its investment needs in the next 5 years.

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