South America: spending more or spending better?

OVER the last year, Brazil’s already-struggling railway construction programme has endured a rough ride as political turbulence and a fiscal crisis have restrained government spending. However, these are not the only issues holding back expansion of the network. According to the World Bank, Brazil’s spending on infrastructure “barely covers depreciation” and government entities are sitting on funds allocated for investment that cannot be disbursed.

A new report by the bank on infrastructure spending in South America, which was launched in São Paulo last month, argues that the challenges facing rail investment stem largely from how money is spent, not necessarily how much.

The report states that South America and the Caribbean does not have the infrastructure it deserves given its income level, and the networks that exist today fall short of what is needed to advance social integration and achieve greater prosperity.

By international standards, spending on infrastructure as a share of GDP is extremely low at just 2.8%. This compares poorly with other developing regions such as East Asia and the Pacific (7.7%), the Middle East and North Africa (6.9%), and South Asia (5%). However, the report notes big variations within South America. The largest countries - Brazil and Argentina - score poorly, at 3% and 2.1% respectively, driving down the average, whereas others demonstrate much higher levels of spending. These include Peru (4.9%), Panama (5.3%) and Nicaragua (6%).

The report argues that simply increasing spending might not be a rational response to the infrastructure deficit and suggests governments need to focus on what it terms the “service gap,” rather than a “notional and largely hypothetical investment gap.” Infrastructure requirements, the World Bank contends, should be driven by countries’ aspirations for economic growth and their social and environmental objectives.

Spending efficiently

The investment gap focusses attention on the question of raising more resources, but the report stresses that closing the service gap cannot just be about increasing spending. Instead, it suggests that South American countries can dramatically narrow the service gap by spending efficiently on the right things. This is particularly important because most states in the region have limited fiscal space to raise public investment.
The report identifies several negative characteristics which frequently afflict infrastructure projects in the region. These include:

•  weak planning, project appraisal and preparation capacity, with a low level of investment effeciency
•  overly rigid or myopic budgeting
•  difficulties with the execution of capital budgets (especially in Brazil, where there is a chronic gap between committed and executed funds)
•  inefficient procurement processes, which contribute to poor budget execution and excessive costs,
•  unclear project sustainability, and
•  an uncompetitive construction industry.

The report recommends that South American governments should adopt national infrastructure plans that outline clear priorities based on identified service gaps. According to a blog post written last month by the World Bank’s country director for Brazil Mr Martin Raiser, Brazil has a multi-annual investment plan, but this is “insufficiently costed and prioritised against development needs and available resources.”

The report advocates shortlisting projects on the basis of objective criteria and taking a multi-year approach to project selection and budgeting. Brazil has multi-annual budgeting in principle, but in practice there is considerable uncertainty over the funding stability of multi-year projects.

The report also says budget rules should be applied to strengthen the implementation of projects rather than simply control spending.

Political meddling, indecision and expediency have severely hampered the delivery of major rail projects in Brazil, a situation exemplified by the farcical (and now abandoned) procurement of the Rio de Janeiro - São Paulo - Campinas high-speed line. A more carefully-targeted approach could well deliver much better value for money and more successful projects in a country which desperately needs improved rail infrastructure.