GLOBAL – Latin American countries should reform "burdensome" regulations if they wish to attract pension funds to invest in the region's infrastructure projects, the Inter-American Development Bank (IDB) has said.
In a recently published report, the IDB noted that the region's governments needed to address how best to attract private capital to large infrastructure projects vital to future economic growth.
In its report, 'Rethinking Reforms – How Latin America and the Caribbean Can Escape Suppressed World Growth', it urged the region to develop a stronger institutional framework to attract private capital to the projects.
"The lack of technically competent regulators and the weak enforcement of sector laws and concession contracts are factors that increase the risk profile of projects to levels unacceptable to pension funds and other institutional long-term investors," it said.
IDB added that countries needed to prepare a pipeline of proposed infrastructure projects, which would allow for the establishment of private firms that could in turn attract private investment to fund construction.
"Countries in the region should also review pension fund investment allocation rules for infrastructure investments," it added, noting that many of the region's pension systems had a high bias towards local government debt, compared with the higher allocation to infrastructure in countries such as Australia and Canada.
It said the successful use of public-private partnerships (PPP) in Chile and Brazil could serve as a model for future capital investment, but insisted countries had to "intensify" efforts to attract interest if they hoped to continue with high economic growth rates.
"Increasing pension savings would promote long-term financing in domestic currency, the type of funding required for infrastructure investment," the report continued.
"Total assets under management by pension funds in Latin America and the Caribbean are growing in many countries, but there is room for improvement by increasing coverage ratios – i.e. reducing informality – and lowering participation costs."
However, it stressed that pension reforms would not automatically increase infrastructure investment.
"Efforts to increase savings should be complemented by mechanisms to enable domestic and external savings to flow into infrastructure investments," it said.
"Even if the region could miraculously increase savings overnight, presently, the red tape, outdated regulatory frameworks and low bureaucratic capabilities are constraints that prevent increases in infrastructure investment."