Innovation in Urban Infrastructure Financing in Latin America

“Cities, not countries, are the key to tomorrow’s economies,” according to David Painter, former Director of Housing and Urban Programs at USAID.  Cities are not only growing in size, they represent an ever greater share of the world’s economy.  In developing countries, where the vast majority of global urban growth is occurring, increasing population and infrastructure deficits are at odds with the ability of local governments to provide livable communities and economic opportunity.  Policymakers need to address this issue with informed decisions and investments that target urban infrastructure and service improvements, says Painter.

On May 6, in collaboration with the USAID Alumni Association (UAA) and the International Housing Coalition (IHC), the Wilson Center’s Urban Sustainability Laboratory, Latin American Program and Mexico Institute hosted a panel discussion about innovation in urban infrastructure financing and efforts toward making Latin American cities more creditworthy.

Expansion in Latin American cities has largely been fueled by natural resources and the agricultural sector, but the struggle to meet the demand for urban services acts as a constraint on long-term development in the region.  David Painter detailed how investment in infrastructure for the regional integration of production, services, and human capital has been used to advance urban development and economic growth in Asia.  He argued for Latin American cities to follow this example by diversifying and increasing infrastructure financing through the tapping of local currency capital markets and institutional investors such as domestic pension funds.

Pavel Kochanov, Senior Municipal Finance Specialist at the International Finance Corporation, further explored options for diversified infrastructure financing.  Focusing on smaller municipalities rather than large cities, Kochanov sees inter-municipal cooperation and decentralized governance structures as important tools for growth.  By utilizing pooled financing, developing countries can overcome hurdles facing smaller cities that are trying to access long term financing from capital markets.

Fernando Gama, Senior Vice President of Evensen Dodge International, Inc. described how Mexico introduced the use of pooled financing, along with bonds and other financial vehicles, to link local governments to the Mexican capital market.  This allowed long-term savings to be safely channeled into infrastructure development.  In Mexico, this strategy was implemented by identifying secure revenue streams that could be linked to long term borrowing after first establishing an enabling legal framework. 

Achieving creditworthiness can be a significant obstacle to cities mobilizing capital for urban infrastructure.  Cities in developing countries struggle because improving creditworthiness requires difficult choices to put their financial house in order.  David C. Jones, former World Bank Financial Advisor for Public Utilities, Water Supply and Urban Development, described the financial circuits for distribution of resources to provision of local government services and capital investments as well as the need for improvement in cities’ public financial accounting.

David Grossman, Director of International Programs at the International City/County Management Association (ICMA), highlighted the success of peer-to-peer assistance in improving the creditworthiness of local governments in Mexico, Costa Rica and Argentina. The ICMA philosophy revolves around the idea that cities learn best from other cities. The exchange of ideas, resources, and experiences can help struggling municipalities institutionalize innovative practices.

Strategies for urban infrastructure financing such as the mobilization of long term private financing, public-private partnerships, and stimulating creditworthiness require strong local institutions to ensure sustainability.  With a little innovation, and some fundamental changes to intergovernmental financial relationships, Latin American policymakers can advance a new urban dynamic that will play a central role in realizing the broader development goals of ending extreme poverty and increasing shared prosperity.

Drafted by Michael Schahfer