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- Latin America and the Caribbean finance ministries can deepen synergies with the private sector to boost investment and resilience.
Highlights
- Strong fiscal frameworks are essential to attract private investment, as they improve the investment environment and reduce risk.
- Ministries of finance can unlock private capital by integrating climate risks into public investment, using fiscal incentives, strengthening sustainable finance systems, and better structuring public-private partnerships.
- These measures work together as a system: stronger fiscal architecture signals reliability to markets, lowers uncertainty, and helps mobilise private investment for resilient and sustainable growth.
By Gerardo Reyes -Tagle, Ana Daniela Torres Pelaez
Discussions on sustainable finance often focus on specific instruments — thematic bonds, blended finance, insurance solutions. For investors, however, the more fundamental question is whether a government has the institutions, instruments, and fiscal credibility to be a reliable long-term partner. The answer starts with fiscal strength.
Solid fiscal frameworks reduce uncertainty and directly influence risk pricing, capital allocation, and long-term returns. Without them, even the most sophisticated instruments rarely scale.
Such fiscal frameworks are particularly critical as high debt levels are forcing governments In Latin America and the Caribbean (LAC) to tighten budgets and scale back investment. Between 2014 and 2024, average public investment in the region declined by more than 30 percent, according to the Inter-American Development Bank (IDB). This contraction widens existing infrastructure gaps and makes it harder for countries to meet development needs. The World Bank estimates that closing these gaps would require investment of around 4.5 percent of GDP per year in developing countries.
In LAC, ministries of finance have made significant progress on that foundation: integrating disaster risks into fiscal frameworks, developing sustainable debt architectures, and designing mechanisms to channel private capital toward resilient infrastructure.
However, there is still scope to strengthen fiscal management to further unlock private investment, as outlined in five opportunities in the next section.
- Position resilient public investment management as a market signal
To attract more private investment, governments need to ensure such investments will be feasible both financially and for society.
They can do that by incorporating climate and disaster risk criteria into their public investment systems. A project that ignores natural hazards may appear profitable initially, but if it collapses under a foreseeable event, it generates fiscal losses and higher reconstruction costs.
That information works as an important market signal to attract private capital, because it helps investors manage risks better. Several LAC countries have begun incorporating such criteria in their public investment systems.
Panama stands out: since 2022 it has required identification of climate threats in all public projects and, since 2024, has incorporated the social price of carbon into investment appraisal. Costa Rica is advancing similarly, embedding climate risk and resilience analysis into its National Public Investment System and using this information both to prioritize investments and to support sovereign green bond issuance.
For the private sector, a pipeline of resilient, well-assessed, and fiscally-backed projects is what makes public-private partnerships bankable.
- Consider fiscal incentives and public-private collaboration to enhance disaster risk management
Fiscal incentives are among the most direct instruments a ministry of finance has at its disposal to align private behavior with fiscal resilience objectives. Well designed, they attract investment, drive adoption of resilient technologies, and reduce the country’s fiscal exposure to disasters. When private assets are adequately protected, reconstruction costs fall, activity recovers faster, and fiscal space is preserved.
The region already has concrete experiences. Colombia has combined government subsidies with credit lines for resilient housing reinforcement among vulnerable populations through its Resilient and Inclusive Housing Project.
In Peru, the Obras por Impuestos mechanism — regulated by the Ministry of Finance and executed by PROINVERSIÓN — allows the private sector to prepay income tax to finance public investment projects prioritized by the country, including resilient infrastructure rehabilitation, in exchange for certificates usable against future tax obligations. It converts existing fiscal resources into resilient investments without committing additional budget.
At the regional level, the CCRIF SPC — a multi-state parametric fund for the Caribbean and Central America — has made 82 disbursements totaling approximately $483 million, all within 14 days of the event (CCRIF SPC, 2025), illustrating the effectiveness of collective risk transfer when national fiscal frameworks support it.
- Incorporate contingent disaster liabilities into the sovereign balance sheet
In conventional debt sustainability analyses, government liabilities from natural disasters often appear as “tail risks” in the appendix rather than as central variables of the fiscal trajectory. That is changing, with direct consequences for how markets price the region’s sovereign debt.
The International Monetary Fund and the World Bank have advanced in incorporating climate risk into debt sustainability frameworks. In the Caribbean, 324 of the 511 disasters recorded in small states since 1950 have occurred in the region; fiscal deficits widened in seven of 12 countries following major events, and debt-to-GDP ratios rose steadily thereafter (Otker and Loyola, 2018).
For ministries of finance, this implies a clear technical imperative: integrating climate and disaster-related contingent liabilities into medium-term fiscal frameworks, annual budgets, and debt sustainability analyses.
This requires quantifying exposure through expected loss models and climate scenarios, provisioning risk through contingency reserves or contingent credit lines, and transferring part of the risk to the private sector through instruments such as parametric insurance, catastrophe bonds, and regional risk pools like the Caribbean Catastrophe Risk Insurance Facility.
The IDB’s regional platform for ministries of finance, economy and treasury from 26 member countries supports this integration, including methodologies to assess and communicate these risks to the markets.
- Build the architecture of sovereign sustainable finance
Capital markets read governments beyond deficit or debt: they look at the coherence between stated policies, executed spending, and issued debt instruments.
Ministries of finance that have built a comprehensive sovereign sustainable finance architecture — with green taxonomies, climate expenditure classifiers, sovereign sustainable bond frameworks, and verifiable impact reports — gain access to a broader investor base and, in some cases, to relatively lower capital costs.
Chile is a regional reference: since 2019, it has issued sovereign green, social, and sustainable bonds, developed a green tagging system for public spending, and progressively built the institutional ecosystem that makes those instruments credible to international markets. Other countries in the region are at various stages of this process.
For investors, the distinction between a government with a solid sustainable fiscal architecture and one issuing green instruments without that institutional base is increasingly relevant for portfolio allocation.
- Empower ministries of finance to enable public-private partnerships for resilient infrastructure
Public-private partnerships (PPPs) for infrastructure are, in theory, the ideal mechanism to close investment gaps. In practice, many PPPs in LAC fail to close — or close under conditions that are not sustainable for either party.
A structural reason frequently underestimated is the distribution of disaster risk in contracts. When force majeure clauses exempt the private partner from all liability for climate or seismic events, fiscal risk concentrates entirely on the government, and the concessionaire has no incentive to invest in resilient design.
Reforming that allocation — so the private operator assumes the share corresponding to foreseeable hazards and contracts catastrophe insurance — is an underused fiscal lever. Chile has institutionalised this approach through Decree No. 956, transforming what was typically an implicit State obligation into an explicit contractual requirement. The rule transfers catastrophic risk to the to the operator—and, ultimately, to the insurance market, thereby relieving the state of this implicit liability.
Beyond contract design, finance ministries play a direct role in structuring the financial conditions that make resilience projects attractive to private capital. By deploying blended finance instruments — public co-financing, partial guarantees, or first-loss capital — they can improve the bankability of projects that would not otherwise attract private investment at scale.
It requires the ministry to actively de-risk transactions, coordinate with development finance institutions, and ensure that fiscal commitments are credible and enforceable over the life of the project. For insurers, asset managers, and infrastructure banks, the quality of a government’s PPP framework directly determines whether resilient infrastructure projects are bankable.
Integrated fiscal actions to boost private investment
These five dimensions are not isolated policies: they form a mutually reinforcing system. Integrating resilience into public investment generates bankable projects. Quantifying climate liabilities on the sovereign balance sheet reduces the uncertainty that raises capital costs.
A credible sustainable debt architecture broadens the investor base. Intelligent fiscal incentives and PPP frameworks with clear rules turn the private sector into an ally — not a counterparty — of fiscal objectives. The result is a direct signal to the market. And markets respond to signals.
For Latin America and the Caribbean, this is not a future agenda: it is a transition already underway. Countries strengthening their fiscal architecture are showing that fiscal sustainability and the mobilisation of private capital are not objectives in tension, but components of the same strategy for resilient, competitive growth.