Asia’s urgent need for financial resources to meet its vast infrastructure demand has been a longstanding issue but a startling new report has revealed that the need is much bigger than had previously been imagined. The Asian Development Bank has more than doubled its estimate of annual investment needed for infrastructure in the Asia Pacific region. In a March report, the ADB put the figure at $1.5tr a year between now and 2030, or $1.7tr — almost $23tr in all — if projects are adapted to cope with climate change.
Many of these resources will need to come from the private sector but there is a fear that unless Asia makes its investment environment more attractive, private investment could flow instead to the US and Europe.
The developing Asia region that excludes advanced nations such as Japan will need huge spending on power, transport, communications and other projects if the world’s faster growing economies are to maintain growth and reduce poverty, the ADB said.
The upper estimates are more than double the $750bn annual spending the ADB estimated in 2009 would be needed between then and 2020. As the needs of more countries have been included (45 now against 32 in the earlier report) so the infrastructure bill that Asia faces has soared.
Not only are the sums much bigger than previously thought but also they are nearly double the $880bn that the 25 biggest Asia Pacific developing nations (home to 96% of the region’s population) have actually been spending on infrastructure in recent years.
Where is the money going to come from? The public sector has been the major source of funding for infrastructure in the past and is currently funding some 92% of the region’s infrastructure investment, Juzhong Zhuang, ADB deputy chief economist and deputy director general of the regional co-operation department at the ADB tells GlobalMarkets.
Governments will continue to be the big spenders but the private sector is going to have to step up to the plate in a much bigger way if infrastructure is to get built.
Creaking systems
This is where things become problematic: Asia is no longer the most attractive game in town when it comes to infrastructure investment.
The period after the Lehman Brothers bank crisis in 2008 was a “very lucky [time] for the Asian region because there were few investment opportunities in advanced economies, and interest rates were very low,” says Ryuchi Kaga, head of the ADB’s Office of Public-Private Partnership. But, he tells GlobalMarkets: “The landscape will change [from here on]. Private sponsors [of infrastructure projects] will have more options.”
US president Donald Trump pledged during his election campaign to spend at least $1tr on renewing outdated public infrastructure in the US and building a nationwide network of high-speed rail projects. At the same time, Europe and Japan are also preparing to modernise or replace their often creaking infrastructure systems.
There is so much financial liquidity globally that there is probably enough money available, in theory, to fund all the infrastructure projects that the US, Europe and other advanced economies, plus Asia and other developing regions, can come up with. But the issue is not as simple in practice as in theory, according to the ADB’s Kaga.
“Investment opportunities will increase in advanced countries and absolutely they will draw the attention of more private investors,” he says. Revenues from advanced nation infrastructure projects may be smaller than those in emerging economies but they are perceived to be “easier and safer”, with virtually no political or currency risk involved.
This could impact the relative attractiveness of public-private partnership (PPP) projects in developing Asia and elsewhere compared to those in advanced economies. In turn, this means that Asian nations need to step up their game in terms of producing “bankable” projects and improving their implementation capacity for infrastructure projects.
While there has been “good progress” in introducing regulatory and institutional frameworks for PPP at the national level in Asia, not least in countries such as India and the Philippines, the implementation capacity of governments in terms of dealing with PPP laws and procedures is often lagging, says Kaga. One example is how to handle project bidding.
This is all the more so where local governments — in Indonesia, Vietnam and the Philippines, for instance — are becoming involved in PPP schemes.
At the same time, governments are being pressured from outside to provide high quality infrastructure. The ADB, along with governments such as Japan, are pushing this theme and the OECD said in a recent report on Asia that “what matters is not just the volume of infrastructure but also its quality”. Governments “need to address better the long-term social and environmental impacts of infrastructure investments,” the OECD said.
PPP vs ODA
The ADB and others are providing grants and technical assistance to governments to help them improve their implementation capacity for PPP schemes. But such schemes are time consuming and “complicated” experts say while transaction costs are also high.
This creates a temptation for host governments to spurn the PPP approach in favour of ODA (official development assistance) projects financed by countries such as China where, some say, quality is relatively low compared to PPP.
With PPP schemes, the private partner usually invests in and operates a project. In the case of an ODA project the host government takes on debt and operates the project and a foreign company undertakes construction. Government debt then rises and efficient operation is not assured because governments lack project operating capacity. It often comes down to a balance between “easy and very quick or efficient and debt-free,” says Kaga.
Whatever the claimed shortcomings of state-funded provision, it has produced impressive results in terms of infrastructure coverage, the March ADB report makes clear.
The ADB’s Zhuang says China needs to be taken out of the picture because it is so big relative to other countries in the Asia Pacific region and also because it is “very atypical” so far as infrastructure is concerned.
The actual and projected infrastructure gap between what is being spent now and what needs to be spent is much smaller in China’s case (around 1.2% of GDP) than is the case elsewhere in the developing Asia Pacific region where it is nearer 5%, Zhuang says. This gap is particularly wide in South Asia and in some southeast Asian countries, and even more so in the case of the Pacific islands.
Frequently voiced criticisms of China-funded infrastructure projects do not apply to those undertaken by the China-led Asian Infrastructure Investment Bank (AIIB), despite initial fears that this might be so. “I think the AIIB’s is very much a global standard,” says one official. “I cannot find any specific differences between their policies from those of the ADB or World Bank.”
One of the reasons for China’s success in advancing infrastructure coverage at a rapid rate is that there are many domestic players such as state-owned enterprises and other lenders for PPP projects without relying on outside sources. “They can do everything within the country,” says Kaga.
Project life cost
Elsewhere, the problem is that many infrastructure projects are not regarded by investors as “viable and bankable”, he says. This means “there are only two ways to increase the supply of [project] funding: to improve the borrowing capacity of developing countries or increase the number of viable and bankable projects. Probably you have to do both.”
Some experts say that “selling” the PPP concept is not easy because of the political and commercial risks that private investors need to take on operating a project in a developing country.
Some governments prefer the EPC (engineering, procurement and construction) approach whereby a contractor undertakes to provide plant engineering and construction, and procures equipment overseas. Project operation is not included.
The prime minister’s office in Japan is pushing the high quality infrastructure concept that will create high quality projects in terms of environmental and other standards. But Japanese equipment is expensive, experts note, and cheaper equipment is available elsewhere.
To overcome this, the ADB is promoting a “project life cost” approach, which takes account of the fact that good projects prove more economic over the longer term. Even so, the “quick and cheap” approach is still preferred by some countries.
Whatever approaches are taken to infrastructure provision — whether state-funded or privately financed — and whatever vehicles are used to ensure that vital services are provided, the financing gap will need to be filled by both public and private sectors, the ADB said in its report.
Multilateral development bank (MDB) operations as a whole in Asia currently finance only around 2.5% of infrastructure in the region — although many kinds of non-financial help are also provided.
This means that government funding of infrastructure has to be stepped up, with the aid of public finance reforms, while private sector investment will become increasingly important, especially in power generation and telecommunication projects.
The load on the MDBs as facilitators or middlemen in this process can only increase, officials say.