Analysis
15 Nov 18

Meeting Asia’s infrastructure needs

The delta between the existing infrastructure (roads, railways, ports, power plants) and the need for infrastructure is called the “infrastructure gap” and it’s a big problem in Asia.

Measure the gap

Lack of infrastructure slows down economic growth, hence why World Bank, universities and the Asian Development Bank (ADB) are following developments closely. The ADB monitors over 40 Asian economies, quantifies need and recommends change.

Bottom line is: Asia needs to invest US$ 1.7 trillion to deliver infrastructure that supports robust growth and is resilient to climate change. Current investment is only the half of this amount; the Asian infrastructure gap is therefore quantified at US$ 0.85 trillion or roughly 5% of each member state’s GDP.

Who is investing?

Although the public sector is generally regarded as the go-to investor, the reality of successful infrastructure implementations is different. The Japanese railway system is a good example. The Japanese Government built the first railway between Tokyo and Yokohama in 1872 and has been in charge of the management of the railways ever since. The actual trains and tracks however were opened for privatisation, leading to 70% of Japan’s railway network accounted for by private lines already in 1890. Coverage multiplied exponentially and economy grew: Japan had its backbone for growth.

However, Japan is the historical exception and China is the contemporary exception. In most of the Asian countries, the public sector has funded infrastructure works. And it hasn’t done a particularly good job.

Room for improvement

Western news reporting likes to display the Chinese ghost cities (full city infrastructure developments without people) as failures of a planned economy. Reality is different; the Chinese model is the only in Asia that is really closing the gap.

Other countries are lacking behind in 3 areas

  • Inadequate mobilizing of public finances. Indepth tax reforms are necessary in most of the Asian countries. The income models have changed (export is increasing, local production is growing, domestic revenue is higher than ever) and there’s a lot of unexplored or badly distributed tax revenue.
  • Expenditure needs to be redirected. Many Asian countries need to wake up and stop useless and counterproductive subvention systems. Fuel subsidies are a perfect example; they hang on to an expired model of economic support and freeze budgets that could be otherwise allocated.
  • Borrowing options are not sufficiently explored. Most of the Asian states have room for funding options (internal and external) that won’t impact their debt levels too dramatically. When companies need funding to increase their revenues, they look for external investment. Asian countries should do the same, but haven’t explored this to its full potential.

Need for private investment

There is no shortage of funds in Asia: investors are asking to invest in Asia. Unfortunately only 1% of these investments go to infrastructure developments. This does not imply that the foreign investor is not interested in toll roads, railways, airports, instead it highlight 3 structural areas of improvement.

Firstly, Governments need to develop investment tools that appeal to the typical risk-adverse long-term investor, such as pension or insurance funds. Good examples are independent rating agencies and bond guarantees.

Next, investment needs to be contextualised. This means that, when investing in, let’s say, a toll road, the investor won’t take the risk in the absence of a roadmap that supports macroeconomic stability. Examples are: environment, good governance, investor protection,…

Finally, investments need to be supported by better procurement processes, dispute resolution systems and generically, better laws. Public-private partnerships won’t work unless professionalism on both sides is comparable.

The much contested Duterte Government in the Philippines has understood this; it has secured over US$ 6 billion for infrastructure development in a record time, only by applying the 3 recommendations above.

Authored by: Yves Helven