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Analysis
Asia infrastructure remains inadequate

Asia infrastructure remains inadequate

Public-private co-operation essential to meet investment needs

by Juzhong Zhuang in Manila

Mon 6 Nov 2017

Asia's substantial investments in infrastructure over recent years have underpinned its rapid economic growth and poverty reduction. But the quantity and quality of its infrastructure remain inadequate, and there are large variations across countries.

Across the region, 400m people lack electricity, roughly 300m have no access to safe drinking water, and 1.5bn are without basic sanitation. Urban traffic congestion alone costs economies huge amounts daily in lost productivity and wasted fuel.

The Asian Development Bank in its 'Meeting Asia's Infrastructure Needs' report estimates that developing Asia will require $26.2tn in infrastructure investment between 2016-30 to support growth, combat poverty and respond to climate change. This is equivalent to 5.9% of the region's projected GDP.

Investment needs are largest in the energy sector at $982bn annually, or 56% of the total across four key sectors. Of the other three sectors, transport needs tally $557bn, followed by telecommunications at $152bn and $53bn for water and sanitation.

The 25 Asian countries where data are available, including China, invested $880bn in 2015 across these four sectors. The ADB forecasts that annual investment needs for these countries over the next five years will reach $1.34tn, leaving an annual investment gap of $459bn, or 2.4% of the projected GDP.

However, if China is excluded – it has spent large sums on infrastructure for decades – annual investment needs for the remaining countries amount to $503bn. This leaves an annual gap of $308bn, or 5% of the projected GDP.

In 2015, total infrastructure investment by these countries (excluding China) was $195bn. Of this, two-thirds were financed by the public sector and one-third by the private sector. To meet demand, both the public and private sectors need to invest more.

There are several ways the public sector can finance increased spending. Government revenues can be increased through tax reform – tax revenues as a share of GDP are lower in much of developing Asia by several percentage points than the developing country average. Some government spending can be redirected towards infrastructure investment and away from inefficient general fuel subsidies which strain public finances in several Asian countries.

Many governments have room for additional borrowing and can also tap non-tax revenues through means such as land value capture to boost infrastructure spending. Land value capture has been done successfully in parts of Asia.

ADB findings indicate that the 25 Asian countries (again excluding China) could increase public spending on infrastructure investment by $121bn annually through tax reform, spending reorientation and prudent public sector borrowing. The remaining gap of around $187bn annually should be filled by land value capture and, more importantly, private sector financing.

Asian countries are making significant efforts to attract private sector participation in infrastructure investment. Local currency bond markets are being developed to provide long-term financing through capital market reform and regional co-operation through vehicles such as the Asian Bonds Market Initiative. Moreover, public and private partnerships are being promoted for infrastructure development. Countries are establishing dedicated agencies for PPP, reforming bidding and procurement processes, and improving dispute resolution mechanisms.

Multilateral development banks will play a significant role as well. Estimates show that infrastructure financing in developing Asia by these institutions accounted for around 2.5% annually of the region's total infrastructure investment over the last few years. When excluding China and India, this figure increases to more than 10%, a sizeable amount. The ADB plans to increase its annual loan and grant approvals to more than $20bn by 2020 from $17.5bn in 2016, with a growing share going to the private sector.

Meeting the region's high-quality infrastructure needs will require greater investment by both the public and private sectors. The ADB will continue to be an important partner for the region's governments as they strive to meet this challenge.

Juzhong Zhuang is Deputy Chief Economist and Deputy Director General of the Asian Development Bank's Economic Research and Regional Co-operation Department.

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