Growing pains

04/05/2009 | Anthony Rowley

Without $8 trillion in infrastructure financing over the next decade, Asia risks losing its competitiveness. A new fund could help, says a recent ADB study

Asia must spend a staggering $8 trillion on energy, transport and communications infrastructure over the next 10 years if the region is to adapt to a changed global economy, unlock its latent potential and remain internationally competitive, according to a new joint study by the ADB and the ADB Institute (ADBI). This is vastly larger than previous estimates and comes at a time when capital markets are in the midst of a crisis that has sharply curbed their contribution to development financing.
Recognizing the “dominant” role that the public sector will therefore need to play in infrastructure financing – as well as the need to make projects more “bankable” so that private investors can be brought back into the game – the joint study urges the formation of what is, in effect, an Asian infrastructure bank. It also proposes a new pan-Asia coordinating forum involving a wide spectrum of public- and private-sector players in infrastructure provision.
Japan is meanwhile urging its partners in the Asean+3 group to draw up an infrastructure “master plan” for the world’s biggest and most populous region. This master plan should be a joint effort involving not only the ADB but also the Jakarta-based Asean secretariat and Japan’s own Economic Research Institute for Asean and East Asia (ERIA), Japanese prime minister Taro Aso has suggested.
Infrastructure will take centre stage at this year’s ADB annual gathering, not only because of the launch of the new flagship study, but also because of what Japanese economic guru Eisuke Sakakibara and others say is the need for a “new economic model” in Asia in light of the global financial and economic crisis. This would emphasize domestic demand rather than exports and would require basic infrastructure to be reshaped accordingly.

Down
The private-sector contribution to infrastructure building in emerging economies has fallen well short of expectations over the past decade, especially in Asia, which did not benefit from the kind of interest investors showed in privatization of Latin American infrastructure. The global financial crisis means that the shortfall in private-sector funding will become more acute unless new ways can be found for attracting money to the sector, experts say.
According to the Institute of International Finance (IIF), global private capital flows to all emerging markets are likely to be just $165 billion in 2009 compared with $466 billion last year and $929 billion in 2007. Those to emerging Europe and Latin America will crash most dramatically, but emerging Asia will see private capital inflows shrink by one-third to $65 billion this year compared to 2008 – and down from $315 billion in 2007.
All types of private flow – bank loans, bond issuance, equity investment and even (supposedly stable) foreign direct investment – are plunging, says the IIF. The Washington-based institution does not single out the likely impact on infrastructure financing, but high-risk and long-term projects in transportation, power and communications seem likely to be penalized, especially during what the IMF has warned is likely to be a deep and prolonged global recession.
After the 1997 Asian financial crisis, infrastructure building and replacement across the region slowed down as private investors retreated and governments struggled to rebuild public finances shattered by emergency fiscal spending. The result was that “while some of the existing infrastructure in the [Asia] region is world class, most of it is below average,” ADB’s president Haruhiko Kuroda tells Emerging Markets.
“If the current crisis is prolonged, demand from advanced economies for Asian exports will decelerate in marked fashion, thus slowing down Asia’s production,” he says. “Asia will need to put greater emphasis on increasing regional demand. This will have strong implications for regional infrastructure, which will need to be geared more toward supporting Asian production networks and regional supply chains.”
The ADB report looks in detail at regional infrastructure needs. It estimates that the region will need to invest $7.9 trillion or $726 billion a year between 2010 and 2020, of which 68% will be new investment and 32% on maintaining existing facilities. Of this, $4 trillion will be needed for energy (electricity), $2.5 trillion for transport, around $1 trillion for telecommunications and $380 billion for water and sanitation.
The needs of East Asia and the Pacific will be greatest, at near $4.7 trillion, the study suggests, while South Asia will need to spend some $2.9 trillion and central Asia $457 billion. The estimates cover 30 countries in Asia but exclude Singapore, Hong Kong and Taiwan. Afghanistan, Turkmenistan and Myanmar are also excluded, owing to lack of data.
Since few national inventories exist of infrastructure needs in emerging economies, the ADB used a “top-down approach based on the latest estimates of future economic growth rates” to estimate spending needs. An economic model was then used to project physical capacity needs by sector.

Regional links
In addition to the $8 trillion needed for national infrastructure projects, Asia needs to spend $287 billion on “regional infrastructure projects” that link countries and sub-regions of the vast continent, the study suggests. This is essential if economic activity and trade within the region are to increase to the point where Asia can become less dependent upon exports to advanced markets – a dangerous dependency, as the global economic crisis has revealed.
These regional projects – some of which are already in the pipeline – include projects such as the Asian Highway, the Trans-Asian Railway, Asian container ports, gas pipelines and others. Such projects would bring increased connectivity and commerce to Asia and would result in “large welfare gains through increased market access, reduced trade costs and more efficient energy production and use”, the study suggests.

Turnaround
But none of this can come about if Asia continues its “bottom-up and market-driven approach to infrastructure development”, the ADB/ADBI study suggests. Instead, a “more top-down, market-expanding and demand-inducing approach” will be needed. The study calls for the establishing of a “Pan-Asian Infrastructure Forum” (PAIF) to “help coordinate and integrate existing sub-regional infrastructure initiatives”.
This would “bring together all the key stakeholders in the region to help build consensus on and to prioritize and coordinate regional infrastructure plans. It could also help develop harmonized standards for regulatory and legal issues – based on international best practices – as well as a common framework for handling and mitigating negative social and environmental impacts” of infrastructure development.

AIF
The vision of a pan-Asian infrastructure network is of little use without a means to finance it, the report acknowledges, and it calls for an “Asian Infrastructure Fund” (AIF) to be founded as a partner institute of PAIF. “Without proper financing, Asia’s vast infrastructure needs will go unmet,” it says.
Despite the ongoing turmoil in global financial markets, many regional infrastructure projects in Asia can involve public/private-sector partnerships (PPPs) provided that sound and “bankable” projects are created, the study suggests. But first governments need to play the “dominant” role in promoting and financing infrastructure projects, so that the private sector can play a “big role in the future [once] significant challenges involved have been overcome”.
The AIF could mobilize Asia’s “vast domestic savings” and also international funds for financing Asia’s infrastructure needs, the report says. Its capital could come from “governments, multilateral development banks, bilateral agencies and, hopefully, from sovereign wealth funds”. The AIF “should have a legal identity, so as to help finance projects through its own resources as well as by issuing bonds as well as cofinancing with other entities including private investors and Islamic financial institutions,” the report adds.

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