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Only bigger public investment can ease Asia's infrastructure shortages

Private funding is too small to close the gap in transport, energy and telecoms

Massive traffic jams like this are a daily occurrence in Jakarta. (Photo by Ken Kobayashi)

For more than 25 years many policymakers have been banging the drum for private investment in infrastructure. It is time they stopped for a moment -- and acknowledged that, while their efforts have produced some results, the public sector continues to finance the bulk of infrastructure -- and will do so for the foreseeable future.

Nowhere is this more true than in Asia, where China has demonstrated the ability of state-dominated finance to make the world's biggest-ever infrastructure investments in everything from electricity to railways in record time. While private investment plays a not insignificant role in transport infrastructure in some countries of the region, including India, and in energy infrastructure in Japan, emerging Asian economies -- which face the greatest infrastructure needs in the coming years -- are mostly unlikely to meet their aims without overwhelming reliance on public finance.

That this needs saying is testament to the power of the privatization rhetoric of the last three decades. The collapse of the Soviet Union and its centrally-planned economy fueled excessive faith in the victory of capitalism and the capacity of capitalists to solve any economic problem. But the experience after 1990 - not least in Asia -- put pressure on this theory even before the 2007 global financial crisis punctured faith in markets.

As a study published earlier this year by the Asian Development Bank Institute (ADBI) in Tokyo says bluntly: "Governments were irrationally exuberant in their expectations of the private sector's ability to create infrastructure out of thin air." 

Asia faces an "infrastructure gap" between demand for and supply of the transport, energy and communications networks needed to keep the world's fastest-growing region on track for future growth and development.

The Asian Development Bank (ADB) said in a report last year that the "developing Asia" region (excluding advanced nations such as Japan) will need to invest $1.5 trillion a year between now and 2030 (a total of $22.6 trillion) to beef up power, transport, communications and other infrastructure. This greatly exceeds the $880 billion actually being spent each year on infrastructure in 25 leading Asian countries.

Asia's situation mirrors the globe's. According to consultants McKinsey, the world currently invests $2.5 trillion a year on infrastructure but needs to raise this to at least $3.3 trillion a year between now and 2030 to support economic growth and development.

There is little argument (in Asia at least) on the role of infrastructure investment in boosting productivity and economic growth. As the ADBI says, "economic growth and investment in infrastructure go hand in hand. A growing economy needs constantly improved infrastructure to ensure that production and exchange of goods and services happens smoothly and efficiently." Likewise, Jin Liquin, president of China's Asian Infrastructure Investment Bank says, "there is empirical evidence of a link between economic growth and infrastructure investment."

Yet, for all this consensus, infrastructure remains greatly under-funded almost everywhere. The main exception is China where a Communist ideology and central planning has backed state investment in infrastructure running at 92% of total spending in recent decades, creating unprecedented growth in expressway, rail, energy and communications networks.

Beijing's critics argue that this reflects bureaucratic excess rather than real demand for services. But China has become the world's second largest economy, growing at an annual rate of around 6% even after decades of strong expansion.

In Asia generally, infrastructure investment has been running at 8% of gross domestic product annually since 2008 and 9% in China's case (twice the proportion in advanced economies). The public sector has been the big spender, accounting for 70% of total investment, while private investment accounted for some 20%. The balance comes from multilateral development banks and bilateral aid -- both also forms of public investment -- taking the de facto public share to around 80%.

Chinese finance has been a strong factor behind this surge across the region. As David Dollar and John L. Thornton, note in a study for the Washington-based Brookings Institution: "China is a major funder of developing country infrastructure, lending $40 billion annually through policy banks," such as the China Exim Bank and others. The loudly-trumpeted Belt and Road Initiative, where Beijing is supporting transport links to China, is only part of the story.

Yet, despite the fact that the state investment-led model adopted in China and in other parts of Asia has made the region better able to fund infrastructure than is the case elsewhere, Asia still faces a biginfrastructure funding gap.

How is this gap to be closed? Free-market enthusiasts argue that Asia needs to develop its capital markets more quickly, so that private savings can flow into infrastructure, rather than predominantly through tax-funded government spending augmented by public borrowing.

Yet experience in the US and Europe has shown that even in stable highly-developed economies private investors remain risk-averse when it comes to infrastructure, because of a large perceived gap between risk and reward.

It was, in retrospect, naive to assume that private institutional investors such as pension funds and insurance companies (which hold a total $120 trillion of private savings, equal to more than one year's global annual GDP) would be eager to make long-term investments in infrastructure. The reality is that they either do not like the risk-reward ratio, even when they are not barred by their own rules from such investments.

To make infrastructure investment more attractive to private investors, the ADBI suggests that part of the additional tax revenues generated by increased economic activity along the routes of new highways and railroads (so-called "industrial corridors") should be diverted into special funds designed to help fund new infrastructure projects. This, it is argued, would help to raise returns to private investors making them more attractive.

Such ideas are useful. But they cannot make more than a marginal contribution.

Increasing public sector debt might not be considered advisable at a time when globally debt has reached all-time-high levels, including in Asia where China has total debt exceeding 300% of GDP and where many other nations are also heavily borrowed in both the public and private sectors.

Yet if, as is widely accepted in Asia, infrastructure investment raises economic growth that in turn should boost tax revenues along with the debt-servicing ability of borrowing governments.

Private investors should be glad to buy dedicated "infrastructure bonds" issued by governments even though they are reluctant to invest directly in infrastructure projects. Governments can act as guarantors or "comfort blanket" intermediaries to attract private investment. So can multilateral lenders like the ADB. Experience shows that the liabilities governments incur in the process crystallize only in few cases.

At least as far as infrastructure is concerned, there is more rather than less for the public sector to do. On this point, the record -- especially in Asia -- has proved the neo-liberal policymakers wrong.

Anthony Rowley is a Tokyo-based journalist who has been covering the Japanese economy and politics since 1993. He is a former business editor and international finance editor of the Far Eastern Economic Review, and a former Tokyo correspondent of the Singapore Business Times.

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