Pouring concrete, laying tarmac, and putting down cable and rail tracks is not typically the stuff of headline news, but a convergence of trillion- dollar global announcements suggests “infrastructure spending” is the buzz term we will be hearing more about.
From statements by US President Donald Trump to plough a trillion dollars into Making America (Roads) Great Again, to China President Xi Jinping’s historic One Belt-One Road links across half the globe, concrete seems the place to be.
If that wasn’t enough, the Asian Development Bank on February 28 more than doubled its previous estimates of annual investment needed in basic infrastructure if the Asia-Pacific region is to maintain economic growth and reduce poverty.
Where will the money come from? It seems very likely global demand and competition for infrastructure funds will grow. And while Asia has long had a surplus of domestic savings it won’t be enough for the scale of spending envisaged and illustrates that the capital markets needed to intermediate this investment remain underdeveloped
Read: How to get cash into Asian infrastructure the ADBI way
As it happened, the ADB report appeared on the same day that Trump was making an address to a joint session of Congress in which he reiterated his pledge to renew the infrastructure base of the world’s largest economy. Beijing’s concrete-pouring plan to link China and other parts of East and South Asia with Europe via Central Asia and the Middle East is an infrastructure scheme of heroic proportions.
The ADB report says the developing Asia region (excluding advanced nations such as Japan) will need to invest a total of US$22.6 trillion or US$1.5 trillion a year, most of it in China and India, between now and 2030. That’s cash for transportation, power plants, communication links and other infrastructure.
This is well in excess of the US$880 billion that 25 Asia-Pacific countries (together representing 96% of the region’s population) currently spend on infrastructure.
The ADB report highlights that despite prolonged and concerted efforts to raise private-sector investment in Asian infrastructure, the public sector still dominates. It calls for further policy reforms to bolster private-sector spending.
If the need to adapt infrastructure design to prospective climate change is taken into account, annual spending will need to be US$1.7 trillion a year or US$26 trillion in total between now and 2030, the ADB says.
The figures are more than double the US$750 billion annual spending the ADB previously estimated for the decade up to 2020, with the jump attributed partly to coverage of 45 countries in the latest publication compared with 32 in a 2009 report, and to price adjustments.
If the need to adapt infrastructure design to prospective climate change is taken into account, annual spending will need to be US$1.7 trillion a year or US$26 trillion in total between now and 2030
“The demand for infrastructure across Asia and the Pacific far outstrips current supply,” said ADB President Takehiko Nakao at the launch of the report, Meeting Asia’s Infrastructure Needs.
Infrastructure development in the countries covered has grown dramatically in recent decades — spurring growth, reducing poverty, and improving people’s lives, the ADB said.
“But a substantial infrastructure gap remains,” it says, “with over 400 million people still lacking electricity, 300 million without access to safe drinking water, and about 1.5 billion lacking access to basic sanitation.”
Many economies in the region lack adequate ports, railways, and roads that could connect them efficiently to larger domestic and global markets, the ADB report points out.
In a breakdown of the investment between 2016 and 2030 adjusted for climate change, power spending is at US$14.7 trillion and transport is at US$8.4 trillion. Telecommunications will require US$2.3 trillion, with water and sanitation costs at US$800 billion.
East Asia will account for 61% of infrastructure investment needs to 2030, requiring spending equal to 5.2% of GDP. South Asia’s needs will equal 8.8% of GDP, Central Asia’s 7.8% and Southeast Asia’s 5.7%.
The public sector currently finances around 92% of the Asia-Pacific region’s infrastructure investment, via taxes and other government revenues such as bond issuance and loans. Added to that is official development assistance and multilateral development (MDB) bank financing.
Mind the gap
“MDB operations in developing Asia, most of which provide support for public sector finance, are estimated to have contributed just 2.5% of the region’s infrastructure investments in 2015” chiefly from the ADB and the World Bank.
For the private sector to fill the remaining gap it would have to increase investments from about US$63 billion today to as high as US$250 billion a year over 2016 to 2020, the ADB report suggests.
“Regulatory and institutional reforms are needed to make infrastructure more attractive to private investors and generate a pipeline of bankable projects for public-private partnerships (PPPs),” the ADB suggests.
In the meantime, public finance reforms – which the ADB estimates could generate revenues to bridge around 40% of the infrastructure funding gap – will be needed if spending targets are to be met.