How private finance can bridge Asia’s infrastructure gap
Philippe Le Houérou says as government budgets dwindle, the region’s immense needs in infrastructure can only be met by convincing investors to step up
Since the financial crisis of 1997, Asia’s growth has astounded the world, lifting nearly 1 billion people from poverty and redrawing the global economic map. Today, parts of Asia have some of the world’s best infrastructure – the best-in-class airports in Changi, Incheon and Chek Lap Kok, for example. But infrastructure coverage across the continent is uneven and major financing gaps remain. In Cambodia, two out of three people struggle without electricity. In Myanmar, just one fifth of the roads are paved. In Indonesia, fewer than half the population has access to clean water. Everywhere in the region, there is a need for better infrastructure.
The Asian Development Bank has estimated it would cost US$8 trillion per decade just to maintain Asia’s existing rate of infrastructure provision. This is a tall order. For most Asian economies, government support for infrastructure has been declining due to weaker finances. Governments in the region have typically provided about 70 per cent of infrastructure financing, while the private sector and development finance institutions contributed the rest. This ratio needs to shift.
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So what is holding back investment?
Investors are mostly likely to invest when they have repeat opportunities to engage
Asian countries can also benefit from setting broad targets and providing clear processes for private financiers to invest in infrastructure. China’s “One Belt, One Road” programme is a good example of this – it targets more than 60 countries across four continents, with initial plans for 80,000km of roads and railway lines, long enough to circle the equator twice. As we have seen in recent renewable energy auctions in India, Jordan and Mexico, and through the new Scaling Solar programme linking investment opportunities across Africa, investors are mostly likely to invest when they have repeat opportunities to engage.
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Infrastructure solutions must also address the threat posed by climate change – countries in Asia should take advantage of green and smart infrastructure to ensure power, transport, water and telecoms systems are efficient and resilient. New technologies such as smart grids can make Asia’s infrastructure more nimble and responsive, and help the region leapfrog dated options as its cities grow. Stationary batteries are increasingly able to ensure renewable energy can provide round-the-clock electricity by storing wind and solar power for later use. Declining prices of solar panels, meanwhile, have opened up new avenues for off-grid power with small solar home systems providing households with basic electricity for as little as US$7 per month. Such energy efficiency gains are not just a boon to the environment – they also raise living standards and strengthen companies’ bottom lines by reducing costs.
Unlocking infrastructure investment is challenging – it will require clear targets, straightforward processes for private financiers, and a pipeline of modern, climate-resilient projects. Governments in the region will also need to put in place legal and regulatory frameworks to cut risks and bolster macroeconomic stability. But by encouraging new investors and embracing new technologies, Asia will be on a much stronger footing to successfully continue to improve the lives of millions of people.
Philippe Le Houérou is the executive vice-president and chief executive officer of IFC, a member of the World Bank Group
