Emerging Asia faces a massive infrastructure burden. According to a recent report from the Asian Development Bank, around $26 trillion of investment is needed between now and 2030. Outside China, the infrastructure gap for the next four years represents a whopping 5% of GDP.
How can this problem be tackled?
It is a perennial question facing governments, corporations and banks in the region, and has been debated endlessly over the last decade. Few long-term solutions have been found, but there is one obvious answer — governments need to spend.
Indonesia needs around $1.23 trillion of infrastructure spending between now and 2030. The ADB says just $23 billion was spent in 2015. In India, the combined force of public and private investment barely covers half of the $261 billion annual funding need. In country after country — with the telling exception of China — Asian governments are proving reluctant to spend enough.
In lieu of a major boost in government spending, market participants like to dream. Debt bankers pin their hopes on a greater role for the bond market. China-watchers cast their eyes on the Asian Infrastructure Investment Bank, the newly-formed multilateral lender. Securitisation gurus, pointing to impressive examples in China and South America, think they can help.
But the numbers do not add up.
The Asian Development Bank took a big step forward last year, providing a 75% credit guarantee to a subsidiary of Aboitiz Power that helped the company sell a $225 million green project bond in the domestic market. It set a template that more companies should follow. But although the deal made admirable headway, it is at best only part of the answer to Asia’s infrastructure problems.
Imagine the ADB was willing to provide a similar guarantee on every project in the Philippines. Imagine further that every corporate bond sold in the Philippines was replaced by one of these infrastructure deals. Would that help? Not much.
According to ADB data, there were P845 billion ($16.8 billion) of outstanding corporate bonds by the end of last September. The Philippine government wants to spend around P8 trillion on infrastructure before its term ends in June 2022, according to finance secretary Carlos Dominguez.
Nor is the AIIB big enough to shift the needle. It has capital of around $100 billion, compared to around $250 billion for the World Bank. Even if the AIIB borrowed ten times its capital base and gave it all to Indonesia — a farcical notion — it would still not be enough to cover the country’s infrastructure needs until 2030.
Securitisation seems an even less plausible response. China’s government, undoubtedly the flag-bearer when it comes to infrastructure investment in Asia, has allowed the use of securitisation to find public-private partnerships. In Peru, the clever use of securitisation to help fund construction of a metro line has given bankers hope.
But neither governments nor investors in emerging Asia appear hungry to see more securitisation. As a result, it represents more of a problem than a solution.
This does not mean these possibilities should be ignored. No-one would argue that bonds cannot play some role in infrastructure funding, or that the power of securitisation should be overlooked. Certainly, few government officials would want to turn down cheap funding from the AIIB.
But although these options can all provide a small boost to infrastructure financing, the main push needs to come from governments.
Indonesia had $103.2 billion of reserves in 2015, according to World Bank data. The Philippines held $73.9 billion. Thailand had almost double that. The scars of the Asian financial crisis appear to have encouraged governments throughout the region to save at all costs. But the time for bravery has come.
Public-private partnerships will be a part of the solution, helping supplement a market that will still face shortfalls even with a big government push. Work should be put in to ensure transparent bidding processes and speedy decisions.
But often governments will need to be willing to swallow the whole cost of a project, whether through directing state-owned enterprises or by taking the hit at central government level.
The figures are terrifying and, even with aggressive use of government funds, the challenge will be huge. Government officials could be forgiven for wondering whether they can afford to finance some $26 trillion of infrastructure investment over the next 15 years. They should be wondering whether they can afford not to.