For Asian infrastructure the key is unlocking private investment
Interview with Hung Tran by Manuela Mirkos
The Asia Pacific region has been particularly active in terms of infrastructure investments in the last decade. But figures show substantial investment is still needed, according to some estimates up to $ 1.5 trillion annually. We sat down with Hung Tran, Atlantic Council senior fellow and former executive managing director of the Institute of International Finance, to find out more.
Two points I want to make: first is that Asia has spent more on infrastructures in recent years than other emerging markets and regions. According to a recent a report by Axa, the insurance company, in terms of road network the Asia Pacific has seen an increase of about 5 per cent annually over the past few years, from 2000 to 2012. Also, in terms of per capita electricity generation, it has experienced an increase of 7 per cent a year over that period, so that is a very good performance. However we have to keep in mind that what we see in the Asia Pacific is the coexistence between the ultra modern –the airports or the high speed train in China for example– and the under-developed in many countries. Therefore the need for future infrastructure investment is still very high. The Asia Development Bank (ADB) report estimates the need for infrastructure between now and 2030 at $ 1.5 trillion per year as you were saying…I think I would put the emphasis on the climate change and adjust the figures to $ 26 trillion over that period, or about 1.7 trillion dollar per year.
You mentioned climate change: what impact is it going to have on future infrastructure projects?
Definitively a big impact. Nowadays, with the awareness of climate change, I think that any long term infrastructure project really should begin with a full incorporation of features such as the mitigation of climate change impact, and clean, green energy and so forth. We also really need to pay more attention to several cases where the environmental impact of past infrastructure projects – particularly hydroelectric dams - already pose a risk to the ecosystem.
Private investment is often mentioned as the key to bridge the current gap in infrastructure financing. What are the obstacles, what needs to be done in order to attract more private investment in the region?
If you look at the pattern of infrastructure spending in the past, public spending accounted for 70 per cent of the overall infrastructure investment; private investment is only 20 per cent and the remaining 10 per cent is accounted for by multilateral development banks, like ADB, AIIB and so forth. Therefore going forward, with fiscal resources being constrained in many countries, the key is really how to stimulate and how to unlock private investment into infrastructure. The problem is not lack of money, because according to many estimates, if you look at the total global investible funds held by pension funds, insurance companies, sovereign wealth funds etc, so far only 0.8 per cent of the total portfolio has been allocated to infrastructure and therefore there is room for more allocation to infrastructure investment . However the key stumbling block is insufficiently robust legal environment, stability of policy, and effective dispute settlement mechanism and risk sharing features that stimulate and make investment in infrastructure more economically appealing to private investors. This is the key challenge in the future.
Apart from physical infrastructure, there is also an increasing need to invest in technological infrastructure, particularly in those countries in the region that are still lagging behind and risk missing out on the benefits of the infrastructure boom…
In the past, when we talked about infrastructure, people used to think about roads, rail roads, physical infrastructures, which are still important and needed in many part of the region. However, going forward, telecommunications, infrastructure for 3G-4G and upcoming 5G telecom technology is going to be very important to connect the region, to open up opportunities for many citizens and regions participating in the global commerce.
A recent Fitch solution survey reveals that Japan is ahead of China when it comes to infrastructure investment in South-East Asia. It is quite surprising, considering that China is the second biggest economy in the world...
Japan is ahead if you use the figures used by Fitch solution which shows the accumulated outstanding value of all infrastructure projects supported by Japan so far and that comes up to $367 billion for Japan and $255 billion for China. There are two reasons for this: one is that Japan has started to support and invest in infrastructure in Asia Pacific for a long time, all the way back to the 19070s and 1980s, so they have a long history, whereas China’s BRI only started in 2015, coinciding with the weakening of China’s growth and equity markets faltering in that year. So with a shorter history of course the accumulated outstanding value is less, even though it is a very impressive amount of investment.
If you look a the whole picture of the need of infrastructure investment in the region, at what is being spent in the region for infrastructure and the actual need according to organization like ADB, the shortage is about 30 per cent, or 30 per cent insufficient investment in infrastructure. There should be more resources coming in, with competition and a race to the top if we want to address this gap.
Energy has been a primary sector for Chinese investment in the region for many years. It seems China is now diversifying into other sectors…
If you look at overall patterns in overseas investment from China, the first phase was certainly more about securing resources, raw materials, energy, but also commodities. With the BRI, the emphasis has turned more and more to connectivity – roads, railways, seaports and digital connectivity. So yes, the focus is now on transport and digital connectivity.