Sat, Dec 13, 2014 - Page 8 News List

Infrastructure key to Asian growth

By Gordon French

If Asia’s emerging markets are to avoid the middle income trap, they need to create foundations for the next phase of growth — they need to invest in infrastructure.

In the early stages of development, moving a worker from the land to a factory quadruples their value-added contribution to the economy on average. Much of Asia’s extraordinary growth to date has been underwritten by this one-off transition, but the windfall gains of rapid industrialization are starting to decline and if the region is to continue on the road to prosperity, it needs to find ways to boost productivity and encourage new economic activity.

At the moment, inadequate infrastructure is possibly the biggest brake on emerging markets’ medium-term growth prospects. It stunts both production and investment — few businesspeople will invest in large-scale production capacity when they cannot guarantee a reliable supply of electricity. Few farmers will upgrade their land if their crops are going to rot before they get to market because of bad roads and inadequate warehousing.

With some standout exceptions, such as Hong Kong, Singapore and Japan, the problem is particularly acute in Asia. It is estimated that urbanization alone will require about US$11 trillion worth of infrastructure investment in Asia over the next 15 years.

The first priority is to maximize the efficiency and impact of current spending by fast-tracking infrastructure delivery and clearing bottlenecks to create a pipeline of transparent, well-structured projects. Infrastructure will also benefit from a robust and predictable regulatory environment that assures investors that schemes will not be canceled or stalled halfway through construction.

Although basic infrastructure needs are relatively easy to determine at the early stages of the development cycle, there comes a point where the market mechanisms become the most effective way to allocate capital to the most economically productive infrastructure projects.

Infrastructure has traditionally been paid for by government, and although governments will continue to play a key role, the old model has inherent weaknesses.

The first is governments do not have the necessary human and financial resources.

In the short term, a liquid banking market in Asia, working with export credit agencies and multilateral institutions, can provide significant amounts of cost-efficient financing. However, over time the sheer size of the funding required will mean that alternative financing sources will be vital to plug what will otherwise become an infrastructure funding gap.

Mobilizing private capital on the scale needed to prepare emerging markets for their next phase of growth will not be easy, though.

Although Asian bond markets have developed rapidly since the 1997 to 1998 financial crisis, they still lack the depth, liquidity and legal safeguards necessary to attract the sort of investment required to fund the region’s infrastructure needs and serve as a more effective mechanism for converting Asia’s savings into investment.

Policymakers, regulators and market participants are working to develop regional bond markets, notably through the Asian Bond Market Initiative, but it will not happen overnight. Initially it is expected that capital markets financing will gravitate toward less risky existing projects, allowing bank financing to be recycled into new greenfield developments.

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