Getting the most from infra spending

The governments of the Philippines, China, India and Indonesia, as well as the incoming US administration, have made infrastructure the central plank of their growth strategies. At the same time, the Asian Development Bank, the World Bank and the new China-founded Asian Infrastructure Investment Bank are ramping up financing for energy, transport and telecommunications.

It’s not hard to see why infrastructure is the growth driver of choice amid difficult global economic conditions: By one estimate, a 10-percent increase in infrastructure investment can contribute to 1-percent growth in gross domestic product. But for such impacts to happen, several things must be done right.

Assessments of infrastructure projects in developing economies frequently cite the need for better implementation, often just by getting back to the basics of sound project management, and the need for building the capacities of government agencies tasked with carrying out these projects. Operations and maintenance are crucial for project success once the bulldozers have gone, yet these crucial infrastructure areas get too little attention—one suspects because they are less eye-catching and politically rewarding than building new infrastructure.

But keeping infrastructure projects as simple as possible is not the solution, because complexity can bring gains. Consider the value of partnerships which carry costs of coordination, but can also add value. A review of 442 projects supported by the Asian Development Bank during the period 2000-2014 indicated that those with cofinancing with partners had an 81-percent success rate, compared to 67 percent for those that did not. Safeguards to ensure that infrastructure projects do not damage the environment also bring costs. Yet a review of projects with high environmental risks had an 84-percent success compared to 62 percent with lower risks and 57 percent with very low risks, signaling the critical value of environmental care provided in the former.

Increased infrastructure spending needs to be balanced by investments in health and education to get the promised benefits from better infrastructure. But government spending on education as a share of GDP in developing Asia in the late 2000s was less than 4 percent, compared to an average of 5.2 percent in the Organization for Economic Cooperation and Development’s high-income countries. For spending on health, developing Asia’s 4-percent share in GDP compared with the OECD’s 7.4 percent.

Infrastructure investments must also keep up with the times and not just repeat past practices. They need to foster technological innovation and become climate-friendly. In transport, investment is needed in alternative fuels to reduce the carbon footprint, in traffic analytics for better management of congestion, and in transit ridership to promote intermodal transport. Port facilities, a major asset in the Philippines and much of Southeast Asia, are ripe for upgrading to reduce handling times, and for modernizing computer and security systems.

New technologies will be vital in the fight against climate change. The solar industry in China, India, the Philippines and Central Asia symbolizes technological progress in renewable sources. But the use of solar, wind, tidal, geothermal and biomass needs to expand vastly. The variability in output from solar and wind sources is higher than from coal-fired power generation plants. Solutions being found include battery storage, smart grids and demand measures.

Fifteen of the world’s 20 most polluted cities are in Asia. Fuel and engine efficiency can be improved, as shown by Busan, South Korea, where higher licensing fees are charged for trucks that do not comply with emission standards.

Traffic congestion is a nightmare in many of the region’s cities. The proposed Edsa bus rapid transit system will be watched to see whether it can ease traffic and reduce long commutes. The experience of others has been generally positive; one in Guangzhou, China, is estimated to be saving 30 million passenger hours a year.

Finally, it matters how investments are financed. If done mainly through public borrowing, administrations need to account for the effect of debt servicing on other vital investments such as in health and education. An infrastructure splurge that relies heavily on public borrowing could lead to inflation, and here the experience of Latin America is a cautionary tale.

Shifting investments from the government’s books to the private sector will help. But this will require establishing user charges, reforming enterprise regulations and getting a political consensus. Public-private partnerships have been shown to cut project implementation times, as they did with notable results in India’s Hyderabad International Airport. This is an alliance that the Philippines is keen to forge to address the country’s infrastructure gaps.

It is not enough to spend more on physical infrastructure. The spending must signal better quality, encourage innovation and ensure sustainable financing.

IT MATTERS HOW INVESTMENTS ARE FINANCED. IF DONE MAINLY THROUGH PUBLIC BORROWING, ADMINISTRATIONS NEED TO ACCOUNT FOR THE EFFECT OF DEBT SERVICING ON OTHER VITAL INVESTMENTS SUCH AS IN HEALTH AND EDUCATION