More finance won’t plug deficit gaps

To plug the “infrastructure deficit” in emerging markets, more private-sector finance is needed, it is often claimed. The fact is there is ample private capital available, from multiple sources, for well-structured “bankable” infrastructure projects across the world, including in emerging markets.

Increasing the supply of capital is not going to address the infrastructure deficit. Instead, what is needed is long-term, national policy frameworks.

The first step in establishing such a policy framework is to ask some simple questions:

First, should infrastructure users pay the full costs of infrastructure or should the costs be subsidised? Perhaps this is the thorniest branch for political leaders and policymakers to grasp.

The question is often avoided, but deserves serious debate in most countries.

Removal of subsidies can be painful in developing countries, but Indonesia had the courage to face down naysayers and cut many of its fuel subsidies in late 2014. In contrast, Ireland stumbled over the introduction of water charges in the face of a vociferous minority who refuse to pay for something which previously had been distributed free of charge. The message from Jakarta: Take bitter medicine quickly.

Second, should infrastructure be provided by the state or by the private sector? Both can supply adequate infrastructure but only if they have the necessary capacity and sufficient funding.

Singapore’s first class infrastructure is the result of decades-in-advance planning and investment by competent and well-funded state bodies. Meanwhile, the UAE has relied on highly successful public-private partnerships over many decades to supply its enormous power and water demands — a successful development model that has spread across the Gulf region.

Every country is different and needs to find its own appropriate solution, but settling on an infrastructure policy framework is paramount. Only then can it get on with the urgent task of capacity building and project implementation.

Third, if the private sector is to be involved, how and when should this happen? There are strong reasons to favour private-sector involvement: Better design and technology, project construction management skills, all-round improved risk management, a focus on lifecycle costs, improved operation and maintenance regimes, and the creation of new asset classes for lenders and investors.

But where to start? Thailand launched a successful independent power producer programme in 1994, by partly privatising the newly-built Rayong power plant through an Initial Public Offering (IPO). This “walk before you run” approach was a success and the Thai IPO programme has gone from strength to strength. Memo to governments: Privatising infrastructure assets that are already operating and low risk is easy, especially in a world flooded with cheap capital.

The opposite, and much less successful, approach is to “run before you can walk”. A complex infrastructure project easily takes 10 years to complete once an invitation is issued on private sector bids.

If sensible risk-allocation norms are ignored and successful precedents are overturned (reinventing the wheel), it takes even longer. The scramble for land and permits favours well-connected parties and spawns corruption. The result could be, and often is, years of delay and wasted effort by infrastructure experts, developers, building contractors and financiers.

Fourth, policymakers must ask themselves if it’s important to have local partners in privately owned infrastructure projects? There is a case for local ownership, but the UK and Australia demonstrate that foreign investors can own 100% of infrastructure assets without adverse consequences. When Singapore privatised its power generators, foreign investors scooped them all up.

Local ownership rules tend to favour powerful local incumbents. For that reason, it might be better for governments to focus on other local elements, for example, requiring the involvement of local banks in project financing, a public credit rating following project completion, or a public offer of shares on a local stock exchange.

The failure to pursue better policies for infrastructure investment is not only a matter for emerging markets; the maintenance and upgrading of infrastructure is no less important in Organisation for Economic Co-operation and Development (OECD) countries.

Nowhere is the infrastructure deficit more surprising than in New York where the age and condition of bridges, highways and tunnels are always a shock to visitors from Asia.

The provision of high-quality infrastructure ought to be a national priority, with each country setting out a long-term infrastructure policy, which is then refreshed every 25 years.

A national debate to inform public opinion followed by a national referendum on key infrastructure policy choices could anchor public support. And then policy makers should get on with the urgent task of tackling the infrastructure deficit. Throwing money at the problem is rarely the solution.

Every country is different, but settling on an infrastructure policy framework is paramount.