Is Infrastructure Spending the Cure?

Developing Asia, according to an Asian Development Bank estimate, needs to invest $1.7 trillion a year—about the size of Canada’s GDP—in infrastructure to maintain its growth momentum. Building roads and ports, expanding electricity grids and telecommunication networks and investing in water supply and sanitation drove growth across Asia, and policymakers are relying even more on infrastructure to deliver the goods. But given the region’s new challenges, past patterns are not adequate: quality must go start going hand in hand with quantity.

Some countries will need to double infrastructure spending over the next 10–15 years. It is not hard to see the allure of making these investments for low-income countries striving for economic take-off, such as Bangladesh and Lao, and middle-income ones trying to transition to high-income statuses, such as Malaysia and Thailand. By one estimate, a 10 percent increase in infrastructure spending can contribute to 1 percent growth in a country’s GDP.

The positive association between growth and the priority for roads, bridges, and other infrastructure projects in East Asia is compelling.  Japan has a striking record, including in the 1950s and 60s, with positive lessons on quality.  But spending of some 4.7 percent of GDP annually for these projects during the 1990s and 2000s was associated with a 0.5 percent a year growth.

Going forward in Asia, there needs to be a laser sharp focus on relevance and returns. Growing limits to land, water and also funding, amplify the consequences of ill-conceived projects. China’s drive of the 1990s and 2000s, when it spent over 8.5 percent of GDP on public works, helped fill gaps in transport and energy and generate double-digit growth. But on the wayside, were also roads-to-nowhere projects and ghost cities.

Transport and energy account for nearly 90 percent of infrastructure spending in Asia. But telecommunications, water and sanitation are getting short shrift. Analysts have voiced concern over large gaps in water and sanitation infrastructure, and the effect on health and productivity. Despite progress, over 1.7 billion people in Asian and the Pacific still need better access to improved drinking water and modern sanitation facilities.

A top priority, therefore, is stepping up well-designed and well-designed investments in water supply and sanitation in both urban and rural settings. Government priority needs to be augmented, private investments need to be attracted, and better and more innovative project proposals need to populate the pipeline. Crucial is better management and policy support for new and existing investments with governments strengthening price signals to ensure efficient and sustainable use of scarce water resources.

Of special interest are removing subsidies which encourage the overuse of groundwater resources and replacing that with incentives which encourage investments in water saving technology.  While groundwater irrigation has been instrumental in increasing agricultural productivity in South Asia and East Asia, the high extraction rates are no longer tenable. In Gujarat, India, groundwater tables are now dropping 6 meters a year. In China and Pakistan, more than 20% of irrigated lands are already affected by salinity.

Regional cooperation also offers solutions with high economic, social, and environmental impacts. Many water resources are a regional common good and can only be successfully managed within an integrated regional framework.  Shared river systems among the South, Southeast and East Asian countries call for inclusive management with the burden of decision-making, governance, and action shared with the affected peoples.

Infrastructure must also connect with interventions in other sectors.  For example, water and sanitation projects have a better chance of reducing water-related diseases if joined with education efforts promoting good hygiene. Ramping up infrastructure spending should not come at the expense of social sectors. Government spending on health as a share of GDP in developing Asia at the end of the first decade of the 2000s was less than 4 percent, compared with an average of 7.4 percent in high-income countries.

The success of infrastructure projects in energy, transport and water varies widely across countries in Asia. Success rates are generally high in East Asia compared to other sub regions and regions. Common weaknesses across countries are gaps in design and execution, government agencies lacking the capacity to handle big projects, and inadequate operation and maintenance spending over the life of the projects—possibly because this is less politically rewarding than building new infrastructure.  There are valuable lessons for taking forward water projects, running water utilities and getting stronger returns.

With runaway climate change, carbon-intensive investments must become non-starters. A particularly heartening development was the China-led Asian Infrastructure Investment Bank making sustainable development the main theme of its annual meeting in February, and the bank—a big new lender for development—reaffirming the need to deliver on their commitments under the Paris climate change agreement.

With Southeast Asia at the sharp end of natural disasters, technological innovation will be vital in adapting to climate change and becoming more resilient to disasters. Two comparable earthquakes that struck in 2010 make the point: 525 people died in the quake that hit Chile, but 160,000 died in the Haiti one because of a lack disaster-resilience.

Climate- and disaster-proofing essential public infrastructure, especially in the area of water,  will need to figure much more in the economic plans. Low-income countries’ losses are especially debilitating: these are equivalent to 22 percent of their social spending, compared with 2 percent in rich countries, according to the United Nations Office for Disaster Risk Reduction.

If infrastructure financing is done mainly through government budget and public borrowing, governments need to account for the effect of debt servicing on priorities in health and education. And spending that relies heavily on public borrowing could kindle inflation, as in Latin American countries. South-east Asian countries have relatively lower debt levels by Asian standards, but leverage has increased, with corporate and household debt becoming a concern. Increasingly, governments, as Thailand’s and the Philippines’, are looking to lower costs through public-private partnerships; successful ones have notably cut project implementation times.

China, Indonesia, Thailand, all have all ambitious infrastructure plans in the areas of energy, transport and water. Thailand has an infrastructure action plan worth 895.8 billion baht (USD 25.2 billion) for 2017. China’s recently announced Belt and Road Initiative for a modern Silk Road has the potential to unleash massive investments across the region. But the next generation of infrastructure will need to help the region confront newer challenges, especially climate change and unsustainable use of resources.

Vinod Thomas is a visiting professor at the National University of Singapore and a former senior vice president at the World Bank.

This version of this article first appeared in the Bangkok Post on 4 July 2017.  

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