Closing the Infrastructure Gap in Asia-Pacific
In the past decade, Asia-Pacific countries have constructed more infrastructure than any other developing region.
The region’s road networks, for instance, have been growing around 5 percent annually, much faster than in other developing nations. Similarly, per capita electricity generation capacity increased by 7.2 percent annually from 2000-2012. And while reliable cross-country data on telecommunications, water supply and sanitation are unavailable, the picture that emerges from the available statistics also shows generally rapid increases in the coverage, quantity and quality of these resources.
At the same time, have you ever tried to drive in Jakarta? Or access clean water and modern sanitation systems in parts of Vietnam or Cambodia?
Ultramodern … and underdeveloped
Substantial investments in the region’s infrastructure in recent decades have helped reduce poverty and improve people’s lives. Nonetheless, according to the Asian Development Bank (ADB), critical infrastructure remains far from adequate in some countries like Malaysia, Laos and Indonesia, in spite of the rapid economic growth and development they’ve experienced over the past decade.
In fact, the ADB estimates that more than 400 million people across the region lack electricity, 300 million don’t have regular access to safe drinking water, and about 1.5 billion lack access to basic sanitation. And while the conditions vary considerably, scarce transport networks in many places limit people’s ability to connect more efficiently with larger domestic and global markets.
In 2017, the ADB released the results of an exhaustive research project on the infrastructure investment needs in Asia and the Pacific between 2016 and 2030. Covering 45 countries across Central, East, South and Southeast Asia plus the island nations in the Pacific, the research describes “… how much the region will need to invest in infrastructure to continue its economic growth momentum, eradicate poverty, and respond to climate change.”
This research focused primarily on “developing countries”; lesser emphasis was given to advanced nations like Japan, Singapore and Australia where the infrastructure is among the best in the world. However, it should also be noted that many developed countries are also being challenged to remain relevant as renewable energy becomes cheaper and more efficient, especially considering their historical reliance on generating electricity from fossil or nuclear fuels.
The headline finding from the research was that these countries’ infrastructure investment needs amount to $1.5 trillion annually from 2016-2030 – that’s equivalent to 5.1 percent of their projected GDP.
The researchers also developed a second set of estimates that factored in the added costs associated with climate mitigation – primarily more efficient and cleaner power generation – as well as climate adaptation; making infrastructure more resilient.
When climate mitigation and adaptation costs are factored in, the required investments rise to $1.7 trillion annually or 5.9 percent of projected GDP.
The ADB also examined the gap between current and needed investment levels. Because of incomplete and inconsistent data on actual infrastructure spending in some countries, this gap analysis was limited to 25 countries and only covered five years from 2016-2020.
The researchers found that these 25 countries collectively spent about $881 billion on infrastructure in 2015, well below the estimated $1.21 trillion baseline or $1.34 trillion climate-adjusted investments needed in these countries.
That means the investment gap in these 25 countries amounts to $330 billion or 1.7 percent of projected GDP under the baseline estimates, and $459 billion or 2.4 percent of projected GDP under the climate-adjusted figures.
However, the researchers repeatedly note how the People’s Republic of China (PRC) can distort the overall findings given its size and, compared to other countries in the region, massive investments in and commitment to infrastructure.
Not surprisingly, the investment gap is considerably higher when the PRC is excluded from the analysis; without the PRC, the difference is 4.3 percent of projected GDP under the baseline estimates and 5.0 percent under the climate-adjusted assessments.
Enabling private investment
The ADB’s recommendations for closing the infrastructure gap stress the importance of attracting greater private sector participation in infrastructure. In general, private sector investments have been particularly important in telecommunications and power generation and far more limited for transport, water and sanitation projects.
Overall, the public sector has accounted for about 70 percent of infrastructure spending in the region’s developing countries while private investment represents only about 20 percent; the remainder has come from multilateral development banks like the ADB as well as bilateral aid.
The ADB also notes that “… a lack of funds per se does not seem to be the binding constraint on private investment in infrastructure.” In fact, only 0.8 percent of the private capital managed globally by pension funds, sovereign wealth funds and other institutional investors has been allocated to infrastructure in recent years.
According to the ADB, an “enabling environment” that includes “effective risk allocation and risk transfer mechanisms” is a prerequisite for governments to substantially and sustainably promote private investment.
AXA XL is actively participating in creating such enabling environments and in supporting essential infrastructure projects in many countries throughout the region.
One way we aid these efforts is via non-payment insurance. For example, say a bank is interested in financing a power project in Vietnam, but the funding requirement exceeds the bank’s internal limits or risk appetite. We can offer non-payment insurance to share the project risk so that the bank’s net exposures remain within its requirements. And given the long-term nature of infrastructure projects, the coverage can go out to 20 years to match the underlying loan requirement.
And for the firm(s) awarded the contract to design, construct and perhaps operate the power plant, we can provide political risk insurance to mitigate a breach of contract, expropriation, political violence, currency transfer or related risks stemming from explicit government action.
In this and similar scenarios, AXA XL benefits from the expertise our underwriters and engineers have in civil engineering, energy, construction, project finance and political risk to assess the threats associated with a particular project and develop appropriate and effective structures for mitigating them. Those capabilities also contribute to our willingness to participate in projects where the financing is slated to run for up to 15-20 years.
Also, the ADB, World Bank and other multilateral development agencies are often a significant source for financing as well as technical expertise on infrastructure projects in developing countries. Here, too, AXA XL can help support and maximise these contributions by offering, e.g., our technical capabilities and data, primary insurance for specific risks, and reinsurance capacity to help the sponsoring authority manage its risk concentrations and country exposures.
Finally, in recent times various multilateral agencies have been highlighting the need for stronger regulatory frameworks and institutions to help create/sustain market environments that are more conducive to private investment. That’s why we’re working closely with the World Bank and other regional development banks, the United Nations, major NGOs and other leading re/insurers on a variety of initiatives. These include, amongst other priorities, helping developing countries create and sustain viable commercial insurance markets that, in turn, can act as a catalyst for greater private investment.
About the author: Mark Houghton is AXA XL’s Head of Political Risk, Credit and Bond, for the Asia-Pacific region. Mark is originally from Australia and has been based in Singapore since 2010. He can be reached at firstname.lastname@example.org