Budget financing across countries-
Southeast Asia’s infrastructure financing requirements are huge. Among the various funding sources, government funds are the mainstay for meeting the financial requirements of infrastructure projects in the region. While the proportion of funding requirements met by the respective governments of the region is high, there is much scope for increasing the same. According to industry sources, the ASEAN members, on an average, spend only about 4 per cent of their gross domestic product (GDP) on infrastructure, which is noticeably lower than the proportion spent by countries like China, which invests over 8 per cent of its GDP in the creation and maintenance of infrastructure assets.
Southeast Asia Infrastructure examines the current scenario of government-sourced infrastructure financing in the region…
Case for budget-sourced financing for infrastructure creation
At present, several factors deter the private sector from investing in infrastructure projects in Southeast Asia. The most important factors are political uncertainty, procedural issues, inordinate delays in execution, and corruption. These factors render infrastructure projects “non-bankable” and lead to investor diffidence towards the sector. In addition, economic cycles also play a major role in overall investment sentiment. The effects of the last few years of global economic slowdown were also seen in the economies of Southeast Asia. While specific statistics are not available, industry experts state that a large number of infrastructure projects were in limbo due to slow economic growth in the region.
Given the large funding requirements for infrastructure development in the region, much of the onus lies with the respective governments. The proportion of government resources spent on infrastructure creation in Southeast Asia ranges from 1 per cent to over 40 per cent, depending on the size of the country and the financial resources available.
Another major reason for the requirement of government-sourced financing for infrastructure creation is the absence of well-developed financial markets to tap private funds. There is also a dearth of financial instruments for risk mitigation, which acts as a major impediment in the deepening of these markets. Pension and insurance funds, a robust source of long-tenor funds, are also absent. The penetration of bond markets, though, is decent. However, the extent varies from country to country. Islamic bonds, or sukuk financing, for instance, are prevalent in Malaysia. Indeed, the country is “the world’s most important Islamic-finance centre”. On the other hand, countries like Laos, Cambodia and Myanmar have yet to tap this source in order to realise the full potential of meeting their infrastructure funding requirements.
Owing to these reasons, the governments of Southeast Asian countries have allocated significant funds for infrastructure development in their annual budgets. These countries have consistently scaled up budgetary allocations to infrastructure sectors. Primarily, these are utilised as development expenditure on the road, energy, communications and utility sectors.
Trend in budget financing
An analysis of the budgetary allocations of Southeast Asian countries for the infrastructure sector shows large disparities among them. Owing to inconsistent data, it is difficult to make precise comparisons, but, nevertheless, it is possible to identify certain attributes. Among all the countries considered, allocation for the infrastructure sector in 2013–14 was the highest in Singapore, followed by Indonesia, the Philippines and Malaysia. Countries such as Brunei, Thailand and Vietnam lag behind by large margins. The situation is similar in the case of expenditure on infrastructure as a share of total government spending.
In the period 2010–14, Singapore and Brunei increased their budgetary allocation to the infrastructure sector at a compound annual growth rate of 2.28 per cent and 4.3 per cent respectively. On the other hand, Malaysia and Thailand have exhibited both upward and downward revisions in their infrastructure-related budgetary allocations, closely in line with economic cycles and immediate priorities. With regard to the utilisation of government-sourced funds, however, industry experts state that there exists large room for improvement. Underutilisation of these funds is a key feature of most of the Southeast Asian economies. This is partly because of procedural issues and lack of transparency in policies regarding the deployment of funds. In addition, huge leakages are common because of corruption, another key characteristic of many Southeast Asian countries. While this is not prevalent in Singapore, it is widespread in countries like Vietnam, Cambodia and the Philippines.
As mentioned earlier, sectors such as roads, energy, communications and utilities have been the main recipients of budgetary allocations in the region. Sectors like oil and gas, railways and urban transport have received limited government funding.
Another significant contribution to infrastructure financing by the respective governments of the region is multilateral funding. Barring Singapore, the economies of the other countries in the region are still at various stages of development. As a result, these countries are key recipients of funds from international financing agencies such as the Asian Development Bank, the World Bank, and the Japan International Cooperation Agency. Here, the governments of the region also participate in and co-fund along with these entities various infrastructure projects. Such financing arrangements are often seen in sectors like roads, urban transport, and water and sanitation.
Impending issues
While the government remains the most important financier of infrastructure projects in the region, it is important to take note of the growing fiscal pressures faced by it. According to Scotiabank statistics, the public sector fiscal balance as a share of GDP was negative for all the countries barring Singapore. Hence, owing to growing fiscal pressures on the government, alternative sources of funds need to be developed at the earliest. In doing this, the government itself will have a key role to play.
The need of the hour is for the government to reduce risks for private investors by addressing the policy, institutional and regulatory impediments to such investments. In addition, addressing governance-related issues, setting up transparent procurement systems, and establishing clearly designed viability gap funding mechanisms (which enable public funding for investments that the private sector cannot undertake) would make future financing of infrastructure projects much easier. Some countries are making progress in this direction. For example, the Philippines government is working towards the liberalisation of the domestic coastal shipping industry in order to lower costs. The country has amended the build–operate–transfer law, expanding it into a public–private partnership (PPP) act.
To reduce the pressure on government funding, another method is the development of a pipeline of bankable projects through PPPs. Governments need a better grasp of the working of the PPP framework and a deeper understanding of what drives private sector investment. In this context, the viability studies of the proposed projects should be carried out with due diligence. For instance, private investors find it difficult to secure funds and earn profits by undertaking construction of airport runways. However, if such projects were packaged appropriately, it would be possible to attract interest from private investors.
The way forward
While efforts to reduce dependence on the government for infrastructure funds and to increase private sector participation are required, it must be understood that these measures will take a few years to fructify. Till then, the government will have to remain the main financier of infrastructure projects in the region. During this time, enhancing government revenues through tax collections, etc. will prove extremely beneficial in meeting the immediate financing requirements of the infrastructure sector. In this context, an upside is the robust savings rate in the region. The task is to convert these savings into investments, which will ease the burden on the government to fund infrastructure projects. Reforms on the institutional and political fronts are required, which will not only provide a fillip to private sector financing, but will also improve the overall investor approach towards the sector.
