Due to lower revenue, COVID-19 has reduced the governments’ capacity to support national infrastructure projects, especially in Asian Development Bank’s (ADB) developing member countries (DMC). These countries need to explore opportunity to generate resources from national and sub-national levels, in order to fulfil the financing requirements for sustainable infrastructure. It is expected that to close the infrastructure finance gap, domestic resources and the private sector will have to supply majority of the funding, with supplementary assistance from international institutions.

In Southeast Asia, the pandemic has resulted in increased infrastructure investments in certain sectors such as such as renewable energy (RE), logistics and transport, public health and info-communication technology. Over the next 20 years, the primary infrastructure growth sectors in emerging Asia will be road development projects, receiving 35 per cent of the total investment in the region, followed by energy infrastructure projects accounting for 34 per cent of the total infrastructure.

Due to the recent fiscal limitations, DMC governments will be required to evaluate the feasibility for alternate sources of funding for future infrastructure projects. Sustainable financing is gaining traction as a source of funds for corporations and project owners of sustainable infrastructure. Regional sustainable infrastructure projects will be able to access more funding choices as institutional investors lay a greater emphasis on the sustainability of their portfolios. Moreover, transition finance is projected to open up a new pool of assets by supporting enhancements to existing infrastructure assets and assisting the DMCs to transition to a low-carbon economy.

This report by ADB called “Supporting Quality Infrastructure in Asia” emphasises the need to balance urgent demand for infrastructure financing with governance approaches that focus on boosting efficiency and integrating infrastructure systems. The report also explores opportunities for ADB to strengthen its support for quality infrastructure in the region through its financing instruments, programmes and projects.

Excerpts…

Throughout Asia and the Pacific, the economic slowdown has contributed to delays in infrastructure financed as traditional public sector projects and by public–private partnerships (PPPs). Airports, for example, provide a grim picture of revenues for 2020, with a 50 per cent drop in total passenger traffic (to 4.6 billion) and nearly 57 per cent in airport revenues (to EUR97.4 billion), compared to pre-COVID-19 forecasts. A 58.9 per cent drop in revenues from pre-pandemic levels in the Asia and Pacific region in 2020 was forecast by the International Finance Corporation (IFC) in May 2020. In order to respond to the immediate challenge, governments will have to reallocate spending requirements and reduce spending. While increased infrastructure spending will help stimulate economic recovery in some countries, other countries may not be able to provide enough fiscal support due to their debt and revenue positions leading to reduced infrastructure investment or prioritizing spending on more immediate needs.

Infrastructure efficiency gaps

Governments need to identify gaps in infrastructure governance pertaining to planning, managing, and implementing public investments to improve the quality of infrastructure project pipelines. Although there is great variation among countries and levels of government in terms of the quality of infrastructure governance, there is scope to improve infrastructure governance by linking medium-term fiscal and budget frameworks to infrastructure planning, inter-agency coordination including between national and subnational levels, and improving the rigor of investment selection, appraisal and risk analysis, and management of projects. The IMF uses Public Investment Management Assessments (PIMAs) to assess infrastructure governance for the full project investment cycle.

The PIMA reviews and analyses the efficiency of infrastructure investment, defined as the ratio of the capital stock of infrastructure investment per capita to indicators measuring the quality of and access to infrastructure. It examines trends in productivity, infrastructure quality, growth, and public investment, providing an analysis based on a cross-country index of public investment efficiency and the application of the PIMA tool across a range of country income levels.

Average public investment efficiency varies widely across and within regions, from an efficiency gap of about 21 per cent in Europe to 32 per cent in the APAC region. Efficiency gap estimates provide a measure of wasted resources and hint at potential institutional weaknesses.

Public sector investment, including investment by government entities and SOEs, is the principal source of infrastructure investment in developing and emerging market economies. SOEs accounted for 74 per cent of total infrastructure investment in East Asia and the Pacific, of which 24 per cent is from Indonesia. In South Asia, SOEs contributed 44 per cent of total infrastructure investment.

To strengthen PIM institutions, emerging markets should adopt and improve processes for screening, selecting, appraising, and approving investment projects. Countries will also benefit from better supervision of public infrastructure and PPPs and linking strategic planning with capital budgeting. Also, there are considerable economic dividends if efficiency gaps are minimized; the most efficient public sector investments can generate twice the growth of public investment expenditure compared to the least efficient. PIMAs identify significant areas where institutions shaping the planning, allocation, and implementation of public investments must be strengthened. Governments can reduce up to two-thirds of public investment inefficiencies by strengthening PIM institutions.

The figure below shows the difference in growth rates among six Asian countries based on either no change in efficiency or closing the efficiency gap over 5 years.

Sustainability of infrastructure projects

Depending on project size, private sector development, income levels, and access to finance, traditional PPPs financed by the private sector and supported by user fees may not be practical, particularly in sensitive sectors like water or in low-income communities. While user charges or fees can offset the operational costs of accessible infrastructure, in many cases, governments will still need to budget subsidies for projects to ensure access for the poor. Basic infrastructure from roads to parks represent public goods and are nonexcludable. The use of one individual or group should not limit access for others. Upstream planning and analysis should consider both environmental and social impacts, including access to natural capital by local communities.

If not properly anticipated in project design, these social and environmental issues can cause infrastructure-related conflict, often resulting in substantial delays and costs. Sustainability is based on extending the life of an infrastructure asset; infrastructure projects should build climate and disaster resilience. Many DMC projects are not sufficiently sustainable due to the inherent complexities of infrastructure investment—long time horizons, social impacts, vulnerability to externalities such as climate change, enabling environments, and institutional challenges.

Sustainable projects reflect fiscal, economic, environmental, social considerations, climate-resilient design standards, and governance (ESG) aspects. These are part of the 2030 Agenda for Sustainable Development and the Paris Agreement to reduce greenhouse gases and are aligned with national and local development strategies of different countries. A systematic approach requires

  • incorporating environmental sustainability
  • capturing and pricing environmental externalities in project appraisal
  • applying safeguards, such as those pertaining to carbon emissions and pollution or energy efficiency

Public-private partnerships

Public–private partnerships (PPPs) can create incentives to mobilize private capital and bring in private sector management capacity, but even good PPP projects present some challenges that governments can only mitigate. The recourse to PPP procurement is surrounded by fiscal illusions that prevent careful fiscal risk management and allows for the approval and engagement of too costly or poorly structured projects.

There are three main sources of fiscal illusion in PPPs:

  • accounting practices
  • asset recognition criteria
  • fiscal risk assessment by public sector contracting agencies.

Accounting practices that allow governments to increase infrastructure without an immediate impact on public sector deficits or debt are a large source of fiscal illusion. Fiscal illusion in PPPs can also arise from failing to recognize PPP assets as public infrastructure. It can also stem from inadequately assessing the fiscal risks in PPP contracts. Weaknesses in infrastructure governance exacerbate fiscal risks.

Infrastructure governance comprises the public institutions, processes, and procedures guiding government decisions in planning, allocating funds, and implementing public investment projects, including PPPs. Many fiscal risks in infrastructure originate from weaknesses in the early stages of the project cycle, mainly during strategic planning and project appraisal. By keeping PPPs off-budget, governments can increase long-term commitments in infrastructure without legislative scrutiny or oversight, thereby jeopardizing fiscal sustainability. Inadequate skills and capabilities in public agencies implementing and managing PPPs expose governments to additional risks.

To procure PPPs soundly, governments need to strengthen their infrastructure governance. Further consideration could be given to strengthening the ability of contracting agencies to understand and apply principles associated with Quality Infrastructure Investment, especially given the challenge of assessing risk over a long-term contract. Development agencies need to ensure a more integrated approach to ensure their technical assistance programs work and coordinate with PPP units, finance officials, and infrastructure line ministries that are part of the infrastructure ecosystem.

The entire report can be accessed here.