“World Bank is supporting infrastructure development in the region”
Infrastructure development in Southeast Asia is expected to play a key role in accelerating growth in the region. Moreover, infrastructure investment also has the potential to be a macroeconomic stabiliser by creating demand and jobs in case there is a shock to economic growth. Therefore, it is important for governments to institute appropriate policies and processes to attract capital for the much-needed infrastructure development in the region.
Southeast Asia Infrastructure speaks to Bert Hofman, Chief Economist of East Asia and Pacific and Director of the Singapore Office at the World Bank, about the role of infrastructure in the economic growth of Southeast Asia and the future investments/strategies needed to spearhead the development of infrastructure.
What are your views on the economic outlook for Southeast Asia over the next two–three years? What role could infrastructure development play in alleviating the economic outlook?
For the next couple of years, we foresee robust growth for Southeast Asia (see Fig.). Economies in theEast Asia and Pacific (EAP) region have generally remained resilient in 2012, despite a lacklustre and, at times, volatile external environment. The region’s economy is projected to have grown by 7.5 per cent in 2012. Economic growth in East Asia, excluding China (largely corresponding to Southeast Asia), is expected to be 5.6 per cent in 2012, higher than the previous year by one percentage point. For 2013, we expect the EAP region to benefit from continued strong domestic demand and a mild global recovery that would nudge the contribution of net exports back into positive territory; this trend is projected to continue into 2014. Therefore, the economic growth of EAP (excluding China) is forecasted to grow by 5.7 and 5.8 per cent in 2013 and 2014, respectively.
For several countries in Southeast Asia, infrastructure is becoming a bottleneck for more rapid growth. Even at the current pace of growth, power supply is strained; roads are congested; and harbours cannot ship out any more goods than they currently do. Therefore, investing in infrastructure would help to relieve these bottlenecks and accelerate growth.
Infrastructure investment could possibly play a second role – as a macroeconomic stabiliser that can create demand and jobs in case there were to be a shock to growth. The world economy is currently still in a fragile state and risks still loom quite large including the risk of renewed issues in the Eurozone; disorderly fiscal consolidation in the US; and an unexpectedly rapid economic slowdown in China. If such events were to happen, governments in the region can maintain high growth by using their fiscal space to expand infrastructure. Governments would then need to be prepared with “shovel-ready” projects that can be implemented if and when the need is there.
What are your views on the funding requirements for infrastructure development in Southeast Asia?
Globally, the need for infrastructure investments is huge. It is estimated that the current investment adds up to $800 billion – $900 billion per year. However, in the medium term, to keep growth in developing countries at around 5 per cent per year, this figure would need to more than double to some $1.8 trillion–$2.3 trillion per year.East Asiawill need to invest 35–50 per cent of this amount. East Asia outside China would absorb 20–30 per cent of this; so, even at the lower end, we are looking at an investment amount of more than $100 billion per year.
What has been the World Bank’s role, through its various arms, in infrastructure development in Southeast Asia?
The World Bank Group has been supporting governments and private sectors in developing and financing infrastructure in the region. Through our International Bank for Reconstruction and Development arm that works primarily with governments, we have been financing infrastructure through project loans, as well as supporting governments in the restructuring of infrastructure sectors such as power and water, so as to make private investments in those sectors more attractive. This strategy has been particularly successful in power, toll roads, and, on some occasions, water. The International Finance Corporation (IFC), our private sector arm, has been supporting private firms that have been investing in infrastructure through equity investments and credits. It also has a successful transaction advisory service that advises governments on the structuring of transactions so as to allow private involvement in infrastructure, while managing the risks for the governments. Finally, the Multilateral Investment Guarantee Agency (MIGA), the multilateral guarantee agency of the World Bank Group, has been supporting private investors by insuring them against political risk and breach of contract.
Some estimates indicate a need for an annual expenditure of $60 billion for infrastructure development in Southeast Asia. Do you believe that the policies and institutional arrangements that are currently in place can help to raise this amount? What more needs to be done?
These estimates that I believe come from the Asian Development Bank sound entirely plausible in light of the broad estimate I had provided earlier. Moreover, a country such asMyanmar, which has been re-engaging with the international community lately, has deep backlogs in infrastructure, hence adding to the estimated need. Financing this amount will be quite a stretch. Although government finances are in good shape across the region, it may be neither feasible nor desirable for governments to finance all the needed infrastructure investment. Therefore, sound infrastructure sector policy frameworks, transparent bidding processes, and an appropriately balanced distribution of risks in the structuring of public-private partnerships should be used to attract private finance, as well as private construction and operational expertise in infrastructure.
What role do you see for the private sector in Southeast Asia? How can the World Bank help in creating an enabling environment for greater private sector participation?
As mentioned, the private sector can play a very useful role in infrastructure development. On the financing side, it is already playing a considerable role, accounting for some 20–30 per cent of all financing, which is more than the combined financing of overseas development aid and multilateral development banks, though it is less than the approximately 60 per cent provided by governments. Apart from financing, the private sector can also be involved in the efficient construction, operation, and maintenance of infrastructure assets.
There is a wide disparity in the levels of infrastructure as well as general development in Southeast Asia. Does this pose any challenges to future economic integration and the funding of cross-border infrastructure?
There are two issues here: one, the lagging infrastructure in poorer countries; and two, the weak link that the poorer countries’ infrastructure could constitute in connectivity–a network is only as strong as its weakest link. I believe that ASEAN countries have recognised the importance of connecting infrastructure for deeper integration in the region, and they have started to develop solutions for this, as part of the overall master plan for connectivity. The ASEAN Infrastructure Fund established last year would also contribute to more financing for such infrastructure. As for infrastructure that only services individual countries, there are already mechanisms that allow poorer countries to catch up, including more concessional financing from institutions such as the International Development Agency (IDA) or the Asian Development Fund. IDA also provides funding for multi-country projects.
The World Bank has begun to play a facilitative role in encouraging South–South cooperation in infrastructure financing between Asia and South America. Do you see a similar role for the mobilisation of resources for Southeast Asia from within other Asian economies and other donors?
There are lots of opportunities for the World Bank Group to play a growing role. Recently, we supported a Latin American country to showcase infrastructure projects for potential Asian investors here inSingapore, and there is more demand from other Latin American countries as well for such investments. This is part of a growing trend, as there is an increasing interest from emerging market investors, public and private, to invest in other emerging markets, also in infrastructure. AndEast Asiahas a lot to offer, both in finances and expertise.
Of course, the World Bank Group will continue to support our clients in the public and private sectors with financial resources and advice, and there is a renewed focus on infrastructure in the group. We are also looking at leveraging our own resources with other resources, and our World Bank Group office here in Singapore is playing a part in this. IFC is establishing a Global Infrastructure Fund that will be managed from here. Moreover, the World Bank has established a Global Infrastructure Centre of Excellence to develop innovative ideas for infrastructure finance. MIGA has its Asia regional office here in Singapore, which also allows it to develop innovative ways of risk management with the public and private sectors. Finally, the World Bank will soon deploy its manager of infrastructure policy here in Singapore, thus further enhancing the role that the office plays in infrastructure development in the region and globally.
