By Yesim Elhan-Kayalar
(Advisor, Economic Research and Regional Cooperation Department, Asian Development Bank)
Developing economies in Asia have for years relied on partnerships with the private sector to pay for infrastructure projects. That could be in jeopardy during the pandemic.
We all need an effective public infrastructure system that connects people and markets, facilitates economic activities, creates jobs and provides reliable public services. It makes for a strong backbone in any economy.
During the early stages of an economy’s development, the government tends to be the primary provider and operator of public infrastructure.
Then we see a transition from “public finance for public works” to private investor-led infrastructure finance and service provision. In a more advanced economy, with an open market and enabling regulatory frameworks, the private sector takes on a larger role in creating, operating, and maintaining infrastructure assets through public-private partnerships (PPPs) with the government, starting with assets that have cost recovery and revenue generation potential such as toll roads and utilities. The source of infrastructure finance thus evolves in tandem with economic development.
This is an evolution that can help fund essential public goods and services (such as universal health care and basic education), and bring in the private sector for infrastructure construction and financing.
Until 2020, upper middle-income countries in Asia were the contemporary examples of this financing evolution. Leveraging their robust economic outlook and using PPPs, these countries attracted private investors for infrastructure. Using institutional finance and public funding, upper middle-income country governments were able to set infrastructure projects in motion.
Some even raised funds from the market, such as the special-purpose bonds in the People’s Republic of China that frontloaded $142 billion specifically for infrastructure projects. The outlook was promising for slowly but surely moving infrastructure finance from public to private sources for upper middle-income countries in the Asia-Pacific region.
This no longer is the case. These countries now have to contend with the health and economic crises resulting from the COVID-19 pandemic, much like the rest of the world. Several “push” and “pull” factors affect infrastructure financing at present. While governments are still keen to employ PPPs, investors are reluctant to pursue long-term infrastructure investments because of uncertainties over economic recovery.
Infrastructure construction under PPPs suffered from demand and supply shocks created by the pandemic. Existing infrastructure PPPs have been impacted to varying degrees, depending on their revenue sources. Private financiers are weary, with little appetite for risky new investments in a time of economic downturn and uncertainty. Mobility restrictions have helped contain infection rates during the pandemic, but have also limited the ability of workers to commute to work sites, and have disrupted supply chains for construction and other requisite materials for infrastructure projects.
Unsurprisingly, many private companies seem to be shifting to a conservative stance, reserving cash flow to manage the delays in existing project timelines and not taking on new investments during the economic downturn.
Governments have also had to reallocate and repurpose public funds, prioritizing financial support programs for furloughed workers, struggling businesses and health care systems. No doubt a much-needed lifeline for all involved, these programs have been financed mostly with already constrained domestic resources and external borrowing in upper middle-income countries.
This approach will not be financially sustainable over an extended period. With many infrastructure projects at risk of suspension or de-prioritization to create fiscal space for COVID-19 response programs, upper middle-income country governments will have to consider other options for a sustainable path to economic recovery.
Diverse economies will need customized solutions to sustain their public infrastructure pipelines, generate jobs and keep private sector investors engaged in infrastructure investments.
How can these countries chart their economic recovery? Large-scale, government-funded public works have been effective in generating jobs, fostering private sector development, and creating economic value in countries like the People’s Republic of China, Indonesia and Thailand at earlier stages of their economic development. They still are for emerging upper middle-income countries, like the nine trillion-peso Build-Build-Build program in the Philippines.
In their battle with the current crisis, should governments “retreat to advance,” then? Should they revert to financing public infrastructure projects only with public funds to create sorely needed jobs and to get companies back in business?
Upper middle-income countries in Asia and the Pacific are diverse in their business climates, access to infrastructure financing options and market frameworks. Diverse economies will need customized solutions to sustain their public infrastructure pipelines, generate jobs and keep private sector investors engaged in infrastructure investments.
A multifaceted approach could include the following:
• Ensure existing infrastructure PPPs continue construction and operations, possibly with increased government support (for example, through extending the concession term, credit guarantees, purchase agreements, tax holidays/deferrals, refinancing options).
• Reintroduce/issue contracts to private construction companies to build fully government-funded public works and help companies remain in business until they can, once again, mobilize institutional finance and undertake infrastructure PPPs.
• Support investments in the “new normal.” For example, government-led urban mobility (with rising demand for bike lanes and mass transport reconfigured for social distancing) and digital infrastructure development (as commerce, education and even primary health care services move to online platforms), can foster private sector-led investments later.
• Explore tax reforms and prudent borrowing strategies to finance priority infrastructure investments in the short term; and then identify fiscal consolidation options to streamline public expenditures after the economic recovery gains momentum.
• Regional alliances such as the Association of Southeast Asian Nations present opportunities to explore initiatives for an infrastructure-led recovery. Developing regional infrastructure projects, such as cross-border roads, communication or power networks, can help create economic value, spread investment risk among multiple governments and private sector investors, and would provide additional employment opportunities.
One thing remains certain for infrastructure finance in upper middle-income countries: infrastructure investments will be one of the key drivers for economic recovery, and it will be important to keep both public and private sectors at the table.