Feature Articles - Asian Infrastructure Finance 2020

Why Developing Economies Should Invest More in Infrastructure: A Macroeconomic and Growth Perspective

Although infrastructure does not guarantee development, there can be no development without infrastructure. This report presents evidence that the growth impact of infrastructure is indeed relatively higher in developing countries, pointing to a need for a higher rate of investment above the global average of 5 percent of GDP. This higher rate of investment (around 6–10 percent of GDP) is also consistent with the idea that developing countries need to cope with demographic needs.

Raising Economic and Social Returns through Design and Engineering

Making better infrastructure investments to maximize their economic and social returns is essential, especially in the context of tight fiscal spaces and scarce private sector dollars. Increasingly, maximizing returns means that infrastructure has to be well-designed, well-engineered and integrated with surroundings. The benefits of technology and cost-benefit analysis in maximizing economic and social returns are demonstrated by projects in Hong Kong, China and India.

Managing Infrastructure Cost

Recognizing that internationally comparable infrastructure construction cost data is hard to come by, AIIB conducted a benchmarking exercise which revealed significant variations in the cost of building road and water infrastructure across cities in Asia, after accounting for the costs of locally obtained materials (in other words, construction purchasing power adjusted). The study surveyed road infrastructure costs across 15 cities and water infrastructure costs across nine cities and provides an evidence base.

Planning for The Future and Avoiding Stranded Assets

When investing in infrastructure today, it is essential to consider a wide variety of factors and scenarios, in both the short and long-term, that could potentially lead to the stranding of assets during the lifetime of an investment. Governments, companies and financial institutions should always attempt to measure and manage the exposure of infrastructure investments to external risks that can strand assets and internalize these risks in their decision making and in their financial and economic models.

Mobilizing Finance: Recent Trends and Giving a Stronger Push Towards High Standard Investment

According to a 2019 United Nations Environment Programme (UNEP) report, the G20, accounting for 80 percent of emissions, is not on track to meet the pledges of the Paris Agreement. Key to addressing this crisis is the role of finance which is laid out clearly in the Paris Agreement, viz, “making finance flows consistent with a pathway toward low greenhouse gas emissions and climate-resilient development.” Thus, mobilizing private capital toward addressing climate and broader sustainability efforts is crucial.

Balancing Investment with Debt Sustainability

There is a perception that public debt levels and risks are increasing across the world, eroding the fiscal space available to fund development spending, especially for infrastructure, but is it also the case in Asia? A review of the sovereign debt and credit risk picture in Asia finds that debt risks remain generally low and credit profiles are generally healthy, even though there may be some specific vulnerabilities, especially amongst smaller countries, that require individual attention. Accordingly, most countries have room to invest more to address their large infrastructure needs.