Editorial: Building Asia's Infrastructure

Source: World Bank

The search for a workable form of public and private-sector partnership capable of supplying Asia with the resources needed to build or renew the region's infrastructure has become as elusive as the quest for the Holy Grail, writes Business Times Singapore in Tuesday’s editorial.

Yet unless some formula is found for marrying private sector capital and expertise with public sector resources, Asia's growth is almost certain to be restricted, economic integration impeded and efforts to reduce poverty set back. The tripartite study into East Asian infrastructure currently being conducted by the World Bank, the Asian Development Bank (ADB) and the Japan Bank for International Cooperation is supposed to produce a new form of public/private-sector partnership for solving these problems. But it looks increasingly likely that the most that will emerge is what one ADB official described recently as a road map indicating general directions.

This may disappoint those who hoped that the two-year study (the first of its kind among the world's three largest development institutions) would produce a way to square the circle of conflicting interests among infrastructure investors and consumers of services and between the different ethos of the public and the private sector. In the past when developing country governments were chiefly responsible for infrastructure provision, they had only to play by their own rules. They decided the cost of services and the national budget bore the cost of providing these, with few questions asked about whether projects showed a financial or economic rate of return. Inserting the private sector into this area has revealed a mass of hidden subsidies, kickbacks, inefficiencies, lack of clear rules and other deficiencies.

The World Bank (as a recent internal audit revealed) largely withdrew from this morass, leaving developing country governments and private sector providers to work out some kind of modus vivendi by themselves, instead of getting seriously into the business of reforming the environment for private provision of infrastructure. The ADB, on the other hand, stayed the course and has useful experience to contribute to the study, which is being extended to cover South as well as East Asia. The complexity of the subject has been revealed since the Japan-funded study was launched last year. One problem is finance and there is broad agreement that the financing requirements are large, an interim report said. Asia will need infrastructure investments of at least $250 billion a year, says the ADB, and the World Bank broadly concurs.

There is strong private sector interest in infrastructure investment in East Asia and elsewhere, the official report noted, but this is very much contingent on improvements in predictability. When public sector provision of infrastructure became discredited in the early 1990s, it was assumed that global capital markets would be willing to fill the gap. But disputes arose between private investors and governments over contract terms, changes in political and other conditions, leading to some dramatic withdrawals from projects. To overcome this, development banks are now being asked to act as mediators by clearly setting ground rules before high-profile disputes arise.

Multilateral development banks have a role to play in acting as honest brokers between the public and private sectors, and in improving policy predictability for investors, said a summary of the recent Bali workshop on the tripartite study. But it is also accepted now that no amount of smart financing techniques can, alone, bridge the gap between private investors and the need for infrastructure in the developing world. While financial engineering can help, it cannot overcome poor project economics or bad policies.