Boosting private investment in Asian infrastructure

Infrastructure investment has helped to encourage economic growth in East and South Asia. However, increasing demand has highlighted shortfalls in the quantity and quality of infrastructure. This threatens to limit growth, particularly in India. Meanwhile, hopes that the private sector would finance infrastructure have not been met.

Apaper from the Institute of Development Studies, UK, and Overseas Development Institute, UK, reviews the challenges for infrastructure policy andinvestment in East and South Asia. Infrastructure quality in South Asia is particularly low, with the exception of mobile phones. Only sixpercent of people in Afghanistan have electricity. Only 39 percent of Bangladeshihouseholds have access to all-season roads. No Indian city with a population ofover a million has a 24-hour water supply.

The fear of politicalinterference discourages potential investors in infrastructure. Existing subsidies for infrastructure services are notpro-poor, as the size of the subsidy is generally proportional to the use ofthe service, rather than focused on increasing access to those withoutservices. Where water and energy costs are politically controversial, it is notpossible for service providers to apply pricing based on cost recovery.

Withthe exception of telecommunications, there has been limited reform in thesectors where infrastructure is important. The private sector only generatesten percent of India’s electricity, far lower than anticipated in the early1990s. In Bangladesh, inefficiency andbureaucracy in Chittagong reduce income from exportsby up to one billion US dollars each year. In many parts of the region,governance – which affects the quality of public investment as well as theincentives for private investment – is getting worse.

Theauthor notes that:

• Infrastructureinvestment in rural roads and improved water and sanitation services has thegreatest direct impact on poor people.
• The infrastructure financing needed for water and sanitation – which hasdirect and well-established benefits for health and well-being – is relativelylow compared to the costs of power and telecommunications.
• There is scope for greater cooperation with dams on major rivers thatcross national borders, such as the Ganges, Brahmaputra, Mekong and Indus.
• While there has been progress in East Asia in regional planning ofroads, rail, gas pipelines and telecommunications systems, cooperation in theelectricity sector remains limited.

Governments have a vitalregulatory role and a responsibility toimprove the environment for private investment, by protecting property rightsand pricing, and subsidy policies that enable investors to make profits. Theauthor recommends that governments:

• significantly increase the proportion of Gross Domestic Product allocatedto infrastructure
• recognise that private investment is not a global solution: even in areaswhere it is likely to be attracted, governments may be required to provideguarantees to ensure investor confidence
• acknowledge that effective public sector operations depend on therecovery of service costs
• control corruption of monopoly service providers
• ensure that decisions reflect the interests of poor people
• emulate China’s success in attractingprivate financing for major roads, freeing public resources for the developmentof rural or subsidiary roads.