Southeast Asia’s $3.5 trillion infrastructure crisis

By: Euan Black - Posted on: March 2, 2017 | Business

Weak infrastructure threatens to bring the region’s breakneck development to a grinding halt, says the Asian Development Bank

Singapore
Singapore. Photo: mivanov via VisualHunt.com

Rapid economic growth, a skyrocketing population and devastating climate change mean Southeast Asia will need to ramp up its investment in infrastructure if it is “to maintain its growth momentum [and] eradicate poverty”, according to a recent report from the Asian Development Bank (ADB).

The ADB projects that the entire region will need to invest $210 billion a year between 2016 and 2030 – a total of $3.15 trillion – to keep pace with its current development trajectory. As it stands, the region – excluding Laos, Brunei and Singapore – spends $55 billion a year on infrastructure development, $102 billion less than needed.

Srinivasan Ancha, the Bank’s principal climate change specialist, warned that a failure to dramatically increase infrastructure spending would lead to reduced productivity and increased distribution costs and “reduce its economic competitiveness”.

“Power outages already restrain economic growth and underdeveloped transportation networks restrict the flow of people, goods, and services within cities and between urban and rural areas. City traffic congestion alone in Manila, Bangkok, Jakarta and Hanoi costs huge amounts in lost productivity and wasted fuel,” Ancha told Southeast Asia Globe.

Climate change has worsened the effects of poor infrastructure in the region, with Southeast Asia’s long coastlines and low altitudes rendering the region particularly vulnerable to unpredictable weather.

“All countries of Southeast Asia are affected by climate change, but the most affected in terms of potential GDP loss will be Vietnam, Indonesia and the Philippines,” Ancha wrote. “In these countries, the potential loss from climate change can vary from 6% to 11% of GDP if climate change is not addressed.”

While the public sector remains the largest source of funding for infrastructure projects in Southeast Asia, the report found that public spending as a share of GDP in Indonesia, the Philippines and Thailand has been in decline since the 1997/98 Asian Financial Crisis and had never recovered to pre-crisis levels.

Reforms to government spending practices, the report suggests, could generate enough revenue to bridge around 40% of the $102 billion funding shortfall with the remaining 60% potentially coming from public-private sector partnerships and other forms of private sector financing.

But according to Siwage Dharma Negara, a research fellow at the Institute of Southeast Asian Studies specialising in economics and development studies, public-private partnerships are a good idea in theory but present an unrealistic option for Southeast Asia.

“With infrastructure projects, the risk is high and the projects take a long time to implement so private investors generally aren’t interested,” he said.

“In order to bring in more private investment, governments need to sell infrastructure projects to private investors more efficiently by providing detailed designs and funding for proper feasibility studies.”

Weak rule of law, endemic corruption and poor transportation networks also serve as further obstacles to investment.

Ancha acknowledged that, besides the power and telecommunications sector, private investment “will be limited for the foreseeable future”.

“Based on current trends of infrastructure investment in the region, it is very unlikely that the region will overcome the shortage in funding of $102 billion per year,” he said. “As a result, infrastructure deficits will continue to prevent the region from realising its full potential.”