ASEAN infrastructure financing gap estimated at $264 billion per annum

THE Association of Southeast Asian Nations (ASEAN) faces an estimated $264-billion infrastructure financing gap each year through 2040, with current government investment covering less than half of the region’s projected needs, according to the Asian Development Bank (ADB).

In its $7 Trillion Challenge: Building Tomorrow’s ASEAN brief, the ADB estimated that Southeast Asian economies would need $7.14 trillion in infrastructure investment between 2026 and 2040, equivalent to $476 billion annually or 8.7% of the region’s gross domestic product (GDP).

However, the ADB said current public investment, equivalent to 3.9% of GDP, would cover only 45% of the region’s infrastructure requirements.

“This leads to a shortfall of above 4.8% of GDP: about $264 billion a year in 2015 prices, or almost $4 trillion over the 15 years,” it said.

The estimates are expressed in constant 2015 US dollars and assume that infrastructure investment would remain at current levels through 2040.

It added that estimates from the Private Participation in Infrastructure (PPI) database, which excludes private infrastructure financing and excludes health infrastructure, add less than 0.4% of GDP to current government investment, marginally reducing the gap to about 4.5% of GDP.

“The gap is larger than everything governments now invest. Closing it from public resources alone would mean doubling government investment,” the bank said.

Meanwhile, the latest infrastructure investment requirement is 2.3 times the $3.15-trillion requirement earlier estimated for the 2016-2030 period, a difference of about $3.99 trillion between the two assessments.

Of the $4 trillion rise in requirements, the electricity sector accounted for around $2 trillion of the total, followed by the transport sector at $1.42 trillion, digital infrastructure at $238 billion, health at $227 billion and water and sanitation at $112 billion.

“The resulting composition is 50% electricity, 35.3% transport, 8.2% digital, 3.4% water and sanitation, and 3.2% health,” the ADB said.

Power sector investment requirements are projected at $3.6 trillion over the 15-year period through 2040, as the ADB noted that recent disruptions to energy supplies and major shipping routes have shown how infrastructure risks can quickly become broader economic risks.

“Renewable generation, transmission, storage, diversified supply and cross-border trade reduce that exposure, and these estimates put the cost of such a system at 4.4% of ASEAN output every year to 2040,” the bank said.

Meanwhile, transport will require $2.5 trillion, followed by digital infrastructure ($584 billion), water and sanitation ($244 billion), and health infrastructure (227 billion).

The ADB said that higher borrowing costs, financial market volatility and competing budget priorities are limiting governments’ capacity to finance infrastructure using public resources alone.

“These pressures constrain governments’ capacity to finance infrastructure solely from public resources,” it added.

Private capital also faces limits as uncertainty over tariffs, demand, permits and government support could discourage investors from financing projects with large upfront costs and lengthy payback periods.

“The implication is that the gap will not close by leaning harder on either source. It will narrow only if public money is used in ways that draw private capital in, and if the terms on which that capital enters become more predictable,” the ADB said.

The bank recommended strengthening project pipelines, improving regulatory predictability and using guarantees, viability-gap funding and blended financing to help attract private investment.

However, it cautioned that governments should properly identify and manage contingent liabilities to prevent private participation from creating hidden fiscal risks.

The brief was authored by ADB Regional Lead Economist James P. Villafuerte, Consultant Aniceto C. Orbeta and Principal Social Sector Economist Rouselle F. Lavado. — Justine Irish D. Tabile