Asia's infrastructure needs are vast, though they do vary from country to country, with the highest demand being in low-income countries. Lawrence Yeo explains what is being done to meet these needs.

The Asian Development Bank (ADB) reports that Asia infrastructure investment is sourced primarily from the public sector (especially since the end of World War Two), followed by official development assistance and private participation in infrastructure. With public sector budgets being stretched, private institutional investors are increasingly providing more financing sources from privatisations (in the 1980s) and public-private partnership schemes (in the 1990s). These two capital sources help investment in Asia infrastructure and capital projects to reach 7% annually, projected to reach an annual volume of about $5000bn by 2025.

Public capital comes from central, regional, local and other government institutions, plus national development banks and multilateral development banks. Private capital is provided in two main forms: corporate finance (on balance sheet, from the resources of infrastructure companies) and project finance. In Asia, bank loans still dominate infrastructure project finance, and public sector banks play a major role, especially in China.

Across Asia, spending on infrastructure (as a percentage of GDP) varies. The first difference is geographic. The highest spender is China, with South Korea as the middle spender and then south-east Asia being the lowest spender. Underinvestment in infrastructure and poor maintenance of existing infrastructure are economic growth constraints and lead to infrastructure bottlenecks, in turn attracting less inward FDI, which creates jobs. Casual research reveals a great many Asian infrastructure projects that are either suspended, aborted over decades, or suffering from frequent breakdowns and accidents when funds are focused on the less strategic areas, depriving local communities of badly needed social benefits and impacts.

Second, Asia infrastructure spending differs by income. Low-income countries experience significantly higher infrastructure needs (12.5% of GDP) than middle-income (8.2%) and high-income (2.3%) countries. An estimated spending gap of $1000bn per annum is projected just for developing economies alone.

The ADB also found that 32 developing Asian economies would need infrastructure investment of $8200bn (in 2008 prices) between 2011 to 2020. About 50% of investments would go into energy, about one-third into transport (mostly roads), and the rest into telecommunications, water and sanitation. Two-thirds is needed for new capacity and one-third for maintenance and the replacement of existing assets.

How will Asia infrastructure investment evolve? Private capital investment is traditionally very dependent on bank loans. Expect more non-bank financial institutional players such as pension funds, insurers, investment funds and sovereign wealth funds. Also, there may be a greater use of securitisation and capital markets in infrastructure finance together with further development of bond markets.

Lawrence Yeo is CEO of AsiaBIZ Strategy, a Singapore-based consultancy that provides Asia market research and investment/trade promotion services. 

This article is sourced from fDi Magazine
fDi Magazine

Global greenfield investment trends

Crossborder investment monitor

fDi Markets is the only online database tracking crossborder greenfield investment covering all sectors and countries worldwide. It provides real-time monitoring of investment projects, capital investment and job creation with powerful tools to track and profile companies investing overseas.

Click here to find out more about fDi Markets

Corporate location benchmarking tool

fDi Benchmark is the only online tool to benchmark the competitiveness of countries and cities in over 50 sectors. Its comprehensive location data series covers the main cost and quality competitiveness indicators for over 300 locations around the world.

Click here to find out more about fDi Benchmark

Research report

fDi Intelligence provides customised reports and data research which deliver vital business intelligence to corporations, investment promotion agencies, economic development organisations, consulting firms and research institutions.

Find out more.