Public Financing of Infrastructure in Asia: In Search of New Solutions
Emerging Asian countries must pursue tax reforms, use spillover effects from infrastructure to encourage private investment, and find a good balance between public and private financing to meet its infrastructure needs.
Infrastructure development is critical for sustainable economic growth and productivity in developing countries. A joint study in 2009 by the ADB and the ADB Institute, revealed that differences in infrastructure development account for a third of the overall difference in output per worker between Latin America and East Asia while access to roads and electricity is associated with increases in income in Thailand, lower poverty rates in India and Viet Nam, and better health outcomes in Indonesia. Nonetheless, the macroeconomic effects of infrastructure in developing countries with capacity constraints are often undermined by lack of critical infrastructure in key economic sectors due to huge infrastructure financing gaps estimated at $22.5 trillion between 2016 and 2030. Despite efforts to diversify sources of funding, including private capital markets, the public sector remains a key provider of funds for infrastructure investments accounting for 70% of the infrastructure investments, followed by the private sector which provides 20%, and multilateral agencies which provide the remaining 10%. Increasing fiscal constraints in many Asian countries, however, pose challenges for maintaining a stable source of funding, and result in underinvestment in critical infrastructure. This policy brief examines current fiscal constraints that inhibit public financing in emerging Asian countries (e.g., governance issues) and identifies new public financing sources such as using tax revenues to refinance infrastructure and institutional investor funds, besides suggesting improvements in existing public and private infrastructure financing methods.
- Infrastructure development is critical to sustain economic growth development in Asia. Unfortunately, the gains from infrastructure development are not fully realized in Asia due to huge financing gaps.
- Over 70% of infrastructure investments in Asia are still funded by public resources and remain a key challenge for many countries with limited budgets and fiscal constraints.
- To meet their growing public financing targets, emerging Asian countries must (i) double their current tax-to-gross-domestic-product ratios by pursuing comprehensive tax reforms, (ii) utilize the spillover effects of infrastructure by investing in new investments that can increase returns to private investors, and (iii) find a more balanced approach to financing, one involving the private and public sector.