New infrastructure will catapult the region into the future, but challenges on funding and private investment demand solutions.
Living standards are rising, a new middle class with disposable income is emerging, consumerism is growing and demand for enhanced lifestyles, modern technology and digital capabilities is soaring. Asia’s time has come for dramatic infrastructure investment, planning and long-term commitment that will catapult economic and social development into the 21st century and beyond.
Almost 650 million people live in the Association of Southeast Asian Nations (ASEAN) region alone, making it one of the largest markets on the globe, while the 45 nations of 'developing Asia' have a combined population of 1.7 billion, according to the Organisation for Economic Co-operation and Development (OECD).
A colossal paradigm shift on infrastructure development has begun over the last few years, with several countries undertaking or announcing projects to increase land-, air- and sea-based connectivity within and between borders. The entire region, as well as China, has launched unprecedented national and transnational initiatives and megaprojects to develop hundreds upon hundreds of new highways, airports, railways, ports, utilities and telecommunications capabilities.
Thailand, Southeast Asia's second-largest economy, recently approved legislation to attract investment for its US$45 billion Thai Eastern Economic Corridor - a plan to transform three provinces into an economic zone of futuristic 'smart' cities, technological manufacturing and transportation links to its ASEAN neighbors. Another US$5 billion initiative calls for Thailand to build a 1,200-kilometer high-speed rail network connecting it to China.
The 4,500-kilometer Kunming -Singapore high-speed railway will erect four new rail routes from China to Singapore, Thailand, Vietnam and Cambodia.
Airport projects are equally massive and many are abandoning the traditional airport model in favor of modern aerotropolis concepts - destination cities featuring retail, entertainment and business centers catering to travelers and non-travelers alike. China is investing about US$12 billion this year toward its five-year plan to build 66 airports. Japan, in anticipation of Tokyo's 2020 Olympics and future tourism numbering 60 million visitors annually by 2030, is racing ahead with massive transportation infrastructure projects including a recent US$18 billion privatization and development initiative for two Osaka airports.
China's Pearl River Delta region - 'the factory of the world' with almost 70 million people and combined 2016 GDP of US$1.38 trillion - is the center of the Greater Bay Area initiative to forge a gigantic economic zone among Hong Kong, Macau and Guangdong province cities. The development envisions an interconnected technology and innovation 'megacity' generating GDP of US$4.6 trillion by 2030 and serving as a gateway to the world for Chinese companies seeking global expansion.
As KPMG’s 2018 report A lens onthe Greater Bay Area notes: "The GBA has the potential to become the most-diversified city cluster in the world by leveraging its wide range of industries and strengths across its cities, such as financial and professional services, high-tech manufacturing, and technology and innovation. This unique combination provides significant opportunities for companies that are looking to enter or build on their existing presence in China."
The Greater Bay Area and other projects underway or planned in Asia and beyond are, in many cases, components of China's staggering vision for transnational infrastructure known as the Belt and Road Initiative (BRI). A project of historic proportions, it will eventually interconnect more than 70 countries in Asia, the Middle East and Europe to forge immense new global opportunities for economic and social development, trade and investment. When complete, some observers say it will transform the face of global trade.
The BRI plan envisions countless new highways, airports, railways, ports, telecommunications capabilities and more. Launched in 2013, the BRI is a 21st-century version of the iconic Silk Road trading routes, a trade and infrastructure web across Asia and into Western Europe and the Middle East. The initiative comes with an estimated cost of up to US$8 trillion.
China is not alone as a major international investor in Asian infrastructure.
Significant investment to support the transformation projects in ASEAN, for example, has already been made and continues to come from Japan and South Korea, as well as other nations, plus multilateral development agencies and policy banks.
But the capacity of governments, private banking and multilateral banks will only go so far, leaving enormous and inevitable funding gaps to fill. Worth noting is the Asian Development Bank's (ADB) estimate that the developing Asia region - representing the ADB's 45 member nations - will need to invest up to US$26 trillion between 2016 and 2030 or about US$1.7 trillion annually just to maintain its growth momentum. The ADB notes in its 2017 Meeting Asia's Infrastructure Needs report that, despite dramatic growth in recent decades, about 400 million people still lack electricity and 300 million lack access to safe drinking water.
The availability of future financing, however, is not the primary challenge for Asia's infrastructure transformation. Huge sums of private capital seeking infrastructure projects are poised on the global sidelines. The bigger issue is that few of these futuristic infrastructure projects or pipelines are structured to attract private capital from international investors, who expect and require prioritized and financially feasible projects, institutional stability, and confidence in the rule of law and contract certainty.
These investors, unfortunately, have little choice but to view most emerging markets and their grand plans as high-risk due to regulatory uncertainty, weak institutional capacity, lack of procurement transparency and inadequate project prioritization and preparation.
Some countries - like the Philippines and Thailand - possess the economic profile to attract at least some private financing for future infrastructure. But overall, the challenge of getting projects off the ground - and sustained for the long term - remains a major issue.
For now, certainly, a number of big projects are proceeding rapidly enough as the various governments place their bets. But still unanswered are looming questions concerning the risk profile and structuring of projects, the capacity of countries to continually fund their projects, compliance issues, sustainability and more.
Will foreign governments eventually take up some of the slack? Infrastructure investment company InfraCo Asia, for example, is backed by a group of governments - including the UK, Australia, the Netherlands, Switzerland and Sweden - and funds pre-financial close, early-stage, high-risk infrastructure projects. Taking an equity stake in infrastructure projects that contribute to economic growth, social development and poverty reduction, InfraCo Asia steps in where the private sector is initially unable or unwilling to invest. By mitigating early-stage development risks, it facilitates private-sector participation.
For now, Asia's governments will continue to do the heavy lifting on financing. But emerging-market governments will clearly need to sharpen their focus on five key fundamentals if there's hope of enticing private investment that's critical to bringing their grand infrastructure visions to life:
Asia is poised at the threshold of an exciting and truly historic new golden era of economic and social development. But it will be up to the regional governments of its emerging markets to kick open the door to the vast benefits of globalization that await.
Asia's dramatic flurry of infrastructure planning and development comes with a remarkably hefty price tag. China's Belt and Road Initiative is estimated to cost US$8 trillion. Beyond that, the Asian Development Bank estimates that the developing Asia and Pacific region will need to invest up to US$26 trillion between 2016 and 2030 - or about US$1.7 trillion annually - just to maintain its growth momentum, compared to annual current investment in infrastructure estimated at US$881 billion.
Multilateral banks will have a significant role to play if Asia hopes to bring its infrastructure visions to life within any given time frame. But how effectively can the world’s multilateral banks — as they currently pursue strategies tochange their own ways — position themselves to perform and capitalize on Asia’s historic initiatives? The reality is that Asia’s infrastructure transformation comes at a time when traditional multilateral models are failing, prompting mostto pursue dramatic reforms and new approaches.
Amid significantly weaker returns in the low-interest environment – and an inability to keep up with demand as global infrastructure projects proliferate in number and soar in size — many of the world’s multilaterals are pursuing a new role, one that’s more about mobilizing and facilitating private capital versus lending stakeholder capital. They are exploring opportunities to ‘open up’ markets for private investment and looking for new ways to move deals out of the pipeline.
So far, however, most are responding slowly to today’s rapidly evolving global environment amid the challenges they face. These include the required change in culture toward mobilizing money instead of lending it; a lack of skills to sustain a new model; the need to provide innovative new products that offer simplicity rather than complexity; and the lingering preference among stakeholders for straight loans with clear structures.
These are significant challenges in a world where megaprojects, the new normal in developed and developing markets, are creating unprecedented demand for massive amounts of funding. It remains to be seen if multilaterals can innovate capabilities and offerings in time to capitalize on Asia’s ambitious journey into the future.