Asia's rapid development over the past two decades has brought the continent to the brink of becoming the world's economic powerhouse. However, its infrastructure shortfall – believed to be worth $6500bn between 2015 and 2020 – is threatening to hold the region back, unless it can scrape together the required funding to fill this gap.

The infrastructure bottleneck holding Asia back

Roads, railways, power plants – Asia needs more of them. A lot more. Countries with large populations and rising income levels are setting ambitious infrastructure development goals, eager to tap into new funding sources such as the China-led Asian Infrastructure Investment Bank (AIIB). Meanwhile, companies are on the hunt for lucrative contracts. 

Of course, making big plans is one thing; pulling them off is another challenge entirely. The infrastructure business is notorious for delays and outright failures. And while there may be plenty of money floating around these days, emerging economies still have to fight for investment dollars.

AIIB demand boost 

Yoo Il-ho, South Korea's deputy prime minister, struck an optimistic note at an economic ministers meeting on February 25. The establishment of the AIIB, he said, "will boost demand for new infrastructure investment in the Asian region." Seoul has a plan to capitalise on that demand, the government recently setting up a council of state-run banks and a trade insurer to help South Korean companies bid for projects. 

MA Mannan, Bangladesh's finance minister, also likes what he sees in the AIIB. "We need more capital to carry out the country's development activities," he told lawmakers on February 23. "The AIIB will help us in this regard." Mr Mannan dismissed concerns that joining the China-led institution would compromise Bangladesh's relationships with two other international lenders – the World Bank and the Asian Development Bank (ADB). 

Established last December, the AIIB is seen as a game changer for regional infrastructure development. However, it is not the only newcomer with cash to offer. The $100bn New Development Bank, also known as the Brics bank, is setting up shop in Shanghai. KV Kamath, chief of the institution, signed documents for the establishment of the bank's headquarters in the city on February 27 and revealed that funding could start in April.

A gap to fill 

These multilateral lenders can only do so much, though. 

Japan's Mizuho Research Institute says that Asia will need $6500bn-worth of infrastructure investment between 2015 and 2020. Electricity in east Asia and south-east Asia is estimated to account for about 37% of that. Indonesia, which had roughly 46,000 megawatts of power generation capacity in 2013, wants to add another 35,000 megawatts by 2019. 

Transportation improvements will also be expensive. By the 2030s, the length of urban railroads in eight south-east Asian and south Asian countries is projected to increase by a factor of four. Thailand is mulling bids for four railway projects worth more than $8.4bn; India plans to construct railways in more than 10 cities. 

All of which brings a reality check, as experts say the AIIB, ADB, Brics bank and other such lenders have the means to fund less than 5% of Asia's infrastructure needs. 

Infrastructure competitiveness in Asia

Costly inefficiency   

Asia's emerging economies need to somehow find this money. Better roads, stable power supplies and reliable access to water are all crucial for stimulating economic activity, attracting foreign businesses and improving productivity. A failure to develop adequate infrastructure can land a country in the middle-income trap – wherein economic growth slows after per capita income reaches a certain level. 

As things stand, several Asian economies are hampered by poor infrastructure. The World Economic Forum's latest global competitiveness index of 140 countries ranks Indonesia's infrastructure at 62nd, the Philippines' at 90th and Myanmar's at 134th. The ADB estimates that traffic congestion shaves up to 5% off Asian countries' gross domestic product every year.

Governments facing budget limitations see public-private partnerships (PPPs) as one answer. ADB president Takehiko Nakao has met with Indian prime minister Narendra Modi, Indonesian president Joko Widodo and Chinese finance minister Lou Jiwei in the past year or so and believes there is "very strong interest" in PPP arrangements. 

The Philippines has set up its PPP Center under its National Economic and Development Authority. A small army of government officials, along with legal and finance experts, is responsible for planning projects that draw on private sector capital and know-how. Last year, Indonesia's government created a one-stop service for obtaining investment permits. It also set up a committee of senior ministry officials to help fast-track priority projects.

The PPP challenge 

But sealing PPP deals can be a challenge, despite there being a lot of capital available. Indeed, bankable infrastructure projects – the kind that give private banks the confidence to lend – are rare in Asia's emerging markets. "The issue is not funding but a lack of good projects," says Rajeev Kannan, director of the structured finance department at Japan's Sumitomo Mitsui Banking Corp (SMBC). 

Negotiations between governments and private investors take time. Opaque regulations are often problematic. And project delays are common. For instance, the forlorn concrete pillars that stand in the middle of a busy Jakarta thoroughfare are remnants of a monorail project that began more than a decade ago. Construction was stalled for years due to financing problems, revived in 2013, and scrapped altogether two years later. 

Land acquisition is perhaps the most typical obstacle, however. This has tripped up a Japanese and Indonesian consortium that is aiming to build a 2000-megawatt power plant in the province of Central Java. The project has been delayed for about three years. 

Political instability is another factor that can bring either delays or cancellations to infrastructure projects. In Thailand, a Bt350bn ($9.91bn) flood prevention project was halted shortly after the military ousted the elected government in May 2014. The new administration justified the decision by saying the bidding process had lacked transparency, but industry watchers were shocked, given that the winner was chosen through an international tender. 

A similar stoppage could lie ahead in Myanmar. In 2015, parliament gave the green light for a port and industrial park to be built in the western state of Rakhine. A consortium led by China's Citic Group is behind the project. But Myanmar's new government, led by Aung San Suu Kyi's National League for Democracy, has pledged to evaluate the impact of large-scale construction on surrounding areas. Many citizens oppose what they see as China's dominance over the domestic economy, raising the possibility of the government rethinking the project.

Infrastructure needs in Asia by sector

Lending constraints   

Yet another impediment for project financing is exchange rate volatility. This is a serious concern for banks. Dollar-denominated loans can help to reduce the risk, but they require governments to provide guarantees in a foreign currency – something countries with tight budgets and limited foreign reserves cannot afford. 

Upcoming capital adequacy regulations for major banks in the US, Europe, Japan and China may also dampen the appetite for financing long-term infrastructure projects. "If more deals start happening in Asia," says one banker, "tighter regulations will be a big constraint."

On the flip side, a PPP project in Singapore shows how clear regulations and low political risk can go a long way toward attracting foreign businesses.

Construction of the Singapore Sports Hub, an athletic complex that includes a 55,000-seat stadium with a retractable roof, was handled by France's Bouygues. "The Singapore government provided payment based on completion and availability of the stadium," says Mr Kannan at SMBC. "Although sponsors and lenders had to take some risk on non-contracted revenue, a majority of the risk was mitigated by payment from the government of Singapore." The country's prime minister, Lee Hsien Loong, declared Sports Hub open in July 2015; a successful refinancing was carried out in December. 

"If you don't reform your system and provide more transparency and risk mitigation, then the money will go to somebody who does," says Julian Critchlow, a partner at Bain & Co.

Asia has a prime opportunity to become the world's economic powerhouse. The region accounted for more than half of global gross domestic product in 1820, according to estimates by the late economic historian Angus Maddison. The figure was down to 18% in the 1950s, at the peak of colonisation, but by 2008 it had rebounded to 43%. 

To make the most of that opportunity, however, Asian countries will need to remove the bottlenecks that are hindering infrastructure investment. 

Nikkei deputy editor Hiroshi Toyofuku and Nikkei staff writers Tamaki Kyozuka, Koichi Kato, Motokazu Matsui, Minoru Satake and Yuji Kuronuma contributed to this article.


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