Boosting Infrastructure in Emerging Asia

NOVEMBER 20, 2019

Manal Fouad

Fiscal Affairs Department, IMF

"Shinkansen" by Antonio Tajuelo is licensed under CC BY 2.0

Infrastructure is essential to support sustainable and equitable growth in Asia.• Most countries in Asia experience infrastructure bottlenecks.

• Emerging and developing Asian countries needs more infrastructure to achieve Sustainable Development Goals (SDGs).

TRANSPORT POWER SANITATION

Outline

I. State of infrastructure and public investment in Emerging and Developing Asia (EDA)

Why does Asia need more and better infrastructure spending?

II. How to meet the large infrastructure needs in Asia?

Impact of different financing options and public investment efficiency on growth and debt

I. State of Infrastructure and Public Investment in Emerging and Developing Asia (EDA)

Public investment has been high in Asia relative to peers in the past 25 years.

General government investment by income level(percent of GDP, IMF staff estimates)

General Government Investment by region (percent of GDP, WEO)

0

2

4

6

8

10

12

14

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018Emerging and Developing Asia (EDA)Emerging and Developing EuropeMiddle East, North Africa, Afghanistan, and PakistanSub-Saharan AfricaLatin America and the Caribbean

Emerging and Developing Asia (EDA)Advanced Economies (AEs)Emerging Markets (EMs)Low-Income Developing Countries (LIDCs)

However, infrastructure outcomes in emerging Asia are still lagging behind.

The infrastructure quality score in emerging and developing Asia is below emerging and developing

Europe and the Middle East and North Africa.

Perceptions of infrastructure quality have stagnated since 2012.

Perception of Infrastructure Quality by Region (2017, World Economic Forum)

Perception of Infrastructure Quality by Income (2006-2017, World Economic Forum)

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017In

fras

truc

ture

Qua

lity

(Sca

le: 1

-7)

Emerging and Developing AsiaAdvanced EconomiesEmerging MarketsLow-Income Developing Countries

1.0

2.0

3.0

4.0

5.0

Emerging andDeveloping Asia

Emerging andDeveloping Europe

Middle East, NorthAfrica, Afghanistan,

and Pakistan

Sub-Saharan Africa Latin America and theCaribbean

Infr

astr

uctu

re Q

ualit

y (S

cale

: 1-7

)

However, infrastructure outcomes in emerging Asia are still lagging behind.

Physical measures of access to infrastructure also suggest emerging and developing Asia still lags behind emerging markets on average.

Measures of Infrastructure Access (2017, World

Development Indicators)

0

20

40

60

80

100

120

0

2

4

6

8

10

12

Public educationinfrastructure

Electricity productionper capita

Public healthinfrastructure

Access to treatedwater (RHS)

EDA AEs EMs LIDCs

Left hand axis: education infrastructure is measured as secondary teachers per 1,000 persons; health infrastructure as hospital beds per 1,000 persons; and electricity production as kWh per 1,000 persons.

Right hand axis: access to water is measured as percent of population.

Therefore, emerging and developing Asia would need to improve the infrastructure outcomes of public investment spending.

Public Investment Efficiency Scores (IMF

staff estimates)

Note: the efficiency gap measures the relative difference between a country’s performance and best performers.

0.0

0.2

0.4

0.6

0.8

1.0

EDA AEs EMs LIDCs

Efficiency gap of 34%

Efficiency gap of 15% Efficiency

gap of 31%Efficiency gap of 39%

Publ

ic In

vest

men

t Effi

cien

cy In

dex

(PIE

-X)

II. How To Meet Asia’s Large Infrastructure Needs?

How to meet Asia’s large infrastructure needs?

More / Better infrastructure in emerging Asia

Debt / tax financing

Private sector financing

Public investment

efficiency gains

Public debt in emerging Asia has stagnated between 40 and 50% over the past two decades.

0

20

40

60

80

100

120

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Emerging and Developing AsiaEmerging and Developing EuropeMiddle East, North Africa, Afghanistan, and PakistanSub-Sahara AfricaLatin America and the Caribbean

General Government Gross Debt (percent of

GDP, WEO)

a. Debt / Tax financing

Should the boost in infrastructure spending be financed by tax measuresor borrowing?

Short to medium term: debt financing yields more growth than tax measures… but also more debt.

Long term: growth pickups are similar for borrowing and VAT… but borrowing significantly increases debt.

debt, higher interest rate

elasticitydebt, lower interest rate

elasticity

VATIncome

tax-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

0.0 0.1 0.2 0.3 0.4

Pub

lic d

ebt

(% o

f GD

P)

Real GDP (%)

debt, higher interest rate

elasticitydebt, lower interest rate

elasticity

VATIncome

tax-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

0.0 0.5 1.0 1.5 2.0

Pub

lic d

ebt

(% o

f GD

P)

Real GDP (%)

Impact of a Permanent One-Percent-Of-GDP Increase of Public Investment Phased In Over Five Years on Debt and Growth (average for six countries, IMF staff estimates)

a. Debt / Tax financing

Source: Vu, Bizimana and Nozaki, 2020. Boosting Infrastructure in Emerging Asia, chapter in FAD’s upcoming IG book

A growing proportion of infrastructure in Asia has been delivered through public private partnerships (PPPs).

PPP Capital Stock in Emerging and Developing Asia (excl. China and Lao PDR)

(percent of GDP; WB and IMF staff estimates)

0

2

4

6

8

10

12

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

25th Percentile 75th Percentile Mean

b. Private sector financing

There are potentially significant fiscal risks associated with PPPs.

Cost and frequency of fiscal risks realization (1990-2014)(Bova et al, 2016)

b. Private sector financing

Prob

abili

ty o

f occ

urre

nce

(per

cent

)

• PPPs fiscal risks are potentially large:• They are typically off-budget and

they can bypass classic spending, deficit or debt controls

• They reduce budget flexibility in the long term

• They can threaten macro-fiscal sustainability

• Occurrence has been limited so far…

… but there is potential for larger fiscal costs in the future.

Sources of fiscal risks associated with PPPs

b. Private sector financing

Construction risk Financial risk

Demand risk Operational risk

Political risk Force majeure

can lead to

Direct budgetarycosts

Call of explicit contingent liabilities

Realization of implicit contingent liabilities

Improving public investment efficiency could increase growth results.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

India Indonesia Philippines SriLanka Thailand Vietnam

No Change in Efficiency

Closing Investment Efficiency Gap (Over 5 years)

Impact of the VAT-financing scenario on growth in 2030

(percentage points of GDP; IMF staff estimates)

c. Public investment efficiency gains

Source: Vu, Bizimana and Nozaki, 2020. Boosting Infrastructure in Emerging Asia, chapter in FAD’s upcoming IG book

Twelve PIMAs have been conducted so far in the Asia-Pacific region.

c. Public investment efficiency gains

BangladeshCambodia

IndonesiaKiribati

MalaysiaMaldives

MongoliaPhilippines

Sri LankaThailand

Timor LesteVietnam

There is potential to enhance public investment efficiency through better infrastructure governance.

c. Public investment efficiency gains

1

2

31. Fiscal targets and rules

2. National and SectoralPlanning

3. Coordination betweenEntities

4. Project Appraisal

5. Alternative InfrastructureFinancing

6. Multi-Year Budgeting

7. BudgetComprehensiveness and

Unity8. Budgeting for Investment9. Maintenance Funding

10. Project Selection

11. Procurement

12. Availability of Funding

13. Portfolio Managementand Oversight

14. Management of ProjectImplementation

15. Monitoring of PublicAssets

Institutional Strength Effectiveness

Average PIMA scores in Emerging Asia(source: IMF; eleven countries)

PIMA allows to identify the least effective infrastructure governance practices in Asia.

PLAN

NIN

G

FISCAL TARGETS AND RULESNATIONAL AND SECTORAL PLANNINGCOORDINATION BETWEEN ENTITIESPROJECT APPRAISALALTERNATIVE INFRASTRUCTURE FINANCING

ALLO

CAT

ION

MULTIYEAR BUDGETINGBUDGET COMPREHENSIVENESS AND UNITYBUDGETING FOR INVESTMENTMAINTENANCE FUNDINGPROJECT SELECTION

IMPL

EMEN

TATI

ON PROCUREMENT

AVAILABILITY OF FUNDINGPORTFOLIO MANAGEMENT AND OVERSIGHTMANAGEMENT OF PROJECT IMPLEMENTATIONMONITORING OF PUBLIC ASSETS

c. Public investment efficiency gains

Good IG practices developed in some countries are opportunities for peer-to-peer learning.

c. Public investment efficiency gains

Conclusion. Recommendations• Asian countries need more and better investment spending to improve

infrastructure outcomes and reach SDGs.

• In emerging Asia, financing an infrastructure spending boost with higher indirect taxes would be desirable in the long run in view of the growth-debt tradeoff.

• Emerging and developing Asian countries can benefit from improving public investment efficiency, which helps produce more and better-quality infrastructure for every unit of money spent on infrastructure investment.

• They could enhance public investment efficiency by focusing reform efforts on their weakest and most critical practices of public investment management.

Thank you!

"Shinkansen" by Antonio Tajuelo is licensed under CC BY 2.0