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South Asian economies are suffering from infrastructure deficit in areas of natural resources, water, energy, roads and rail networks. Infrastructure investment builds the bridge that connects the old growth engine of industrialisation with the new growth engine of sustainable productivity gains. Spending on roads, ports, power stations, water and railways increases aggregate demand in the short-term, and in the medium-term acts as an enabler, creating a cost-effective and flexible business environment that allows manufacturing and high-yield agriculture to fulfil their potential as drivers of long-term economic growth.
Unlike other regions such as Africa, West Asia or Latin America, South Asia is not well endowed with critical natural resources such as land, water, minerals and hydrocarbons. Presently the per capita arable land in South Asia is 0.16 hectors, much lower than the world's average of 0.24 hectors. Similarly, the South Asian region accounts for just 2.0 per cent of the world's forest cover, which is essential to maintain ecological balance and biodiversity, despite having 3.8 per cent of the world's total surface area. Although three large watersheds (the Brahmaputra, the Ganges, and the Indus) serve the region, the per capita availability of fresh water is much lower compared to other parts of the world. With increasing urbanisation, the most critical challenge for the South Asian region will be that of water. In respect of energy, which is so essential for industrialisation and economic growth, South Asia fares poorly. The region has only 85 trillion cubic feet of natural gas reserves (1.69 per cent of 5,016 trillion cubic feet of world's total gas reserves). A recent report of the World Bank, Transport Challenges in South Asia Region, identifies transport infrastructure gap as one of the main constraints to economic growth and to attract foreign investments.
The first priority, therefore, is to maximise the efficiency and impact of current spending by fast-tracking infrastructure delivery and clearing bottlenecks to create pipeline of transparent, well-structured projects. Infrastructure will also benefit from a robust and predictable regulatory environment that assures investors that schemes will not be cancelled or stalled halfway through construction. Two central inter-linked challenges to infrastructure investment remains: what to build and how to pay for it.
With an average sustained growth rate of 6.7 per cent over 2000-2012 (World Bank, 2013), South Asia is emerging as the second fastest growing region in the world. Financial pundits predict that the growth will continue at 6.0-8.0 per cent until approximately 2025 (Tan 2010). In this context South Asia's emerging markets may avoid the middle-income trap, need to create foundations for the upcoming phase of growth and most importantly they need to invest in infrastructure (Gordon French 2015). Because, at the moment, inadequate infrastructure is possibly the biggest brake on emerging markets' medium-term growth prospects. It stunts both production and investment: few businesspeople will invest in large-scale production capacity when a reliable supply of electricity cannot be guaranteed. Few farmers will upgrade their land if their crops are going to rot before they get to market because of bad roads and inadequate warehousing. Institutional and even marginal investors as well will feel uncomfortable in the capital market because of many manipulations.
Previously at the initial stages of development, when a worker was moved from the land to a factory, their value-added contribution to the economy on average was four times. Much of South Asia's extraordinary growth in the decades has been underwritten by this one-off conversion, but the windfall gains of rapid industrialisation are starting to decline and if the region is to continue on the road to prosperity, it needs to find ways to boost productivity and encourage new economic activity. Though since the early 1990s, the level of global integration of the region was increased by the implementation of trade and investment reforms, now it has reached its saturated point as attention is increasingly being paid to promote greater regionalism.
Closer affiliation to China via multilateral frameworks such as South Asian Association for Regional Cooperation (SAARC), Bangladesh-China-India-Myanmar Forum for Regional Cooperation (BCIM), Association of Southeast Asian Nations (ASEAN) and Asia-Pacific Trade Agreement (APTA) creates further opportunities for economic benefits through increased trade, foreign direct investment (FDI), infrastructure building, etc. Empirical estimates show that some $8.0 trillion worth of infrastructure investment in South Asia will be required over the next 15 years.
Infrastructure has traditionally been paid for by government. Although governments will continue to play a key role, the old model has inherent weaknesses. Liquidity and legal safeguards are necessary to attract the sort of private investment required to fund the region's infrastructure needs and serve as a more effective mechanism for converting South Asia's savings into investment. Policymakers, regulators and market participants should work together to develop regional bond markets, notably through the South Asian bond market initiative, but it will not happen overnight. Initially capital markets financing may be expected to gravitate towards less risky projects existing now, allowing bank financing to be recycled into new greenfield developments.
South Asia's inadequate infrastructure could shamble its attempts to achieve strong, sustainable growth, but handled right it could also be the solution to a range of challenges. The sort of financial and legal architecture that will funnel resources towards building highways, power networks, and ports will go on to provide the capital to fund the new wave of growth. International institutions like the World Bank and the Asian Development Bank as well as newer entrants like Brazil-Russia-India-China-South Africa (BRICS) and the proposed Asian Infrastructure Investment Bank (AIIB) may not have sufficient resources to fill the infrastructure funding gap on their own. But they can leverage their credit-worthiness to guarantee infrastructure bonds issued by local entities to mobilise Asian capital for South Asian growth. The creation of Pan-Asia Exchanges will generate more crude capital to build infrastructure among BCIM in particular and SAARC region in general. The issuance of local currency infrastructure bonds with meaningful amount guaranteed by big multilateral agencies would achieve several goals simultaneously. It would raise the money needed to build roads, bridges and power stations; create deeper, more liquid bond markets that private enterprises could use to raise capital for investment in new growth opportunities opened by improved infrastructure; eliminate the potential danger of currency and maturity mismatches; and, last but not least, it would provide a pool of secure long-term investments for Asia's ageing population.
South Asia's economic linkages have grown faster than its physical linkages. The region needs to improve connectivity through upgraded intra-regional roads, railways and ports that connect manufacturers with consumers. Regional banks, multilateral financing institutions and agencies like the Association of South East Asian Nations and the SAARC, BCIM can assist by promoting regulatory standardisation and designing financing structures to be used across markets.
Dr Muhammad Abdul Mazid is a former Secretary to the Government and a former Chairman of NBR.