Paradigm shift in financing infrastructure needs

Abdul Mazid | Published: October 12, 2018 21:46:35

Previously at the initial stages of development, moving a worker from farmland to factory usually fetched a very high value-added contribution to the economy. Much of South Asia's extraordinary growth in the decades has been underwritten by this 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.

With a sustained average growth rate of 6.7 over 2000-2016 (World Bank, 2017), South Asia in general and Bangladesh in particular are emerging as the fastest growing region in the world. Financial pundits predict that the growth will continue at 6-8 per cent until approximately 2025. In this context, South Asia's emerging markets may avoid the middle-income trap, and for that to happen the region needs to create foundations for the upcoming phase of growth, most importantly to invest in infrastructure. At the moment, inadequate infrastructure is possibly the biggest brake on emerging markets' medium-term growth prospects. It stunts both production and investment. Few business people will invest in large-scale production capacity when they cannot guarantee a reliable supply of electricity. 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 will also feel discomfort in the capital market because of many irregularities.

Bangladesh still suffers from infrastructure deficit in the area of natural resources, 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 plenty of natural resources such as land, water, minerals and hydrocarbons. Presently, per capita arable land in South Asia is 0.16 hectors, much lower than the world's average of 0.24 hectors. Similarly, South Asian region accounts for just 2 per cent of the world's forest resources, which is essential to maintain ecological balance and bio diversity, despite having 3.8 per cent of the world's total surface area. With respect to fresh water, although three large watersheds (the Brahmaputra, the Ganges, and the Indus) serve the region, 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 Asia region will be that of water. With respect to 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 out of the world's 5,016 trillion cubic feet of total gas reserves (1.69 per cent). 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.

Infrastructure has traditionally been paid for by the governments, and although governments will continue to play a key role, the old model has inherent weaknesses. Liquidity and legal safeguards 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. Policy makers, 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 existing projects, allowing bank financing to be recycled into new Greenfield developments.

South Asia's and Bangladesh's in particular, inadequate infrastructure could stifle 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 capital to fund the new wave of growth that will make improved infrastructure possible. International institutions like the World Bank and the Asian Development Bank as well as newer entrants like BRICS and the proposed Asian Infrastructure Investment Bank 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 substantial amounts guaranteed by big multilateral agencies would achieve several goals simultaneously. It would raise the money needed to build roads, bridges and power stations; it would create deeper, more liquid bond markets that private enterprises could use to raise capital for investment in new growth opportunities created by improved infrastructure; it would 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: it 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 South Asian Association for Regional Cooperation, BCIM  can assist by promoting regulatory standardisation and designing financing structures that can be used across markets.

Dr Muhammad Abdul Mazid, former Secretary to the Government and former chairman, NBR.

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