Quality must prevail in post-pandemic infrastructure development
As Asia and the Pacific comes out of the crisis with significantly larger public debts, their infrastructure investments will need to be efficient, affordable, and sustainable.
Out of crisis comes opportunity is a common refrain and perhaps there is no better time than now to preview what follows on the COVID-19 relief and recovery support. Infrastructure development has been a cornerstone of Asia and the Pacific’s ’s successful growth and development strategy. It has served to strengthen income per capita, improve livelihoods and lower poverty through investment led growth. In parallel, it has supported the Sustainable Development Goals, recognizing the crucial link between infrastructure development and service delivery.
High quality infrastructure is critical to continue to deliver on these gains. The Quality of Infrastructure Investment (QII) was central to the deliberations of the G20 Finance Ministers and Central Bank Governors, which endorsed the new G20 Principles for QII at their meeting in Fukuoka, Japan in 2019.
This comprises a broader, robust and dedicated approach to sound project preparation practices over the project lifecycle including the adoption of innovative technology, environmental and social sustainability, resilience against natural disasters, and governance for procurement transparency and robust institutions. Investments aligned with these principles will support the value for money proposition, help extend the life of the infrastructure asset and thereby increase the returns on investment across both end-users and investors, enhancing social welfare.
Gradually, these principles are gaining traction across countries. In the People’s Republic of China (PRC), for example, the Measures for the Administration of Infrastructure and Public Utility Concessions took effect in 2015. They enabled competition for public-private partnerships (PPPs) between private and state-owned bidders, and encouraged bankable projects and risk transfer over the project life cycle.
The preparatory phase of the project cycle is crucial in ensuring that only a well-structured, commercially viable PPP projects—which are more likely to provide value for money—are procured by governments. The preparation phase in the project cycle includes appraisal of fiscal affordability, social and environmental assessment, risk identification, financial viability, comparing public and private options and sounding out the market.
Asia has some work to do on this score. The Procuring Public Private Partnerships in Infrastructure Report by the World Bank found that, based on an index from 0 to 100, of global best practices for project preparation, East Asia and the Pacific scored 40 compared to an average 65 for high-income OECD countries. This demonstrates the need for more work in Asia to bridge the gap between theory and practice when it comes to implementing project preparation practices associated with the quality infrastructure principles.
There is no greater compelling case for quality infrastructure than now. All countries will come out of the crisis with significantly larger public debts. Infrastructure investments will have to meet three key indicators:—efficiency, affordability, and sustainability.
On efficiency, considerable progress is needed. In a review of public investment management frameworks of 30 emerging, low, and middle-income countries, the International Monetary Fund concluded that 30% of potential economic benefits of public investments are lost due to inefficiencies in the public investment process.
On affordability and inclusion, COVID-19 has led to the further widening of already yawning inequalities across this region including between those securing and losing their jobs and varied levels of access to health services. IMF research shows that GINI coefficients—a widely accepted measurement of inequality–have risen by nearly 1.5% five years after pandemics.
From a public policy perspective, greater attention to financing will be required. For example, tariffs should be part of a wider package of financing–and not the driver—including tax revenue and returns from land value capture to ensure wider infrastructure service availability. Infrastructure investment with proper appraisal and aligned to QII can help to turn the tide on inequality by providing inclusive infrastructure that is more affordable and accessible by all.
On sustainability, there is no greater threat than climate change and natural disasters. Addressing these threats requires innovative and inclusive solutions to foster new technologies that enhance resilience, boost green investment in a decarbonized economy, and to leverage innovative technology throughout the project lifecycle.
Economic and financial sustainability and strengthening institutions will be equally important in a world of scarce resources and limited fiscal headroom in the pandemic’s immediate aftermath. A recent survey of finance ministries, central banks, and academics in G20 countries showed that green investment has a positive impact on the speed at which the stimulus delivers economic impact for every dollar invested. The question is how to effectively internalize future returns on an infrastructure project against upfront construction costs exacerbated by the pressing fiscal and financing constraints caused by COVID-19.
Emergency financial support should be integrated into a fiscal framework that does not jeopardize debt sustainability. In the medium to long term, however, a sound fiscal framework should be combined with increased investment in high-quality infrastructure that provides direct positive social and economic impacts, climate resilience, and more effective delivery of public goods and services.
Quality infrastructure is not a luxury good that would be nice if affordable. It is a necessary good that delivers a positive return on public investment as well as measurable economic benefits.
Beyond ramping up finance to meet the immediate crisis, multilateral development banks can help their borrowing members by ensuring infrastructure investment is in line with the Quality Infrastructure Investment principles.