Commentary: Poor, inadequate infrastructure causes inequality, poverty

• Vincent Lingga

  The Jakarta Post

Yokohama | Mon, May 8 2017 | 12:12 am

Six of the more than two dozen simultaneous seminars and conferences held on the sidelines of the four-day 50th Asian Development Bank Board of Governors meeting in Yokohama, Japan last week focused on various aspects of infrastructure development.

The rationale is self-evident. Infrastructure investment has the multiplier effect of increasing efficiency and competitiveness, promoting both international linkages and domestic economic integration and increasing an economy’s productive capacity.

Many international and national studies have also concluded that inadequate physical infrastructure is not only an impediment to growth, but is also one of the root causes of poverty and inequality. And poverty as well as inequality are the main problems of most ADB members.

An ADB report on Asian infrastructure needs issued in February concludes that inadequate physical infrastructure is not only an impediment to growth, but is also one of the root causes of poverty. 

Addressing the region’s infrastructure and connectivity means addressing the risks and uncertainties linked to regional investment and the lack of public funding. 

The study estimates infrastructure needs in developing Asia and the Pacific at more than US$22.6 trillion through 2030, or $1.5 trillion per year, if the region is to maintain growth momentum. 

Meanwhile the National Development Agency in Jakarta put Indonesia’s infrastructure financing needs at around Rp 5,000 trillion ($373 billion) for the 2015-2019 period or $75 billion a year. Of which, 40 percent is expected from the government and 60 percent from the private sector.

Panelists at the seminars agreed that the existence of large infrastructure gaps across many countries reflected a combination of institutional and financial constraints. And the best way to speed up infrastructure development is through public-private partnership (PPP) schemes because of the limited financing resources of governments. 

But the central issue is when governments enter into a long-term contract with a private entity to give it a license to operate public infrastructure, they must address such questions as who will be responsible for land acquisition; whether or not there could be changes in the future to the regulations on setting tariffs or tolls; who will take on the risk of a loss in the event that the income does not match projections.

A key issue in confronting these difficulties is how to define the roles of the private and public sectors in such a way that infrastructure gaps can be closed while ensuring good service delivery and protecting both investors’ and taxpayers’ (consumer) interests. 

“We need better solutions to attract investors to PPP projects because infrastructure development requires big investment and is long term in nature, thereby exposing investors to risks related to exchange rates, maturity mismatch, policy and tariff changes,” Indonesian Finance Minister Sri Mulyani Indrawati noted.

Even though the Indonesian government has launched a PPP program since 2005 and has set up many support facilities for the program, very few large infrastructure projects have attracted investors as a result of an acute lack of bankable projects.

Panelists at infrastructure-related seminars here said many tendered projects lacked proper contracts, appropriate risk allocation, a sustainable revenue model, government support, key project inputs such as international-standard studies for feasibility, social safeguards, uncertain resource assessments and properly secured land.

Hence, the role of the ADB Office of PPP which was set up in 2014 to help enable the governments of its developing member countries such as Indonesia to prepare bankable infrastructure projects to be offered to private investors under the PPP scheme. 

The PPP Office provides assistance to set up regulatory frameworks and transaction advisory services (TAS) to developing member countries to deliver bankable PPP projects and coordinate and support PPP-related programs. 

The ADB last year also set up a $73 million technical assistance fund to focus on creating a pipeline of bankable PPP projects to support the ADB program of scaling up its operations by 50 percent from $14 billion in 2014 to more than $20 billion in 2020, with 70 percent of this amount for government and private infrastructure investment.

Yet more encouraging is that the ADB also has embarked on cofinancing programs with the World Bank and China-led Asian Infrastructure Investment Bank (AIIB) ) despite previous concern that the Japanese government, one of the ADB’s largest shareholders, was lukewarm to the establishment of the AIIB.

Multilateral development banks like the ADB and the World Bank have been effective in building good infrastructure because they combine finance with expertise and knowledge, drawing on their experience across countries. In addition to bringing advanced technologies to projects, the ADB has helped strengthen government capacity in planning and implementing infrastructure projects. 

During the conference last week the ADB also announced another initiative to improve and monitor the business environment for PPPs and to strengthen the bankability and implementation of PPP projects at the ADB Board of Governors meeting, which ended on Sunday.

The initiative was the Infrastructure Referee Program (IRP) whereby the ADB will provide independent third-party advice through qualified consultants to help public and private parties to resolve disagreements that may arise over the life of a PPP project.

Riyuichi Kaga, head of the ADB’s PPP Office, said disagreements between public and private parties over risk allocation could arise during tendering, negotiation, construction or operation, potentially triggering protracted delays and increased costs.

An enabling environment that delivers well-prepared, viable proposals for private investment is critical for PPP projects. However, to meet their potential, they need to be structured within a regulatory and institutional environment conducive to private investment.