Across Asia Pacific, the need for substantial infrastructure development has become increasingly urgent. Factors such as urbanisation, population growth and economic development create a need for new and updated infrastructure - fast.
The variation in levels of infrastructure development between territories adds further complexity to long term infrastructure planning (see table below). While developed and developing economies differ greatly in terms of the availability and quality of infrastructure, as well as the ability and capacity to develop and obtain financing for infrastructure projects, they share one common problem: budgetary constraints. Few governments can solely fund their infrastructure.
The Asian Development Bank (ADB) estimates that approximately US$1.7 trillion will have to be invested annually in infrastructure across Asia through 2030 if the region is to maintain economic growth, battle poverty, and mitigate climate risk. This is more than double the level of investment ADB advised in 2009. The gap between estimated infrastructure needs and realised infrastructure delivery is growing.
The availability of finance is not a material issue (there is a significant availability of finance for quality infrastructure projects), but the ability to attract finance into particular markets / projects and how to use the finance efficiently are material challenges. According to ADB, developed economies such as Japan and South Korea have a massive saving rate and foreign exchange reserves. However, most of their investments are outside of Asia. On the other hand, not enough investment is flowing to developing economies where it is most needed.
Bridge the infrastructure gap
Across Asia Pacific, there’s a growing appetite among investors and lenders for well-prepared infrastructure projects that are affordable (to users and/or government), socially equitable and environmentally sustainable. But many territories lack a pipeline of attractive, investment-ready projects.
In the arena of infrastructure, it’s important to think about how the private and public sector work together to allocate project risks. Picture, for a moment, a new toll road in a rural, under-developed area. It is unfeasible to expect the private sector to absorb the risks of this project because they cannot forecast how many people will pay to use the road in the longer term. However, if the government absorbs the demand risk and pays the private sector a fixed return on their investment (subject to satisfying certain objective parameters such as maintenance standards), such projects can become more viable.
Blended finance can also play a role. This is a structuring approach which allows financing organisations to invest and lend alongside each other while achieving different objectives. For example, a philanthropic investor may be willing to accept a low financial return as long as the project has development impact, and can therefore mobilise a much greater volume of commercial finance seeking market returns. In fact, a greater use of blended finance is critical to enable the high volume of private capital available, especially in developed territories, to be channelled into projects in developing territories in order to close the infrastructure gap and fund the net zero transition.
In many territories, the infrastructure gap is exacerbated by a lack of long-term planning. It is important for governments to be very clear about a project pipeline. For instance, there needs to be visibility and clarity around the other infrastructure projects that are going to be developed that stakeholders can potentially invest in – this gives greater confidence to developers and investors to allocate resources to a territory or sector. One-off opportunities may not justify the cost of private investors’ due diligence or their entering of a new territory.
Local strategic and regulatory frameworks, which should be integrated with territories’ national policies, play defining roles when it comes to closing the infrastructure gap. However, sub-national governments in particular may lack the capacity, experience, and financial resources required for high quality infrastructure project preparation, master-planning and city planning. There is a greater need for assistance and support whether that be underwriting risks, or technical assistance in project preparation from national government and international institutions.
Infrastructure for the green transition
As the journey towards net zero transformation has become more essential, so does the challenge of developing the infrastructure and sourcing the finance required to support a just and equitable transition1.
According to PwC’s new research on green infrastructure, the middle- to low-income territories in Asia Pacific, including India, Indonesia, the Philippines, Thailand and Vietnam, are where 60% of new infrastructure investment is needed. However, these territories have little or no ability to pay for the green transition, creating the crucial need for foreign direct investment and foreign grant support. At the same time, developed territories are failing to meet existing funding pledges.
On the bright side, the investor appetite in sustainable investment is picking up. Environment, Social and Governance (ESG) has been growing in importance for their investment analysis and decision making, according to our Global Investor Survey. There is also an increase in government- or international finance–backed partnerships that provide assurances for financial institutions to align their investment portfolios with the 1.5 ºC challenge.
To access this pool of finance, it’s increasingly important for governments to put green elements high on their agenda. Priority should be given to infrastructure projects that support a fair and inclusive transition to low-emission economies and accelerate climate-resilient growth. Upskilling and building capacity in the arena of renewable energy is also vital.
Governments also need to mainstream digitisation and technology into their infrastructure plans and projects in order to enhance efficiency, speed up development, and make projects more resilient and adaptable to changing requirements. Cybersecurity and data privacy should be factored in from the outset.
There are many compelling examples of green and smart infrastructure. Take, for example, smart street lighting that optimises energy usage, reduces traffic accidents and creates a safer environment for pedestrians. Or monitoring technologies, such as sensors that have a wide range of applications including the reduction or and elimination of greenhouse gas emissions during wastewater treatment. However, there needs to be incentives for companies to take the lead in research and build innovative projects, knowing that they might not get a fair return for their risk. Governments across Asia Pacific should support the research and development of landmark net-zero transition projects in order to provide evidence that such technologies work.
If Asia Pacific is to work towards increasing the finance available for sustainable and inclusive infrastructure, the developing world and the developed world need to join forces. Collaboration between territories – and between the public and private sector – can create the conditions for a just transition towards a net-zero future. It can also turn the ideals that drive the green transition into the building blocks of an ecologically conscious world.
Note
- A just transition seeks to ensure that those who stand to lose economically from decarbonisation are supported – be they countries, regions, industries, communities, workers, or consumers. In addition, a just transition seeks to ensure that the substantial benefits of a green economy transition are shared widely.
Through The New Equation strategy, PwC continues to build trust and deliver sustained outcomes by working together with clients and stakeholders to accelerate net zero transformation and helping shape the climate and policy agenda.
PwC is acting as Knowledge Partner for B20 (Business 20) Indonesia in 2022 for the: (1) Finance & Infrastructure Task Force, and (2) Energy, Sustainability & Climate Task Force, both of which are addressing critical factors in the fight against climate change.
Variation in levels of infrastructure development between territories in Asia Pacific
Territory |
Ranking (/141) |
Ranking (/63) |
||
Australia |
79.2 |
29th |
72.08 |
19th |
China |
77.9 |
36th |
71.04 |
21st |
Hong Kong SAR |
94 |
3rd |
74.22 |
14th |
India |
68.1 |
70th |
35.38 |
49th |
Indonesia |
67.7 |
72nd |
26.70 |
52nd |
Japan |
93.2 |
5th |
67.35 |
22nd |
Malaysia |
78 |
35th |
51.06 |
37th |
New Zealand |
75.5 |
46th |
58.46 |
29th |
Philippines |
57.8 |
96th |
23.68 |
57th |
South Korea |
92.1 |
6th |
72.68 |
16th |
Singapore |
95.4 |
1st |
76.31 |
12nd |
Taiwan |
86.7 |
16th |
75.91 |
13rd |
Thailand |
67.8 |
71st |
40.35 |
44th |
Vietnam |
65.9 |
77th |
N/A |
N/A |
