Thanks to the strenuous efforts of US and European central banks to stimulate their moribund economies, government borrowing costs are historically very low. US ten-year bonds are paying less than 2%. At the same time, we know that much of South-East Asia is critically short of public infrastructure.
This would seem to be a once-in-a-lifetime opportunity to redress the infrastructure shortfall. Savers want a safe investment in an uncertain world and investment opportunities with substantial social returns remain stuck on the drawing boards. Why doesn't the financial sector bring these two needs together?
A boost to infrastructure spending would benefit depressed world demand. It would also help redress external imbalances by shifting the infrastructure-deficient countries into modest external deficit.
The domestic needs are obvious. Per capita electricity consumption in OECD countries is around 10,000kWh. In Indonesia, for example, it is 600kWh, and outside Java, less than 400kWh. Only 12% of Indonesia's population has access to piped water.
The new element in this demand equation is the burgeoning middle class. They don't just want more shopping malls, mobile phones and the other goodies being that are provided in abundance by the private sector. They also want to run their air conditioners, breathe cleaner air and have potable water on tap. Indonesia puts nearly a million extra cars into circulation every year, onto a largely-unchanged set of grid-locked and pot-holed roads.
The Indonesian Government can borrow ten-year US dollar funds for well under 4%, and pays around 6% for rupiah-denominated funds. In this infrastructure-deficient environment, a multitude of projects are profitable at this funding cost.
Of course, infrastructure is intrinsically hard and financing is only one element in the equation. First, infrastructure usually means big, complex projects with substantial implementation risk. Second, there is a pricing problem. The services provided are often seen by the public as part of their birthright: free roads, free water, cheap electricity. Politicians everywhere have trouble resisting the populist pressures for subsidised service. Projects with a high social return go unachieved because the authorities are not able to capture the bare costs of providing the service, even when these costs are far below the benefit to the users. And of course some services are 'public goods', available to all, even those who don't pay. There might be big health benefits from lowering pollution, but it's hard to get anyone to pay hard cash in return for breathing cleaner air.
There are no easy answers to these problems, but one distraction which hinders progress is the widespread fixation with public-private partnerships (PPPs). For the past couple of decades, PPPs have been seen as the universal answer for infrastructure projects. But their benefits have turned out to be grossly overstated, and their relevance to the problems of developing-country infrastructure is often slight. Governments need technical assistance in assessing and implementing these projects, but this is better provided by the World Bank and the Asian Development Bank, rather than the slick financial engineers who promote PPPs.
The World Bank and its regional counterpart banks (such as the Asian Development Bank) have largely switched their efforts away from direct involvement in these sorts of large-scale projects, which had once been the bread-and-butter of their existence. Under Jim Wolfensohn, the World Bank became a 'Knowledge Bank': it might tell you what to do, but not actually do it. In the face of environmental pressures and impracticable accountability, implementing projects became too hard. Time to switch back again.
Photo by Flickr user djembar lembasono.