Abacus | Asia’s infrastructure problem is not what you think

Picture US$40 trillion. It’s a lot of money. It is, for example, bigger than the annual economic output of the United States, China, Japan, Germany and Britain combined. Well US$40 trillion is how much developing Asia needs to spend on infrastructure between now and 2030, says Danny Alexander, the former British cabinet minister who now fills the number two job at the Shanghai-headquartered Asian Infrastructure Investment Bank. Happily, adds Alexander, the AIIB is on hand to help raise the private capital Asia needs so badly to build all those roads, railways and other stuff necessary for the region’s development.

Except Alexander has got it the wrong way round. If Asia has an infrastructure problem, it is not a shortage of capital. The region is a massive exporter of capital. What Asia lacks is economically viable infrastructure projects that any sensible investor would want to go anywhere near with their money.

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That might sound like a strange assertion. After all, the conventional wisdom is that infrastructure investment is a sure-fire route to growth for developing economies. Infrastructure, the theory goes, raises productivity, and by reducing costs, increases returns, pushing up incomes. As evidence that the theory works in reality, economists point to China, where the pace of infrastructure investment over the past two decades has been awe-inspiring.

Just last week, China announced that its high speed rail network now exceeded 20,000km, up from zero at the turn of the century. Similarly, after years of frenetic building, China now boasts more than 100,000km of expressway, up from 5,000km in 1997. And of course this infrastructure building was accompanied by rapid economic growth, which saw the real value of China’s gross domestic product double every seven to 10 years – proof, the enthusiasts argue, of the income-boosting power of infrastructure investment.

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That all sounds very well at the macro level. But at the micro level of individual projects, the argument begins to break down. In a paper published earlier this month, Atif Ansar and his colleagues at Oxford University studied 95 road and rail projects in China built with financial assistance from either the World Bank or the Asian Development Bank. Their findings will strike a chill into the heart of any potential infrastructure investor. Although road projects were generally completed on time, and rail projects only 25 per cent behind schedule, this performance was achieved only at the expense of quality, safety, environmental impact, social equity and cost. As a result, the vast majority of projects ran heavily over budget even after allowing for inflation, with the over-run averaging 28 per cent for roads, and 42 per cent for railways.