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.
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.
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.
That’s not all. After completion, traffic volumes on two-thirds of projects failed to live up to initial forecasts, and even then volumes were typically achieved only by slashing road tolls and rail fares. The paper cites the example of the YuanMo expressway in Yunnan ( 雲南 ) province. Not only did construction costs overshoot by 24 per cent, but 12 years after completion, traffic was just half the projected volume, while tolls were set at half the rate originally envisaged.
As a result, revenues were only a quarter of the amount the project’s backers had counted on. Even allowing for wider spill-over benefits from the new highway, the researchers calculate that YuanMo’s costs exceeded its benefits more than three times over. “The project destroyed economic value,” they conclude.
YuanMo is hardly unique. Fewer than a third of the projects the Oxford researchers examined turned out to be economically productive. And they were studying projects backed by the World Bank and the ADB; the cream of China’s infrastructure crop, picked over intensively in advance by the institutions’ financiers and due diligence staff. Where projects were conceived and financed locally, often to advance officials’ careers rather than economic development, the benefits are likely to have been even slighter, and the value destruction correspondingly greater. Worse, although the study focussed on roads and railways, the authors found evidence of even greater malinvestment in dams and nuclear power stations, both of which China has built in abundance in recent years.
Of course, China is not alone in overstating the benefits of infrastructure. Officials around the world habitually underestimate construction costs and overestimate returns from projects, whether through optimistic delusion or deliberate deception in their eagerness to get projects built. But China’s experience holds a salutary lesson for the rest of Asia.
As the Oxford researchers write: “A massive infrastructure investment programme is not a viable development strategy in other developing countries”. More to the point, without viable projects that offer the prospect of reliable economic returns, private investors will never step up to finance Asia’s future infrastructure needs. The establishment of the AIIB will not change that, whatever Danny Alexander may think.