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Could promise of 'spillover' revenue make infrastructure investment more attractive for private sector?

South China Morning Post logo South China Morning Post 11/2/2019 Anthony Rowley
© Xinhua

The estimated cost of supplying the world – and its fastest growing region of Asia in particular – with infrastructure such as transport, energy and communications systems over the next couple of decades runs into trillions of dollars, and the gap between the finance needed and what is being spent at present likewise amounts to thousands of billions.

How is the gap to be closed if economic growth and social welfare are not to suffer? Policymakers have been wracking their brains for decades over this question and are still nowhere near a solution. In theory, there is enough money in private savings to close the gap, but in practice the risk-reward ratio is all wrong for a purely private sector solution.

Some 25 years ago, it seemed that a solution had been found, in the shape of "public private partnership”, or PPP schemes, whereby the public sector (which provides the lion’s share of finance at present) would partner with the private sector. But actual results have fallen short of expectations.

Governments around the world are carrying record amounts of debt already, and despite the fact that total funds in private financial institutions are estimated at around US$100 trillion (more than the highest estimates of the global need for infrastructure spending), money is not eager to shift into infrastructure, where perceived risks are too high compared with rewards.

As someone who has long believed infrastructure to be a dangerously neglected topic (except by China), I am intrigued by a new idea coming from a senior Japanese academic. So too, it seems, are official bodies such as the OECD in Paris and the Financial Stability Board in London, among others.

The idea devised by Naoyuki Yoshino, dean of the Asian Development Bank Institute in Tokyo, is to funnel "spillover”revenue generated indirectly by infrastructure projects such as motorways and railways to investors, thereby making returns more acceptable to investment institutions.

This revenue is future business and other taxes to be collected along the route of new infrastructure. Yoshino’s idea builds on past systems (including Hong Kong’s Mass Transit Railway) where other forms of financial spillover – from sales of land and other assets – helped finance development.

The plan is sufficiently compelling to have attracted attention from the development and financial communities, and is likely to be tested in the Philippines, where a new railway is planned between Manila and Clark International Airport. Japanese institutions will be among the financiers.

If the scheme succeeds – and there are obvious questions over collection, sharing and administration of spillover revenue – it might be applied to financing of everything from China’s Belt and Road Initiative to Donald Trump’s US$1 trillion plan to make American infrastructure great again.

G20 nations have recognised infrastructure as an asset class and Japan (as host of the G20 process in 2019) is working on how to guide such investment. But official blessing will not of itself solve the problem of perceived inadequate returns on infrastructure investment.

To overcome this, investors need to be given access not just to user charges, but also to indirect revenue that governments gain from infrastructure. ADBI research in and beyond Japan has revealed significant increases in property, corporate and other taxes related to infrastructure development.

"Railways bring manufacturing to a region by making the shipping of products faster, safer and cheaper. They connect manufacturers and farmers to markets and ports, and new industry creates jobs. Ultimately, service sector businesses are constructed to meet increased demand,” as Yoshino notes.

He proposes that governments (central and local), be required to return to investors 50 per cent of new tax revenue arising from economic development associated with new infrastructure. This will be computed by comparing revenue in areas that have received investment with those that have not.

An official agency, such as the World Bank or Asian Development Bank, would be charged with overseeing an agreement between the host government in whose area infrastructure is built and the investor group of banks, insurance companies and others who provide finance.

Investors could receive infrastructure bonds issued by a development bank and the interest on these "floating rate” instruments would increase over time in line with the enhancement to tax revenue enjoyed by hosting governments. This could provide upfront capital to finance projects.

The ADBI estimates that returning part of the additional tax revenue from spillovers to construction companies and investors could raise the return on infrastructure investment by between 39 per cent and 43 per cent in the case of Japan and by significant amounts elsewhere. The idea deserves a try.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs

This article originally appeared on the South China Morning Post (SCMP), the leading news media reporting on China and Asia. For more SCMP stories, please download our mobile app, follow us on Twitter, and like us on Facebook.

Copyright (c) 2019. South China Morning Post Publishers Ltd. All rights reserved.

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