Closing the infrastructure gap
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The 2008 Global Financial Crisis left the world in ruins. Inflation, debt and unemployment was everywhere. but there were some regions more resilient than others. A different narrative emerged in Southeast Asia. While growth has slowed among the 10-nation Association of Southeast Asian Nations (Asean) bloc in the decade following the crisis, they still did better than most. The OECD says Asean is set to grow by 5% per year over the next five years1.
Asean highlights the resilience and potential of Emerging Markets to fuel global growth. Globalization, the adoption of technology and advancements in social and economic reform in the 1990s and early 2000s helped EMs gain ground on developed markets. In a recent analysis, Swiss Re Institute estimates that EMs will account for 60% of global growth in 10 years’ time. The seven largest EMs now contribute up to 42% of global growth, while China alone is responsible for 27% of all growth.
Home to more than 650 million people, Asean has seen massive development and rapid urbanization. According to the UN, the global urban population is projected to increase from 4.2 billion in 2018 to 6.7 billion by 2050, and around 90% of this growth will be in Asia and Africa. Asia is urbanising at a breath-taking speed: in 2017, 31 of the 47 megacities were in Asia and several more cities are projected to join them.
Growing urban populations require substantial investment in infrastructure to enable sustainable growth. However, studies have shown that there is a substantial infrastructure gap, especially in these emerging markets. Today, only about 26% of the roads in Myanmar are paved2 and just over half of Cambodian households have access to grid-quality electricity. In Indonesia, traffic congestion resulting from inadequate transportation infrastructure is estimated to account for more than USD4 billion in annual losses to the city of Jakarta in the form of fuel wastage, productivity losses and medical costs3. Poor network speeds and out-of-date tech infrastructure in pockets of Asia are holding these societies behind as the rest of the world steams ahead with 5G and all its benefits. What growing societies and cities need is a better ability to absorb shocks. The infrastructure gap needs to be reduced to limit shocks and build a more resilient society.
Growth ahead – the need for quality infrastructure
Globally, there is a need to invest USD 69.4 trillion in infrastructure between 2017 and 2035, which amounts to USD3.7 trillion a year. Approximately USD43.7 trillion (63% of the global total) is required in emerging markets, with China and India alone accounting for USD 23.6 trillion (34%) and USD 5.6 trillion (8%) respectively. Total infrastructure investment needs in Asean from 2016 to 2030 are estimated to be around USD2.8 trillion4, indicating an annual investment need of USD 184 billion, according to the Asian Development Bank.
Enhancing and investing in infrastructure can have a significant economic impact on the region and there are encouraging signs through large-scale integration projects in Asia. Beyond project construction and engineering, investments in renewable energy production, transportation including marine and aviation, logistics, and trade enablement now play a crucial role in the economy. For instance, China’s Belt and Road Initiative (BRI) is expected to reduce the infrastructure gap in EMs that it impacts. Total investments in BRI projects until 2030 will amount to around USD7.4 trillion, of which more than 80% is expected to be in infrastructure. It is estimated that around USD5.1 trillion of the total investments will be outside of China. For instance, the Thailand-China high-speed railway could bring Thailand closer to regional supply chains. The China-Pakistan Economic Corridor, which includes investment in roads, ports, and power plants, should create jobs, increase trade and provide power highly needed for industrial growth. More importantly, it is supposed to help Pakistan itself, where GDP per capita stands at around USD1,400 per annum to rank it 148th, according to the IMF. In contrast, Switzerland's GDP per capita stands at around USD82,000 by the same metric.
The infrastructure needs are huge, and the public sector alone cannot finance this. Ageing populations are now impacting monetary and fiscal policies significantly so much so that it limits governments’ abilities to address infrastructure needs. Higher outlays for healthcare and pensions put pressure on public finances and crowds out government spending on items such as infrastructure and education.
Enabling infrastructure investment – the role of re/insurance
Today’s urbanising world will generate substantial opportunities for the re/insurance industry to enable infrastructure investment. Large cities are vulnerable to man-made and natural catastrophe risks due to the higher concentration of people and economic assets. However, cities located in many of these EMs have little or no insurance to cover losses arising from disaster events. However, private capital will not be deployed blindly. For example. a project delay along the terrestrial Silk Road could impact the flow of vital goods out of Pakistan, such as surgical instruments and cotton, to the rest of the region. No investor, private or public, wants to carry the risk of such mega losses on their own.
Collectively, the re/insurance industry possesses the necessary data, risk knowledge and expertise to drive sustainable insurance that is fundamental for infrastructure investment. From the pre-construction to operational stage, the use of analytics and technology to accurately assess key risk factors of projects, monitor insurance portfolios and enable effective steering will support investors’ appetite for risk taking and encourage investment.
The role of re/insurance goes beyond enabling risk absorption. Globally, the re/insurance industry manages about USD30 trillion of assets. The public and private sector can work together to strengthen the industry’s role in investing in long-term resilience-building projects. Promoting standardization and transparency through a common disclosure framework and related documentation to establish a tradeable infrastructure asset class will enable opportunities to unlock these assets for investment. Establishing a risk-based market environment and framework, and encouraging Environmental, Social and Governance (ESG) benchmarks and disclosures can facilitate investments in infrastructure projects that support a sustainable, low-carbon economy. Looking at the BRI projects announced in the first half of 2019, energy and power projects accounted for more than half of the announced projects which amount to USD123 billion, of which South Asia and Southeast Asia attracted the most investments. The opportunity is immense for us to make an impact in building a more sustainable and resilient future.
4 PwC, “The Future of ASEAN: Time to Act” (pdf), May 201