For these reasons, the governments participating in both APEC and the G20 have agreed to accelerate investment in economic infrastructure. But it will not be easy to go beyond declarations of good intentions and studies to significant new investment.
Finance is not the immediate constraint. Economies with a sound enabling environment for investment can mobilise financing for well-prepared projects which are expected to earn an adequate rate of return. Unfortunately, there are not nearly enough of such projects.
All governments need to improve their policy environments and their capacity to prepare commercially viable projects. Involvement and collaboration in organisations like APEC and the G20 can help them to develop the necessary human capital and institutional capacity, while overcoming the policy and administrative obstacles to accelerating investment.
But policy development alone will not be enough.
Governments also need to commit to implementing some well-conceived infrastructure initiatives backed by a shared determination to solve the inevitable problems that will be encountered. The lessons of experience are the most effective means of drawing attention to the policy changes and institutional improvements needed to expedite investment in subsequent projects.
Some useful examples are already being set in the Asia Pacific. As part of their determination to create an ASEAN Economic Community, Southeast Asian governments are investing in the necessary transport, communications and energy networks, with support from the ASEAN Infrastructure Fund.
Asia Pacific leaders also adopted the APEC Framework on Connectivity last year. Officials are drawing a blueprint to upgrade physical, institutional and people-to-people connectivity. When they meet later this year, APEC leaders can agree on some early steps to translate that blueprint into a pipeline of infrastructure investments, backed by a substantial investment to create the skills and institutional capacity to finance and manage them.
APEC is not, and should not become, a financing or implementing agency — the resources needed to plan and then implement projects to improve connectivity will need to be provided by individual governments and by attracting investment from the private sector. It will take time to mobilise resources on a large scale, but the Asian Infrastructure Investment Bank (AIIB) makes it possible to take some important early steps in 2014.
China is expected to launch the AIIB when it hosts the APEC leaders’ summit in November. The bank is open to shareholding by any government or private investor; more than ten governments have already agreed, in principle, to be foundation shareholders. The AIIB is to focus on narrowing gaps in the region’s economic infrastructure, so support for investments to connect Asia Pacific economies fits neatly into its mandate.
To initiate a productive partnership with APEC, the AIIB could commit a very small part of its expected capital base to finance the preparation of a APEC Master Plan on Connectivity during 2015, together with a feasibility study to demonstrate how Asia Pacific governments can work together on a significant initiative to improve connectivity — for example a coordinated, region-wide effort to upgrade the capacity and performance of ports and airports.
The potential gains from practical cooperation to improve trade logistics are far greater than any possible APEC-wide deal on trade liberalisation. Work to upgrade transport facilities can set the example for implementing the many other components of a long-term plan for better physical, institutional and people-to-people connectivity among all Asia Pacific economies.
The G20 can learn from APEC to accelerate investment in economic infrastructure.
G20 leaders have already commissioned policy-oriented research to ensure that financing does not become a constraint once the pace of investment in economic infrastructure accelerates. Looking for ways to mobilise more private savings to finance infrastructure will alert policy-makers to some significant new issues.
First, the best way to attract investment is to reduce the perceived risk of investing in infrastructure in various economies. The most effective way governments can do that is to establish sound and transparent policy-making, and to construct an institutional framework which is based on sound principles and creates a business-friendly environment.
The share of private financing of investment in infrastructure will need to increase, but public-sector investment will remain essential to attract finance from global capital markets. It is essential to clarify when public investment in infrastructure is justified and to assess objectively the capacity of governments to borrow for productive investment.
It is not efficient to expect many individual or institutional private investors to acquire the expertise needed to estimate the potential benefits and risks of specific infrastructure projects. Multilateral development banks were created to reduce the transaction costs, but these banks are not making an adequate contribution to commercial financing of investment.
The new AIIB provides an incentive to consider expanding the financing capacity of existing development banks. At their 2014 meeting, G20 leaders can ask the World Bank and other multilateral development banks to prepare strategy papers they can review in 2015. These strategies should set out how international financial institutions intend to attract more private sector finance for infrastructure and how they could increase their own commercial lending to meet a much larger share of the finance needed to narrow gaps in economic infrastructure.
Andrew Elek is a Research Associate at the Crawford School of Public Policy, Australian National University. He was the inaugural Chair of APEC Senior Officials in 1989.
This article appeared in the most recent edition of the East Asia Forum Quarterly, ‘The G20 summit at five’.