China and Japan Face Off in New Asian Infrastructure Raceby
Analysts say planned spending will run into obstacles
Governments in the region need billions to fund projects
When the Japanese and Philippine governments ink a $2 billion loan agreement later this month for a major rail project, it will mark the biggest expenditure of its kind between the two nations.
More importantly, it will signal the latest phase in Asia’s infrastructure boom.
Across the region, lenders including the governments of China and Japan are promising hundreds of billions of dollars in spending to upgrade and construct roads, ports and railways. The anticipated facelift should be a boost to Asian economies seeking new growth engines, especially as China heads for its slowest annual expansion in 25 years.
Yet the countries are grappling with how to ensure that the projects are delivered in a region dogged by everything from corruption and dubious governance to inhospitable terrain and complicated land rights. Asia needs “improved governance -- well designed and transparent regulations and an intolerance of corruption,” International Monetary Fund Managing Director Christine Lagarde said in a speech in Jakarta on Sept. 2.
“This kind of investment is inherently difficult and challenging,” said Matthew Goodman, senior adviser for Asian economics at the Center for Strategic and International Studies in Washington. “The fundamental problem in Asia is the lack of bankroll-able projects and the ability to execute rather than a lack of money.”
The new infrastructure drive is in part led by the China backed $100 billion Asian Infrastructure Investment Bank. Officials in Beijing also are establishing a $40 billion Silk Road infrastructure fund to overhaul creaking roads and bridges along the ancient trading route and have spearheaded the $50 billion BRICS Bank, another development lender.
China’s development funding push has spurred a riposte from Japan’s government. Last month Japanese Prime Minister Shinzo Abe visited five Central Asian nations over five days, accompanied by construction and engineering executives in a bid to make progress in an area targeted by China’s Silk Road initiative. Abe vowed in 2013 to expand infrastructure exports to 30 trillion yen ($248 billion) from 10 trillion yen, by 2020.
“Asia is looking at a new infrastructure race,” said Ben Simpfendorfer, founder of research firm Silk Road Associates in Hong Kong, which advises multinational companies on expansion strategies in Asia and the Middle East. “The bigger unknown is to what extent politics will play a role in big-ticket infrastructure deals.”
The Chinese and Japanese funding comes alongside the usual list of infrastructure lenders including the Asian Development Bank, which earlier this year overhauled its development fund to boost annual lending and grant approvals by 50 percent. The World Bank in May pledged as much as $11 billion in new financing for Indonesia and said it was one of its largest financial commitments anywhere.
“The infrastructure needs in Asia are gigantic,” said Shang-Jin Wei, chief economist at the Asian Development Bank in Manila, which has estimated around $8 trillion is needed. “All of the multilateral banks put together can only hope to supply a fraction of it.”
Indonesia, for example, needs 5,519.4 trillion rupiah ($409 billion) over the next five years to finance its infrastructure needs, Indonesia’s then planning minister, Andrinof Chaniago, said in November last year.
Indonesia’s planning ministry said then that its plans included:
- 30 new dams and 33 hydroelectric power stations
- Rehabilitation of 3.3 million hectares of irrigation networks
- Construction of two 300,000 barrels-per-day oil refineries
- Lifting the electrification ratio to 96.6%
- 2,650 kilometers of new roads
- 15 new airports, 24 new ports, and 3,258 kilometers of railway in Java, Sumatra and Kalimantan.
These plans face significant obstacles, such as acquiring land on which to build large-scale projects. Construction of a $4 billion coal-fired power plant in Batang by Japan’s Electric Power Development Co., Itochu Corp. and a unit of Indonesia’s PT Adaro Energy has been long delayed as farmers held out against selling their land.
In Vietnam, the government wants to increase the distance of its highways to about 2,000 kilometers by 2020 from about 700 kilometers currently, according to the Vietnamese transport ministry’s website. Authorities on Oct. 25 started building a $69.5 million road in Ho Chi Minh City to connect the country’s economic hub to a national highway and help ease traffic congestion at the city’s southwest entrance, according to a posting on the website.
Philippines President Benigno Aquino is set to decide this month on whether to approve seven projects worth 170 billion pesos ($3.6 billion), including an upgrade to Manila’s airport, a road connecting two expressways in the Philippine capital and a gas pipeline.
The scale of financing needed for these projects means governments will increasingly look to Asia’s biggest powers for assistance.
“China and Japan tensions are likely to increasingly play out as governments lobby for big-ticket infrastructure deals,” Simpfendorfer said. “But that’s a healthier source of tension than armed territorial conflicts, and still leaves the door open to private-sector collaboration.”