The Asian Infrastructure Investment Bank has identified the privatization of infrastructure assets as an important trend as Asia moves to recover from the economic damage caused by the Covid-19 pandemic.
The AIIB said in a recent report that, as the immediate health impacts of Covid-19 eventually recede, countries will have to deal with deep economic scarring, including widespread bankruptcies, increased unemployment and high debt levels.
Long-term investors will be seeking safe entry points into infrastructure investments, leaving economies with debt overhang and weak institutions finding it difficult to attract capital.
“Governments under fiscal constraints would regard asset recycling or privatization as a path forward, which will be an opportunity for private investors,” the AIIB notes. On the other hand, private companies may choose to exit some projects and shift to new investments promising better asset performance. The low interest rate environment will be supportive for companies to take advantage of such opportunities.
According to the AIIB, multilateral development banks (MDBs) have an important role to play in this post-pandemic environment, given their ability to bring financiers together, ensure socio-economic alignment of projects and provide counter-cyclical financing and protection against political risk. Flexibility and innovation will be key.
MDBs should consider high-return and high-quality investments even outside their traditional scope and comfort zone. It is imperative that MDBs continue to work with the private sector to mobilize much needed investments to boost recovery and help reduce public debt.
The AIIB says stimulus packages can be designed to orient investment toward sectors and technologies that can accelerate post-crisis recovery and improve resilience to future shocks from climate change. While the recent investment trends in green infrastructure have been promising, the actual volume of investment is still well below desired targets.
Meanwhile, the pandemic has revealed that a deficit in basic healthcare facilities is endemic to all countries, regardless of their development status, the AIIB says. The 2020 Global Infrastructure Index shows that 48% of countries surveyed globally tend to favour greater investment in social infrastructure investment, compared with 32% that favour traditional economic infrastructure. The investment gap in health and education infrastructure has widened substantially during the last decade.
The bank also notes that pockets of new technology use and innovation already exist for infrastructure, but the applications have been sluggish due to lack of awareness of industrial and infrastructure uses in many developing countries. For example, 64% of stakeholders in infrastructure cite lack of understanding as the main barrier to adopting appropriate technology. Covid-19, however, has been a game changer by rapidly heightening awareness of the many and varied uses of technologies.
Connectivity infrastructure will also face challenges and will likely have some mixed years ahead, the AIIB says. Airport infrastructure, for example, will not recover any time soon. The global supply chain has been basically resilient throughout the crisis. But supply chain infrastructure investment will continue to face uncertainty, given the trade and technology-related tensions as well as ongoing discussions on reshoring or near-shoring of activities.
The bank recently released its 10-year corporate strategy, which sets out clear priorities and establishes ambitious targets on its overall share of financing for climate action (50% by 2025), cross-border connectivity (25-30% by 2030) and private sector operations (50% by 2030). Moving forward, the AIIB says it will expand into social infrastructure and ramp up its investments in digital infrastructure as a timely response to the medium- to long-term needs of its clients in the post-Covid era.