Developing Infrastructure in Central Asia: Impacts and Financing Mechanisms (PDF)

ADB Institute — March 2021
Edited by Naoyuki Yoshino, Bihong Huang, Dina Azhgaliyeva, and Qaisar Abbas
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The authors believe to increase the economic impact of infrastructure investment, financing for small businesses must accompany infrastructure development. Otherwise, the economic impact only reaches large businesses. Restaurants, small shops, and the agricultural sector gain benefits from the development of infrastructure by making use of the roads and railways to sell their products.

They argue, as governments have to support small and medium-sized enterprises, medical care, and schools to cope with the coronavirus disease (COVID-19) pandemic, public finance, including expenditure on infrastructure, will be limited. Thus, the role of the private sector in infrastructure investment finance has to be enhanced. In order to entice the private sector to participate, an adequate rate of return from investing in infrastructure has to be secured and risks associated with infrastructure investment minimized.

The authors explain in Europe and other developed economies, pension funds and insurance markets are well developed. Infrastructure investments are a desirable target for long-term institutional investors such as pension and insurance funds, as the spillover effects of infrastructure investment will increase property tax, business tax, income tax, and sales tax revenues. Returning part of these increased tax revenues to infrastructure operators, added to their user fees, would increase the rate of return from infrastructure investments.

Another focus area of this book is public-private partnerships (PPPs) in the seven CAREC member countries studied. Connectivity between Europe and Central Asia and the Caucasus in terms of financing would increase larger-scale infrastructure projects, which will bring about a stable rate of return to private investors by returning part of the spillover tax revenues.

Book Content

The book is organized as follows.

Chapter 1 first plots the landscape of various infrastructure systems in the region, including roads, railways, air transportation, ports, water and sanitation, telecommunications, and energy. The authors give an overview of the infrastructure connectivity situation in Central Asia and the Caucasus, discuss the investments needed to fill the infrastructure gap, and propose strategies to address the challenges facing the region.

Chapter 2 takes a look at the impact of road construction on household financial wealth in target communities in Azerbaijan. To that end, the author constructs a two-wave dataset with regional data and household characteristics, spanning the course of 8 years, and estimates the differentials created by regional-level access to national roads. The study finds that gaining access to roads improves financial wealth in some contexts, indicating the need for policy makers to spatially sequence infrastructure improvement efforts.

Chapter 3 comprehensively reviews the evolution of financing models for infrastructure projects in the People’s Republic China since 1978. The authors identify the potential risks of different financing models and highlight the importance of risk management for the sustainable development of infrastructure construction.

Chapter 4 assesses the impact of infrastructure provision on public tax revenues by presenting the case study of Kutaisi International Airport in Georgia. The difference-in-differences analysis used suggests that the reconstruction of the airport had a positive impact on the tax revenues of the state, implying that the government can use the incremental tax revenues to fill the viability gap for infrastructure projects by increasing the rate of return for the private investors. The author further discusses the current state of infrastructure financing in Georgia and outlines the importance of greater involvement of the private sector in infrastructure financing through PPPs.

Chapter 5 studies the impacts of the Khorgos-Zhetygen railway infrastructure construction project in Kazakhstan. The railway line is located in the Almaty region in the southeast of the country on the border with the People’s Republic of China. The project aims to facilitate cross-border trade between the two countries and to increase the transit potential of both countries. Using region- and subregion-level panel data over the period 2000-2017, the author shows that the construction of the railway increased construction sector production in the region in the short term (2009-2012) and industrial production in the medium term (2013-2017). The railway construction project also increased real gross regional product in the medium term, as well as tax revenues in the short and medium terms.

Chapter 6 measures the impact of two road construction projects in the Kyrgyz Republic: Osh-Sarytash-Irkeshtam and Sarytash-Karamyk. Using region- and subregion-level panel data over the period 2005-2017, the authors provide empirical evidence that the road construction projects had a positive effect on poverty alleviation in the long term and on retail trade in the short term. They conclude with policy recommendations on how to increase the economic benefits of road construction.

Chapter 7 estimates the economic impact of improving and modernizing transport infrastructure, a rapid transit system in Punjab Province of Pakistan. Using a large sample of household data over the period 2005-2016, the author provides empirical evidence that improvement and modernization of transport infrastructure in urban areas of Punjab Province increased household income by more than 14% of the mean income compounded annually.

Chapter 8 calculates the impact of the Dushanbe-Chanak toll road project in Tajikistan that was undertaken through a PPP. The toll road links the capital of the country and Khujand, located in Sughd and Districts of Republican Subordination (DRS), and was opened in 2010. Using data from four regions (Sughd, Khatlon, Gorno-Badakhshan Autonomous Oblast, and DRS) over the period 2000-2017, the author provides empirical evidence that, following the opening of the toll road, real gross regional product increased by 26%, regional public revenues by 29%, and regional public expenditures by 42% in the Sughd and DRS regions. ■