Private Finance Into Infrastructure By Use Of Spillover Effects

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Private Finance into Infrastructure by Use of Spillover effects Naoyuki YOSHINO Dean & CEO Asian Development Bank Institute (ADBI) Professor Emeritus, Keio University February 27--2019

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Land Trust for Infrastructure Investment Spill Over Effects

Land Owners

1, 2, 3, 4,

Transfer of Management

Dividends

Trust Bank (Watch Proper Use Of Land)

Investors

Tax Increase ⑤

Railway Company

New ④ Business Increased Employment

Reduction of Costs of Land Purchase Leasing contract future tax revenues can be used for repayment Land owners keep their ownership

Benefits of Land Trust 1, Annual Income rather than one time receipt of huge income 2, Even if Land owners are not in the country trust bank keeps the rent 3, Smooth construction 4, Need Trust Laws 5, Give Trust license to bank by the Central Bank No need to establish trust bank 3

Circulation of Savings into Domestic Investment

Domestic Savings

Loans

Bank Deposits Mutual funds

Stock Market

Hometown Crowd Funding

Bond Market

Insurance

Large Corporates

SMEs Government Expenditures

Infrastructure

Pension Funds 4

Growing Savings Ratio in Asian Countries (1) Savings  Bank Loans  SME  Economic Growth  Deposits (2) Increase of domestic Savings is Important in Asian Growth (3) 1997 Financial Crisis of Asia  Lack of Asian domestic Savings  relied on foreign capital inflows

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6

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Pension Funds and Insurance Institutional Investors 1, Increase Long term Savings (Insurance) 2, Pension Funds to cope with aging population 3, Asset Management of Insurance and Pension Funds  Invest into Overseas’ Bond  Put their assets into bank deposits (Myanmar, Cambodia) 4, Infrastructures are needed 8

Various Risks associated with Infrastructure

1, Risks:

(i) political risk (International organization ADB, WB) (ii) construction risk, (iii) Natural Disaster (iv) operation and maintenance risks, (v) exchange rate risk (overseas’ investors)

2, User charges cannot be set too high

User charges <<< Total costs 3, How to maintain stable income stream ? Utilize Spillover Tax Revenues

4, Infrastructure Oriented Developments

User Charges are not enough Increase in tax revenues by spillover effects

user charges

1/14/2018

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Direct Effect and Spill-over Effects Production Function

Output

Y=F( Kp, L, Kg ) Spillover effects Direct Effect

Y= Output, Quality of Infrastructure is measured by Kp= private capital, the spillover effects L = labor Kg = public capital (infrastructure)

Railways Spillover Effects of Infrastructure Investment

The Southern Tagalog Arterial Road (STAR Highway), Philippines, Manila Tax Revenues in three cities Yoshino and Pontines (2015) ADBI Discussion paper 549

Construction

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Operation period

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Highspeed Rail Network

High speed railway Lines of JR Standard Gauge 2,765 km Usual Lines of JR Narrow Gauge 19,835 km

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800 series, JR Kyushu

Estimation results (Connectivity increased tax revenues) High speed railways 250000

200000

150000

100000

50000

0

-50000 Construction Operation 1 Operation 2

[1991-2003] [2004-2010] [2011-2013]

∆ Total Tax 94895 75131 194790

∆ Personal Income Tax 7447 -23843 48690

∆ Corporate Tax 3435 -6883 80998

∆ Other Taxes 84012 105858 65102 16

Increases in Tax Revenues

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Metro Station in Delhi

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Railway Station in India

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Hotel Business

Promote Tourism

Restaurants at Various Stations

JR Farm

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Give incentives to operating companies SOE Reform  Increase efficiency and rate of return

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Long term bond (Floating rate) 𝑡∗

Return

𝑅ത

Fixed Interest Rate 0 𝑡→𝑁

𝑅

𝑡ҧ

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Outcome

Concept of subsidy based on additional flow of tax revenue due to infrastructure Treatment Group

∆Tax=𝒕ҧ ∗ ∆Y

∆Tax

(no need for increase in tax rates)

Subsidy = 0.5*∆Tax

Control group

α+β0

α

𝑵

Time

𝑶𝒖𝒕𝒄𝒐𝒎𝒆 = 𝜶 + 𝜷𝟎 𝑫𝒊 + ෍ 𝜷𝟎 ∗ 𝑫𝒊 ∗ 𝑻𝒕 + 𝜺𝒊,𝒕 𝒕=𝟏

Uzbekistan Railway

Railway

(Yoshino and Abidhadjaev, 2017)

Time

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25

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Financing for Start-ups along Roads and Railways (Hometown crowd funding)

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Hakata Station

Bakery Shop

Station Building Business

Kokura Station Building

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Kagoshima Station Building

Different Classes of Infrastructure Assets Bank Loans

Safer Assets

Insurance Pension Funds Hometown Trust

Different Infrastructure Classes

Revenue Bond

Equity

Riskier Assets

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Infrastructure & Education Yoshino and Umid Abidhadjaev (2016) Dependent variable: log difference GDP per capita in 1991-2010 Regression number Variables lnY_1991 ln(n+g+d) ln(Kg)

REG.1 Coef. -0.06 (-0.54) -3.09 (-0.59) 0.23 (1.17)

REG.2 Coef. -0.14 (-1.35) -5.75 (-1.23) 0.31 (2.00)

ln(Sec) ln(Kg)xln(Sec)

REG.3 Coef. -0.14 (-1.38) -4.36 (-0.77) 0.53 (3.30) 0.00 (0.46)

0.20 (1.59)

ln(Uni)

0.21 (2.07)

ln(Kg)xln(Uni) Constant

-0.28 (-0.33)

0.24 (2.76) 0.56 (0.69)

Number of observations R-squared F-statistic

44.00 0.21 2.62

44.00 0.30 4.14

0.48 (0.57) 44.00 0.30 3.29

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References YOSHINO Naoyuki, and Farhad Taghizadeh–Hesary, (2019) “Modelling the social funding and spill-over tax for Addressing the green energy financing gap”, Economic Modelling, 2019, forthcoming Asian Development Bank (2017) Meeting Asia’s Infrastructure Needs Yoshino, Naoyuki, and Umid Abidhadjaev. 2017a. “An Impact Evaluation of Investment in Infrastructure: The Case of a Railway Connection in Uzbekistan.” Journal of Asian Economics 49: 1–11. Yoshino, Naoyuki, and Umid Abidhadjaev. 2017b. “Impact of Infrastructure on Tax Revenue: Case Study of High-Speed Train in Japan. Journal of Infrastructure, Policy and Development 1 (2): 129– 148. Yoshino, Naoyuki, and Masaki Nakahigashi. 2004. “The Role of Infrastructure in Economic Development.” ICFAI Journal of Managerial Economics 2: 7–24. Yoshino, Naoyuki, Masaki Nakahigashi, and Victor Pontines. 2017. “Attract Private Financing to Infrastructure Investment by Injection of Spillover Tax Revenues.” Nomura Journal of Asian Capital Market 1 (2): 4–9.

Thank you so much for your attention

Naoyuki YOSHINO Dean & CEO Asian Development Bank Institute (ADBI) [email protected]