Spillover Effects of Infrastructure and The Way to Achieve High Rate of Return

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1 Spillover Effects of Infrastructure and The Way to Achieve High Rate of Return Naoyuki YOSHINO Dean, Asian Development Bank Institute (ADBI) Professor Emeritus Keio University, Japan

2 High Speed Railway Spillover Effects of Infrastructure Investment

3 Direct Effect and Spill-over Effects Y= Output, Production Function Y=F( K p, L, K g ) K p = private capital, L = labor Output K g = public capital (infrastructure) Spillover effects Quality of Infrastructure is measured by the spillover effects Direct Effect

4 Trans-log Production Function

5 Macroeconomic Effect of Infrastructure Investment Spillover Effects Estimated from a Macroeconomic Translog Production Function Direct effect (Kg) Indirect effect (K p ) Indirect effect (L) Increment 43.8% 4.5% 3.% 3.% Source: Yoshino and Nakahigashi (26) 5

6 Regional Disparities (2) Manufacturing Services Sector

7 High Quality of Infrastructure Investment, Big Spillover effects in the region Utilize spillover tax revenues 2, Reduce income inequality 3, Opportunities for small business 4, Gender equality 5, Education (together with infrastructure) 6, Incentive mechanism for operating company 7, Transparency 7

8 Growing Savings Ratio in Asian Countries () Savings Bank Loans SME Economic Growth Deposits (2) Increase of domestic Savings (3) 7 Financial Crisis of Asia Lack of Asian domestic Savings relied on foreign capital inflows 8

9 Infrastructure Investment Needs by Sector, Sector ($ billion in 25 prices) Investment Needs Baseline estimates Annual average % share to total Power Transport Telecommunications Water and Sanitation Total Source: Meeting Asia s Infrastructure Needs, ADB (27)

10 Various Risks associated with Infrastructure, 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 and Tax on CO2

11 Different Classes of Infrastructure Assets Bank Loans Insurance Pension Funds Hometown Trust Revenue Bond Equity Safer Assets Different Infrastructure Classes Riskier Assets

12 Private Finance to Infrastructure Investment,Much more infrastructure can be constructed 2, Reduce construction period 3, Increase Efficiency of operation 4, Better price setting of user charges 5, Avoid distorted projects by politicians 6, Better governance of infrastructure 7, Connectivity creates large spillover effects

13 The Southern Tagalog Arterial Road (STAR Highway), Philippines, Manila Tax Revenues in three cities Yoshino and Pontines (25) ADBI Discussion paper 54 Construction 3 Operation period

14 Injection of Increased Tax revenues Increase of tax revenues by spillover effects user charges /4/28 4

15 Outcome Concept of subsidy based on additional flow of tax revenue due to infrastructure Treatment Group Tax= tҧ Y (no need for increase in tax rates) Tax Subsidy =.5* Tax α+β Control group α Outcome = α + β D i + β D i T t + ε i,t N t= Time

16 High Speed Railway of Japan Travel time to Kagoshima Before After Tokyo h m 7h 2m Shin-Osaka 6h 2m 4h 4m Hakata 3h 5m 2h m Kumamoto 2h 3m h m Shin-Yatsushiro 2h m 35m Kyushu Shinkansen Japan Source: 6

8 2 8 3 8 4 8 5 8 6 8 7 8 8 8 2 3 4 5 6 7 8 2 2 2 2 2 3 2 4 2 5 2 6 2 7 2 8 2 2 2 2 2 2 3 Pre-construction period Construction period Operation Phase Phase 2 7 Naoyuki Yoshino - Umid Abidhadjaev.

17 Pre-construction period Construction period Operation Phase Phase 2 7 Naoyuki Yoshino - Umid Abidhadjaev. Impact evaluation of infrastructure provision: case studies from Japan and Uzbekistan. December 4-5, 25. Islamabad, Pakistan Group 5 Group 3 Group 2 Group 8. Group 7 Note: Numbers for tax revenue amount adjusted for CPI with base year 82. Pre-shinkansen construction period covers years from 82 to. Non-affected groups include rest of the prefectures Affected groups: Group 2: Kagoshima, Kumamoto Group 3: Kagoshima, Kumamoto, Fukuoka Group 5: Kagoshima, Kumamoto, Fukuoka, Oita, Miyazaki Group 7: Kagoshima, Kumamoto, Fukuoka, Oita, Miyazaki, Saga, Nagasaki Group Con.: Kagoshima, Kumamoto, Fukuoka, Yamaguchi, Hiroshima, Okayama, Hyogo, Osaka Case of Kyushu Shinkansen

2 22 23 2 22 23 2 22 23 2 22 23 Million JPY Estimation results Group 7 Group 5 Group 3 Group 2 Group 8. 6 5 4 3 2 - Difference-in-difference coefficients across periods, mln.

Difference-in-difference coefficients estimated year by year Personal Income Tax Corporate Tax Other Taxes Y2 8653 28 23483 35433 Y22 8476 2744 2262 338332 Y23 87384 2772 242 3862 Note: Numbers for

18 Million JPY Estimation results Group 7 Group 5 Group 3 Group 2 Group Difference-in-difference coefficients across periods, mln. JPY Total Tax Personal Income Tax Corporate Tax Other Taxes Construction [-23] Operation [24-2] Operation 2 [2-23] Total Tax Difference-in-difference coefficients estimated year by year Personal Income Tax Corporate Tax Other Taxes Y Y Y Note: Numbers for tax revenue amount adjusted for CPI with base year 82. Pre-shinkansen construction period covers years from 82 to. Non-affected groups include rest of the prefectures Affected groups: Group 2: Kagoshima, Kumamoto ; Group 3: Kagoshima, Kumamoto, Fukuoka; Group 5: Kagoshima, Kumamoto, Fukuoka, Oita, Miyazaki Group 7: Kagoshima, Kumamoto, Fukuoka, Oita, Miyazaki, Saga, Nagasaki ; Group 8: Kagoshima, Kumamoto, Fukuoka, Yamaguchi, Hiroshima, Okayama, Hyogo, Osaka Naoyuki Yoshino - Umid Abidhadjaev. Impact evaluation of infrastructure provision: case studies from Japan and Uzbekistan. December 4-5, 25. Islamabad, Pakistan 8

20 Context: Uzbekistan Tashguzar Baysun Kumkurgan (TBK) Railway Line Uzbekistan 2 Naoyuki Yoshino - Umid Abidhadjaev. Impact evaluation of infrastructure provision: case studies from Japan and Uzbekistan. December 4-5, 25. Islamabad, Pakistan

21 Railway Methodology: difference-in-difference GDP growth rate Y control, after Y treatment, after δ Y control, before Y treatment, before Pre-railway Control Group (CG) "Normal" for Treated Treated Group (SK) Post-railway Time Measure outcomes for both groups before and after introduction of railway 2 Naoyuki Yoshino - Umid Abidhadjaev. Impact evaluation of infrastructure provision: case studies from Japan and Uzbekistan. December 4-5, 25. Islamabad, Pakistan

22 Launching effects Y it = α i + φ t + X it β + D i D 2>t>28 + ε it Y it = α i + φ t + X it β + D i D 2>t>28 + ε it Y it = α i + φ t + X it β + D i D 22>t>28 + ε it Year Short-term Mid-term Long-term Pre-treatment period Post-treatment period Effect from start of railway operation 22 Naoyuki Yoshino - Umid Abidhadjaev. Impact evaluation of infrastructure provision: case studies from Japan and Uzbekistan. December 4-5, 25. Islamabad, Pakistan

23 2 years year GDP GDP Term Connectivity effect Regional effect Spillover effect Launching Effects Short 2.83***[4.48].7[.45].33[.4] Mid 2.5***[6.88].36[.2].27[.46] Long 2.6***[3.4] -.42[-.2] 2.2**[2.4] Anticipated Short.[.33].85[.75] -.8[-.2] Mid.3[.5].64[.3] -.2[-.3] Long.7[.3] -.6[-.].5[.67] Postponed Effects.76*[.5] -.4[-.72] 2.58*[2.3] Anticipated Short -.54[-.66].42[.78] -.32[-.2] Mid.32[.44].84[.42].3[.3] Long.[.5].[.6].87[.] Postponed Effects -.4[-.2] -.7[-.35].5[.44] Note: t-values are in parenthesis. t-value measures how many standard errors the coefficient is away from zero. legend: * p<.; ** p<.5; *** p<. Naoyuki Yoshino - Umid Abidhadjaev. Impact evaluation of infrastructure provision: case studies from Japan and Uzbekistan. December 4-5, 25. Islamabad, Pakistan 23

2 years year Industry GDP Term Connectivity effect Regional effect Surrounded effect Launching Effects Short 5.27*[.4] 3.4[.68] 2.82[.] Mid 4.5[.6] 2.56[.8] 2.3[.83] Long 5.23[.5] 3.6[.67] 3.54[.

7] 4.[.7] Mid 3.*[.3] 3.68[.23] 5.2**[2.33] Long 5.83**[2.72] 4.6[.37] 8.4[2.45] Postponed Effects.6[.46].5[.27].6[.] Note: t-values are in parenthesis.

24 2 years year Industry GDP Term Connectivity effect Regional effect Surrounded effect Launching Effects Short 5.27*[.4] 3.4[.68] 2.82[.] Mid 4.5[.6] 2.56[.8] 2.3[.83] Long 5.23[.5] 3.6[.67] 3.54[.2] Anticipated Short 2.47[.74] 3.8**[2.6] 4.3**[2.58] Mid 2.53[.5] 3.6*[2.2] 3.43*[2.2] Long 3.7[.68] 4.62[.5] 5.3*[.85] Postponed Effects 6.2[.65] -.2[-.3] 3.2[.5] Anticipated Short -.85[-.25] 4.8[.7] 4.[.7] Mid 3.*[.3] 3.68[.23] 5.2**[2.33] Long 5.83**[2.72] 4.6[.37] 8.4[2.45] Postponed Effects.6[.46].5[.27].6[.] Note: t-values are in parenthesis. t-value measures how many standard errors the coefficient is away from zero. legend: * p<.; ** p<.5; *** p<. Naoyuki Yoshino - Umid Abidhadjaev. Impact evaluation of infrastructure provision: case studies from Japan and Uzbekistan. December 4-5, 25. Islamabad, Pakistan 24

25 25

26 Revenue Bond for Infrastructure Investment Government Finance Private Investors Such as Pension funds 4% 6% Railway company issues Revenue Bond (user charges) plus (Spillover effects) 26

27 Equity and Bond Investment in infrastructure Government Finance bond issue (fixed interest rate bond) Equity Investors 2% 5% 3% Railway company issues bond and equities (Spillover effects) 27

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

29 2

30 Possible Solutions Start up businesses, farmers Hometown Investment Trust Funds : Springer A Stable Way to Supply Risk Capital Yoshino, Naoyuki; Kaji Sahoko (Eds.) 23, Japan, Cambodia Vietnam, Peru, Mongolia Access to Digital Technology 3

31 3

Infrastructure & Education Yoshino and Umid Abidhadjaev (26) Dependent variable: log difference GDP per capita in -2 Regression number REG. REG.2 REG.3 Variables Coef. Coef. Coef. lny_ -.6 -.4 -.4 (-.

32 Infrastructure & Education Yoshino and Umid Abidhadjaev (26) Dependent variable: log difference GDP per capita in -2 Regression number REG. REG.2 REG.3 Variables Coef. Coef. Coef. lny_ (-.54) (-.35) (-.38) ln(n+g+d) (-.5) (-.23) (-.77) ln(kg) (.7) (2.) (3.3) ln(sec). (.46) ln(kg)xln(sec).2 (.5) ln(uni).2 (2.7) ln(kg)xln(uni).24 (2.76) Constant (-.33) (.6) (.57) 32 Number of observations R-squared F-statistic

ADBI- Book on Infrastructure FINANCING INFRASTRUCTURE IN ASIA AND THE PACIFIC: Capturing Impacts and New Sources Edited by Naoyuki Yoshino, Matthias Helble, and Umid Abidhadjaev the latest evidence

33 ADBI- Book on Infrastructure FINANCING INFRASTRUCTURE IN ASIA AND THE PACIFIC: Capturing Impacts and New Sources Edited by Naoyuki Yoshino, Matthias Helble, and Umid Abidhadjaev the latest evidence on the impact of infrastructure investment on economic and social indicators country studies on how infrastructure investment can increase output, taxes, trade and firm productivity innovative modes of infrastructure financing DOWNLOAD FOR FREE: 33

34 Land Trust for Infrastructure Investment Land Owners Transfer of Management Dividends Trust Bank (Watch Proper Use Of Land) Investors Railway Company Spill Over Effects 4 Tax Increase 5 New Business Increased Employment, Reduction of Costs of Land Purchase 2, Leasing contract 3, future tax revenues can be used for repayment 4, Land owners keep their ownership

35 References YOSHINO Naoyuki, and Farhad Taghizadeh Hesary, (2) Modelling the social funding and spill-over tax for Addressing the green energy financing gap, Economic Modelling, 2, forthcoming Asian Development Bank (27) Meeting Asia s Infrastructure Needs Yoshino, Naoyuki, and Umid Abidhadjaev. 27a. An Impact Evaluation of Investment in Infrastructure: The Case of a Railway Connection in Uzbekistan. Journal of Asian Economics 4:. Yoshino, Naoyuki, and Umid Abidhadjaev. 27b. Impact of Infrastructure on Tax Revenue: Case Study of High-Speed Train in Japan. Journal of Infrastructure, Policy and Development (2): Yoshino, Naoyuki, and Masaki Nakahigashi. 24. The Role of Infrastructure in Economic Development. ICFAI Journal of Managerial Economics 2: Yoshino, Naoyuki, Masaki Nakahigashi, and Victor Pontines. 27. Attract Private Financing to Infrastructure Investment by Injection of Spillover Tax Revenues. Nomura Journal of Asian Capital Market (2): 4.

36 Circulation of Savings into Domestic Investment Domestic Savings Loans Large Corporates Bank Deposits Mutual funds Insurance Pension Funds Stock Market Bond Market SMEs Government Expenditures Infrastructure 36

Utilization of Spillover effects of Infrastructure Investment

Utilization of Spillover effects of Infrastructure Investment Naoyuki YOSHINO Dean & CEO Asian Development Band Institute (ADBI) Professor Emeritus of Keio University UNESCAP, September, 2018 1 Circulation