Investors should get infrastructure levies, not tax holidays

THE head-in-the-sand attitude that many governments in Asia and beyond (with the notable exception of China) have had for decades towards the cost of financing basic infrastructure is coming to haunt them now as official warnings mount about the shortfall of revenue to pay for such facilities. The Organisation for Economic Co-operation and Development and the International Monetary Fund (IMF) have both indicated in reports this month that governments will need to increase revenue collection if they are to meet the cost of providing infrastructure and other public goods.

Looking at the size of the challenge - the Asian Development Bank has estimated that the infrastructure bill in this region will amount to US$1.7 trillion annually between now and 2030, or some US$22 trillion-US$23 trilion in all - it is easy to conclude that it could bankrupt Asian taxpayers. So it would if the burden were to fall on the public sector alone - either that or infrastructure would simply not get built. But of course much of the cost needs to be met by the private sector and this is what governments have been running away from rather than facing up to.

For a start they have, as IMF deputy managing director Mitsuhiro Furusawa observed in Jakarta, engaged in "intense competition for foreign direct investment" and in a short-sighted "race to the bottom in which countries compete, to the advantage only of investors". What Mr Furusawa was referring to is the fact that many Asian governments, not least in Asean, have competed with one another to offer ever more generous tax holidays and other revenue-eroding incentives in order to lure foreign business investment into their countries. The rather intangible and sometimes illusory benefits they receive in return by way of technology transfers are not easily quantifiable. Yet the burden on national revenues is, especially as inward foreign investment in manufacturing creates strains on transport and other infrastructure.