Ways to Increase the Rate of Return for Infrastructure Investments

Well-designed infrastructure can increase productivity, growth, and tax revenue. Photo credit: ADB.

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Design projects with high economic impact and share dividends with investors and communities through hometown investment funds, land trusts, and other instruments.


Infrastructure is a cornerstone of a country’s economic development.  In general, however, public investments cannot keep up with the increasing demand for infrastructure development.

This policy brief discusses the importance of high-quality infrastructure investment, where quality is measured by how much economic and social value can be created by infrastructure projects in a region. At the same time, the values created may be utilized to address the infrastructure financing gap. High-quality infrastructure will create high spillover effects reflected in increased economic growth rate and tax revenue in the area or region.

Traditionally, governments retain increases in tax revenue. This study reveals that if part of the tax revenue could be directly distributed among infrastructure shareholders, including investors and landowners, the financing gap would diminish, and the construction time could be shortened.

Building quality infrastructure does not refer to simply physical infrastructure but also to reforms—setting up the correct legal and institutional framework for infrastructure development. New models are being proposed for these reforms, such as city infrastructure, hometown trust funds, and promotion of small and medium-sized enterprises (SMEs) and start-up businesses, along with changing the face of education and land trust for land acquisition.

This is adapted from a policy brief developed under the T20 Japan Task Force 4: Economic Effects of Infrastructure Investment and its Financing for the G20 Leaders’ Summit in Osaka in 2019. THINK 20 (T20) is the research and policy advice network for the G20, an annual meeting of leaders from the world’s major economies.


Infrastructure is crucial to fostering a country’s economic development and prosperity. Investments in infrastructure contributes to higher productivity and growth, facilitates trade and connectivity, and promotes economic inclusion. Recognizing this critical role, Japan attempts to revive the infrastructure agenda under its G20 presidency. G20, which stands for Group of 20, is an annual meeting of leaders from the world’s major economies.

High infrastructure demand. McKinsey (2013) reported that from 2016 to 2030, an average of $3.3 trillion in investments is needed annually to keep pace with the projected growth in gross domestic product (GDP), 60% of which is accounted for by developing countries. Furthermore, the Asian Development Bank (2017) estimated that $1.7 trillion will be required every year to maintain rates of growth sufficient to alleviate poverty in Asia.

Infrastructure financing gap. Although a lot has been accomplished, challenges remain regarding this agenda. To close the financing gap, countries cannot simply rely on public financing and multilateral development banks, which account for financing only about 45% of global infrastructure needs (GIH, 2016). Private investors are the potential source of funds for the remainder. Public–private partnerships (PPPs) in infrastructure have been promoted to narrow the financing gap.

Infrastructure investment is less attractive to private investors. In developing countries, the involvement of private sectors in infrastructure financing is quite low. There are several reasons why there is less appetite for private investors to invest in infrastructure:

In developing countries, the capital market is shallow and more volatile, people tend to put their money in bank deposits, which is usually short- to medium-term in nature. This causes banks’ assets to always have a shorter tenor compared to the long-term financing needs of infrastructure. This mismatch is likely to constrain the lending in countries where risk-hedging instruments are less developed. Furthermore, banks that extend many long-term loans leave themselves open to liquidity risks.

On the other hand, from the point of view of the project development itself, if a long-term project can only be financed by short-term bank credit, it also means the company faces re-financing risks, which results in the increase of uncertainty regardless of at what price the project can continue to be refinanced.

Because of investors’ high-risk exposure and the lack of viability of long-term contracts in emerging markets. The exposures to risk include the role of government agencies and the perceived instability of public policies with regard to infrastructure. Some technical risks are also considered, such as regime change, cost increases, unexpected revenue decreases, unexpected expenses, and delay in land acquisition (Yoshino et al., 2018). Foreign infrastructure investors also consider macroeconomic risks, such as taxation or the ability to work with local partners (as part of risk exposure) (GIH, 2016).

Despite this high-risk exposure, infrastructure projects could not provide their investors decent returns, which come mostly from operating revenue or usage price, such as toll fees or train fares. The returns are relatively low compared to the risks that the investors face during project construction and development. For projects with low economic value, the government becomes involved to cover the risks through viability gap funding using the PPP scheme. However, this PPP concept burdens the government budget as it leads to major accumulated debt for local and central governments.

Is one of the challenges to infrastructure development. For example, when the construction of a road is planned, city officials have to negotiate with many landowners. Large amounts of time and money mobilization are required at the early stages of an infrastructure project.

Policy Proposal

High-quality infrastructure investments should have positive economic value that can stimulate job creation, enhance foreign direct investment, and improve productivity and tax revenue in the area .

Connectivity among regions and rural community is important to boost economic value. Therefore, the development of railways, roads, and highways is crucial. Such comprehensive infrastructure projects should have the ability to support communities and build business opportunities, including improved agriculture and farming. Farmers will be able to transport their harvests and access markets outside their regions more easily with the support of infrastructure facilities. In other words, market accessibility and trade networks can be greatly expanded if quality infrastructure thrives in a country. Furthermore, increased connectivity will also lower the production cost and shorten the distance between buyer and producer, eradicating the middleman from the supply chain. This allows room for farmers and other villagers to start SMEs and build their entrepreneurial capacity.

This paper addresses the importance of creating high-quality infrastructure investment measured by how much economic and social value can be created by infrastructure projects in a region. The strategy is also relevant to addressing the financing gap in infrastructure investment.

Spillover effects of infrastructure projects

There are two effects of infrastructure development: direct and indirect. Direct effect means a private firm can increase outputs without changing inputs, while indirect effect occurs when a firm wants to further increase output by changing the amount of inputs in order to maximize profits. This indirect effect reflects the benefits of infrastructure investment to the economic activities of private firms. This consequently increases capital inputs and employment. The indirect effect is assumed to be equal to the spillover effects, as explained by Figure 1 below.

Figure 1: Direct Effect and Spillover Effects

This spillover effect could be described by the increase of regional GDP (Y), which is affected by the change of regional development created by infrastructure investment (Kg). The increase in regional development (Kg) will drive new business opportunities (Kp) and create new employment (L).

This concept is explained in the equation below:

As new businesses start production, hotels and restaurants are expected to open near stations and roads. Those new businesses will create new employment. Furthermore, property prices will also rise, which will increase property tax revenues. New business activities will also increase corporate tax revenues. Opportunities for new employment will increase, and income tax revenues and sales tax revenues will also start to rise (near locations of the infrastructure investment).

The increase in tax revenue is described in the equation below:

ΔT is the increase of tax revenue of the region impacted by infrastructure projects, αi is the sum of autonomous affect, and (α) is the time-invariant unobserved region-specific effect, Øt is the year-specific growth effect; X denotes time-varying covariates (vector of observed variables), D is the binary variable indicating whether the observation is related to the affected group after the provision of the project, and εit is the error term, assumed to be independent over time.

The increase in the tax revenue of an infrastructure project using this method has been applied to Manila’s highway. It shows a significant increase in tax revenues after 4 years of operation (t+4). Tax revenues in Batangas City went up to 1.21 billion Philippine pesos, compared with the period before the construction of the highway, as seen in Table 1.

Table 1: Calculated Increase in Business Tax Revenues for the Beneficiary Group Relative to Nonbeneficiary Group 4
(in million Philippine pesos)

Years T-2 T-1 T T+1 T+2 T+3 T+4

Lipa City
















Batangas City








Source: N. Yoshino and V. Pontines. 2018. The “Highway Effect” on Public Finance: The Case of the Southern Tagalog Arterial Road Tollway in the Philippines. In N. Yoshino, M. Helble, and U. Abidhadjaev, eds. Financing Infrastructure in Asia and the Pacific: Capturing Impacts and New Sources. Tokyo: Asian Development Bank Institute.

Based on the explanation above, the economic value of infrastructure development is reflected in the rise of the growth rate or the increase in total tax revenue. The growth is reflected in the total GDP, including value added from industries impacted by the projects in surrounding areas. The total tax revenue could be in the form of personal and corporate income taxes or property and sales taxes. Yoshino and Abidhadjaev (2017, 2016) use the difference-in-differences approach to quantify the additional economic value of infrastructure projects in Kyushu (Japan) and Uzbekistan using the tax revenue and growth rate respectively. Their studies found that economic growth and tax revenue in the regions rise in line with the economic development of the areas.

Policies proposed

In the conventional tax system, the increase of economic value in the form of tax revenue (as a result of the spillover effect of infrastructure) is retained by the government. The revenue could be used for the next infrastructure development or other public facilities. There are no direct incentives for infrastructure investors except the usage charge, which is often lower than expected. With the challenges that the governments face to finance their infrastructure development, a new design for the dividend policy for investors and the salary system of the infrastructure operating entity for both entities and investors is important.

With our concept, we propose the sharing of spillover effects in infrastructure development with infrastructure stakeholders, including investors and landowners. As economic development progresses, regional development will lead to higher tax revenues. If part of these increased tax revenues is returned to the investors in infrastructure, their rate of return will keep on increasing for many years, keeping pace with the development of the region.

The economic spillover effects derived from infrastructure projects could be utilized to incentivize investors to have a better return and at the same time stimulate creativity to make the infrastructure projects more economically functional and productive. For example, Kyushu’s high-speed rail company increased the tax revenue in the area during construction, but then revenue was reduced when operation commenced. However, when the railway connected to large cities, the tax revenue increased significantly. This shows stimulations expecting high returns are not always successful. With motivation for a better return, investors and governments will find ways to come up with projects that yield higher returns.

Figure 2: Spillover Effects of Infrastructure Investment

Source: N. Yoshino et al. 2018. Closing the Asia Infrastructure Gap—BRI, Public Investment, Private Financing, and Spillover Effects. Horizons. 10. Belgrade: Center for International Relations and Sustainable Development.

A similar concept could be applicable to landowners whose lands are used for infrastructure projects. Landowners play an integral role in deciding the allocation and development of infrastructure projects (Irwin, 2017). In many developing countries, land acquisition is one of the major obstacles in infrastructure development. Using the spillover from the infrastructure concept, the economic value distributed to landowners could be in the form of rent with a long-term lease contract. The source of rent payment could be from the spillover of tax revenue or additional economic value from projects.

Figure 3: Land Trusts Shorten the Completion Time of Infrastructure Projects

Source: N. Yoshino et al. 2018. Land Acquisition and Infrastructure Development through Land Trust Laws: A Policy Framework for Asia. ADBI Working Paper Series. No. 854. Tokyo: Asian Development Bank Institute.

Sharing spillover from the infrastructure investment with landowners in the form of rent payment shortens the construction time of infrastructure projects (Figure 3).

Acquisition of land is often very difficult in infrastructure development since the landowners feel they will lose the opportunity to gain greater economic value in the future. By applying this concept and providing them with recurring economic compensation in the form of rent, the landowners will have sustainable income over the years.


In developing infrastructure, we cannot investigate projects in isolation. There are many areas that require careful design in order to build quality infrastructure projects. Most regions in Asia struggle with digital connectivity, hampering the process of information dissemination to a large population in a short period of time. Encouraging quality infrastructure investments to address this problem will lead to greater access to skills-based education through digital media, thus positively impacting people’s welfare.

To increase productivity, growth, and tax revenue, it is imperative that reforms in infrastructure development be implemented well. Creating an institutional framework with poor implementation may lead to more problems than solutions. Therefore, we propose ways to facilitate better the sharing of spillover effects from infrastructure projects.

When developing infrastructure, many countries, policymakers, builders, and contractors overlook the city planning aspects. City planning is imperative for the construction of sustainable infrastructure. This can ensure a positive spillover effect from infrastructure investments. Traditionally, infrastructure has been considered only from the construction perspective. However, it goes much further beyond simple construction. It is pertinent to address the capability of the proposed infrastructure to develop the region, cascading the benefits to multiple communities. Such projects should allocate areas or zones for markets, shops, residencies, and manufacturing industries. This kind of zoning will help create a good city.

The authorities should think beyond “building infrastructure.” Encouraging businesses to grow in the region impacted by the infrastructure is also important. Even if the infrastructure is available, most SMEs find it difficult to get financial support for their start-ups. Banks and financial institutions are often reluctant to lend money to start-ups because of the inherent high risks. This is where the “hometown investment trust funds” can play an integral role. The basic objective of these funds is to connect investors with projects in their own locality in which they have personal knowledge and interest (Yoshino & Taghizadeh-Hesary, 2017). Furthermore, the hometown trust fund can also improve inclusiveness in the region. Given the nature of SMEs and start-ups, female participation in labor markets can be encouraged by providing hometown funds.

The level of education among infrastructure stakeholders also determines how large the economic value of the spillover effects (of the project) can get. Stakeholders include investors, government, landowners, farmers, and entrepreneurs. Yoshino and Abidhadjaev (2016) show that secondary and university education together will lead to a higher GDP in the region with infrastructure investment estimated using data of 40 different countries.

The modern education system can be introduced using mobile phones and the internet. Technological progress and innovation are very important in the education system, especially in the STEM (science, technology, engineering, and mathematics) disciplines. Traditionally, in order to receive quality education, students in Asia had to attend exclusive private schools with a very competitive admission process. With advances in technology, it is becoming convenient for young students, and even for those keen to study further, to listen to compelling lectures and learn from the foremost professors and academicians through the internet and smartphones, regardless of their geographical location. It is important for governments to provide facilities with quality technology and encourage students and school-leavers to make use of these facilities for personal growth.

The relationship of education and technology to the region’s economic growth could be expressed in the production function as: Y= A F(Kp, L, Kg) where Y= regional GDP, A= technological progress, Kp= private capital, L= labor, and Kg= infrastructure. If technological progress (A) advances, the regional output created by the infrastructure investment will also rise up further. Human capital development (L) will enhance regional output induced by the spillover effects.

Therefore, this paper suggests that Asian countries include digital education services starting from secondary to university level. Professors and lecturers can deliver lectures online that can be broadcast nationwide. This technique will be beneficial for students and people across villages and regions. People can learn basic technical skills, languages, and gain knowledge to pursue industrial and vocational training courses.

Land trusts can act as an intermediary between the landowners and government for managing the spillover effects of infrastructure development. Land trust was created in Japan many years ago and accordingly, people are able to keep ownership of their land. Furthermore, they can lease out the land for the long term—for instance, for a period of 99 years, enabling them to earn a reasonable income.

Under the land trust concept, landowners entrust their land to trust banks, which manage the land. For instance, in the case of agricultural land, the trust bank can help a farmer lease adjoining farmlands to increase production and earnings, while the landowners (lessors) receive part of the profit as dividends. The consolidation of lands leads to higher profits for landowners. The proposed framework allows for usage rights, which enables the landowners to retain their rights to their property while increasing their profit by leasing land for infrastructure and development projects.

This method involves three stages:

  1. Consolidate assets owned by individuals.
  2. Entrust assets to the trust banks.
  3. Make better use of the assets.

This concept is similar to a trust fund. Pooling funds and then investing them in more effective operations is similar to consolidating assets of individuals who are not able or do not know how to maximize their utility. Entrusting them to the trust bank can increase the utility of the assets.


Asian Development Bank. 2017. Meeting Asia’s Infrastructure Needs. Manila.

EDHEC Infrastructure Institute-Singapore and Global Infrastructure Hub. 2016. Towards Better Infrastructure Investment Products?  Survey report.

N. Yoshino, N. Hendriyetty, and S. Lakhia. 2019. Quality Infrastructure Investment: Ways to Increase the Rate of Return for Infrastructure Investments. ADBI Working Paper Series. No. 932. Tokyo: Asian Development Bank Institute.

N. Yoshino, M. Helble, and U. Abidhadjaev, eds. 2018. Financing Infrastructure in Asia and the Pacific: Capturing Impacts and New Sources. Tokyo: Asian Development Bank Institute.

N. Yoshino and V. Pontines. 2018. The “Highway Effect” on Public Finance: The Case of the Southern Tagalog Arterial Road Tollway in the Philippines. In Yoshino et al., eds. Financing Infrastructure in Asia and the Pacific: Capturing Impacts and New Sources. Tokyo: Asian Development Bank Institute.

N. Yoshino, U. Abidhadjaev, and M. Nakahigashi. 2018. Closing the Asia Infrastructure Gap—BRI, Public Investment, Private Financing, and Spillover Effects. Horizons—Journal of International Relations and Sustainable Development. 10. Belgrade: Center for International Relations and Sustainable Development.

N. Yoshino et al. 2018. Land Acquisition and Infrastructure Development through Land Trust Laws: A Policy Framework for Asia. ADBI Working Paper Series. No. 854. Tokyo: Asian Development Bank Institute.

N. Yoshino and U. Abidhadjaev. 2017. An Impact Evaluation of Investment in Infrastructure: The Case of a Railway Connection in Uzbekistan. Journal of Asian Economics. 49. pp. 1–11. Published by Elsevier for the American Committee on Asian Economic Studies.

N. Yoshino and F. Taghizadeh-Hesary. 2017. Alternatives to Bank Finance: Role of Carbon Tax and Hometown Investment Trust Funds in Developing Green Energy Projects in Asia. ADBI Working Paper Series. No. 761. Tokyo: Asian Development Bank Institute.

N. Yoshino and U. Abidhadjaev. 2016. Impact of Infrastructure Investment on Tax: Estimating Spillover Effects of the Kyushu High-Speed Rail Line in Japan on Regional Tax Revenue. ADBI Working Paper Series. No. 574. Tokyo: Asian Development Bank Institute.

N. Yoshino and U. Abidhadjaev. 2016. Explicit and Implicit Analysis of Infrastructure Investment: Theoretical Framework and Empirical Evidence. American Journal of Economics. 6 (4). pp.189–199.

T. Irwin. 2007. Government Guarantees: Allocating and Valuing Risk in Privately Financed Infrastructure Projects. Directions in Development. Washington, DC: World Bank.

R. Dobbs et al. 2013. Infrastructure Productivity: How to Save $1 trillion a Year. McKinsey and Company.

Naoyuki Yoshino
Dean, Asian Development Bank Institute

Dr. Naoyuki Yoshino is dean of the Asian Development Bank Institute, professor emeritus of Keio University, and chief adviser at Japan Financial Services Agency’s Financial Research Center. He was a visiting scholar at Massachusetts Institute of Technology and taught in various universities, including University of New South Wales and Fondation Nationale des Sciences Politiques. He chaired the Financial Planning Standards Board and Japan’s Council on Foreign Exchange and Fiscal System Council, and was board member of the Deposit Insurance Corporation of Japan.

Nella Hendriyetty
Senior Capacity Building and Training Economist, Asian Development Bank Institute

Nella Hendriyetty joined ADBI in January 2019. She was deputy director for the G20 forum at Indonesia’s Fiscal Policy Agency in 2016–2019, senior compliance officer in the Indonesia Financial Intelligence Unit in 2005–2010, and head of the Sub-Division of Accounting Compliance for Securities Institutions in the Indonesian Capital Market Supervisory Agency (now OJK) in 2004–2005. She holds a PhD in Economics from Victoria University in Melbourne, and MSc in Finance from the University of Illinois at Urbana Champaign.

Saloni Lakhia
Former Research Associate, Asian Development Bank Institute

Saloni Lakhia's research focuses on land relations from a gender perspective, effects of land displacement on human security, and effectuation of implementation imperatives. Before joining the Asian Development Bank Institute, she worked with multiple nonprofit and state institutions in India, formulating gender-specific policies and legal reforms as well as socio-legal handbooks focusing on crimes against women and children.

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