Note: Preliminary work - not to be quoted without permission from the author.
Confidential-Not for Further Circulation
A Joint Conference of ADBI and RIS
On
Sustainable Growth and Enhancing Integration in Asia
15 September 2010, IHC, New Delhi
Infrastruacture for Enhancing Asia’s
Economic Integration
Biswa N. Bhattacharyay
Lead Professional and Special Advisor to the Dean
ADBI, Tokyo
The views expressed in this paper are those of the author and do not reflect the views or policies of Asian
Development Bank (ADB), ADB Institute, its Board of Directors, or the governments they represent.
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ADBI-RIS joint conference on Sustainable Growth
and Enhancing Integration in Asia, 15 September
2010, New Delhi, India
Outline
1. Twin Goals
2. Need for Basic Infrastructure
3. GFC Impact
4. Infrastructure Financing Gap and Risk
5. Addressing Bottlenecks
6. Sources for Financing
7. Conclusion
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ADBI-RIS joint conference on Sustainable Growth
and Enhancing Integration in Asia, 15 September
2010, New Delhi, India
Twin Goals
• Focus on Asian integration through
enhanced regional connectivity—
developing and implementing regional
infrastructure projects—has high pay-offs
for all participating countries
• Asian large financial and technical
resources can be effectively mobilized to
meet the large investment needs in
productive sectors like infrastructure
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ADBI-RIS joint conference on Sustainable Growth
and Enhancing Integration in Asia, 15 September
2010, New Delhi, India
Needs for Basic Infrastructure
• Need to reduce the infrastructure gap to facilitate inclusive
growth and poverty reduction:
– Inadequate road network coverage-very low road density
(1-1.9 km/km2 in Asia against 3.3 km/km2 in Latin America)
– 53.4% of total road network of 5.66 million km paved
– 300 out of 1,000 people have access to telephone services
– Over a billion people have no access to electricity
– 638 million with no access to improved drinking water and
piped water access ratios of less than 20% in many
countries
– 1.5 billion without access to improved sanitation
– Access to improved sanitation is as low as 8% in some
countries, with only 23% of the rural population having
such access in South Asia and 37% in East Asia
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ADBI-RIS joint conference on Sustainable Growth
and Enhancing Integration in Asia, 15 September
2010, New Delhi, India
Global Crisis Impact
• Highlighted the need to rebalance Asia’s economies
toward regional and domestic demand
– Infrastructure investment and connectivity is key to this
• High demand for public fund—Fiscal stimulus responses
emphasize infrastructure investment
• Fiscal constraints emphasize increased private sector
engagement
• PPP projects face considerable risk
– New PPP projects : Decreased access to lending (especially
from foreign banks), need for greater sponsor equity, shorter
underwriting periods, more stringent conditions, and increased
financing costs for long-term concessions
– Ongoing PPP projects : larger refinancing risk for long-term
concessions, potential delays in refinancing with risk of
cancellation and market disruption (Glennie, Nair, and
Bloomgarden 2009)
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ADBI-RIS joint conference on Sustainable Growth
and Enhancing Integration in Asia, 15 September
2010, New Delhi, India
Pre-Financial Crisis Global Trends
PPPI Investment by Region, US$ Million
160,000
Sub-Saharan
Africa
140,000
South Asia
120,000
100,000
Middle East
and N. Africa
80,000
60,000
Latin American
and the
Caribbean
40,000
Europe and
Central Asia
20,000
East Asia and
Pacific
0
1990
1992
1994
1996
1998
2000
2002
6
2004
2006
Source: World Bank PPIAF
Database
ADBI-RIS joint conference on Sustainable Growth
and Enhancing Integration in Asia, 15 September
2010, New Delhi, India
Pre-Financial Crisis Global Trends
PPPI Investment by Sector, US$ Million
160,000
140,000
Telecom
120,000
100,000
Energy
80,000
Transport
60,000
40,000
Water and
Sewerage
20,000
0
1990
1992
1994
1996
1998
2000
2002
7
2004
2006
Source: World Bank PPIAF
Database
ADBI-RIS joint conference on Sustainable Growth
and Enhancing Integration in Asia, 15 September
2010, New Delhi, India
Infrastructure Financing Gap
• Regional demand of US$750 billion per year is
massive, growing, and surpasses supply
– Role of one country or one single institution is rather limited
against such huge requirements
• Large gap is due to three major bottlenecks:
– Capacity and Knowledge Gaps, particularly delivery capability
(Policy, Design, State-of-the-Art Knowledge/Technology,
Construction, Operations, etc.)
– Financial/Fiscal (Public and Private Sector) = public debt
concerns, reserves and liquidity channeled elsewhere, lack of
private sector involvement and inability to commit, underdeveloped national and regional bond markets
– Special Risks inherent in the region’s infrastructure demand
profile—risk profile is very different in developing economies in
this region (Subramaniam, 2010)
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ADBI-RIS joint conference on Sustainable Growth
and Enhancing Integration in Asia, 15 September
2010, New Delhi, India
Risk for Infrastructure Financing
• Risk profile in developing Asia is very complex and different
• Risk appetite of private sector is low following the global crisis
• As a result, private funds tends to go to infrastructure projects
in developed economies
• Risks at Country Level (across the region)
– Greenfield opportunities, mostly
– Political: Sovereign and Multi-layer
– Policy, Regulatory, and Institutional
– Pipeline and level of bankable, quality projects
• Risks at Project Level
– Operational
– Financial
– Uncertainty of Safeguards (Subramaniam, 2010)
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ADBI-RIS joint conference on Sustainable Growth
and Enhancing Integration in Asia, 15 September
2010, New Delhi, India
Addressing Bottlenecks
• Policies or actions to address challenges:
– Fill in capacity and knowledge gaps
• Expand infrastructure delivery capability
• Enhance institutional and administrative capability
– Mitigate/reduce infrastructure investment risks
– Broaden and deepen the financial base for
infrastructure
• Strategy for the region:
– Enhance the level and speed of infrastructure
spending in the region
– Expand soft-infrastructure development to make
hard-infrastructure work effectively
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ADBI-RIS joint conference on Sustainable Growth
and Enhancing Integration in Asia, 15 September
2010, New Delhi, India
Sources of Financing
1. Public Sector
• Use traditional public sector funding and fiscal stimulus
• Savings of Public Sector
• Sovereign wealth and foreign reserves
2. Private Sector and PPPs
• Private portfolio funds, FDI, etc.
• Joint ventures, concessions, management contracts, BOO
(Build Own Operate) BOT (Build Operate and Transfer)
BOOT/ BOLT (Build Own Operate/Lease Transfer),
• Public sector needs to enhance “PPP skills” to manage
PPPs—a new procurement and service delivery approach
• For the private sector it is a new market opportunity that
requires market intelligence and analysis to evaluate
bankable emerging country opportunities
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ADBI-RIS joint conference on Sustainable Growth
and Enhancing Integration in Asia, 15 September
2010, New Delhi, India
Sources of Financing
4. National/Regional Savings
•
•
Tapping through local currency bonds
Setting up financing vehicles
5. Multilateral and bilateral institutions
•
•
•
•
•
•
Public sector and private sector loans, loan syndication, and
credit enhancements
Help create an enabling environment
Strengthening policy guidance and bringing additional
financial and technical expertise
Expanding lending programs to assist in rapid delivery of
infrastructure projects
Offering innovative range of credit enhancements and risk
mitigation measures
Act as: knowledge partners, technical advisers, capacity
builders, and honest brokers
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ADBI-RIS joint conference on Sustainable Growth
and Enhancing Integration in Asia, 15 September
2010, New Delhi, India
Conclusion
1. Large financing needs should be translated into
viable and bankable projects
•
•
Project Development Facilities - (pilot successful cases that
can be replicated)
Viability Gap Funding Mechanisms
2. Public and Private Partnerships
•
•
•
PPP Policy, Legal, and Institutional Frameworks
Viability Gap Funding
Risk Management Frameworks
3. Regional financing mechanisms
•
Identifying and adopting innovative funding strategies establishment of sub-regional and regional infrastructure
funds and regional infrastructure companies
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ADBI-RIS joint conference on Sustainable Growth
and Enhancing Integration in Asia, 15 September
2010, New Delhi, India