Catalog

Planning for Growth
ADB Review [ August 2005 ]

In the wake of Asia’s recent explosive urbanization, three seminars examined the problems and opportunities in meeting the demands of the region’s cities

About $40 billion per year is needed for urban infrastructure investments to meet the demands of the explosive urbanization seen in Asia over the past 4 decades, seminar participants heard in Istanbul.

“In the mid-1960s, only one person in five lived in towns and cities,” Bindu Lohani, Director General of the Asian Development Bank (ADB)’s Regional and Sustainable Development Department, told the first of a series of ADB seminars on Financing the City. “Today it is one in three, and by 2020, it will be one in two.”

Three seminars examined the problems and opportunities presented by the projected growth of Asia’s urban centers, as well as the potential for public-private partnerships and new approaches to local currency financing.

In the first seminar, Problems and Opportunities, Mr. Lohani explained that city growth has been largely unplanned and uncontrolled, with a plethora of problems ranging from inadequate water supply to festering slums. Despite this, he said, cities are the engines of national economic growth, citing Bangkok, which generates about one third of Thailand’s gross domestic product (GDP).

Another speaker, Kadir Topbas, Mayor of Istanbul, echoed the importance of cities to the overall national economy, saying that Istanbul accounted for 3% of Turkey’s GDP. Yet Istanbul, a city rich in culture and history, needs to substantially upgrade its transportation and water infrastructure. Each of these programs will cost the city an estimated $4 billion–$5 billion.

“We need to learn from the experience gained by other cities,” he said. “Networking among city officials from Asia and elsewhere is vital to avoid repeating the mistakes of the past and to identify new and successful ways of doing things.”

One major problem, highlighted by Freddie Tinga, Mayor of the City of Taguig in the Philippines, is that cities have to fiercely compete for limited financial resources. To gain an advantage, he said that a city’s “product” must be perceived by the investment community as worthy of their attention.

Private investments can be tapped to help bridge the resource gap in the infrastructure financing needs of developing countries, the second seminar on Private-Public Sector Partnerships heard. Companies engaged in public-private partnerships presented various modalities through which the private sector can help finance urban infrastructure needs.

For example, Foo Hee Kiang, Chief Operating Officer of the Hyflux Group, which has undertaken a desalination project in Singapore, explained the background of the drinking and industrial water sector in Singapore, the structuring of the project, and the allocation of risks between the project company and the offtaker for the water—the Public Utilities Board of Singapore.

Another speaker, S. Ramakrishnan, Executive Director of Finance for Tata Power Company in India, outlined the context of the privatization of electricity distribution in New Delhi and presented an innovative funding arrangement to cover losses during the transition period.

At the third seminar on New Approaches to Local Currency Financing, project developers, sponsors, and banks showed how developing long-term cross currency swaps will help bring in confidence and trust in local capital markets to provide long-term local currency funding to finance urban infrastructure.

Short-term alternatives are important, but policy makers need to focus on developing longer-term solutions to hedge currency and maturity risks associated with foreign investments, participants heard. Foreign investors prefer currency swap markets for investing in long-term local currency debt instruments of emerging market borrowers.

Asia could look forward to explosive growth in the years ahead, participants were told. A vibrant capital market is no longer a luxury for Asia. Capital markets are not just debt markets but include swap and equity markets.

“The most far-thinking governments in Asia have encouraged the development of local currency financing solutions even if they lacked a strong incentive to do so,” said one of the speakers, Robert Gray, Chair of the Hongkong and Shanghai Banking Corporation’s Debt Financing and Advisory group.

He said that Asia’s bond markets are expanding rapidly and gathering momentum. Asia should be uniquely equipped to finance its infrastructure investment—roads, water, ports, and power through local currency capital markets. The knowledge that finance can be raised locally on a long-term basis can be a key spur to foreign direct investment.

ADB has proposed several local currency financing solutions to its developing member countries, the seminar heard. One is an innovative cross-currency swap product that allows ADB to inject longterm local currency funding to support infrastructure in developing economies by undertaking a currency swap with the host government.

The swap mechanism is a “win-win” for the developing member country, the borrower, and ADB, participants stressed, with its relative simplicity providing great potential to generate local currency financing across developing countries. ADB will use the inputs from the seminar in the ongoing review of its urban sector strategy this year.

Compiled from reports by Robert Dobias, Director, Agriculture, Natural Resources, and Social Sectors Division, Regional and Sustainable Development Department; Seethapathy Chander, Director, Infrastructure Finance Division, Private Sector Operations Department; and Ajay Sagar, Senior Structured Finance Specialist, Private Sector Operations Department

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