Water Makes a Country Grow - ADB Review

Water Makes a Country Grow
ADB Review [ December 2006 - January 2007 ]

By upping its investment offer, ADB finds an appetite—and a bite—in countries that believe in water to either support or juice up their growth rates

By Eric Van Zant
Writer

Under its new Water Financing Program, ADB is offering to double spending on projects in the water sector as a means for ramping up investments in infrastructure that is critical to capturing and sustaining the huge new opportunities emerging in Asia's booming economies.

PART OF THE PIPELINE Governments are ramping up investments in infrastructure to spur growth

"When you arrive in Bangalore, you can smell the money," says Keiichi Tamaki, an ADB Urban Development Specialist, "and it's looking for a good place to park." For the past few years, investors have streamed into the capital of India's southwestern Karnataka State, home of its high-tech and outsourcing boom, eager for return.

Hardly a week passes without an article in the global media about the economic opportunity in Asia's Silicon Valley, where Tata, Infosys, and Wipro hold court with the world's information technology (IT) giants. It is, indeed, a worthy symbol of India's emergence after decades-long economic stagnation.

However, money avoids risk if it can and if India is to continue attracting investment to places like Bangalore—and if it is to ensure that benefits of large-scale investment accrue also to the poorest—it needs to deal with the deplorable state of infrastructure in many parts of the country, including in Karnataka State.

Similarly, in countries throughout Asia, where economies have been booming in recent years, governments need to ramp up investments in the infrastructure upon which growth depends.

ADB's Water Financing Program (WFP) is designed precisely to help countries meet the infrastructure challenge in the water sector, which represents perhaps the most critical gap in financing. Safe and reliable water sources, and the resources upon which they depend, are integral to sustained economic growth, and to meeting the targets of the internationally agreed Millennium Development Goals for reducing poverty.

The WFP will initially focus on six countries: the People's Republic of China PRC), India, Indonesia, Pakistan, Philippines, and Viet Nam, which together account for a large part of the region's population and are among ADB's biggest clients. However, the program is open to all ADB's developing member countries DMCs).

Modest and Unpredictable

TAPPING THE POTENTIAL Demand for new water-sector projects is huge; the issue is how to transform that demand into bankable projects

ADB's investments in the water sector over the last 15 years has been modest and unpredictable, averaging $790 million a year from 1990 to 2005, and ranging from $330 million in 2004 to $1.4 billion in 2005. WFP is an offer to increase ADB's overall investments in water operations to an average that is well over $2 billion annually in the next 5 years.

In the first phase, ADB has programmed $2.4 billion for 2006, $1.8 billion in 2007, and $1.7 billion in 2008. In the second phase, in 2009–2010, total delivery could reach $12 billion over 5 years.

WFP will also mobilize cofinancing and investments from government clients, the private sector, and multilateral and bilateral partners.

Through much of the area covered in the six countries, actual demand for new projects in the water sector is huge. Indeed, "it is unlimited in India," says Hun Kim, Director of ADB's South Asia Urban Development Division.

The issue becomes how to transform that demand into bankable projects. In most of the countries, the capacity for project design and implementation is complicated and implementation is complicated by the lack of skill, including in India.

In several countries—such as Indonesia, Pakistan, and Philippines—that shortfall has been complicated by the decentralization of government services from federal to lower-level governments. To deal with these issues, the WFP will be backed by a grant facility—the Water Financing Partnership Facility-through which more than $100 million in grants may be distributed to top off current projects and fund programs that will develop human resources in public utilities and groups that manage water resources.

In others, such as the PRC and Viet Nam, borrowing or lending caps in one form or another make it difficult to boost lending for water-sector projects.

However, reforms in recent years have made ADB financially more flexible, introducing several new products that will help governments with limited expertise and funds to create projects to improve rural, urban, and basin water resources. Measures such as the Multitranche Financing Facility (MFF), for example, offer a line of credit (a sort of up-front, umbrella financing) that can be drawn down by a government as needs emerge or the capacity to carry through a project develops. It can combine public-sector lending with sub-sovereign lending and private sector operations.

Part of a Larger Effort

Just as water has moved up ADB's development agenda, it is gaining more recognition within government ministries and the media. The PRC and India have become favorite place for international journalists to illustrate the critical nature of Asia's water conditions. But nearly every other developing country is facing what the PRC and India are facing, in addition to their own local water issues.

Reforms in recent years have made ADB financially more flexible, introducing several new products that will help governments with limited expertise and funds to create projects to improve rural, urban, and basin water resources

ADB's WFP is a part of the solution to Asia's water woes. As Asia's economies boom, they are creating a huge need for enabling infrastructure to continue attracting eager investors and to ensure capital flows into areas outside the economic centers where poverty is often highest.

In places such as India's Karnataka State, and in the other five WFP countries, and throughout ADB's DMCs, the WFP will seek creative solutions to ensure that the development of water sector infrastructure keeps pace with the increasing demands placed upon it. However, more financing, more partners, and more commitment by governments are needed to continue the investment momentum that this program is attempting to start.

The following sections outline some of the opportunities for and barriers to expansion of investment in each of these six countries, as well as some of the barriers to investment. The sections also highlight just some of the projects now emerging from the pipeline that will define ADB's WFP.

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