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“Private Finance for Infrastructure Development: Experiences and Prospects in Asia”

Speech by
Haruhiko Kuroda
President
Asian Development Bank

At the Emerging Market Forum

22 September 2006
Jakarta, Indonesia

I.  Introduction

Mr. Chairman, Excellencies, distinguished panelists and participants, ladies and gentlemen:

When we met last year in Oxford for the inaugural meeting of the Emerging Markets Forum, I set forward my views on steps Asian leaders could take to promote deeper economic integration. As I noted in my remarks then, infrastructure and logistics development is one of the most important elements in this process. Not only are modern transport, telecommunications and utility networks vital for supporting Asia’s economic expansion, they are also essential for improving the quality of life, especially for the poor.

The size of Asia’s infrastructure challenges should not be underestimated. Yet these challenges can be met. To do so, however, far-reaching reforms, including in governance and risk management, will be needed. Financial resources required to meet this challenge are available. What is also needed is a set of keys to unlock those resources and put them to use in building a future of sustainable growth and poverty reduction.

II.  Asia’s Infrastructure Needs

While estimates vary, it is perhaps not an understatement that Asia will need some $3 trillion over the next ten years to keep up with the growing demand for infrastructure. However at current rates of investments, less than half of such demands will be met.

Today in Asia, more than half a billion Asian people have no access to safe water, and three times as many live without proper sewage and waste disposal. Access to paved roads, electricity and other services is uneven throughout the region. And rapid urbanization is putting a serious strain on infrastructure services in Asia’s cities, as we can clearly see here in Jakarta. With Asia’s urban centers set to swell by nearly half a billion people in the next 20 years, there is simply no time to lose.

These infrastructure gaps have not yet affected the region's overall export and economic performance. But the danger signs are there. Inadequate transport and communication infrastructure, uncompetitive transport, logistics and industries, and high fuel costs will all push up the cost of doing business in Asia. Unless action is taken soon, the region may lose its competitive edge. Moreover, it will fail to achieve the potential that currently exists for improving the lives of the poor.

III.  National, Regional and Global Challenges

Asian leaders recognize this. They know the important role infrastructure plays in economic growth and poverty reduction.

Before the Asian financial crisis of 1997-98, a large portion of domestic savings was channeled toward infrastructure development., After the crisis, public and private infrastructure investment dropped off dramatically, especially in the countries hardest hit. In Indonesia for example, infrastructure investment accounted for 6% of GDP before 1997. Though recovering from its post-crisis low, Indonesia’s infrastructure investment is still only around 2% of GDP.

Asian countries clearly need to create fiscal space to invest public funds in infrastructure. But that won’t be enough; they must also find ways to bring private investment back up to a level that will help them meet these enormous needs.

One of the basic problems facing private investors is the general lack of good quality information on projects. Macro-level investment needs have yet to be translated into projects that are well planned, financially viable and prepared to international standards. Private investors need to be presented with well prepared, bankable projects before they can decide whether to invest in them or not.

In addition, governments must create an enabling environment that assures investors of predictability, a level playing field, low transaction costs and fair rates of return commensurate with the risks they take. This will require, among others, sector reforms to allow increased competition; credible and independent regulatory oversight; clear rules and regulations for the solicitation and evaluation of infrastructure project proposals; tariff regimes based on cost recovery; transparent and fiscally prudent means of risk-sharing with the private sector; and efficient mechanisms for dispute resolution.

Infrastructure, for which the public sector is often the regulator, operator, owner, and/or financier, is particularly prone to high risks. Conflicting interests affecting the selection of bidders and corruption during the execution of transactions and implementation of projects often mar the process. Governments must tackle corruption in the sector and improve transparency so that the outcomes of infrastructure projects will be accepted by consumers, civil society and private industry alike. With the huge service coverage gaps in the region, transparency in the design, bidding, execution, and operation of projects can reduce the overall costs of infrastructure provision to the public at large.

ADB is assisting many developing Asian countries to pursue these needed reforms. To begin addressing the problem of project preparation, for example, we are currently considering a project development facility as part of a major infrastructure reform program here in Indonesia.

This two-pronged approach should make it easier for Indonesia to attract the private capital it needs for infrastructure development. The comprehensive reform agenda adopted by the Government is expected to gradually pave the way for leveling the playing field between the public and private sectors, while at the same time resulting in prudent risk-sharing arrangements between the Government and private investors. The project development facility will help undertake feasibility studies and thereby reduce information gaps, and along the way it will strengthen capacity for accelerating public-private partnerships in infrastructure provision.

With such reforms underway across Asia, private investors are once again looking for opportunities in the region. Although the levels of private investment have not returned to their 1997 peak, this renewed interest is encouraging. Equally encouraging is that this interest is now coming from the Asian private sector – from domestic entrepreneurs and multinationals based in Asia. However, the pace of reforms must be accelerated to attract the huge volumes of private investment needed for Asia’s infrastructure development.

In addition to these reforms, the region’s financial system needs improvement. Developing regional capital markets, harmonizing rules and regulations, and allowing innovative solutions are all crucial to increase infrastructure investment in Asia.

As we know, one of the root causes of the Asian financial crisis was an over-reliance on short-term external financing and the domestic banking system. In the 1990s, the greatest source of finance for infrastructure was commercial banks, either directly or through syndicated loans. Since the 1997 crisis, the cost of lending has risen, largely due to increasing host country risk rather than global infrastructure industry risk.

Strengthening bond markets will, therefore, be one of the first steps in creating a viable source of infrastructure financing. This work is ongoing through the ADB-supported Asian Bond Markets Initiative, or ABMI, and others. The ABMI was designed to facilitate access to the market by a wide variety of issuers, and to create an environment conducive to developing bond markets, both domestic and regional. While there is some growth in infrastructure financing through bonds, more needs to be done. Capital markets must be further developed to provide appropriate instruments that better match the profiles of infrastructure project investments.

Parallel reforms will also be needed in the contractual savings sectors to increase the demand for long-term investment products.

Finally, Asian capital markets need to be integrated with the financial systems and players, and innovative ways found to mobilize Asian savings for Asian investment. For example, the region’s foreign exchange reserves, not including Japan’s are now at some $1.8 trillion and growing. As some have suggested, with proper safeguards and discipline in place, the global community could potentially find ways to mobilize a part of these huge reserves for investments in infrastructure. Although there are sensitivities surrounding this approach, it is worth further discussion given the substantial benefits such investment could bring to Asia and the world.

IV.  Conclusion

In conclusion, the resources to fund Asia’s infrastructure demands already exist, in large part, within the region. What is needed is the political will, bankable projects, and ongoing reforms, including in governance and risk sharing mechanisms, to unlock these resources to finance long-term infrastructure needs. None of this will come without cost – but to neglect concerted action now will mean we all pay a much higher price later.

Thank you.