"Sustaining Asia's Prosperity: Prospects and Opportunities"
Speech by
Haruhiko Kuroda
President
Asian Development Bank
At the Instituto de Empresa
29 January 2008
Madrid, Spain
I. Introduction
Thank you, Chairman de la Dehesa, for that gracious introduction. And good afternoon, ladies and gentlemen.
Let me start by saying how delighted I am to be in beautiful Madrid - the city that will, in May, host the 41st Annual Meeting of the Asian Development Bank. This is my first official visit here as President of ADB, and one of my key purposes has been to inspect the Convention Center, IFEMA. I can tell you that I am truly impressed with the facility, and I look forward to what I am sure will be, with Spain's strong support and partnership, a very successful Annual Meeting for us.
As a long-standing member and shareholder in ADB, Spain has been a tremendously valuable partner in the economic and social development of Asia and the Pacific. With Spain's support, ADB has pursued a vision of an Asia and Pacific region free of poverty, and we continue to do so today. It is therefore a privilege for me to have this opportunity to discuss some of the issues the region is grappling with in its efforts to sustain the rapid growth and poverty reduction that has been a hallmark of the past few decades. I would like to thank all of you for your interest in this important issue, and the Instituto de Empresa for providing me with this opportunity.
II. Asia in the Global Economy
Asia's rise in the modern global economy has been unprecedented. The dramatic growth that has spread from Japan to the so-called "Asian Tiger" economies of Hong Kong, Taipei,China, Korea and Singapore; from the economic miracles in Malaysia, Thailand, and Indonesia to China, India and Viet Nam, has brought tremendous benefits to the people of Asia, and to the world.
For example, per capita income in developing Asia, in real terms, grew from less than $170 in 1967 to over $1,000 in 2005. During a similar period, average life expectancy rose from 53 years to more than 67. In 1990, more than one third of the region's people still lived in absolute poverty. Today, it is fewer than one in five.
All of this has brought new opportunities for businesses and investors the world over. Many of you will have first hand knowledge of these opportunities, and perhaps others will be soon to follow. So it is important that the Asia and Pacific region continues to expand quickly-to sustain the growth of opportunities, as well as to continue improving the lives of the poor. The two go hand in hand, with tangible benefits for all.
In general, we expect that growth in developing Asia will continue to be brisk, although there are clearly some warning signals ahead. The external environment, for example, with $100 a barrel oil and the slowdown in the US, will almost certainly affect the region. Still, we are looking at a potential forecast of slightly less than 8% regional growth-including China but excluding Japan-for 2008.
Much will depend, of course, on how Asian countries manage their domestic challenges. Rising inflation will be a serious issue this year, and a number of countries will need to confront this by reducing unsustainable domestic subsidy arrangements, particularly for fuel. Exchange rate regimes have become much more flexible in recent years, but here too more could be done. Other risks, such as the threat of avian flu and environmental degradation, require regional and international attention, as well as domestic action.
III. Asia's Infrastructure Needs
In addition to these risks, developing Asia is struggling with a huge infrastructure gap. Some recent estimates suggest that Asia will need $3 trillion over the next ten years to keep up with the growing demand for infrastructure. However at current rates of investment, less than half of such demands will be met.
Today, 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.
These infrastructure gaps have not yet affected the region's overall export and economic performance. But we cannot deny that inadequate transport and communication infrastructure, uncompetitive transport, logistics and industries, and high fuel costs will all push up the cost of doing business.
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. Developing countries today spend an annual average of just 3% to 4% of GDP on infrastructure. At these rates, the Asia and Pacific region will take about half a century to reach industrialized world standards.
Asian countries clearly need to create fiscal space to invest public funds in infrastructure. They must also find ways to bring private investment back up to a level that will help them meet these enormous needs. There are some encouraging signs. Changes in technology and management practices, the need to improve economies of scale and the introduction of excludability of services have led to the unbundling of large monopolistic infrastructure into smaller components. This has been able to attract private sector investment with more efficient management practices, greater competition and lower costs of service. Still, the private sector accounts for only about 20% of infrastructure spending today, while 70% comes from public funding, and the remaining 10% from Official Development Assistance.
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. Obviously, private investors will look for well prepared, bankable projects before deciding whether or not to invest.
In addition, governments need to 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.
As the region's development partner, ADB is working with governments to pursue such reforms and improve transparency. We are also working with developing Asian economies to improve the region's financial system. Regional capital markets, harmonized rules and regulations, and innovative solutions must be fostered and adopted to increase infrastructure investment in Asia.
One of the root causes of the Asian financial crisis of 1997-98 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 to provide appropriate instruments that better match the profiles of infrastructure project investments.
Asian capital markets also need to be integrated with the financial systems and players, and innovative ways found to mobilize Asian savings for Asian investment. A portion of the region's large foreign exchange reserves, for example, could potentially be mobilized for investment 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. ADB Working with the Private Sector
In addition to assisting developing Asian countries in creating a conducive environment for private investment, ADB finances critical development projects in the private sector through hard currency loans, equity investments, financial and political risk guarantees, syndication arrangements and cofinancing, and technical assistance. Our aim is to promote an enhanced investment climate and financial environment for the private sector. New sources of debt and equity financing, institutions that promote more stable and liquid bank and capital markets, and new contractual structures and better risk sharing are all important to this goal. We also finance and encourage public-private partnerships, which are especially crucial in the infrastructure sector.
Our private sector operations have grown significantly since inception in 1983, reaching $1.7 billion in 2007. About 44% of that total was for infrastructure projects, 36% for the financial sector, and 17% for funds and capital markets. As Asia continues to grow and develop, our emphasis on private sector and PPP projects, particularly those that protect the environment, will only increase. We are actively promoting investment in renewable energy generation projects, energy efficiency enhancement projects, wastewater and solid waste treatment projects, energy transport systems among others - all of which save precious natural resources and improve the quality of life in developing Asian countries.
We also provide significant support for trade. The development effect of trade has been proven in Asia: one only need look at the experiences of Japan, South Korea, and now China and India. Our Trade Finance Facilitation Program promotes the growth of regional and international trade, especially in support of the poorer countries in the region. The program works in partnership with private sector financial institutions by sharing risk in challenging markets to support higher levels of trade.
Today we have private sector operations in 20 of our developing member countries, and our track record in major markets such as China, India, Pakistan, Philippines and Indonesia is well established. We are now moving into some of the most challenging of markets for the private sector, such as Afghanistan, where we have made five private sector interventions to date. And last year, we expanded our support for private sector projects into a larger geographical area. These included an $8.0 million direct loan for a power transmission project in Cambodia; a $25 million loan to the Bank of Georgia for on-lending to small and medium-sized enterprises; and a $4.5 million direct loan to a finance leasing company in the Maldives to fund small and medium sized clients of their leasing businesses. We also approved a $25 million loan to a bank in Viet Nam for residential mortgage lending activities-our first private sector approval in Viet Nam in five years.
V. Opportunities in Developing Asia and the Pacific
I would be remiss if I didn't take this opportunity to encourage all of you to consider bringing both your investments and your expertise to Asia and the Pacific, particularly to meet some of the needs I have highlighted today. Development projects in Asia need experienced financial advisors, technical consultants, construction contractors, equipment suppliers, operations management companies, equity investors and lending institutions to succeed. There are opportunities in all areas of power generation, transmission, distribution and energy efficiency (and particularly renewable power such as wind, hydro, biomass, etc.). There is a great need in the energy sector, including pipelines and LNG terminals; in water and waste management projects; in the transportation sector from ports to airports to airline systems to roads and rail systems; in mining sector projects; and in telecommunications, particularly rural telephone services. And of course there is a need for financial sector services, from banks to funds to leasing companies and mortgage finance providers.
I am happy to say that we are already in partnership with some major Spanish companies to develop projects such as hydropower in Pakistan and a new cement plant in Bangladesh. We are also in discussion with a few Spanish companies that are looking to enter or expand their operations in India in the urban infrastructure and renewable energy segment. These are very encouraging developments, and I hope only the beginning of a renewed and larger presence in Asia for Spain's private sector firms.
VI. Concluding Remarks
Ladies and gentlemen, I will stop there as what I always look forward to most on occasions like this is the opportunity for a more interactive discussion on issues of mutual interest.
Let me just reiterate, in closing, that while there are downside risks looming, we believe that the Asia and Pacific region can, with diligence, weather the storm and continue along a path of rapid growth and poverty reduction. It will, however, take the participation of all players, including the private sector, both within Asia and around the world to help the region fulfill its tremendous potential. If that potential can be transformed into tangible reality, I believe we can look forward to a new era of prosperity and stability not only in Asia, but around the world.
Thank you, and I look forward to hearing your questions and comments.
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