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"Infrastructure for Development: Asia, ADB and Private Sector Opportunities"

Address by
Liqun Jin
Vice President, Operations 1
Asian Development Bank

At the Casa Asia

5 March 2008
Madrid, Spain

Thank you very much for that warm welcome.

I am delighted to be here in Madrid, and particularly at the Instituto Empresa, following the visit of ADB's President, Haruhiko Kuroda, earlier this year. These visits are the Bank's way of reaching out to our members and development partners around the world. Spain, as you may know, has been a very important partner and shareholder to ADB since 1986, and has made many valuable contributions to economic growth and poverty reduction in the Asia and Pacific region. We are fortunate, and extremely pleased, that the Government of Spain, along with the City of Madrid, will be hosting the 41st Annual Meeting of the Asian Development Bank this year, during the first week of May. We are certainly looking forward with great anticipation to spending a few days in your beautiful city and enjoying the warm hospitality of the Spanish people.

During that time, we will of course be showcasing some of Asia's development success stories, but also some of the large development challenges still facing the region. I believe that this is a critical moment in the region's history, and how those challenges are met will determine not only the future of Asia and the Pacific, but that of the world. For instance, today we will be discussing infrastructure - an area that is extremely relevant given Asia's huge infrastructure gaps.

But we are no longer in an era where infrastructure development and use can proceed without close attention to its environmental impacts, including its impact on climate change - and these issues have very serious implications for the global community. The good news is that many such challenges can be turned into tremendous opportunity for all parties, including - perhaps I should say especially - for private companies.

II.  Asia's Infrastructure Needs

Asia's infrastructure needs are immense. 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. It is estimated that the region will need about $3 trillion over the next ten years to keep up with these growing demands. However, at current rates of investment, less than half of such demands will be met.

Asian leaders recognize the important role infrastructure plays in economic growth and poverty reduction. Before the financial crisis ten years ago, a large portion of domestic savings was channeled toward infrastructure development. After the crisis, both public and private infrastructure investment dropped off dramatically, especially in the hardest hit countries. 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.

It is encouraging that changes in technology and management practices, and the introduction of excludability of services have led to the unbundling of large monopolistic infrastructure services. As a result, the private sector is looking more favorably on developing Asia. However, the private sector still accounts for only about 20% of infrastructure spending, while 70% comes from public funding, and the remaining 10% from Official Development Assistance.

One challenge here is to translate macro-level investment needs 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. Another is 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 other things, 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.

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.

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 international 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.

V.  ADB Working with the Private Sector

Ultimately, these infrastructure demands will not be met without investment and participation from the private sector. And this is where ADB can make what we feel is a valuable contribution now and in the future.

ADB is unique in that it has both public sector and private sector operations under one roof. That gives us a key advantage and offers an array of benefits to all parties involved in critical development projects. As a public-private institution, we can mitigate risks for both our sponsors and host governments, work with governments on regulatory change, foster knowledge in the sectors we work in, promote corporate governance and risk management, and improve compliance with laws and regulations.

For private sector partners, we provide 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 facilitate public-private partnerships, which are crucial in the infrastructure sector.

Private companies benefit from partnering with ADB because of our credibility. We have over 40 years of experience in the region, and we maintain positive relationships with a wide network of government agencies and financial institutions. We have found that our presence alongside private partners helps provide comfort to private investors, thus enabling us to mobilize financing for private sector projects or enterprises. Our loan maturity can be as long as 15 years, or more in some cases.

Last year, our private sector operations totaled $1.7 billion. About 44% of that total was for infrastructure projects, 36% for the financial sector, and 17% for funds and capital markets. In the financial sector, we assist private financial intermediaries such as banks, non-bank financial institutions, and funds so that these institutions can, in turn, finance SMEs, micro enterprises, infrastructure facilities, mortgage finance, trade, and other underserved areas. In infrastructure, we help build physical facilities in such fields as energy (power and hydrocarbons), water supply, waste management and treatment, telecommunication, toll roads, ports, airports, and rail systems. We also finance existing infrastructure projects for upgrading or expansion to enhance their operating efficiencies.

As Asia grows and develops, our emphasis on private sector and PPP projects is also growing. We are particularly promoting investment in renewable energy generation projects, energy efficiency enhancement projects, wastewater and solid waste treatment projects, energy transport systems among others, to conserve natural resources and improve the quality of life in developing Asian countries. To be eligible for ADB financing, a project must be financially viable with significant economic and social merit, and a positive development impact. We look for projects that reduce poverty, protect the environment, and improve the lives of the poor, with reasonable costs and a fair sharing of risks and rewards among the country and the sponsors.

As just a few examples, our private sector projects have ranged from a rural cellular telephone network in Bangladesh to thermal power generation facilities in India to expressway rehabilitation and expansion in the Philippines. Construction of a modern water supply plant in the People's Republic of China - the first private sector water project financed by ADB - won "deal of the year" awards from Project Finance International and Finance Intelligence Asia. The plant provides reliable water to nearly three million residents of the City of Chengdu. We also have a Trade Finance Facilitation Program, which 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.

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 private sector support into a larger geographical area. For instance, we provided $8.0 million for a power transmission project in Cambodia; $25 million to the Bank of Georgia for on-lending to small and medium-sized enterprises; and $4.5 million to a finance leasing company in the Maldives to fund small and medium sized clients. 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.

Currently, we are working 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

All in all, I believe the future of the Asia and Pacific region is a bright future. A recent report commissioned by ADB envisions that by 2020, the region will have largely conquered severe poverty and most of its residents will be living in middle-income countries. However, it will take a great deal of hard work and investment to create that future. It will require new and more efficient sources of energy - particularly renewable power such as wind, hydro, and biomass; water and waste management projects; ports and airports; roads and rail systems; and new telecommunications networks, 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.

The opportunities to participate are immense for all sectors of society - governments, development institutions, civil society, academia and the private sector. ADB, as the region's primary development partner, can help facilitate the partnerships and coordinate the investments that will bring Asia and the Pacific region to the next level of development. We look forward very much to your continued engagement and interest in this unfolding success story.

Thank you.