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ABAC-ADB-JBIC Infrastructure Finance Forum
Keynote address by Haruhiko Kuroda, ADB President, at the ABAC-ADB-JBIC Infrastructure Finance Forum, Yokohama, Japan
Mr. Nakao, Mr. Wanatabe, Mr. Tanaka, honorable APEC officials, distinguished guests, ladies and gentlemen.
I would like to thank Japan's Ministry of Finance for its support, and the APEC Business Advisory Council and Japan Bank for International Cooperation for co-sponsoring this forum with ADB. I would also like to extend my special thanks to ABAC for its extensive logistical help. It is a privilege for me to be here this afternoon to discuss the enormous challenge we face in meeting the demand for infrastructure development and maintenance. Most importantly, we must improve how we finance infrastructure projects in Asia to ensure their success and sustainability.
Let me raise three important questions involving infrastructure finance. First, what is the scale of the challenge we face? Second, how can we better mobilize Asian savings for infrastructure financing? And lastly, what is ADB doing to help support infrastructure finance in Asia together with our partners?
II. The Demand for Infrastructure and How it is Financed
The 2009 Asian Development Bank Institute's publication—Infrastructure for a Seamless Asia—estimates the region will need $8 trillion in infrastructure finance through 2020 to support current levels of economic growth. Energy and electricity will take up about 40% of the total, followed by transport at about 25%. Social infrastructure for education, health, water and sanitation, and other public goods will account for another 25%. The balance will be mainly investments in infrastructure for telecommunications.
Private sector participation through public-private partnerships, or PPPs, is essential. We estimate that private investment should cover about 40% of total costs. The majority of this still derives, however, from commercial banks—and increasingly from purely domestic commercial banks. Equity developers account for about a quarter of total financing, while bonds may cover about 15%.
No doubt the global economic crisis deeply affected infrastructure development. Fortunately, we are seeing private sector bank lending for infrastructure projects returning to pre-crisis levels. Yet, much needs to be done.
III. Tapping Asian Savings for Infrastructure Development
For one thing, regulatory reform and global economic governance should ensure sound financial deepening and support real economies in attaining long-term sustainable, balanced, and inclusive growth. Governments should strengthen legal and regulatory frameworks, for example, to attract private investors to infrastructure development. Private sector investment depends on stable and predictable frameworks. This is key to successful project finance.
Infrastructure funds and local institutional investors, like pension and provident funds, can channel Asian savings to help finance PPP infrastructure projects. Multilateral development banks like ADB and export credit agencies like JBIC can add to this process through credit enhancement tools and expertise.
Currency mismatches have been problematic in many public-private partnership projects. Continued development of domestic capital markets and encouraging local currency lending will help to address this problem. For example, local pension funds could be tapped as a source of long-term local currency funding. The ASEAN+3 Asian Bond Markets Initiative has been working to deepen domestic capital markets and promote local currency bond issues for widening both issuer and investor bases. The pilot $700 million Credit Guarantee and Investment Facility is expected to be operational next year within ASEAN+3. This type of credit enhancement will also make it easier to promote public-private partnerships and obtain better financial terms.
Emerging Asia's1 savings rates are exceptionally high. Yet, how to activate them to help build the foundations for long-term prosperity is an urgent challenge. It is estimated that gross domestic savings in emerging Asia reached close to $4 trillion in 2009. The People's Republic of China (PRC) and Singapore save about 50% of GDP a year. Malaysia, Indonesia, Thailand, and India save over 30%, with Korea and Hong Kong, China not far behind.
So how do we better use these savings for infrastructure development? This is a key challenge for the region, and for ADB.
IV. What ADB is Doing
Infrastructure development is central to ADB's long-term strategic framework, Strategy 2020. We expect ADB's infrastructure-related lending to exceed $8 billion annually, or about two-thirds of our projected total over the decade. In 2008, we established the Asian Infrastructure Financing Initiative, with support from both the Republic of Korea and the Islamic Development Bank. So far, partners have pledged about $5 billion for this initiative.
Let me give you one example of how ADB supports public-private partnerships. Last year, we launched the Asia Infrastructure Project Development Company in partnership with Singapore and the Asian Training and Research Initiative for Urban Management. With equity from ADB and three Singaporean companies, the company aims to attract private sector participation in PRC's water supply and wastewater treatment. Through such efforts, ADB is working with private investors to identify and support infrastructure development.
ADB places great importance on sustainability. Our infrastructure investments are fundamental to achieving poverty reduction, narrowing development gaps, promoting environmentally sustainable growth and deepening regional integration.
Many infrastructure projects are large and complex, involving a multitude of investors and complex cofinancing and credit enhancement arrangements. It is critical that the views of all stakeholders are well understood, and that there is room for their input in project design. Public-private partnership projects should be subject to strict due diligence to ensure that international best practices cover financial, economic, environmental, and social aspects. ADB offers a wide range of credit enhancement products and can provide extensive due diligence to ensure this happens.
I would like to take special note of the Kyoto Report on Growth Strategy and Finance, which was released yesterday at the APEC Finance Ministers' Meeting. The report eloquently underscores the importance of infrastructure finance using credit enhancement tools with support from multilateral development banks and export credit agencies. This approach will help the APEC region achieve its goals for growth, competitiveness, and poverty reduction.
As you know, ADB promotes clean and renewable energy investments. In this context, we support sustainable urban infrastructure including water and sanitation, as well as sustainable transport investments.
In 2008, for example, ADB established a Cities Development Initiative for Asia, which invests in public transportation, methane capture from solid waste, energy efficiency in buildings, alternate energy sources, and eco-industrial estates and systems.
Working with our development partners and private sector partnerships, the Initiative links cities to the financing resources they need to design investments, construct them, and build the capacity to operate them sustainably. The Cities Development Initiative for Asia is already partnered with nine city governments across Asia, and is working toward establishing partnerships with 25 others.
We also have substantial activity in the water sector. About 500 million people across Asia and the Pacific lack access to safe drinking water, and nearly 1.8 billion people have inadequate sanitation facilities. Improved water management is needed to provide water security for all.
ADB's Water Financing Program sets specific targets for increasing access to reliable, affordable, and safe water. It also provides for adequate sanitation, helps reduce disaster risk, and manages integrated water resources in 25 river basins. Since the program began operationally in 2006, we have initiated a substantial array of new water-related investments. The program is steadfast in reaching its target of benefiting 300 million people in the region.
Ladies and gentlemen, the infrastructure challenge for developing Asia is one of the most daunting we face today. It involves far more than just the size and cost of infrastructure demands. We must work diligently to be innovative, yet financially responsible, in mobilizing Asian savings to deliver successful, sustainable and robust infrastructure projects. We must improve our ability to coordinate and integrate all elements of these complex public-private partnership projects. And we must maintain solid partnerships with all stakeholders throughout the process.
This is no easy task. But ADB is ready to meet the challenge. As I look around the room, I see those from APEC, our distinguished speakers, and many other experienced participants. With your wisdom and expertise, I believe that, together, we can better consolidate our resources to process and manage successful and sustainable infrastructure projects.
I look forward to my two distinguished fellow keynote speakers, and to the sessions that follow.
1 Emerging Asia includes: ASEAN, PRC, Hong Kong, China, Korea, Taipei,China and India.