Opening Speech on Urban Development and Infrastructure Investment

Opening speech by Zhao Xiaoyu, ADB Vice President, at the international seminar on Urban Development Investment Corporations and Urban Infrastructure Investment and Financing, Chongqing, People's Republic of China

Ladies and Gentlemen. Good morning.

On behalf of the Asian Development Bank, I am truly honored to be with you in this important gathering. I am thankful to the organizers of this conference for the opportunity to share views and experiences on this crucial topic.

Alongside growth and development, the world has experienced a continued process of urbanization, with an ever increasing urban population that has already exceeded the number of people living in rural areas. This urbanization process will continue, particularly in the developing countries. In the next 20 years, another 1.1 billion Asians are expected to join the urban population. In the People's Republic of China (PRC) alone, the urban population increased dramatically from 160 million in 1975 to about 562 million in 2005, accompanied by an increase in the urbanization ratio from 17% to 43%. The ratio is expected to reach 47% in 2010, 50% in 2015, and 55% in 2020.

The scale of the envisaged urbanization requires enormous capital investment and operational expenditures at the municipality level for construction and operation of urban infrastructure, provision of municipal and social services, and protection and improvement of the urban environment. The long-term nature of the urbanization process requires that the financing mechanisms for the development process in the cities must be sustainable.

As the development partner of the Asia and Pacific Region, ADB is committed to improving the living conditions of people in Asian cities. One way to concretize this commitment is to provide financial support for urban development.

From 1988-2008, 11.43% of ADB total lending has been earmarked for urban sector projects in its developing member countries, amounting to over $11 billion in total. ADB has generally been financing urban infrastructure at the municipality level through the central Government, in many cases with relending arrangement through the central government to subsovereign borrowers at local government level or to the SOEs with sovereign guarantee. Other modes of financing include loans extended directly to the local administrations, with prior consent of the central government, and again backed by a sovereign guarantee. In addition, ADB has a very active private sector operation window that has made equity investment in and/or provided lending support for the privately owned enterprises including utility companies to support urban development.

Under the Innovation and Efficiency Initiative adopted in 2005, ADB has introduced a set of innovative facilities to support the local government financing, which include sub-sovereign lending/non-sovereign lending without sovereign guarantee, local currency financing, and refinancing, among others. These instruments are particularly suited in supporting the development of urban infrastructures.

Urban infrastructure is normally developed by the concerned city government, sometimes with limited financial support through internal transfer from the higher level government. In today's world, there is an emerging trend to decentralize the investment, operation, and maintenance of public services to the lower levels of the governments. However, the transfer of responsibilities to local governments is not always matched with necessary resources. Financing for urban infrastructure development is a common and persistent challenge to the city governments across the world.

In the case of the PRC, the city governments are further constrained by the restriction on their direct borrowing from the banks and the capital market to meet their financing need for urban infrastructure development. The establishment of UDICs appears to be a practical solution for the city governments to address the financial challenge. The sub-sovereign lending and non-sovereign lending modalities available at ADB can boost the capacity of SOEs and UDICs to deliver the services for which they were set up for.

In this connection, ADB has recently completed a comprehensive market study on potential of using nonsovereign financing for projects in the water and wastewater sector in the PRC. The market study identified a number of pilot projects located in second and third tier cities around the country. With the end goal of identifying bankable projects, the following issues came up based on the initial results of the due diligence process: First, there is a need to clarify the nature of ownership and to identify the actual shareholders of the SOEs and UDICs, for the purposes of accountability. Second, there is a need to introduce corporate governance measures and to align existing bank modalities with internationally accepted standards as part of managing the risk. Third, there is a need to clarify internal approval and coordination processes among relevant ministries to achieve efficiency. Lastly, there is a need to bridge the knowledge gap between stakeholders by championing and piloting projects on subsovereign or nonsovereign lending.

To date, ADB has not yet extended any loan to either SOE or UDIC without a sovereign guarantee. But ADB will continue to explore the most appropriate operational modality to support urban development through providing sub-sovereign or non-sovereign lending to SOEs and UDICs without a sovereign guarantee from the central government. This requires, among others, a reliable mechanism to assess the creditworthiness of the city government and UDICs and an enabling policy and regulatory environment for such operations in the PRC.

Let me conclude by saying that UDICs play an important role in promoting urban development in PRC. The Conference today is timely and relevant. We are looking forward to working with you together to meet the great challenge in developing a sustainable financing mechanism for urban infrastructure. I am sure that the experiences gained in PRC in this important area will benefit our clients in other developing countries in the region as well.

Thank you very much.