Michael Barrow, head of the ADB's private sector unit, explains how the multilateral lender is switching course to mobilise private sector capital to help build the region's infrastructure.
The Asian Development Bank is putting the private sector front and center as it reappraises its strategy after more than half a century of providing loans, technical assistance, grants and equity investments to developing Asian countries to push economic growth and reduce poverty.
Under a new strategy announced on July 26, the 52-year-old bank has adjusted its priorities for the coming decade to reflect the growing need for a more balanced approach to investment in the region
One of the critical adjustments amongst a host of others for the Manila-based multilateral lender is the increased focus on the private sector.
Recognizing the huge increase in cost and number of development projects across the region, the bank has pledged to increase its funding to private sector projects to one third of its total project pipeline by 2024.
This is a considerable increase from approximately one fifth of total projects in 2017.
In addition, there will be a renewed focus on renewable energy and other infrastructure sectors such as transport, particularly urban transport and water, sanitation, and waste-related financing to support livable cities as the population grows in the region.
The ADB has long aspired to tap private sector funding and sees an urgent need to do so now. According to the 2017 ADB annual report, some $1.7 trillion a year of infrastructure investment is needed to meet sustainable development goals, nations' commitments under the Paris climate change accord and The United Nations' far reaching "Financing for Development" targets.
The Belt and Road Initiative of the People’s Republic of China and the Beijing-based Asian Infrastructure Investment Bank — sometimes touted as a rival to the Japan-backed ADB — also change the dynamic for infrastructure investing in Asia. ADB has indicated a willingness to work with all partners, including Chinese institutions. However, ADB insists all projects meet its stringent standards.
The new strategy will vary according to the needs of each country, promote the use of innovative technologies and leverage the ADB's half century of experience and expertise across a range of sectors through a mix of public and private sector operations.
The ADB financed $32.2 billion of projects including infrastructure and social development operations in 2017. That includes $11.9 billion in co-financing, such as a $2 million loan agreement with Jarcon and Sun Pacific Energy to finance the installation of 4 MW of solar energy generation capacity in Samoa in August 2017.
This loan was in conjunction with a $1 million loan from the Canadian Climate Fund for the private sector in Asia, an example of how the ADB is working towards its new goal of matching every $1 in financing for its private sector operations with $2.50 in long-term co-financing.
But more needs to be done.
"We will expand our private sector operations in new and frontier markets, such as fragile and conflict-affected situations and small island developing states, and support more public-private partnerships", ADB President Takehiko Nakao said.
"A key measure of our success will be the volume and quality of additional resources we mobilize on top of our own financing."
Speaking exclusively to FinanceAsia, Michael Barrow, director general of the ADB's private sector operations department, discusses how the bank has evolved to reflect the changing financial landscape in the region, and how it is increasing private sector operations to help fill the infrastructure gap.
Q The need for private capital in the Asia infrastructure space is great – does the ADB work with private capital to achieve scalability for some of these mega projects?
A In every deal we do we co-finance. We are almost always a minority lender and/or investor. Mobilizing finance from the rest of the market is critical if we are to address infrastructure deficits at scale. So, every deal we do we work with private capital, from developers to institutional funds and investors, to IFls to private banks and insurers.
For example, last year ADB's private sector operations signed new deals worth $2.3 billion of our own money, but on top of that we mobilized co-financing of close to $6 billion alongside us. We see ourselves in large part as a mobiliser, catalyzer, convener and credit-enhancer of finance provided by others.
Q Long term, private capital will have to cover some 75% of the estimated US$1.7 trillion needed annually in the region. What can be done to entice more private capital to invest in infrastructure?
A We need many more, better prepared projects that are considered bankable and investible by the private sector. We are working on this. We need more sources of finance including institutional investors such as insurance companies and pension funds to finance private infrastructure through funds, funding platforms, project bonds and risk transfers.
Again, we are working on this. Part of our job is to advocate for private infrastructure in the region. Part is to intermediate and de-risk. Part is to finance and co-finance. We are expanding the tools and our capacity to do all of this. In July, our Board approved our new long-term strategy (Strategy 2030). It outlines a major increase in our private sector-focused operations, including our PPP work.
Q As infrastructure development increases across the region, which countries do you believe offer the best investment destination and why?
A There is hardly a country in developing Asia that does not need more infrastructure and thus infrastructure financing. Almost every developing Asian country is committed to doing so and most are committed to increasing private sector participation in infrastructure. The scale and breadth of this activity is expanding and at a level never before seen.
Just to quote our own recent experience, whilst the better-known PPP markets such as India, the People's Republic of China, Thailand, Pakistan, Indonesia and so on, are all extremely active, we have done private infrastructure financings in just the last few months in places as far flung as Samoa in the Pacific, Kazahkstan, Cambodia and Sri Lanka and with many deals in lesser banked markets to come. So, the opportunities exist and will grow across the whole of Asia.
Q With the Belt and Road Initiative of the People’s Republic of China becoming an ever-increasing presence in the region how does the ADB differentiate itself from other lenders and investors
A We are untied. We have been based and operating in Asia for 51 years and know our clients, our markets and our shareholders (the governments of Asia and beyond) and we offer a comprehensive set of products and modes of intervention, from reform to capacity building to advisory to financing in many guises and including products to crowd in commercial providers of funding (indeed cofinancing and mobilization of commercial finance is one of our raisons d'etre).
At the same time, we work closely and well with most other regional and non-regional international financial institutions (IFIs).
Q As the investment arm of the ADB, I would imagine the due diligence process to be exhaustive and very thorough. On average, how long would an investment take from initial approach to completion of deal?
A We undertake deals of many types from equity to debt to guarantees and many blends or hybrids in-between, and covering various types of project finance infrastructure to financial institutions to corporates and private equity funds. All have their own characteristics, their own dynamics, their own complications and their own exogenous factors dictating or influencing timing.
In the old days, before ADB, I was a project finance advisor and always got the stock question from prospective clients as to how long it would take to close financing on a deal. My stock answer was 'six months' - plus a caveat: subject to everything going smoothly, all information being complete and provided promptly, everybody acting rationally and no unseen upsets.
The truth is the unforeseen happens and deals get complicated. But based on experience in the private sector arm of ADB, I have seen deals done in as little as three months and as much as several years.
Q Your department invests in Infrastructure projects across the region. What is the average length of investment?
A If by 'investment' the question revolves around equity, then the holding period for direct infrastructure investment varies enormously but would tend to be in the range of six to twelve years. If the question pertains to debt, it again depends (largely on the needs of the project but also on the asset class) but for infrastructure a typical range is 12 to 15 years. But when the need is there, we can go longer (we have, exceptionally, been as long as 23 years door-to-door for some power infrastructure where extended tenors were required).
Q What current impediments are dragging infrastructure investment in the region?
A Availability of (good) opportunities, risk and risk perception. I highlight the latter as, having been in Asia for some 28 years, I truly believe that the perception of risk is far higher than actual risk in the market. Again, it is our role to help improve the perception and to help mitigate the real risks.
This article was written by Andrew Wright and was first published in FinanceAsia (Article is accessible to subscribers only).Stay up to date Subscribe to our newsletter and get the latest issues, news, events, jobs and data in your e-mail inbox.