Future prospect of quality infrastructure projects in Asia through public private partnership
Delievered at the JBIC seminar during the 50th ADB Annual Meeting in Yokohama, Japan.
The success of sustainable development is critically linked to member States ability to harness the right and competitive infrastructure development. Fast tracking infrastructure development and achieving balanced regional and sector infrastructure development to cater to the needs of businesses and people while also ensuring that infrastructure is resilient and climate friendly are prerequisite elements of the 2030 Agenda. Infrastructure development is embedded as a dedicated goal in the 2030 Agenda (Goal 9) with several targets and indicators.
The Asia-Pacific region has some of the world’s most amazing infrastructure, but it faces huge infrastructure deficits. There is a need to rebuild and rehabilitate neglected or outdated infrastructure and meet widening infrastructure gaps given rapid population and urbanization growth. Annually 50 million more people will be added to urban areas in the coming years, worsening congestion, air pollution and waste management. National and international cooperation is perceived within the 2030 Agenda as critical for steering competitive infrastructure backed by holistic transport, energy and ICT corridors and social infrastructure development. There is a need to properly pace and sequence infrastructure development so that it not only spurs sustainable growth, but also improves living standards for people and offers businesses access to regional and global markets.
To promote quality and high impact infrastructure, future investments need to focus on:
- Mainstreaming sustainable solutions;
- Enhancing inclusivity to “leave no one behind”;
- Developing robust and viable bankable projects;
- Promoting macroeconomic and political stability, so that we can have more transparent policies which are supported by sound legal and regulatory frameworks and ensuring effective governance and competitive bidding;
- Paying due regard to environmental and social implications and building them into the PPP frameworks at the stage of project selection and prioritization;
- Promoting resilient and climate-friendly infrastructure is key for us in the UN, it is a part of the Sendai Framework and is critical to the Paris Accord; and
- Laying the foundation for seamless connectivity with embedded smart, sustainable and path dependent technological solutions.
Demand for infrastructure financing in Asia is estimated to be around $1.6 trillion annually or 60 per cent more than it has been in the past. Limitations on public investments and affordability are profound challenges for least developed, landlocked and small island developing countries, of which 33 are member States of ESCAP. Infrastructure financing investments could require up to 10.5 per cent of these countries’ GDP , yet with an average tax to GDP ratio of 18.4 per cent, which means that they will struggle to mobilize the domestic resources to meet these demands.
In view of this, tapping private sector investment will be critical. Over the last 15 years, $650 billion in private sector investment has been mobilized across the region. Of course now the numbers appear low and this is because the private sector has been deleveraging during and after the financial crisis period. While reliance on public investment will continue, leveraging private investment and institutional investor funds will be the main way to meet long term infrastructure funding requirements. Exploiting PPP modalities is also critical. Close to three quarters of the region’s countries have enacted PPP laws and guidelines, while 13 countries have established project preparation facilities. Two substantive examples can be found in China and the Philippines. China’s PPP Center has processed 232 projects with a value of around $2 trillion; and the Philippines whose BOT center has about 30 projects in different stages of development valued at almost close to a billion with 14 projects already awarded.
While PPP modality is gaining momentum in Asia-Pacific, more concerted efforts are warranted to:
- Launch efforts for “Properly Prepared Projects” backed by sound enabling policy environments and legal and regulatory sector frameworks. Viability gap financing and risk mitigation mechanisms have to be explicit, transparent and rules based. Project selection, feasibility and development need to be rigorous and effectively gauge the implications of alternative scenarios over a project’s lifetime to filter out unviable projects and to assess properly financial and operational risks.
- Incentivize the private sector to deliver sustainable and integrated infrastructure solutions. This could be supported by introducing resilience-related design requirements for construction and management stages of a project in a single contract, giving due consideration to future operation costs and making companies accountable for delivering against key performance indicators.
- Create robust, transparent and accountable procurement processes to promote value for money must be introduced to weed out corruption in infrastructure development, which is estimated at between 5 to 20 per cent of construction costs. Billions are lost every year because of the lack of competitive bidding processes which are essential to deliver value-for-money outcomes.
Finally, infrastructure projects require sizeable investments. Long term bank financing, however, has its limitations in terms of risks of maturity and currency mismatches, and credit limits. Moreover, Basel III tends to make bank loans more expensive in terms of provisions, capital adequacy and liquidity ratios. Bank financing is nevertheless critical to finance the development and construction phases of projects in which negotiation of the terms of debt need to be managed. To this end, managing long-term and diversified sources of capital with supportive credit enhancement mechanisms or guarantees will be helpful. Of course MDBs have an important role to play and they have stepped up to the plate. They now offer long term debt and equity financing for infrastructure, as well as local versus foreign currency requirements with recourse to hedging both interest rate and FX risks via cross-currency swaps. Opportunities to deepen regional capital markets and incentivize institutional investors including pension funds, insurance companies and sovereign wealth funds, that now manage over $50 trillion globally, would offer the required sustainable and assured long term risk capital. In this respect, I would like to recognize the work of ADB in this area.
Mega-regional cooperation endeavors such as the Belt and Road Initiative, Eurasia initiative and ESCAP’s intergovernmental regional cooperation agreements, including our intergovernmental agreements on transport and trade, will provide a major impetus to infrastructure development. Our work in this area is also supporting the development of the Asian Highway Network and the Asia-Pacific Information Superway. The transboundary implications of cross-border projects calls for complex political agreements and institutional mechanisms to deal with different cross-border legal and regulatory jurisdictions, varying policies, and technical standards; such as power transmission networks and management of system imbalances in the energy sector. Development of cross-border infrastructure through PPPs could gain momentum as new regional cooperation and integration initiatives pick up speed.
Sustainable development cannot be achieved unless steps are taken to expedite quality infrastructure and get the private sector fully engaged in sustainable and resilient infrastructure development. We need strong political commitment and effective PPP coordination mechanisms backed by contingent financing for managing risks and rewards.
I thank you.