ADBI-RIS joint conference on Sustainable Growth and Enhancing Integration in Asia, 15 September 2010, New Delhi, India 1 Note: Preliminary work - not to be quoted without permission from the author. Confidential-Not for Further Circulation A Joint Conference of ADBI and RIS On Sustainable Growth and Enhancing Integration in Asia 15 September 2010, IHC, New Delhi Infrastruacture for Enhancing Asia’s Economic Integration Biswa N. Bhattacharyay Lead Professional and Special Advisor to the Dean ADBI, Tokyo The views expressed in this paper are those of the author and do not reflect the views or policies of Asian Development Bank (ADB), ADB Institute, its Board of Directors, or the governments they represent.

ADBI-RIS joint conference on Sustainable Growth and Enhancing Integration in Asia, 15 September 2010, New Delhi, India 2 Outline 1.Twin Goals 2.Need for Basic Infrastructure 3.GFC Impact 4.Infrastructure Financing Gap and Risk 5.Addressing Bottlenecks 6.Sources for Financing 7. Conclusion

ADBI-RIS joint conference on Sustainable Growth and Enhancing Integration in Asia, 15 September 2010, New Delhi, India 3 Twin Goals Focus on Asian integration through enhanced regional connectivity— developing and implementing regional infrastructure projects—has high pay-offs for all participating countries Asian large financial and technical resources can be effectively mobilized to meet the large investment needs in productive sectors like infrastructure

ADBI-RIS joint conference on Sustainable Growth and Enhancing Integration in Asia, 15 September 2010, New Delhi, India 4 Needs for Basic Infrastructure Need to reduce the infrastructure gap to facilitate inclusive growth and poverty reduction: –Inadequate road network coverage-very low road density (1-1.9 km/km 2 in Asia against 3.3 km/km 2 in Latin America) –53.4% of total road network of 5.66 million km paved –300 out of 1,000 people have access to telephone services –Over a billion people have no access to electricity –638 million with no access to improved drinking water and piped water access ratios of less than 20% in many countries –1.5 billion without access to improved sanitation –Access to improved sanitation is as low as 8% in some countries, with only 23% of the rural population having such access in South Asia and 37% in East Asia

ADBI-RIS joint conference on Sustainable Growth and Enhancing Integration in Asia, 15 September 2010, New Delhi, India 5 Global Crisis Impact Highlighted the need to rebalance Asia’s economies toward regional and domestic demand –Infrastructure investment and connectivity is key to this High demand for public fund—Fiscal stimulus responses emphasize infrastructure investment Fiscal constraints emphasize increased private sector engagement PPP projects face considerable risk –New PPP projects : Decreased access to lending (especially from foreign banks), need for greater sponsor equity, shorter underwriting periods, more stringent conditions, and increased financing costs for long-term concessions –Ongoing PPP projects : larger refinancing risk for long-term concessions, potential delays in refinancing with risk of cancellation and market disruption (Glennie, Nair, and Bloomgarden 2009)

ADBI-RIS joint conference on Sustainable Growth and Enhancing Integration in Asia, 15 September 2010, New Delhi, India 6 Pre-Financial Crisis Global Trends PPPI Investment by Region, US$ Million Source: World Bank PPIAF Database

ADBI-RIS joint conference on Sustainable Growth and Enhancing Integration in Asia, 15 September 2010, New Delhi, India 7 Source: World Bank PPIAF Database Pre-Financial Crisis Global Trends PPPI Investment by Sector, US$ Million

ADBI-RIS joint conference on Sustainable Growth and Enhancing Integration in Asia, 15 September 2010, New Delhi, India 8 Infrastructure Financing Gap Regional demand of US$750 billion per year is massive, growing, and surpasses supply –Role of one country or one single institution is rather limited against such huge requirements Large gap is due to three major bottlenecks: –Capacity and Knowledge Gaps, particularly delivery capability (Policy, Design, State-of-the-Art Knowledge/Technology, Construction, Operations, etc.) –Financial/Fiscal (Public and Private Sector) = public debt concerns, reserves and liquidity channeled elsewhere, lack of private sector involvement and inability to commit, under- developed national and regional bond markets –Special Risks inherent in the region’s infrastructure demand profile — risk profile is very different in developing economies in this region (Subramaniam, 2010)

ADBI-RIS joint conference on Sustainable Growth and Enhancing Integration in Asia, 15 September 2010, New Delhi, India 9 Risk for Infrastructure Financing Risk profile in developing Asia is very complex and different Risk appetite of private sector is low following the global crisis As a result, private funds tends to go to infrastructure projects in developed economies Risks at Country Level (across the region) –Greenfield opportunities, mostly –Political: Sovereign and Multi-layer –Policy, Regulatory, and Institutional –Pipeline and level of bankable, quality projects Risks at Project Level –Operational –Financial –Uncertainty of Safeguards (Subramaniam, 2010)

ADBI-RIS joint conference on Sustainable Growth and Enhancing Integration in Asia, 15 September 2010, New Delhi, India 10 Addressing Bottlenecks Policies or actions to address challenges: –Fill in capacity and knowledge gaps Expand infrastructure delivery capability Enhance institutional and administrative capability –Mitigate/reduce infrastructure investment risks –Broaden and deepen the financial base for infrastructure Strategy for the region: –Enhance the level and speed of infrastructure spending in the region –Expand soft-infrastructure development to make hard-infrastructure work effectively

ADBI-RIS joint conference on Sustainable Growth and Enhancing Integration in Asia, 15 September 2010, New Delhi, India 11 Sources of Financing 1.Public Sector Use traditional public sector funding and fiscal stimulus Savings of Public Sector Sovereign wealth and foreign reserves 2.Private Sector and PPPs Private portfolio funds, FDI, etc. Joint ventures, concessions, management contracts, BOO (Build Own Operate) BOT (Build Operate and Transfer) BOOT/ BOLT (Build Own Operate/Lease Transfer), Public sector needs to enhance “PPP skills” to manage PPPs—a new procurement and service delivery approach For the private sector it is a new market opportunity that requires market intelligence and analysis to evaluate bankable emerging country opportunities

ADBI-RIS joint conference on Sustainable Growth and Enhancing Integration in Asia, 15 September 2010, New Delhi, India 12 Sources of Financing 4.National/Regional Savings Tapping through local currency bonds Setting up financing vehicles 5.Multilateral and bilateral institutions Public sector and private sector loans, loan syndication, and credit enhancements Help create an enabling environment Strengthening policy guidance and bringing additional financial and technical expertise Expanding lending programs to assist in rapid delivery of infrastructure projects Offering innovative range of credit enhancements and risk mitigation measures Act as: knowledge partners, technical advisers, capacity builders, and honest brokers

ADBI-RIS joint conference on Sustainable Growth and Enhancing Integration in Asia, 15 September 2010, New Delhi, India 13 Conclusion 1.Large financing needs should be translated into viable and bankable projects Project Development Facilities - (pilot successful cases that can be replicated) Viability Gap Funding Mechanisms 2.Public and Private Partnerships PPP Policy, Legal, and Institutional Frameworks Viability Gap Funding Risk Management Frameworks 3.Regional financing mechanisms Identifying and adopting innovative funding strategies - establishment of sub-regional and regional infrastructure funds and regional infrastructure companies