Institutions For Financing Asia's Infrastructure Demand

ADB/ADBI's 2009 flagship study “Infrastructure for a Seamless Asia” showed that the total infrastructure needs of the Asia-Pacific region over 2010 and 2020 are an estimated US$7.9 trillion (Table 4 [ PDF 17.4KB | 1 page ] and Table 5 [ PDF 17.4KB | 1 page ]) to replace aging infrastructure and build new infrastructure, to keep pace with fast economic growth. In view of the global financial crisis and the global economic downturn, Asian economies will find it difficult to meet this infrastructure demand. The region's governments are faced with severe budgetary constraints, while the private sector is reluctant to take on the risks involved in funding large and complicated infrastructure projects.

Asia must continue to develop new or strengthen existing institutions and regional capital markets to address the resource and funding gaps, but international and regional financial institutions, bilateral institutions of major economies, and multilateral development banks may also need to step in to fill the gaps in resources and funding and facilitate where possible. Multilateral development banks, such as ADB and WB, would need to play a more active role in facilitating infrastructure financing. Asia needs an effective financing framework and further integration and strengthening of Asian capital markets to mobilize the region's savings and encourage public-private partnerships (PPPs) for finance and technology. Furthermore, a comprehensive financing strategy, appropriate financing mechanisms and an institutional framework would be required to finance priority projects.

However, these institutions also face various fiscal constraints and they lack the capacity to fill the entire financing gap. Bhatacharyay (2010) proposed several options for new institutions or mechanisms dedicated to regional infrastructure financing (Table 6 [ PDF 19.2KB | 1 page ]). Creating many of these proposed new institutions at the regional level could be a very complicated and expensive process, and may require considerable effort and time. Given several multilateral and bilateral infrastructure financing institutions already exist in Asia, the creation of a new investment bank may not be worthwhile or practical. Moreover, generating political support from Asian countries for a new regional institution could prove very difficult and it may be more cost-effective to simply use existing institutions. New institutions would need to establish credibility and strong track records, as well as such things as the highest Triple A credit ratings (all of which ADB have already acquired), to ensure trust and confidence among member countries and potential private sector partners, and to be able to borrow at low interest rates in international capital markets. Furthermore, the overall cost of borrowing would be higher compared to costs for the existing regional institution, namely ADB who have already have in place large-scale operations and effective systems and business processes of international standard. It would also be challenging and would take time for a new institution to create an adequate base of knowledge and relevant expertise comparable to ADB (Bhattacharyay 2009).

ADB's 40 years of experience in national and regional infrastructure development, and its recent increase in capital and manpower, means it is well-positioned to make a contribution to meeting possible and existing gaps in infrastructure financing. It has a good track record in providing significant and effective financial assistance for infrastructure development in Asia and of conceiving and implementing regional projects under several subregional programs, such as GMS, SASEC, CAREC, BIMP-EGA, and BIMSTEC. However, for the ADB to be able to meet the huge infrastructure needs of the Asia-Pacific region, it would have to further increase in size and general capital. Even though ADB has recently tripled its capital, to reach $165 billion, ADB's own resources are still limited and would be insufficient to fill Asia's financing gap (Bhattacharyay 2010). Nevertheless, ADB has been playing a catalytic role in mobilizing financial resources through infrastructure funds and through co-financing.

It is clear that the public sector alone cannot meet the estimated infrastructure investment demand of $750 billion per year and that the private sector would have to play a major role. To attract private sector participation in regional projects creating a favorable investment would be a prerequisite. Commercially attractive and bankable projects need to be developed by mitigating, providing guarantees for, and removing additional risks and uncertainties involved in regional projects where possible. This again calls for establishing effective intuitional mechanisms, both nationally and regionally.

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Comment(s)

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1. Sritanu Chatterjee
   (posted 29 June 2010 / 12:13:47 PM)
   
   Dear Sir,
   
   I much appreciate the effort to write this well thought-out paper. It is true that most of the Asian integration has been market driven with a bottom up approach unlike that of NAFTA or EU. But it would have been better as to think about how market driven approach can transform the thinking of national governments to implement the soft infrastructure. Some of the top-down projects that have faced eternal delays are mostly due to changes in market condition. One of the examples is the India-Pakistan-Iran gas pipe line project. The project seemed very attractive and feasible till crude was trading 140 USD and projected to reach 200 USD. But now the whole project is lying in shambles. So I think it is very important to have the soft infrastructure in place and that will expedite the process of regional integration.
   
   The institutional framework presented in the paper is quite elaborate. Some timelines or for the formation of each the teams could have been provided.
   
   Is there any forum still now where the premiers of Asian countries can meet? What I think missing in the papers is the process of initiation of talks for the formation of PAIF Summit Steering Committee.
   
   As crisis helps in creating successful institutions that can change the destiny of nations, I hope that the Asian Connectivity program of ADBI would help in changing the future of 60% of the world population.
   
   Thanks & Regards,
   Sritanu