In the ADB’s estimate, US$800bn a year is needed to pay for infrastructure development across the region. While progress is being made, it is clear that the bank needs to leverage its own resources to make even a dent in that total.
Infrastructure is central to the ADB’s mandate. Improvements in the region’s infrastructure will accelerate economic growth, improve integration, address climate change and reduce poverty. However, even after the capital increase in 2009, the bank’s own resources fall well short of the investment required.
“Increasingly, our emphasis has to be on greater leverage,” said ADB managing director general Rajat Nag. “If the ADB is to be meaningfully engaged in infrastructure development, we need to leverage our resources much more and, therefore, the role of co-financing and public-private partnerships is going to increase even more.”
A full 70% of its lending in 2010 went to infrastructure. However, with limited resources, the ADB has sharpened its focus on infrastructure projects, where it can ensure the heaviest impact, including paying greater attention to lower-income countries.
India has emerged as the single largest borrower, having more than doubled its reliance on funding from the ADB in the last five years. The bank’s programme in India in 2010 reached a record US$2.4bn, including non-sovereign lending, with about 85% of that total going to three key areas of roads, urban water supply and power, and concentrated on the less-developed states, such as in the country’s north-east.
Source: Reuters
A train makes its way down a narrow alley in Hanoi. The ADB is scaling up its investments in rail and urban transport.
“ADB’s programme has become more sophisticated in India,” said Sultan Hafeez Raman, director general of the ADB’s South Asia department. “We no longer do the standard road construction project; we also bring institutional reforms and knowledge in other dimensions. We have moved towards performance-based contracting, which, basically, means that operations and maintenance are outsourced for a period of five to seven years after a project is completed. This is not mainstream in India yet, but, increasingly, we are breaking new ground.”
Greater sophistication means the ADB is focused on ensuring the long-term impact of a project, not just a successful construction phase. It also means targeting more complex projects, for instance prioritising rail transportation over road. Three recent approvals will see the ADB fund metro rail lines in Hanoi, Ho Chi Minh City and Bangalore.
“Last year, we launched our transport operation plan, which focuses on helping developing countries moving people and goods rather than moving cars. Before, about 80% of our transport investments were in roads and highways, now our vision for the next five to 10 years is to continue to help build roads where we can provide value-added support, but we want to scale up our investments in railways and urban transport,” said Woo Chong Um, deputy director-general of the regional and sustainable development department.
Green growth
Projects like these go down well with member governments due to the potential economic benefits. They also signal a shift towards a greater awareness of climate change.
“The level of knowledge on climate change has gone up tremendously over the last couple of years,” said Um. “In fact, developing countries are very much embracing the activities under the climate-change programmes, not so much as an obligation, but as something that is actually good for their economy. That’s why this ’green growth’ concept is coming out, as it does achieve the same growth objective, while, at the same time, helping to reduce poverty and boost energy security by reducing the region’s reliance on fossil fuels.
“For a lot of people, though, it was flavour of the month, now they think it is the flavour of the century.”
The ADB’s climate-change programme focuses on the key areas of clean energy, sustainable transport, urban development and issues related to land use and deforestation. The bank has a target of providing US$2bn in financing to support clean energy by 2013 and is well on the way to meeting that goal, having extended loans of US$1.76bn in 2010.
While governments may be willing to contribute resources for such projects, it is clear that the private sector must play a greater role in supporting Asia’s infrastructure development. Financiers complain, however, that few projects are “bankable” - a catch-all term covering internal return targets, political and financial risks, as well as the solidity of contractual documentation and legal frameworks.
The ADB is trying to address that.
“You have a mismatch between project availability and the willingness of the private sector - they want to get on with the deal tomorrow and start earning revenues the day after. For that to happen, a lot of preparatory work needs to be done,” said Raman. “Projects take time to prepare; you can’t just get them off the shelf.”
Promoting PPPK
The ADB is hoping the idea of public-private partnerships will go a long way in convincing private sector investors that projects can be bankrolled. Initiatives across Asia are in place to build frameworks with member governments, with the goal of laying solid legal foundations on which private sector investment can build.
Raman says he is looking forward to a time when the ADB can contribute just 10% of a project’s total costs, leveraging on its due diligence and credibility to mobilise the remainder from external sources.
“PPP is one of the most important vehicles to allow the ADB to leverage its own resources. In the corporate structure for the PPP of an infrastructure facility, for example, the ADB might take up a share of the equity alongside five other private sector players, who will also raise debt finance leveraging on ADB’s involvement in that project - which will certainly reduce their cost of funding. Through that, we will be able to leverage another US$900m from our US$100m.”
To some extent, this is already happening. Rahman points to the Agribusiness Infrastructure Development project, approved last year. The aim of the project is to improve infrastructure and capacity along the entire agricultural value chain from procurement to wholesaling in India’s Bihar and Maharashtra states.
“The project will show we are able to leverage a considerable amount of resources. The total size of the ADB project is less than US$100m, but the total investment is going to be more like US$600m over the next three years,” said Raman.
Regulation, however, remains crucial to attracting private sector funding, and Raman believes policymakers need to do more to support the development of PPP.
“It is crucial to these projects that South Asia strengthens the regulatory and policy framework. More transparency, greater predictability and accountability are required. You must be able to enforce contracts in a predictable way,” he said.
Hua Du, director in the ADB’s co-financing office, is also pushing for better legal frameworks to support another ADB initiative.
The ADB has ambitious co-financing targets, aiming to mobilise external funds matching 100% of its own commitments by 2020. While its A/B-loan - where commercial lenders join a deal alongside the ADB and enjoy the bank’s preferred lender status - is an established product, the ADB’s guarantee scheme has struggled to gain traction.
“We need to work on building capacity so that there is a policy and regulatory framework in place for guarantees,” said Du. “Governments need to have rules in place to address these. It is happening, but it will take time.”
Tadashi Kondo, head of the co-financing office, is pushing to make the guarantee product more efficient. Guarantees consume the same amount of the ADB’s capital as loans, while the product is far less known and comes with additional fees, offering little incentive to encourage borrowers.
“Recently, the ADB has developed a risk-transfer mechanism for private sector and public insurers to cover the ADB guarantee, so that our risk is transferred to them - within certain guidelines. Those guidelines are being developed, but it should mitigate the use of our headroom by 80%-90%, which will give a huge boost to the use of the guarantee facility,” said Kondo.
While co-financing operations also include other official sources of funding, Kondo is well aware of the need to attract private sector money. Official sources, he notes, have been constrained since the financial crisis and are unlikely to become bigger lenders in the medium-term.
“We really need to mobilise more external resources to make us more relevant in the development business,” he said.
There are some encouraging signs across the region, including in some new areas and industry sectors that had previously struggled to attract private sector investments.
Breaking new ground
Last year, the ADB agreed to lend up to Bt4.2bn (US$140m) to Bangchak Petroleum to fund the construction of two solar power plants in central Thailand. Under the 15-year loan agreement, Japan’s Mizuho Corporate Bank will assume a large portion of the medium-term risk on the baht-denominated loan in an unfunded-risk participation. The unfunded structure broke new ground, allowing the ADB to extend the tenor of the financing in a young industry sector where banks have been reluctant to take long-term risks, while providing cost-effective funding to the borrower.
The regional and sustainable development department’s Um believes opportunities to work with the private sector will continue to grow as a wider range of investors outside the commercial lending sector actively look for green investments.
“We have been able to attract quite a bit of interest from non-traditional investors, such as pension funds and sovereign wealth funds, partly because, over the last two years, the investments they made in private equity or stocks have not been doing as well. They have been discussing how to channel some of those resources through the ADB’s infrastructure projects and how they can add as many green projects as possible to their portfolios. They are, of course, very conservative, but they are discussing how to get into the developing world through us.”
