Asia will be lucky to see “even one half” of the region’s infrastructure spending requirement of $8tr in the decade up to 2020, head of the ADB’s office of public-private partnership Ryuchi Kaga told Emerging Markets.
“I'm afraid that not even half the targeted amount will be achieved,” Kaga said. “Normally we expect 2%-3% or [up to] 6% of GDP should be spent on infrastructure but in the past five years I don't think that such an amount has been spent by [ADB] member countries.”
Public-private partnership (PPP) schemes have great potential for relieving Asian governments of some of the burden of providing infrastructure, he said, but only if the right “frameworks” can be achieved to enable such public-private schemes to succeed.
Appointed by ADB president Takehiko Nakao in 2014 to ensure a “hands on” approach to private sector involvement in infrastructure, Kaga a former senior executive at the Japan Bank for International Cooperation, has firm ideas about what the private sector can and cannot be expected to do in terms of involvement in power, transport and other forms of infrastructure.
“Public sector infrastructure is dominant and it should be dominant because not all projects are viable and bankable, commercial projects,” he said. “In rural areas infrastructure projects are absolutely not eligible for private participation.”
SUITABLE RISKS
At the same time, said Kaga, governments must have a realistic view of what risks the private sector should be expect to bear. “In this region in the past governments pushed all the risks to the private sector, even political risks events. Those kinds of risks should absolutely be covered by the public sector.
“A very important aspect of PPP is appropriate risk sharing between public and private sectors. When we structure transactions we have to identify what kind of risks will be caused by the project and who should pay for each risk.”
Kaga’s comments came as experts at ADB seminars stressed the need for radical new approaches to infrastructure financing. “We should look for new financing mechanisms,” Norbert Kloppenburg, a board member of Germany’s KfW development bank said. Multilateral development banks “need to take the currency risk” on projects instead of leaving it to borrowing countries, he said.
In addition to reducing risk, it is essential that project costs be controlled, Kaga told Emerging Markets. “If we have a good framework for structuring PPP projects it will reduce costs for the government side and not just for the private sector.”
The ADB’s PPP office aims to help countries provide such frameworks, in terms of co-ordination and support and in developing “implementation capacity among borrowers,” he said. "In the history of the ADB this is the first operational department directly attached to the president. The president is very keen on PPP and he prefers hands-on instruction.”
SLOW PPP PICK-UP
The PPP concept has been more widely accepted in Latin America than in emerging Asian economies, according to Kaga. “In the Asian region, India, the Philippines and Korea have the most advanced PPP frameworks. The Philippines and India are model cases. The newest is Bangladesh. They enacted their PPP law just last year.”
On infrastructure financing, Kaga said: “One aspect we need to highlight is that in Latin America they have more project bond funding, so they are able to raise funds through the capital markets by using project bonds.
“But in the Asian region projects bonds are available primarily in Malaysia. Malaysia can do it because they have Islamic bonds and many Islamic institutional investors want a project with Islamic financing. But in other countries it is limited.
“The big issue in the Asian region is that more than 90% [of infrastructure financing is in the form of] bank borrowing,” he said. “This means that banks’ exposure to infrastructure is accumulating dramatically.” In the case of countries such as India and the Philippines, banks have nearly reached their ceiling for exposure to a single country.
How to develop the capital market is therefore an immediate issue in the Asian region. “Money goes basically to banks,” said Kaga. “For institutional investment we need to have good pension and insurance mechanisms but these are still under-developed while in many Asian countries institutional investors have no due diligence capacity.”
The ADB estimates that of the $8tr investment required by 2020, around $4tr needs to go to energy and $2.5tr to transport, said Kaga. “Power generation demand is relatively easy to project but traffic risk is more difficult because transport projects are always competing. In electricity, there is a certain business model for PPP but in transport there is no concrete business model yet. If governments wish to get more money from the private sector for transport definitely they need to create a business model for the private sector.”