The ADB is planning a “dedicated infrastructure financing facility” to mobilise public and private sector funds to finance $300 billion a year of infrastructure spending, its president Haruhiko Kuroda announced yesterday. South Korea’s ADB governor Man-Soo Kang immediately promised that Seoul would scale up its infrastructure cofinancing with the bank to $3.5 billion over the next three years, as the first contribution to the facility.
The ADB is in talks with other Asian governments, as well as with public and private financial institutions, to secure further contributions, ADB managing director Rajat Nag told Emerging Markets. In a speech to bank governors, Kuroda made it clear that the ADB plans an aggressive role in infrastructure under its new long-term strategic framework.
Nag suggested that, instead of having to go out and secure infrastructure cofinancing on a project-by-project basis, the ADB would have a dedicated “pool” of money to fund them. Some of the funds might come from Asia’s $2.7 trillion of official exchange reserves. The ADB, the World Bank and the Japan Bank for International Cooperation, the three biggest providers of public funds for infrastructure in Asia, are collectively meeting less that one tenth of the $300 billion total annual need. Private sector funds have not been available on anything like the scale needed, and the new facility could go some way to close the financing gap, officials said.
Nag emphasised that the new facility would not be a new “infrastructure bank of the kind that some have suggested: there would not be an independent legal entity or “separate institutional arrangement” from the ADB. But it could act as a project coordinator on behalf of government and other public or private bodies subscribing money to the new entity.
Bankers cautiously welcomed the initiative but emphasised that infrastructure projects would still need to be commercially viable to appeal to the private sector.
“There is more than enough cash in the private sector, the problem is a lack of good projects with acceptable risk profiles and returns that are sustainable,” Ashley Wilkins, head of capital raising for Asia at Societe Generale, told Emerging Markets. “If the initiative expands the number of properly-structured public private partnerships coming onto the market, it will be a great thing.”
“We are sensitive to the demand for bankable projects,” Indian finance secretary Subba Rao told Emerging Markets this weekend in Madrid. “The infrastructure deficit has been absolutely one of the biggest constraints to India maintaining its current growth.” The ADB faces an early need to double its existing capital of $56 billion within one or two years, or face having to slash its ordinary lending – currently around $8 billion a year, the bulk of it on infrastructure – to around half that level. But first it wants to examine “every other financing option” before going to shareholders, Nag said.
Projects financed under the dedicated funds facility would still have to meet the same tests and safeguards as normal projects financed by the bank with regard to environmental and other criteria, Nag stressed. The facility would be used for financing both public and private sector infrastructure and would offer finance in the form of both loans an d equity depending upon the public or private sector nature of a project.