2010/SOM2/SOM-SFOM/WKSP/008 Session 2-2 Private Financing of Infrastructure in Asia Submitted by: Asian Development Bank Workshop on the APEC Growth Strategy Sapporo, Japan 1 June 2010
Private Financing of Infrastructure in Asia APEC SOM-SFOM Workshop Sapporo, Japan Michael Barrow Private Sector Infrastructure Finance Division 1 Private Sector Operations Department Asian Development Bank 1 st June 2010 Huge Need for Infrastructure Investment in Asia A huge step-up in infrastructure investment is required for Asia to sustain economic growth x2.5 in real terms ~$10.0 trillion (5-6% of GDP) Social Infrastructure Water & Sanitation Transport ~$2.6 trillion (5% of GDP) ~$4.0 trillion (4% of GDP) Telecommunications Energy (Electricity) 1990-2000 2000-2010 2010-2020 Source: ADB, Infrastructure for a Seamless Asia, 2009; ADB s estimates (Asia ex-japan, all data in 2008 US$)
Private Sector is Expected to Contribute Annual Infrastructure Investments, 2010-20 Expected Private Sector Contribution by Type of Instruments (estimates) Source of Funds Private ~$1 trillion Equity ~$400 billion Unlisted Equity (Infra Funds) Listed Equity (Developers) Corporate/ Project Bonds Institutional Investors: key catalysts as they take the riskiest piece Gov. Debt Commercial Bank Loans Retail Investors/ Deposits Source: ADB s estimates But Limitations in Current Infrastructure Financing landscape power, telecoms, O&G still dominate concentration in handful of markets true PPPs limited in scope some transport water/waste still a challenge health, education still on the horizon more knowledge and pilots (PPP cells ) and role models simple structures ( 70:30 sponsor equity, senior bank debt) limited rise of regional sponsors and bankers no secondary market name recourse financing risk appetite gradually returning
And New Setbacks With Significant Impact on Infrastructure Debt Markets caution / flight to quality / change in structures / change in players The performance of the project finance market in 2009 was fairly decent given the abject state of the capital markets in late 2008 and early 2009. Volumes were down significantly on 2008 but remained at a level close to those achieved in 2005 Project Finance International, 13 January 2010
Today, Local Commercial Banks Providing Ever More of Liquidity for Infrastructure Projects Asia-Pacific Project Finance Q1 2010 League Table In Q1 2010, liquidity was back to pre-crisis levels Local bank Asia-Pacific bank with foreign lending in Asia Non Asia-Pacific bank Source: Thomson Reuters, 2010 8
But risk of a two-speed Asian PPP market? domestic dynamic liquidity developers political (low) risk perception institutions / planning / m gmt size / volumes Asian growth story little local finance perceived risk low volumes preparation / ownership issues forex issue below the radar Asian Infrastructure Financing Lacks Sophistication Increased Sophistication Australia Europe N. America Asia Corporate loans Listed equity Project finance loans Unlisted equity/ infrastructure funds Local institutional investors investing in infrastructure Mezzanine Monoline Greenfield listing Source: ADB s analysis
Yet, Huge Pools of Money Could be Tapped for Infrastructure Investment in Asia US OECD Economies: Institutional Investors Asset Base Asian Emerging Markets: Savings Rates US$ trillion, 2005 Gross Domestic Savings as % GDP, 2008 Euro area Japan UK Australia Canada S.Korea ~$50 trillion asset base China Singapore Malaysia India Thailand Indonesia Vietnam Philippines ~$5 trillion per year How to attract some of these money pools into (new) infrastructure investments? Source: BIS, Institutional Investors, Global Savings and Asset Allocation, 2007; World Bank, 2009 Asian Economies Need to Better Preparation to Attract Private Investment in Infrastructure Key attributes required More ready economies will attract more investments Identified pipeline of wellprepared projects Fair return for risk taken Developed capital markets (financial recycling from startup to exit) Parties able to manage construction and O&M risks Investment grade contractual agreements Good regulatory framework (strong implementation agency, regulatory independence, enforceable dispute resolution) Source: McKinsey, Private Investment Opportunities in Public Transport, 2007; ADB s analysis
Asian Economies also Need to Better Mobilize Internal Savings for Infrastructure Channels of Mobilization Pension Funds Insurance Companies Corporate / Project Bonds Source: ADB s research Leading APEC Examples Singapore: Government-managed individual savings (CPF) invested into infrastructure equity and bonds Malaysia: Government employee pensions fund (EPF) with significant stakes in infrastructure assets Chile: Large private pension funds allowed to invest directly into infrastructure projects Japan/ Korea: Insurance premium >10% GDP, compared to 1-3% in emerging Asia China: Since 2006, insurance companies are allowed to allocate 6% of their funds to infrastructure Malaysia: Bonds represent 72% of private sector infrastructure investment Korea: Korea Infrastructure Credit Guarantee Fund provides credit guarantee for project debt/bonds Regional: Asian Bond Fund launched in 2003 to invest in East Asian sovereign bonds and to stimulate bond markers regionally ADB Supports Greater Private Sector Participation in Infrastructure Public Sector Operations Capital Markets Development - Credit Guarantee and Investment Facility Private Equity Funds - Islamic Infrastructure Fund - Clean Energy Funds Development of Financial Intermediaries Project / corporate loans Equity investments Guarantees ~$1billion / year Private Sector Operations Catalyst for Greater Private Sector Participation Direct Lending and Co- Investment Technical Assistance and PPP Advisory Capacity building, sector reform, advisory on investment climate Advisory to government on setting-up PPP framework and projects
ADB: Mainstreaming PPPs scale up private sector development and private sector operations in all operational areas, reaching 50% of annual operations by 2020 ADB Private Sector Financing 2001-2009 US$ Million 2,000 Finance Infrastructure 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Very recent deals: water - PRC telecoms - PNG solar power Thailand hydro power Philippines transmission Cambodia Deals in process: biomass Thailand heavy rail Mongolia hydropower Laos thermal power Vietnam geothermal - Indonesia
Private sector still needs lots of support and risk mitigation if the gap is to be filled