Financing Asian Infrastructure Emerging Financial Instruments and the Role of the Multilateral Development Banks Bambang Susantono Ph.D. Vice-President, Asian Development Bank 2 nd April 2018, Bandung, Indonesia
So does Asia and the Pacific
Factors shaping the new normal Economic progress Rising inequality Rapid urbanization Climate change Demographic change Disruptive technologies
Asia grew rapidly in the past 5 decades Global GDP decomposition Sub-Saharan Africa Middle East & 2% North Africa 3% Latin America & Caribbean 7% Rest of the world 10% 1965 Asia 14% Middle East & North Africa 4% Latin America & Caribbean 8% Sub-Saharan Africa 2015 2% Rest of the world 8% Asia 29% North America 29% European Union 35% North America 25% European Union 24% Note: Asia includes developing Asia plus Japan. Source: ADB staff calculations from World Bank, World Development Indicators online database, accessed on 22 May 2017.
Development progress in Asia Asia became one of three cores of global economy The region will continue its growth momentum 5.7% growth in 2017 and 18 Positive growth in most of the sub-regions 60% of global growth 70% 60% 50% 40% 30% 20% 10% 0% Asian Share of World GDP 1700 1820 1870 1913 1950 1970 1980 1995 2010 2020 2030 2040 2050 5
The number of MICs mostly UMICs is rising, while the number of LICs is dwindling. 40 35 30 25 20 15 10 5 0 5 5 5 5 5 5 5 5 5 5 5 2 3 4 4 5 7 8 11 11 12 11 18 18 17 16 20 13 23 23 23 22 19 20 10 9 7 7 7 6 22 24 3 2 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Low Income ( $1,025) Lower-Middle Income ($1,026-$4,035) Upper-Middle Income ($4,036 - $12,475) High Income (> $12,475) 2005 to 2010 L to LM: Bhutan, India, Lao PDR, Mongolia, Pakistan, Papua New Guinea, Solomon Islands, Timor- Leste, Uzbekistan, and Viet Nam. LM to UM: Azerbaijan, PRC, Kazakhstan, Maldives, and Thailand. 2010 to 2015 L to LM: Bangladesh, Kyrgyz Republic, Cambodia, Myanmar, and Tajikistan. LM to UM: Fiji, Georgia, Marshall Islands, and Turkmenistan. Source: Based on World Bank Income Classification Note: Excludes Cook Islands, Nauru, and Tuvalu. Numbers in parenthesis indicate the range of GNI per capita to be qualified for each income group in 2015.
Poverty in Asia is declining 70 60 50 40 30 20 10 0 Headcount ratio (% of population) Developing Asia Sub-Saharan Africa Latin America and Caribbean Source: PovcalNet
but inequality has risen 40 35 30 25 20 Consumption expenditure share of the richest 10%, selected developing Asian economies 36 35 1990 or earliest 2014 or latest 32 32 31 30 30 30 29 29 27 25 31 Source: ADB staff estimates based on World Bank PovCal data.
Asia-wide Gini increased to 45% in the 2010s compared to 40% in the 1990s, contrasting with growth with equity in the 1960s and 1970s 50 45 40 35 30 25 32 40 Gini coefficient of per capita household consumption, selected Asian economies 42 40 39 38 35 46 39 31 38 37 38 1990 or earliest 2014 or latest Source: ADB staff estimates based on World Bank PovCal data.
Asia s urbanization is unprecedented 1400 1200 1000 800 600 400 200 0 Increase in urban population in Asia (millions) 1.24 billion 1.06 billion 1980-2015 2015-2050 (projected) Bangladesh Pakistan Indonesia India China, People's Rep. of Rest of Asia Source: United Nations, Department of Economic and Social Affairs, Population Division (2014). World Urbanization Prospects: The 2014 Revision, CD-ROM Edition.
Asia s urbanization is very fast Number of Years from about 10% to 50% of Urbanization Rate Latin America and Caribbean North America Europe 10% 210 years 49% 105 years 9% 51% 150 years 12% 51% Asia and the Pacific 11% 95 years 51% Viet Nam Indonesia Lao PDR Bhutan China, People's Rep. of 90 years 12% 50% 12% 65 years 54% 60 years 10% 52% 10% 55 years 51% 11% 61 years 51% 1750 1775 1800 1825 1850 1875 1900 1925 1950 1975 2000 2025 2050 Source: ADB estimates using Bairoch (2008) and UN (2012).
bringing benefits but posing challenges too 120,000 migrate daily Cities = 80% energy consumption Cities = 75% of carbon emissions 4.5 million annual death due to air pollution Vulnerable to climate change hazards Municipal waste = 75% collected but < 60% treated <90% people have access to improved water supply Cities effectively treat a small % of wastewater Half of the world s slum dwellers live in Asia Elderly are increasing and also those with disabilities 12
More megacities are emerging.. ADB is responding Megacities, 2025 ASIA: 21/37 Note: The circles indicate population sizes ranging from (10 million) to (39 million). The circles do not reflect the physical extents of the cities and any overlap between them merely reflects their relative population sizes and not any official acceptance or endorsement of any geographical sovereignty. Source: UN (2012).
The future is in secondary cities Number of cities in Asia and the Pacific City population size 2010 2025 2050 Less than 500,000 3,692 5,236 6,878 500,000 to 1 million 203 225 282 1 million to 5 million 179 246 303 5 million to 10 million 17 22 30 Over 10 million 8 13 23 Source: United Nations Department of Economic and Social Affairs
Recognizing Climate Change Top Global Risks Climate change Large scale involuntary migration Water crisis Natural catastrophes Extreme weather events Biodiversity and ecosystem collapse Energy price shock Interstate conflict Fiscal crisis Weapons of mass destruction Source: WEF World Risk Report 2016 15
The C-Story of Human Civilization Cumulative human carbon dioxide emissions [Mt C] 0.001 0.01 0.1 1 10 100 1000 Data Source: CDIAC 2016 (Andres, R.J., T.A. Boden, and G. Marland. 2016) Bathymetry: NASA, Earth Observatory Animation: PIK 2016 Adapted from: Professor Hans Joachim Schellnhuber, Director, Potsdam Institute for Climate Impact Research; Professor for Theoretical Physics, University of Potsdam; Senior Research Fellow, Stockholm Resilience Centre
Asia has a large stake in the global climate change agenda Average annual growth rate of greenhouse gas emissions, 1990 2012 Developing Asia 4.4 Middle East and North Africa 3.9 Sub-Saharan Africa Latin America and the Caribbean 1.2 1.0 Japan, Australia and New Zealand 0.6 North America 0.2 Europe -1.1-2 -1 0 1 2 3 4 5 Source: Asian Development Outlook 2016 Update
Asia is critical to achieving the 2 C goal Developing Asia s share in global greenhouse gas emissions 1990 1999 2012 Rest of the world = 75% Developing Asia = 25% Rest of the world = 60% Developing Asia = 40% Source: Asian Development Outlook 2016 Update
Billions Demographic dividend was key to Asian success 6 5 4 3 2 1 0 Estimated and projected population by major area, medium variant, 1950 2100 Asia Africa Asia Africa Latin America & Caribbean Europe Northern America Oceania Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision, DVD Edition.
Share of Population (in %) CHANGING DEMOGRAPHIC STRUCTURE 35 30 25 20 15 10 5 0 2010 2025 Richer countries such as Japan, Singapore, and South Korea already have more than 10 percent of their population 65 years or over. Among developing middle-income countries, PRC, Sri Lanka, Thailand, Viet Nam are projected to have 10% or more of their population 65 years or older by 2025.
Young populations gave the region a growth dividend in the past % points 1.2 Contribution to annual growth rate per capita GDP, 1981 2010 0.8 0.4 0 Developing Asia People's Rep. of China Rep. of Korea India Philippines Source: Asian Development Outlook 2011 Update.
but some countries now face a demographic tax % points 0.8 Contribution to annual growth rate per capita GDP, 2011 2030 0.4 0.0-0.4-0.8 Developing Asia People's Rep. of China Rep. of Korea India Philippines Source: Asian Development Outlook 2011 Update.
Asia Europe and USA Latin America Family support is declining in Asia, but public transfers are underdeveloped China, People's Rep. of India Indonesia Korea, Rep. of Philippines Taipei,China Thailand Japan Austria Germany Hungary Spain Slovenia Sweden USA Brazil Chile Costa Rica Mexico Uruguay Support system for people ages 65 and above, selected economies -50-30 -10 10 30 50 70 90 110 130 150 % Private transfers Public transfers Savings Source: Asian Development Outlook 2011 Update.
but developing Asia is aging yet diverse Old-age dependency ratio 70 60 50 40 30 20 10 0 2010 2015 2020 2025 2030 2035 2040 2045 2050 Korea, Rep Singapore Thailand China, People's Rep. of India Philippines Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision, DVD Edition.
Units Asia is fastest-growing market for industrial robots 300,000 Annual supply of industrial robots 2014 2019 250,000 200,000 150,000 100,000 50,000 0 2014 2015 2016 2017 2018 2019 Asia/Australia Europe America Note: Data for 2016 2019 are forecasts. Source: World Robotics 2016.
with projected effects on employment Non-farm jobs potentially impacted by technology in ASEAN, 2030 1 (million) 1 Comprises Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Viet Nam. 2 Non-farm labor force is calculated as total labor force less employment in agriculture. 3 Knowledge-based jobs in functions such as clerical and administration, legal, finance, engineering, teaching, and general management (e.g., algorithms to support teachers with adaptive learning, for more automated credit decisions, and for fraud and error detection in transfer payments). Note: Numbers may not sum due to rounding. Source: McKinsey Global Institute analysis.
The Infrastructure Gap
Challenge: The Asian Infrastructure Gap 2016 2030 Estimated Investment Needs $26 trillion (Climate-adjusted) Sector Power Transportation Telecommunications Water and sanitation Region $14.7 trillion $8.4 trillion $2.3 trillion $0.8 trillion Current investment per year $ 881 billion $1.7 trillion Central Asia East Asia South Asia Southeast Asia The Pacific $0.5 trillion $6 trillion $6 trillion $3 trillion $0.04 trillion Investment needs per year Source: ADB
The Asian Infrastructure Gap Estimated Funding Sources Investment needs per year* $504bn Public investment Private investment Current Future Current Future $133bn $121bn $63bn $187bn Private funding will need to be 300% of current levels *excluding People s Republic of China, in 2015 prices Source: ADB
Private Sector Engagement in Asian Infrastructure: Private sector investment and project number 2012 2016 (Billion) $200 300 Number of projects (H1) 250 $150 200 $150 150 100 $50 50 $0 0 2012 2013 2014 2015 2016 Price sector investment in emerging markets and developing economies WHY private sector investment is declining? 1. Inequitable deal structures by governments. 2. Lack of a supportive legal and regulatory framework. 3. The lack of consistency and prioritization of private sector projects. 4. The uncertainty and lack of transparency associated with bid processes. Source: World Bank Group
The Role of Governments
The Role of Government Authorities Project pipeline is key Priority project with private sector involvement Appropriate feasibility studies. Capacity for management and procurement. Clear and measurable infrastructure service delivery objectives The commercial requirements of incoming financiers in bid documents at the outset Financing Modalities
The Current Financing Landscape
The Financing Landscape Has Changed Global Financial Crisis Project finance Traditional source International commercial banks Increased capital costs and regulatory oversight Retreat to core markets and customer base Significant reduction of active institutions Limited replacement by regional lenders Developing economies particularly affected
The Financing Landscape Has Changed (cont d) Asian infrastructure development requires alternative funding sources to banks Departed institutions unlikely to return in near term The development of innovative and diverse financing solutions Directly influenced by the delivery of bankable projects by governments Private sector finance thrives in a robust and active environment
Key Financing Modalities
Key Financing Modalities Green Bonds Blended Finance Catalyzing Green Finance Credit Guarantees
Green Bonds 2007 Initial issue 2017 2020 Amounting to $155.5 billion Expected to issue amounting to $1 trillion Mexico $4.0bn (13%) PRC, Hong Kong, China $1.2bn (4%) India $2.0bn (6%) Others Developed $7.8bn (25%) 2017 $31.5 billion France $1.1bn (3%) Others Emerging $0.6bn (2%) Denmark $2.0bn (6%) U.S. $10.6bn (34%) Sweden $2.2bn (7%) Source: Climate Bond Initiative
Green Bonds Source: Climate Bond Initiative
Blended Finance + Donor Contributor ADB Blended Finance Combining concessional finance from donors or third parties alongside DFI s normal own account financing activities and/or commercial finance from other investors to develop private sector markets, address the Sustainable Development Goals and mobilize private resources. Blended finance targets the provision of important benefits to society beyond those which are captured by the private sector, i.e. additionality. Blended Finance can confer Bankability.
Catalyzing Green Finance Green Finance Catalyzing Facility (GFCF) Innovative financing Resource leveraging Knowledge collaboration
Credit Guarantees Loan ADB Political Risk Guarantee Commercial bank Project borrower Host government Support Government Agency/ State owned enterprise Tariff/availability payment
The Potential for Institutional Investors
Institutional Investors Investment Companies $29 trillion Insurance Companies and Private Pensions $26 trillion Public Pensions and Superannuation Plans $11 trillion Source: McKinsey Global Institute` Sovereign Wealth Funds $6 trillion Infrastructure and Private Equity Funds $3 trillion Endowments and Foundations $1 trillion Pension Funds $7.8 trillion under management 1% invested in infrastructure Source: OECD
Institutional Investors cont. Institutional Investor mobilization has been achieved e.g. Canadian, Australian and UK Pension Funds. Confirms the value of a stable regulatory environment. Focus has been on Mature / Privatized Assets. Issues of liquidity, complexity and credit rating will remain. MDB (and other) credit enhancement products mitigate this issue. Core issue remains the absence of a bankable project pipeline.
The Role of Multilateral Development Banks
Role of Multilateral Development Banks: Assisting Financing Pioneering Convening legal and regulatory frameworks project identification and evaluation development of local currency capital markets individual or portfolio project developments Credit enhancement alternative financing techniques e.g. Green Bonds, Sustainability Bonds. exchange of information between the private and public sectors to stimulate sustainable infrastructure.
ADB Asia s First Green Project Bond Philippines: Tiwi: MakBan Geothermal Financing Package Benefits Project Bond with ADB Partial Credit Guarantee (PRG) $226m-equiv. project peso bonds ADB PRG of 75% of P+I ($180m-equiv) ADB PRG backstopped by CGIF's risk participation on a 1st-loss basis ($140m-equiv.) ADB net exposure is $40m-equiv. on 2"-loss basis, amortized <5 years New asset class: 1st local-currency project bond in Philippines. 1st project bond in Southeast Asia (ex-malaysia) since 1998 Asian Financial Crisis 1st certified "Climate Bond" in emerging markets Addresses Single Borrower Limits issues for a major developer Project Loan $38m-equiv. ADB project loan, 5 years amort. MakBan 458 MW 4 th largest geothermal worldwide Tiwi 289 MW 7 th largest geothermal worldwide
ADB Cloud Based Banking Challenge Financial inclusion Solution Digital finance Only 3 out of 10 Filipinos have a bank account 41% of the unbanked are in Mindanao Offer new opportunities to save, make a payment, get a small business loan, send a remittance, or buy insurance. Reach the underserved and unbanked people Provide personalized and efficient services Mitigate various IT, strategic, and operational risks Reduce major IT capital expenses Lack of efficient technology infrastructure in rural and remote areas and archipelagos Higher costs of reaching and servicing clients for rural banks in high-risk frontier areas
ADB Rantau Dedap Geothermal Project Senior Lenders Shareholders Government of Indonesia Commercial Banks Public Service Obligation Business Viability Guarantee Letter Power Purchase Agreement JBIC Loan Commercial Bank Loan Pt. Supreme Energy Rantau Dedap Advisory Services Contract ADB Loan, CTF Loan Equity Drilling Contract Engineering, Procurement, Construction Contract PT Rekayasa Industri Source: Mott MacDonald
Conclusions
Conclusions The Asian infrastructure gap will require a full mobilization of available funding sources. Private sector funding will become an increasingly important source of infrastructure funding. Project delivery on a bankable basis is a government responsibility. Privatization and rehabilitation offer opportunities for the recycling of public finance. Sustainable development goals should be prioritized by governments.
Conclusions cont. Unlocking institutional investment funding is a priority task. Multilateral development banks can be critical factor in addressing the financing of the global infrastructure gap. The key issue remains. Host governments should create the environment for viable, scalable infrastructure projects which will attract widespread private sector investment and foster financial innovation.
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