FACING UP TO A FUNDING DILEMMA

THE WORLD will need to spend an estimated US$57 trillion between now and 2030 on new and existing infrastructure just to keep the global economy ticking over at today’s growth rate, according to the McKinsey Global Institute.
This figure is more than 60 per cent of the US$36 trillion spent globally on infrastructure over the past 18 years ­— and more than the total estimated value of today’s worldwide infrastructure.
In rapidly-growing Southeast Asia alone, some US$8 trillion will be required to build infrastructure to meet growing demand over the next decade.
It is easy to say that X amount is needed for infrastructure development.
It is much harder to say where the funding will come from.
Governments the world over are cash-strapped, global banks have retreated to their home regions, and private sectors are at best cautious when it comes to long-term investments in sectors such as infrastructure. Another source of public funding, overseas direct assistance (ODA), is also under pressure, with traditional donor countries in Europe and the United States facing serious budgetary constraints.
Infrastructure funding is — and will continue to be ­­— a massive challenge facing governments.
The days of easy credit ended with the global financial crisis. To understand the magnitude of change in global financial markets, one only has to look at the fall in cross-border investment between 2007 and 2012. According to McKinsey in another study, the volume of cross-border capital flow dropped from $US11.8 trillion in 2007 to around US$4.6 trillion in 2012.
McKinsey’s observations on the collapse of cross-border private capital flow have been documented by countless other organisations, including the International Monetary Fund and the Institute of International Finance. The problem will likely worsen, rather than improve, as new banking rules on capital adequacy and bad loan provisions are being enacted to avoid a repeat of the GFC.
The funding gap is so large that not even multilateral agencies, including the Asian Development Bank, the World Bank and bilateral development agencies, are able to fill it. New ideas are needed.
Multilateral institutions and peak bodies are exploring new possibilities to raise funds. One line of thinking is to tap into Asia’s rich foreign reserves. In Southeast Asia alone, these collectively amount to US$700 billion. The pool expands considerably when China’s US3.3 trillion and Japan’s US$1.25 trillion are added.
The Manila-based Asian Development Bank is developing a financing instrument to tap into the savings of these countries to boost its infrastructure funding. One approach under consideration is to issue bonds which can be bought by central banks without diminishing their foreign reserves.
Similarly, the Berne Union, a global body representing the interests of export credit agencies (ECAs), will likely discuss the merits of bond issues in its own search for new sources of funding.
ECAs often need to step in with guarantees to make it palatable for banks to provide longer-term finance.
Even where money is available, multilateral agencies and bilateral development assistance agencies like the Japan Bank of International Co-operation (JIBC), are required to help bridge funding gaps in specific projects.
As well as the gap in the quantum of the loan, borrowers face maturity gaps. Long-term financing is difficult to obtain, and if available, is expensive. Some banks simply will not look at loan terms beyond five to seven years.
The most obvious new source of funding is the private sector, in particular pension funds, which controlled US$30 trillion worldwide at the end of 2012 (with US$1.6 trillion of that amount managed by Australian superannuation funds).
But governments will need a convincing — and credible — story to convince institutional investors of the value of co-financing and co-investing in railways, roads, ports, wind farms and so on. In short, public private partnerships will play a key role in mobilising the long-term funding needs of infrastructure projects.
Not all countries in Asia have started to embrace the concept of PPPs, nor do they have the regulatory framework to support and promote them. Some, like Indonesia and the Philippines, have made a start – but just a start. Other countries are a long way from framing PPP policies. This is where the ADB is offering a helping hand.  
Governments need to make their projects both “bankable” and “investable”. And only the best projects will win backing to get them off the ground.

* Florence Chong is Editor of ATI Magazine.