“We see healthy growth across Southeast Asia, with economic fundamentals growing stronger”-
Infrastructure is critical for overall development of Southeast Asia. With the region’s annual infrastructure investments pegged between $60 billion and $100 billion, multilateral institutions are expected to play a bigger role in meeting these targets. Sérgio Pimenta, Director, East Asia and the Pacific, IFC, highlights the state of infrastructure in the region, financing requirements, potential of private financing, role played by IFC, and the outlook and opportunities…
What role does infrastructure play in achieving the overall development of ASEAN member states?
Reliable infrastructure, which provides basic services to the poor in water supply and sanitation, transport, telecommunications and power, is critical to economic development. The World Bank estimates that emerging markets globally will need infrastructure investments of $1 trillion to $1.5 trillion every year until 2020. Infrastructure is a particularly high priority in Asia. Of the 1.2 billion people lacking electricity in the world, about 700 million live in Asia.
At the same time, Asia is growing fast. ASEAN as a single economy would be the eighth largest in the world. We need to meet the expansion of Asia’s populations and cities with quality and sustainable infrastructure so that countries’ transformation towards middle- and high-income status is possible over the next decade or so. The challenge is to meet the resource needs, accelerate job creation, continue to share prosperity in this region, and do all of this in a way that leaves our environment intact. It’s a once-in-a-generation opportunity to get the region’s transformation right.
What has been IFC’s role in infrastructure development in Southeast Asia? What problems do you face in balancing your investment goals in terms of both financial returns and economic development?
We provide loan and equity financing for infrastructure projects. We advise companies on ways of executing projects such that they leave lasting benefits for local communities and the country at large. We also advise governments on transparent and most equitable ways of tendering some of their interests in state-owned firms, such as power utilities or water companies, to turn them into successful public–private partnerships (PPP).
In fiscal year 2014, IFC committed a total of $623 million of long-term finance in infrastructure across the Asia-Pacific region. Our experience shows that there is a high correlation between the profitability of projects and the quality of economic development that they help to generate. If a project is financially sustainable for private sector investors, it is much more likely to also be helpful for the poor. We are therefore here to attract private financing to close the infrastructure gap. There is simply no way that government funding alone can do this. On the government side, the key is to create a business environment strong enough to attract the capital that is needed to meet the infrastructure demands. This means developing financing tools and structures to reduce the cost of funds, lower risk, incentivise investors to be involved in projects for the long term, and to cultivate a conducive regulatory environment.
What sectors in Southeast Asia are priorities for IFC given your mandate for economic development?
IFC supports investments across all infrastructure sectors. Generally, there is scope for all partners to do more in urban mass transit, cross-border energy connection, and electricity and water supply across the region. In Myanmar, for example, IFC is working in the energy sector to help ensure the country has reliable access to power as it develops. The need is great. Less than 30 per cent of households in Myanmar have access to electricity. IFC is advising the government in transforming the Yangon Electricity Supply Board into a commercially viable corporate entity. IFC also advises on PPPs in the power sector to help enable power developers invest in Myanmar and thereby provide much-needed power supply to close the fast growing gap between soaring demand and supply.
Estimates indicate that Southeast Asian countries need funding in the range of $60 billion to $100 billion annually to meet their infrastructure development needs. Do you believe that the policies and institutional arrangements that are currently in place can help to raise this amount?
The main challenge is to put available money to work in commercially and developmentally sustainable infrastructure. While there may not be a shortage of financing in the region, there is a shortage of bankable projects with acceptable risk and return profiles. We need to create the right enabling environment for viable projects to take root. Governments need to be fully committed to private sector involvement in large-scale infrastructure projects. Long-term policy needs to be consistent because projects require a clear focus in terms of development and time frame. In some areas we need to increase investor confidence and in others the situation can be improved by loosening the state sector’s hold on capital resources. In both cases this would help unlock available financing. IFC is active in these areas and can provide expert advisory services along the project development chain.The situation in the region is improving overall, but there remain significant scope to enhance the relationship between the public and private sectors.
With wide disparities in the levels of infrastructure as well as general development in Southeast Asia, do you foresee any challenges to future economic integration and the funding of cross-border infrastructure?
The goal of the Asean Economic Community is the free flow of goods, capital, and people. Part of this can be achieved with soft and hard infrastructure, be it connecting people efficiently with markets, or promoting the use of green buildings. Another part lies in promoting cross-border infrastructure in the electricity sector, such as across the Laotian– Thai border. There are many more opportunities to carry out cross-border projects.
IFC and other multilateral institutions are setting up financing vehicles to address disparities in infrastructure development across Asia. IFC’s Global Infrastructure Fund reached financial close last year with $1.2 billion. The fund is managed by IFC’s Asset Management Company, with a mandate to make equity and equity-related investments in a broad range of infrastructure in developing countries.
Other initiatives like the Asean Infrastructure Fund, the future Asia Infrastructure Investment Bank, and BRICS Bank are welcome partners in the effort to address the infrastructure gap. This year’s G20 in Brisbane has also made infrastructure a core part of their discussion agenda. This shows that the international community is determined to tackle the challenges of infrastructure head-on.
What are the commonly faced challenges in the planning, designing, and financing of infrastructure on a large scale? What could countries do to address these challenges?
Large-scale infrastructure projects are often, or at least should be, done as PPPs as they require financing from both the public and private sectors. They indeed do face a number of challenges.
First, launching a successful PPP programme requires clear commitment from the highest levels of government. This commitment needs to be sustained throughout the process. It can be a challenge if policy changes along the way.
Second, there need to be a clear focus on priority projects. In our experience, PPP programmes tend to be successful when one or more projects are identified upfront as viable. Then one has to look at laws and regulations, the enabling mechanisms, to identify what’s missing to get the pilot projects off the ground. This should lead to a solid framework that works for both lenders and investors.
Third, competitive procurement is important. One needs to work out what competitive tendering means to any one particular country as different countries use different approaches.
Fourth, one needs to identify clear lines in the government decision-making process and stick to these to make projects happen. Often, government agencies, which have the authority to support PPP projects, are not the actual ministries that would be implementing the PPPs in practice. Once a successful project is done, it is easier to replicate this format elsewhere in the region.
What are your views on the economic outlook for Southeast Asia over the next two to three years?
The region is well positioned for sound macroeconomic growth over the next two to three years. We see healthy growth across the region, with economic fundamentals growing stronger. Risks include a possible slowdown in China and possible geopolitical tensions. However, we at IFC look forward to working with other partners to facilitate the Asean Economic Community in 2015 and beyond.
In terms of the immediate and long-term future, what are IFC’s priorities?
IFC is the largest global development institution focused exclusively on the private sector. As part of the World Bank Group we have a clear mission to end extreme poverty by 2030 and boost shared prosperity for the bottom 40 per cent of the population in developing countries. So our priorities focus around this core mission. All our projects have this transformational theme running through them.
What opportunities for partnerships exist between global and Southeast Asian infrastructure players in realising the planned investment requirement?
IFC is helping Asian banks get comfortable with financing foreign-sponsored projects. We’re helping governments structure viable and sustainable projects with manageable risk. We facilitate partnerships using our global networks. We’re also seeing more of our Asia-based clients reaching out to Africa, Latin America, and the Middle East. In those cases, we help by introducing them to local partners and finding new markets. Conversely, our global clients are active in the region, for instance, in telecom, oil and gas, power, and water sectors. The World Bank is well positioned to provide tailor-made solutions to our clients and to meet our core mission of alleviating poverty and boost shared prosperity in this fast changing region.
