Asia Summit—Accelerating Infrastructure: Leveraging Partnerships and Mitigating Risk
Meeting Asia’s Infrastructure Needs Will Take a Generation
Asia will be the center of global economic activity for the next 20 to 30 years, while two thirds of the world’s middle class will be based in Asia, said Cesar Purisima, newly-appointed Asia Fellow at the Milken Institute, as he introduced the panel “Accelerating Infrastructure: Leveraging Partnerships and Mitigating Risks” at the 2016 Milken Institute Asia Summit.
Meanwhile, Japan’s corporations and individuals combined hold $23 trillion in cash, while the central banks of ASEAN (Association of Southeast Asian Nations) have over $700 billion in reserves. But according to the Asian Development Bank, Asia needs $8 trillion to fund the region’s infrastructure from 2010 to 2020, of which only half can be met. HSBC estimates an $11.5 trillion funding gap to 2030.
There’s demand. There’s liquidity. So why is Asia not building?
Cesar Purisima, Asia fellow at the Milken Institute; former secretary of finance, Republic of the Philippines
All of the panelists agreed that it all starts with political will and leadership in creating a stronger ecosystem that allows investors to see opportunities more clearly.
Donald P. Kanak, chairman of Eastspring Investments, identified five areas for improvement, in what he called ‘STRIP’:
- Standardization, for exampleof debt instruments, structures, proposal formats and bids to reduce the complexity in due diligence and costs of transactions.
- Transparency in layers of government and agencies, as well as in the pipeline of the project in order to plan ahead.
- Risk-matching between pools of capital, which have their own fiduciary standards and requirements, to infrastructure projects, especially when the country does not even have a sovereign rating.
- Investment markets should create financial tools such as project bonds or other instruments to help make the infrastructure asset class more “digestible” to invest in, rather than “eating the whole elephant at one time.”
- Policy and the regulatory regime must be stable, as infrastructure is a public-affiliated asset class.
Panelists agreed that institutional capacity is critical. Governments need to mandate separate government agencies to overlook infrastructure, and be given legislative power over legal, administrative, finance, and even regulatory matters.
Jordan Schwarz of the World Bank cited Singapore as an example where good governance has led to responsible public agencies to keep an eye on infrastructure services, cost recovery tariffs, and a population’s able to pay. This in turn has opened up financing opportunities for future development. However, there are still risks, especially in the underlying economics and interface with consumers.
Donald Kanak, chairman of Eastspring Investments and chairman of EU-ASEAN Business Council; Cesar Purisima; Sean Chiao, president of Asia Pacific, AECOM
To mitigate these risks, Sean Chiao of AECOM, a top-ranked engineering design firm, explained five criteria the firm uses to assess the potential of prospective projects:
- Connectivity–not just physically, but also digitally
- Enhance the productivity and competitiveness of the region or city
- Resilience against climate change and natural disasters, with a full recovery plan in place
- Take into account the peoples’ future lifestyles.
- An integrated partnership across the entire project pipeline – from design, to finance and investment, and operation and management.
However, infrastructure is still highly sensitive to sovereign and political risk. In order to address this, the World Bank has announced that it will double the use of its political risk insurance products and guarantees over the next few years for projects close to being commercially viable. Kanak agreed that these products have huge potential, but in the long term, won’t be able to meet the $11.5 trillion gap.
The really big number, he said, has to be funded by domestic pools of capital, such as insurance and pensions. Mobilizing domestic savings to fund domestic projects is financially sound and reduces risk, while removing contingent liability from the government. But there will be no revolution. “This will be a generational thing,” he said.