Financing emerging Asia infrastructure

Private sector must redouble efforts on much-needed projects

The private sector must redouble efforts to finance infrastructure projects in emerging Asia. Multilateral development banks are critical to mobilising this capital. Beyond co-financing, they can help improve project preparation and reduce project risks, a valid concern for investors when dealing with perceived geopolitical or policy uncertainty. Greater risk-sharing between financiers can cushion the impact from higher borrowing costs.

Despite much discussion and effort, private capital is still not playing the role it can or should. Structural issues around bankability, coupled with short-term challenges, threaten to hold back private sector participation.

In the light of macroeconomic uncertainty, multilateral institutions such as the Asian Infrastructure Investment Bank can bolster fiscally-sustainable public investment, given their ability to lend counter-cyclically and take longer-term exposures.

Cross-border infrastructure can support trade and development that fosters income growth. Increased rail connectivity in central Asia could enable further Europe-China trade and integrate central Asia with other regions. It is estimated that $38bn in investment is required between now and 2030 for rail upgrades and new lines. Better infrastructure, together with investments in productive sectors, can also promote a more sustainable trade structure between Latin America and Asia.

Information and communication technology can facilitate integration. However, some Asian economies are at risk of falling behind in basic ICT to support trade. They require more investment support from the international community.

Tourism flows to and from Asia, as well as within the region, are rising quickly in line with incomes. This will require sustainable airport infrastructure and fuels to support industry growth. With improved aircraft technology, there will also be opportunities for more direct connections between Asia and Latin America, facilitating services trade such as tourism and activities involving face-to-face interactions.

Project financing is at an inflection point. Geopolitical tensions, rising nationalism and macroeconomic developments are adding uncertainty to the sourcing and continuity of infrastructure investment. Data show that private sector participation in project financing has stagnated or declined in recent years. Stakeholders in the infrastructure sector will face a markedly different situation in the coming years.

Interest rates will rise as central banks continue to normalise policy, propelling a flight to quality. The combination of remaining liquidity in the system, higher cost of capital and the potential impact from the implementation of Basel III and International Financial Reporting Standard 9, which may make banks more risk-averse in terms of long-term lending, could lead to a divergence in lending costs. There will be a widening credit spread between projects with strong contracts, government backing and multilateral development banks’ involvement, and those without.

Trade frictions and market volatility have increased uncertainty around project pipelines. Sustained trade tensions will cause a shift in supply chains, potentially affecting long-term infrastructure and economic development plans. Currency volatility in some emerging markets will impact the transaction pipeline, as governments delay projects with a view to protecting their currencies or reducing government expenditure.

As major economic infrastructure is sometimes classified as a national strategic asset, sponsors and lenders are likely to be more prudent in building such assets. Increased geopolitical uncertainty and shifts in terms of sources of infrastructure financing, as well as broader trade and political partnerships, are also likely to accentuate such sensitivity. Many Asian economies will see national elections in 2019, which could induce investors to bide their time.

Jang Ping Thia is Principal Economist at the Asian Infrastructure Investment Bank.

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