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Resolving the infrastructure funding gap in Asia – the need for private financing

by Jocelyn Ho  This email address is being protected from spambots. You need JavaScript enabled to view it. | 9 January 2019

Source: RMG Bangladesh

The UN Conference on Trade and Development estimates that US$5 to 7 trillion is needed to achieve the Sustainable Development Goals (SDGs) by 2030. Major infrastructures such as those used for energy production, water sanitation and transportation play an integral role in achieving the SDGs, especially by improving the standard of living for people. For Asia’s developing countries, infrastructure development is fundamental in achieving the SDGs. To achieve sustainable development, the Asian Development Bank (ADB) estimates that US$1.7 trillion will be needed every year from 2016 to 2030 for Asia and the Pacific1 to maintain growth momentum, eradicate poverty, and respond to climate change. This means a total of US$26 trillion is needed.2

Despite the infrastructure investment opportunity this figure presents, the region (excluding Japan) faces an infrastructure funding gap, where insufficient investment is being put towards infrastructure development. Instead, we are seeing much of the region’s funds being invested in Europe and the Americas where investors and the public feel more confident investing in. In Asia, the perceived risks and low returns, as well as immaturity of the financial market, particularly in emerging markets, has made Asian investments unattractive to investors. As of the end of 2016, Asia invested $6.2 trillion in the rest of the world, while the rest of the world invested $4.4 trillion in Asia.3 There is a large outflow of capital leaving Asia.

Currently, the region’s funding for infrastructure development comes largely from the public sector.4 With limited potential for additional public-sector financing, the ADB concludes that private financing will have to fill the remaining gap. Private financing will have to reach $250 billion to bridge the gap.5

So, what needs to happen to increase the amount of private financing to fill the funding gap?

According to the ADB6, one of the key components to attract private financing is to make these projects “bankable”. This means making information readily available to investors, supporting them to make investment decisions confidently. Project investment feasibility assessments, including environmental and social impact assessments, need to be conducted at an early stage. Assuming these assessments are conducted properly, these findings not only offer transparency to investors on environmental and social risks but also demonstrate that necessary mitigation measures are identified and implemented to prevent such risks. This information supports investors to properly evaluate the financial risks and returns of these infrastructure development projects.

Investors, on the other hand, should equip themselves with knowledge and capacity on the fundamentals of environmental and social aspects along with how they can be linked to financial risks and returns. At the same time, investors need to understand and leverage the influence they have to demand such assessments to be conducted and made available to support their decision-making process.

The International Finance Corporation’s recent announcement to help the private-sector get involved

On another front, the International Finance Corporation (IFC) announced its new climate targets last month for 2021-2025 to double its 5-year investments to approximately $200 billion. The funds will be used to support countries for climate change adaptation, inclusive of infrastructure financing.7 The IFC, a member of the World Bank Group, is an international financial institution that offers investment, advisory, and asset-management services to encourage private-sector investments in developing countries. Their work creates a more attractive market for private sector investments, and together with its new climate targets, there’s hope for more private investments to close the infrastructure funding gap in the short term.

As part of the Fair Finance Asia Programme, CSR Asia will provide support to meet this capacity building need through strengthening financial institutions’ internal knowledge with training on ESG-related topics. Covering issues ranging from climate change, gender equality and supply chain risks, to financial inclusion, we will draw on our extensive experiences in Asia to demonstrate the strong business case for financial institutions to act responsibly.

The Fair Finance Asia Programme aims to reduce the negative impacts of investments of regionally operating banks and insurers in Asia on human rights, environment and climate change, and on increasing their investments in pro-poor inclusive economic development. The cross-border nature of the industry requires an approach targeting both national and regional levels. The programme operates in seven countries: Cambodia, India, Indonesia, Japan, Philippines, Thailand and Vietnam. The programme will work with different stakeholders and their networks such as civil society organisations, governments (at national and regional level), financial institutions, financial regulators, investors and development banks. This five-year programme will work in close alignment with the Fair Finance Guide International network and its methodology to assess and policy and practices of financial institutions. The programme will influence and engage financial institutions and regulators to promote a sustainable financial sector in Asia, with financial sector institutions operating at national and regional levels, being more transparent and accountable and adhering to ESG criteria.

1. Data provided by the ADB includes the Pacific Islands in addition to Asia. Refer to footnote 2 for source.

2. Closing the financing gap in Asian infrastructure – ADB South Asia Working Paper Series No. 57. Published in June 2018. Accessed at: https://www.adb.org/sites/default/files/publication/431261/swp-057-financing-gap-asian-infrastructure.pdf

3. ibid

4. Public financing during 2016-2020 is estimated to be $272 billion per year, approximately 60% of the total gap in Asia.

5. At the time of ADB’s report is published (2016), private financing was recorded to be $62.5 billion.

6. Closing the financing gap in Asian infrastructure – ADB South Asia Working Paper Series No. 57. Published in June 2018. Accessed at: https://www.adb.org/sites/default/files/publication/431261/swp-057-financing-gap-asian-infrastructure.pdf

7. World Bank Group Announces $200 billion over Five Years for Climate Action. Published by World Bank on 3 December 2018. Accessed at: https://www.worldbank.org/en/news/press-release/2018/12/03/world-bank-group-announces-200-billion-over-five-years-for-climate-action