MDBs’ private sector lending arms are expected to build distinctiveness in lessons learned and best practices in catalysing private sector finance for development at scale given global infrastructure investment needs.
This article is part of GP-ORF series — From Alpha Century to Viral World: The Raisina Young Fellows Speak.
Since multilateralism first emerged and became institutionalised in the aftermath of the Second World War, the world has changed profoundly. In the past 75 years, Asia and the Western world have made significant economic progress. To continue with this progress, more and better civil infrastructure is needed to enable sustainable economic growth and social progress, lift more people out of poverty, and provide better-quality services for the public.
The current macroeconomic climate amid the COVID-19 pandemic will potentially slow down public infrastructure investments across developing Asia and the world. In Asia, as elsewhere, most infrastructure has been funded from government budgets. Given this adverse situation, sovereign financing is unlikely to ramp up, further exacerbating the need to capture alternate financing sources.
Renowned architect Lord Norman Foster has this to say on tackling the infrastructure challenges of the developing world: “There are many challenges ahead. In a world that is expanding at 7 percent, with finite resources, a significant proportion of the world’s population needs infrastructure to raise the quality of life.” The world’s infrastructure gap is widely recognised. To address the substantial infrastructure financing gap in Asia-Pacific, the region will have to significantly increase its current investment from its gross domestic product (GDP). According to the Asian Development Bank (ADB), the Pacific leads all other Asian subregions, requiring investments valued at 9.1 percent of GDP; this is followed by South Asia at 8.8 percent, Central Asia at 7.8 percent, Southeast Asia at 5.7 percent, and East Asia at 5.2 percent of GDP<1>. Developing Asia needs to invest US$ 26 trillion in infrastructure financing through 2030 — or US$ 1.7 trillion annually — to maintain growth and tackle poverty, while addressing climate change (climate-adjusted estimate); without climate change mitigation and adaptation costs, US$ 22.6 trillion will be needed, or US$ 1.5 trillion per year (baseline estimate). Substantial expenditure on new (greenfield) and existing (brownfield) public infrastructure is needed but cannot be satisfied solely from government coffers. Where will the extra funding come from in the current scenario?
One way to close this funding gap is by promoting public-private cooperation, which would in turn attract increased private investments in infrastructure. Upstream, governments must confront the challenge of producing enough well-structured, bankable projects to satisfy market needs and to close the gap. Downstream, there are adequate private sector resources and know-how to bridge the gap. Improved public investment and maintenance, and increased private sector financing, are much needed for the delivery of sustainable infrastructure. Partnerships between the public and the private sectors not only can provide new sources of capital but also can bring discipline to projects in the development, construction, and operation phases<2>. Development finance is key to private sector investment delivering high-quality infrastructure in developing economies.
Multilateralism in the form of international finance institutions and multilateral development banks (MDBs) like ADB have a pivotal role to play in not only the traditional mechanisms for infrastructure financing using public budgets as the primary source, but also in innovative and competitive private sector financing solutions. MDBs can take action for the Sustainable Development Goals by designing tailored financing options through a common platform supporting green infrastructure projects and helping catalyse private sector investments.
MDBs do have an important tool to jump over certain obstacles that may block the flow of private finance for development. These in-house ecosystems are their private sector lending arms or private sector windows. The ADB’s Private Sector Operations Department, IDB Invest or the World Bank Group’s International Finance Corporation (IFC) are rightly seen as key actors in the challenge of moving from billions to the trillions of private sector finance necessary to fill the infrastructure funding gap.
The catalysing role of MDBs is exemplified by ADB’s Strategy 2030<3>, which sets the course for ADB to respond effectively to the Asia-Pacific’s changing needs. Under the aegis of Strategy 2030, ADB will expand its private sector operations, to reach one-third of its total operations in number by 2024. ADB will catalyse and mobilise financial resources for development by strengthening collaboration with multilateral, bilateral, and private sector partners. It will seek finance from commercial and concessional sources targeting a substantial increase in long-term co-financing by 2030, every US$ 1 in financing for its private sector operations will be matched by US$ 2.50 of long-term co-financing.
To better illustrate the catalytic role of MDBs in general, and ADB in particular, in mobilising private finance — a role that has till date been largely overlooked by research on development finance — I draw from my experience with a project that I led towards financial close (November 2019), for which physical completion is expected by the end of 2021.
The Riau independent power producer (IPP) project in Sumatra, Indonesia makes news for all the right reasons<4>. The 275-MW power plant, supported by ADB and private sector participants, will help secure Indonesia’s energy future and provide local communities with more affordable and reliable electricity. In addition, the use of combined-cycle gas-fired power generation (i) will improve the environmental sustainability of the current energy mix in Indonesia by displacing diesel and coal as more polluting fuels for electricity generation, and (ii) could increase the penetration capacity of renewable energy sources in the national grid. A combined-cycle power plant uses both a gas and a steam turbine; the waste heat from the gas turbine is routed to the nearby steam turbine, which generates extra power. Therefore, combined-cycle plants are more efficient and eco-friendlier than traditional (simple-cycle) gas-fired plants. Furthermore, gas engines and turbines can respond more quickly than coal-fired units, and, thus, are better suited to responding rapidly to load fluctuations. In turn, this can enable greater use of intermittent renewable energy sources, such as wind and solar.
ADB's support for the Riau IPP helped accelerate and magnify financing necessary for any large-scale infrastructure investment, which has remained a challenge in Indonesia. As a lender, ADB provided a US$ 70 million direct (“A”) loan from its ordinary capital resources and invited and worked together with IFC (co-lending US$ 50 million) on its first joint infrastructure project in Indonesia. As a mobiliser, ADB arranged a US$ 82 million (“B”) loan funded by commercial banks, with ADB providing an extended political risk guarantee (PRG) to the participating banks for the first time in Indonesia. Furthermore, ADB administered a US$ 20 million parallel loan from Leading Asia’s Private Sector Infrastructure Fund, supported by the Japan International Cooperation Agency (JICA). ADB’s role as A/B lender and provider of its PRG product to commercial banks, and cross-MDB collaboration enabled the project to secure a substantial amount of long-term debt — US$ 222 million.
Amidst COVID-19 and the post-pandemic recovery, increased MDB funding for relief responses will spur a greater reliance on private sector investment to build back more resilient emerging economies, and especially to narrow the infrastructure financing gap. In April 2020, ADB announced a US$ 20 billion package to address the immediate needs of its developing member countries amid COVID-19. As part of ADB’s Comprehensive Response to the COVID-19 Pandemic<5>, I was invited to contribute to ADB’s first infrastructure COVID-19 assistance at its epicentre in Wuhan, China<6>. In May 2020, ADB assisted natural gas distributor China Gas to finance LPG for new hospitals that were hastily being constructed to meet the growing demand for beds to treat COVID-19 patients. The US$ 20 million loan enhances the resilience of cities in China through the sustenance of uninterrupted energy supplies to meet basic human needs and support economic activity in the most affected areas. ADB’s loan will also have a catalytic role in mobilising further commercial bank loans. ADB’s additionality also includes the client increasing the scope of its gender-responsive community activities in Wuhan and, a year after the outbreak of COVID-19, extracting gender-sensitive lessons from the epidemic’s impact and the company’s response.
I believe that both ADB interventions are compelling models and excellent instances of development in Indonesia and China. They illustrate the ADB’s mandate well to help close the yawning infrastructure funding gap, to help increase access to private sector finance in developing Asia, and to support project sponsors and clients to ensure that infrastructure is green and enduring.
The imperative is for MDBs to work together, as in the ADB-IFC-JICA-supported Riau IPP, and to address immediate crises, such as the COVID-19 response in Wuhan. MDBs must find new ways to help the private sector invest more — and more effectively — in improving people’s lives, even as the future is uncertain. The role of MDBs, beyond as bankers, is to try to pioneer environmentally and socially sustainable investments and build resilience in the pursuit of infrastructure and economic development in developing economies.
MDBs’ private sector lending arms are expected to build distinctiveness in lessons learned and best practices in catalysing private sector finance for development at scale given global infrastructure investment needs. These private sector windows also present unique opportunities for impact, pushing the frontiers of collaboration with multilateral and bilateral partners by strengthening public-private strategic alliances in designing ingenious project financing. This cross-collaborative work is critical to structuring more infrastructure investment initiatives in developing Asia and the world. MDBs now have a meaningful role “in helping to steer a course between the immediate threat of COVID-19 and the long-term need for infrastructure to support growth”<7>.
Time, expertise, coordination, commitment, perspective and passion are the necessary ingredients for such catalysts to be successful wherever needed. It is only by working together that multilaterals can develop resilient and sustainable infrastructure that is the backbone of the global economy and is so urgently required to connect people and enhance the quality of life worldwide.
<1> “Meeting Asia's Infrastructure Needs, Manila,” Asian Development Bank, 2017.
<2> Marco Airoldi et al., “Meeting the Infrastructure Challenge with Public-Private Partnerships: Bridging the Gap,” Boston Consulting Group, 2013.
<3> “Strategy 2030: Achieving a Prosperous, Inclusive, Resilient, and Sustainable Asia and the Pacific,” Asian Development Bank, 2018.
<4> “Indonesia: Riau Natural Gas Power Project,” Asian Development Bank.
<5> “ADB’s Comprehensive Response to the COVID-19 Pandemic: Policy Paper,” Asian Development Bank, 2020.
<6> “China, People's Republic of: COVID-19 Emergency Energy Supply Project,” Asian Development Bank.
<7> Henny Sender, “Covid-19 and climate change reshape infrastructure plans,” Financial Times, 11 May 2020.
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Juan-Pablo Martnez-Molina Mercado is an investment specialist in private sector infrastructure in the East Asia Southeast Asia and the Pacific team at the Asian Development ...
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