Infrastructure Financing Sources & Trends

Opportunities for Private Sector Investment and Partnerships in the Southeast Asia Region

Arthur Smith Chairman National Council for Public-Private Partnerships

Based on Presentations prepared by Bob Finlayson, Senior Evaluations Specialist (Private Sector) ADB, and PPIAF

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts no responsibility for any consequenc es of their use. Terminology used may not necessarily be consistent with ADB official terms.

Global Infrastructure Challenges

Developing countries invested 4% of national output in infrastructure BUT: 1.1 billion lack adequate access to clean water 2.4 billion lack adequate sanitation 4 billion lack sound wastewater disposal 2 billion lack electric power Investment and Operations & Maintenance needs are considerable between 5.5 % of GDP for lower middle income countries to 7.5% of GDP for low income countries

Infrastructure Investment Gap Asia

Annual Expenditures on Infrastructure as Share of 2003 GDP (Actual versus Needed 2003)

7.5% Percent to GDP

5.5%

2.9% Lower-middle income Actual

1 1

4.0% Low Income Needed

ADB. 2007. Survey of Market for Sub-national Finance in Asia and the Pacific

There is a large difference between demand and actual investment

Southeast Asia Infrastructure Investment Needs are Large

Annual Infrastructure Demand, Southeast Asia in US$ billion
6.1 5.6 5.1 4.6 4.1 3.6 3.1 2.6 2.1 1.6 1.1 0.6 0.1
Cambo dia Lao P DR Thailand Viet Nam

Source: ADB. 2007. Survey of Market for Subnational Finance in Asia and the Pacific

$( billion)

There are Significant Variations in Service Access

Access to Improved Water supply (%)
110 95 80 65 50 35 20 Cambodia Lao PDR Thailand Viet Nam

Electricity access (kWh/capita)

2200 1700 1200 700 200 Cambodia Lao PDR Thailand Viet Nam

Landline phone access (subscribers / 100 inhabitants)

20 16 12 8 4 0 Cambodia Lao PDR Thailand Viet Nam

Access to Improved Sanitation (%)

115 100 85 70 55 40 25 10 Cambodia Lao PDR Thailand Viet Nam

Source: World Development Indicators, 2008

Quality of Roads and Railroads is Low

World Competitiveness Report Ranking, 2007-2008

Roads

Railroads

Viet Nam

Viet Nam

Thailand

Thailand

Cambodia

Cambodia

Note: Vertical line is the average for all 131 surveyed countries, both within and outside of East Asia. Rating Scale: (1= underdeveloped, 7 = extensive and efficient as the worlds best)

Quality of ports and air transport is slightly better, but still low by international standards
World Competitiveness Report Ranking, 2007-2008
Ports Air Transport

Viet Nam

Viet Nam

Thailand

Thailand

Cambodia

Cambodia

Note: Vertical line is the average for all 131 surveyed countries, both within and outside of East Asia. Rating Scale: (1= underdeveloped, 7 = extensive and efficient as the worlds best)

Quality of telephones is reasonable, but further investment required in Electricity Supply

World Competitiveness Report Ranking, 2007-2008
Telephones Electricity Supply

Viet Nam

Viet Nam

Thailand

Thailand

Cambodia

Cambodia

Note: Vertical line is the average for all 131 surveyed countries, both within and outside of East Asia. Rating Scale: (1= underdeveloped, 7 = extensive and efficient as the worlds best)

Combined effect of poor quality infrastructure is constraining economic competitiveness and growth
World Competitiveness Report Ranking, 2007-2008
Overall Infrastructure Quality

Viet Nam

Thailand

Cambodia

Note: Vertical line is the average for all 131 surveyed countries, both within and outside of East Asia. Rating Scale: (1= underdeveloped, 7 = extensive and efficient as the worlds best)

Urbanization is creating new demands on infrastructure & competitiveness

in 20 years, urbanization and associated infrastructure financing needs in Southeast Asia can be expected to increase significantly
Urban population (% total population) Growth in number of cities over one million inhabitants
180 160 140 120

90 75 60

100

45
80

30
60

th row15 g 0% - 20 >4 0 0 20

15
40

0 SSA SA MENA LAC OECD ECA

20 0 2000 2005 2010 2015

Source: World Development Indicators, 2006; United Nations World Urbanization Prospects, 2003 EAP = East Asia and the Pacific; LAC = Latin America and the Caribbean; MENA = Middle East and North Africa; OECD = Organization for Economic Cooperation and Development; SA = South Asia; SSA = Sub Saharan Africa

Source: United Nations World Urbanization Prospects, 2003

The greatest demand for infrastructure in East Asia and the Pacific is power, followed by roads, telecoms, and water
180 Rail 160 140 Maintenance 120 US$ billion 100 Roads 80 Investment 60 40 20 0 by economic classif ication
Source: Connecting East Asia, ADB, World Bank, JBIC

All except PRC

Water and sanitation Telecoms

PRC

Electricity

by country

by sector

Southeast Asia infrastructure deficit is arising due to problems mobilizing finance

Southeast Asia Region requires infrastructure financing of about $42 billion per annum Actual investment is likely to be less than half this amount, with funding being mobilized from Public sector International donors Private sector

Increasingly, governments in Asia are cutting back on the use of public sector debt
120 100 80 % GDP 60 40 20 0 1997
Source: Key Indicators, ADB

Cambodia India Indonesia Malaysia Pakistan Philippines PRC Thailand Viet Nam 1998 1999 2000 2001 2002 2003 2004 2005 2006

Donor assistance is a finite resource and similar to other parts of the developing world, development assistance in South East Asia can only help catalyze broader sources of funding for investment in infrastructure
Viet Nam

Thailand

Lao PDR

Cambodia

-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

% of GNI
Source: World Development Indicators, 2007-2008 Southeast Asia Development Assistance % of Gross National Income and % of Gross Capital Formation, 2006

% of GCF

Globally, private infrastructure investment is recovering following events such as the Asian crisis, particularly in SA and LAC countries
By Region, in US$ billion
120

100

80

60

40

20

0 1990

1992

1994

1996

1998

2000

2002

2004

2006

EAP

ECA

LAC

MENA

SA

SSA

EAP = East Asia and the Pacific; LAC = Latin America and the Caribbean; North Africa; SA = South Asia; SSA = Sub Saharan Africa

MENA = Middle East and

Source: World Bank, PPI database

On a global level, private infrastructure investment has primarily been directed to the telecom sector, followed by transport and energy
By sector in US$ billion
140 120 100 80 60 40 20 0 1990 1991 1992 1993 1994 1995 Energy
Source: World Bank, PPI database

Telecom Transport Water and sew erage

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Private infrastructure investment in East Asia and the Pacific has mainly been directed towards the energy and telecom sectors, although transport has been growing post the Asian crisis
40,000 35,000 30,000 25,000

$ million

20,000 15,000 10,000 5,000 0 1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Energy
Source: World Bank, PPI Database 2006

Telecom

Transport

Water and Sew erage

In Southeast Asia private infrastructure investment has been relatively low, focused on telecoms and power in Thailand, and highly volatile
5000 4500 4000 3500 3000 $ million 2500 2000 1500 1000 500 0
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

Cambodia
Source: World Bank, PPI Database 2006

Lao PDR

Thailand

Viet Nam

Private Infrastructure Investment Commitments: 2005-2006

GLOBAL: By Contract Type 2005-2006
100 90 80 70
100 90 80 70 Percen t 60 50 40 30 20 10 # Projects
Management and lease contract Greenfield Divestiture Concession

EAP: By Contract Type 2005-2006

Percent

60 50 40 30 20 10 0 # of Projects Investments

Investments

Management and lease contract Greenfield project Divestiture Concession

Greenfield is the dominant type of investment and privatization (divestiture) is only playing a minor role facilitating private investment in infrastructure

While PPPI has started to recover, particularly in India and Latin America, the composition of the top 10 sponsors has changed significantly over the last decade
1990-2001
Sponsor Telefonica (ESP) Carso Global Telecom (MEX) SUEZ (FRA) Telecom Italia (ITA) France Telecom (FRA) AES Corporation (USA) Deutsche Telekom (GER) Enron Corporation Electricit de France Andrade Gutierrez Investment (2001 US$ billions) No. Projects 35.2 (12) 34.8 (5) 32.6 (79) 30.7 (16) 26.6 (26) 21.6 (58) 18.4 (18) 16.9 (48) 15.5 (28) 14.7 (9) Sponsor Reliance ADA Group (INDIA) Saudi Oger Ltd RWE (GER) America Movil (MEX) Telecom Italia Electricit de France Malakoff Bhd (MALAYSIA) E.ON (GER) Akfen Construction (TKY) Orascom (EGYPT)

2001-2005*
Investment (US$ billions) No. Projects 8.1 (3) 7.5 (2) 5.1 (9) 4.9 (5) 4.0 (1) 3.8 (10) 3.9 (4) 3.7 (6) 3.7 (4) 3.4 (2)

Includes investment in projects that reached financial closure in 2001-2005, investment data in 2005 US$

PPPI Global Trends - Summary

Global markets recovering but PPPI investments still far below infrastructure demand Investment flows increasing rapidly in certain regions such as India and Latin America Activity in telecom, energy & transport sectors continues to expand In the water sector, focus is on a few countries, with smaller projects, targeted at bulk facilities PPPI activity in South East Asia still very limited

PPPI Global Trends - Summary

Different types of risk-sharing arrangements are evolving Greater regional diversification of private sponsors with new non-traditional players Retreat by foreign investors creating opportunities for regional/local sources Increase in number of Greenfield projects rather than privatization of existing assets Average project size has increased, with a few large deals accounting for a large share of total investment

All This in the Context of

Impact of PPI performance largely positive but did not meet expectations Negative public opinion high expectations, perceptions of corruption, inter-distributional transfers A few high profile failures over 1990-2006
SA: 5 projects cancelled/under distress, 3% of investment EAP: 65 projects cancelled/under distress, 11% of investment LAC: 110 projects cancelled/under distress, 11% of

investment SSA: 29 projects cancelled/under distress, 4% of investment

 with these challenges

recognized PPP advantages continue to drive new growth in PPPI

Key Lessons for Success & Sustainability

Political economy dimensions are critical
Need to ensure Regulatory independence and stable & credible contractual and regulatory frameworks Capital market development and local currency funding needed for large-scale infrastructure Improved risk solutions and mitigation products to address financing and exchange rate risks Government commitment to cost-recovery tariffs or targeted subsidies

Key Lessons for Success & Sustainability

Getting the Infrastructure Basics and Service Priorities Right

Financial engineering never substitutes for sound project design In the end, it is always the taxpayers and users who pay

Source: Connecting East Asia: A New Framework for Infrastructure, The World Bank

Thank You