The problem in Asian market perceptions around infrastructure financing begins with the assumption of that there is a 27 trillion dollar[1] demand for infrastructure by 2030. This figure has been quoted in several development discussions especially within the Asian Development Bank (ADB), World Bank (WB) and other Multilateral Development Bank (MDBs) discussions. The emergence of this figure is first seen in a report released by the ADB Institute in 2016[2], and since then the 27 trillion dollar figure for infrastructure has captured the imaginations of financiers, project developers, governments, and investment firms, much to the worry and concern of local communities. The WB has reechoed a similar statement in the latter part of this decade by suggesting a Billion to Trillions of shifts in infrastructure[3], ADB President Nakao has also cited this figure of 27 Trillion in allaying concerns raised by the media in the 50th ADB AGM in Yokohama last year over the market competition with Asian Infrastructure Investment Bank (AIIB) [4].
By the assumption of a massive infrastructure market, the IFIs are trying to paint a picture for newer investors, especially from the private sector to step in. Thus, a slightly deeper look into the lending portfolio of a new MDB like the AIIB will reveal modalities which are often investor friendly such as co-financing, financial intermediary lending, financial securities, bonds etc[5]. As more forms of blended finance mechanisms are being established, the AIIBs public relations game in the investment finance world has leveled up since the AIIBs 2nd AGM in Jeju, South Korea. The President of AIIB had reinforced the Bank’s mantra of Green, Lean, and Clean along with emphasizing the need for efficiency and fast-tracking projects, which is intended to suggest that investors can reap their rewards quicker than what the other banks offer.
Taking a step back, the AIIB had started operations since 2016 simultaneously with China’s One Belt One Road agenda, which is now the Belt Road Initiative (BRI) master plan. The BRI by its DNA is a close cousin to the 27 trillion dollar figure pronounced by the ADB. The BRI sets the same scenario of a never-ending infrastructure market of connectivity, transport and energy projects making the case for new private investors under the guise of global economic integration. This is the very current, very hyped, dominant narrative in infrastructure financing leading it to be presented as another asset class for big capital to play with.
Infrastructure Financing: Upstream, Midstream and Downstream concerns
Stemming from this framework it would be useful to have a look at the operational phases of an infrastructure project. To this end, the infrastructure project cycle should be the bedrock of all conversations that look towards development effectiveness. In the upstream the question that needs to be asked is – are around the appropriate scale of a project, how big is the project being envisioned? How are decisions being made around which projects are viable to finance? Focusing on the end use and end gain, who then will the infrastructure serve, reward and incentivize and to what end? Midstream into the project cycle the project selection process should be accountable to national development strategies? The debate remains on how borrowing governments are currently defining national development strategies, and whether the inclusive and local sustainable development goals are being considered.
The jury is still out on that issue.
Downstream into the project cycle comes from a step preceding it where due recognition of Quality at Entry (QAE) requirements prior to project approval has been ensured. Questions that often emerge in downstream are infrastructure project related social and environmental impacts. Thus the QAE stage is absolutely critical to bring in the immediate and long-term local environmental and social dimensions. Which begs to ask- are the governance mechanisms within project financiers ensuring that these issues at QAE have been meaningfully integrated into the project design to ensure sustainable infrastructure outcomes? Have these QAE requirements been verified in terms of robust methodologies, multiple layers of checks and balances with validation exercises? If not, the downstream harsh realities of project sites will be marred with irreparable social and environmental damage. This can lead to social upheaval, political, and economic tensions and not to mention the potential threat of deep financial risk of failed projects to both public and private investors.
Concluding Reflections
Keeping all these considerations in mind, the nature of infrastructure projects these days are showing a trend of multiple financiers in a project mix. Public finance in the form of MDs is showing increasing trends in co-financed projects. There are numerous players from the MDB scene such as ADB, International Finance Corporation (IFC), AIIB, European Bank for Reconstruction and Development (EBRD) and the WB. These co-financed projects are peppered across the Asia region in sectors of energy, transport, etc. The civil society takes on co-financed projects has not been positive. Immediate reactions point towards banks trying to shirk responsibility on due diligence and responsibilities, while private sector project developers are gifted a broader capital base for each of these projects.
ADB Strategy 2030 Framework clearly focuses on unlocking private capital to infrastructure projects as a core pillar for the coming decade of its work[6]. There is an emerging conversation within UN Financing For Development, UNFFD conversations and even the UN SGD processes for making private sector a development partner.
This leads us to focus on the end stream implementer, the project developer, which in most cases are private sector companies utilizing big pools of public finances from various sources including MDBs, pension funds, and other leveraging sources of finance. In some cases, we are also noticing commercial and bilateral banks and financial intermediaries (FI) playing into the infrastructure financing market as a key player. This often in tandem and close cooperation with public financing sources including MDBs. Looking at the myriad of financiers it is clear that the agenda, for now, is unlocking the private sector finance into projects. But can private sector-led infrastructure projects really deliver the public good? The answer will only be gleaned from the close scrutiny of the emerging maturation of these infrastructure project models. For now, the debate can be simply summarized between- investor’s financial risk versus the public risk burden when large-scale infrastructure projects unfold on local communities.
[1] Asian Development Bank Institute. 2016. Connecting South Asia And Southeast Asia. Manila: Brookings Institution Press.
[2] Peel, Michael, and Tom Mitchell. 2017. "Asia’S $26Tn Infrastructure Gap Threatens Growth, ADB Warns | Financial Times". Ft.Com. https://www.ft.com/content/79d9e36e-fd0b-11e6-8d8e-a5e3738f9ae4
[3] "Press Release: From Billions To Trillions--Transforming Development Finance Post-2015 Financing For Development: Multilateral Development Finance". 2015. IMF. https://www.imf.org/en/News/Articles/2015/09/14/01/49/pr15170.
[4] Curran, Enda, and Karl Yap. 2018. "ADB Says Emerging Asia Infrastructure Needs $26 Trillion By 2030". Bloomberg.Com. https://www.bloomberg.com/news/articles/2017-02-28/adb-says-emerging-asia-infrastructure-needs-26-trillion-by-2030-izouvxn8.
[5] "Articles Of Agreement - Other Documents - AIIB". 2018. Aiib.Org. https://www.aiib.org/en/about-aiib/basic-documents/articles-of-agreement/index.html.
[6] "Strategy 2030 Achieving A Prosperous, Inclusive, Resilient, And Sustainable Asia And The Pacific". 2018. Adb.Org. https://www.adb.org/sites/default/files/institutional-document/414336/strategy-2030-draft.pdf.
[7] HBF paper, The big gamble, 2018
Download the paper here.