The Philippines, the host of this year’s Asian Development Bank annual meetings, provided an ideal backdrop for a forthright debate on the role of the capital markets in funding Asian infrastructure projects.
President Rodrigo Duterte’s administration has embarked on an ambitious ‘Build, Build, Build’ campaign to close the country’s notorious infrastructure deficit. While that kind of initiative is long overdue, it also raises questions over how Asia’s developing economies should be paying for major projects.
The Philippines has moved away from the public-private partnership model and is relying heavily on government borrowing to fund its BBB programme. At the same time, however, other Asian countries have made some useful progress in connecting institutional investors with long-term infrastructure financings – most notably Indonesia.
Last year’s US$2bn Paiton Energy bond issue proved there is a global market for long-term, amortising paper from Asia’s infrastructure sector. Also in Indonesia, state-run roadbuilder Jasa Marga added securitisation and offshore rupiah bonds to its funding toolkit, diversifying beyond the local banking sector.
IFR’s Manila seminar, part of the ADB’s knowledge-sharing programme, explored ways for the local and international capital markets to share more of the infrastructure financing burden.
As the Philippines case highlights, many challenges remain, from underdeveloped bond markets to dominant local banks and cheap soft loans provided by expanding regional powers – especially China.
On the private side, demand for long-term, sustainable investments is certainly rising, but most of it is from outside the region. Major hurdles remain in place in Asia’s local markets, not least regulations that restrict domestic institutional investors to the most vanilla of investments. Integration and standardisation is lacking across the region.
The growth of Asia’s institutional investor base was a recurring theme throughout this year’s ADB meetings, making it quite clear that the drive to leverage private-sector funds into infrastructure development through the capital markets is gaining ground in the multilateral sector.
Novel discussions around portfolio-based investments alongside the IFC, risk-sharing agreements with private insurers and co-investments with dedicated green funds are all a step in the right direction.
No single source of funding, however, can close Asia’s infrastructure gap. Even in the Philippines, which has the fiscal space to afford the current round of infrastructure spending, the government cannot go it alone.
Multilaterals, governments, banks and the institutional markets all have an essential role to play. The opportunity for arrangers and intermediaries, then, is to devise new ways of bringing those parties together.
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