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 consequences of their use.
Terminology used may not necessarily be consistent with ADB official terms.

Infrastructure Development in Asia

Fauziah Zen
Project Financing and Sustainable Development of
Railway Infrastructure
Asian Development Bank Institute and Ministry of Finance, Thailand
Bangkok, 10 August 2016

Economic Research Institute for ASEAN and East Asia

Outline
The demand for infrastructure: factors
Financing Modality
Sustainable Infrastructure Development

Financing Infrastructure

THE DEMAND FOR INFRASTRUCTURE

Infrastructure as key of growth

Challenges

Opportunities

Source: World Economic Forum Report 2014-2015

4

Infrastructure Investment Needs

as % of GDP (est.), 2010-2020

Source: Bhattacharyay (2010)

Characteristics of investment aspects in

ASEAN economies

Investment is capital intensive with high sunk-costs

Investment is highly leveraged
Capital investment is long-term
Revenue streams are stable and generally indexed to
inflation
Output has low price elasticity
Debt servicing obligations are matched to project cash
flows
Lender security is generally limited to the bundle of
contracts that make up the investment agreement
The relationship between the parties is usually regulated
by contract.

Drivers

Urbanisation rate is high, could the cities accommodate it? McKinsey

estimates that by 2030, urban population will reach more than 550 million
people or about 44% of total population in Asia Pacific, shaping 85% of
GDP.

Source: McKinsey Global

Institute (2015)

Characteristics of the future economy

Big data and Internet of Things (IoT)
Backward linkage industries: hardware, software, providers, integrated services, etc.
Forward linkage industries: marketing, healthcare, consumer goods, politics, governance,
trade, services/advisory, integrated services, etc.
Goals: accuracy, efficiency, speed.
Affect both private and public sectors. The size of investment may decline to produce the
same level of returns (e.g. Uber, Grab, Amazon, etc.)
Requires new types of skilled workers and regulatory adjustments.

Clean energy and climate change concern

Advocated by advanced economies. Future penetration in emerging economies will be
influenced by incentives offered and cost of investment.
ASEAN challenges: power grid and energy cooperation.
Electric car, PVE, wind energy, biomass, Supercritical (SC) and ultra-supercritical (USC)
power plants.

Financial services and derivatives

Drivers: freer flows of capital, new financing modalities, excess liquidity, new development
of instruments as responses to changes in technology, climate concerns, and real sectors.
Regulatory concerns.
Fast (and open) development will increase vulnerability.

What type of Infrastructure will be demanded in

the future Asia?
Urban facilities: mass and rapid commuting system, broadband,
ICT-based services, water and sanitation, green and open
spaces
Connecting urban and periphery: trade, logistics, tourism
railways, highways.
Connecting islands, inter cities, inter countries airports,
seaports, HST
Clean and uninterrupted energy supply

Challenges
Uneven population and income distribution: need for integrated
and multimodal services
Inequality issues: inclusive development planning, distribute
centers of production, improve skills accordingly
Environmental issues: diversification of energy resources,
carbon emission, waste management, integrating power grid,
food security

Financing Infrastructure

FINANCING MODALITY

Sources of Infrastructure Financing

Sources of Financing
Public
Tax

Direct:
general,
earmarked

Private
Portfolio
investment

Non-tax

Indirect:
loan,
bonds

User-fee

Natural
resources
revenue

Grants

Loans

Bonds

Financing Modality (1)

Types of project

Investment types

Financing Scheme

Priority
Advanced
infrastructure
Private goods

Public funding

PPP

state finance
loan from
investment bank
loan from
development bank

Private

project bond

SOEs

mix finance

Economic Research Institute for ASEAN and East Asia

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Financing Modality (2)

Channeling

Efforts

Ownership

Capital market

Country efforts

Local infra

Government bond

Bilateral efforts

Direct Investment

Regional efforts

National infra
Regional/Crossborder infra

Economic Research Institute for ASEAN and East Asia

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Determinants
Private - Influenced by:
Regulatory framework and enforcement
Investment climate
Supporting system: capital market, consultants, contractors,
experts, local companies, etc.

Public:
Regulatory framework
Political process
Governance system (political interference, decentralized
system, public participation)
Fiscal Capacity (debt level, tax revenue, growth, economic
structure)

Mobilizing Funds: Tax v. Investment

Stages of financing: Finance v. Funding.
Finance: Construction costs
Funding: OM costs, have different time horizon, risks,
cash flows patterns, skills needed, oversight actions, and
(re)financing options.
Thus, evaluation of the options at different stages will
require different skills and mechanism.
Many projects development are hampered from
shortsighted mindset. but timing does matter

Economic Research Institute for ASEAN and East Asia

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Mobilizing Funds: Tax v. Investment (2)

Understand the nature and liability implications of
different types of funds
Government must be able to estimate future liabilities
and put them into the context of countrys fiscal
sustainability.
Tax: distortive, different consequences for finance v.
funding, analyses of cost v. benefit, losers v. winners,
distributional impact, short v. long term impact, financial
and socio-economic impact.
User fees
Public v. Private Investment
Economic Research Institute for ASEAN and East Asia

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Capital Market
Capital market has significant role as intermediary
It does not mean that banking system should be put
aside in infrastructure finance.
Infrastructure bonds development.
Long-term Institutional investors: insurance and pension
funds.
Requires a complete system, especially: regulation,
hardware and software infrastructure, reporting
mechanism, transparency, omitting burdensome tax(es),
openness v. vulnerability management, professionalism.

Economic Research Institute for ASEAN and East Asia

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LCY Bond Market size in East Asia Q4 2015

Economic Research Institute for ASEAN and East Asia

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Indonesia case:
What would it take to stop the capital stock decline?
140

60%

120

50%

100

40%

80
30%
60

16%
CAGR

40
20
0

20%
10%
0%

APBN

APBD

SOE

Private

Estimates

Future projection

Infrastructure capital stock/GDP

Source: AIPEG Indonesia 2016: World Bank (2015) for infrastructure investment from 2002-2012, AIPEG estimates from 2013-2019 seeking the
constant compound annual growth rate that would stop the decline in infrastructure capital stock as a proportion of GDP at 5.5% real annual growth.

Infrastructure capital stock/GDP @ 5.5% real growth

Constant 2000 IDR trillions

Infrastructure investment per year 2002-2019 (projected)

Financing Infrastructure

SUSTAINABLE INFRASTRUCTURE
DEVELOPMENT

Capacity and Regulatory Framework

are equally important.
Having a complete regulatory system does not mean
having progressive implementation.
Governance system should be put into the context: multitier or cross-sectoral authorities.
After putting regulatory setup in good perspective
dealing with Capacity.
Mutual understanding between Private v. Public entities.
Public sector capacity: does Government have to be
excellent in technical skills?

Economic Research Institute for ASEAN and East Asia

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Sustainable Development
Sustainable development is development that meets the
needs of the present without compromising the ability of
future generations to meet their own needs (The
Brundtland Commission report, 1987)
Nurture economic growth, inclusive, and preserve
natural resources:
Long term vision of economic development.
Efficiency
Participatory

Economic Research Institute for ASEAN and East Asia

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Infrastructure Industry
Financing
Financier
Creditor
Sponsor

Regulatory
Framework

Intermediaries

Management

Construction

Owner
Users

Building
M&E

Intermediaries/Support System:
Advisors (legal, project management,
financial advisory, etc.)

Source: Fauziah Zen (2016)

Channel (capital market, negotiator,

banking system, etc.)

Building the system

Requires:

Appropriate regulatory structure and authorization

Appropriate incentives to attract long-term private players
Utilization of private core competence
Strong commitment (dedicated funds, law enforcement, good
governance) and leadership (champion)

Challenges:

Thin market
Few domestic players
Capacity of public sector
Absorption capacity
Economic Research Institute for ASEAN and East Asia

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Thank you
fauziah.zen@eria.org

Economic Research Institute for ASEAN and East Asia

Sentral Senayan II, 6th FL., Jalan Asia Afrika No. 8, Gelora Bung Karno,
Senayan, Jakarta Pusat 10270, INDONESIA
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