Connecting Markets

New infrastructure will catapult the region into the future, but challenges on funding and private investment demand solutions.

Connecting markets

New infrastructure will catapult the region into the future, but challenges on funding and private investment demand solutions.

Living standards are rising, a new middle class with disposable income is emerging, consumerism is growing and demand for enhanced lifestyles, modern technology and digital capabilities is soaring. Asia’s time has come for dramatic infrastructure investment, planning and long-term commitment that will catapult economic and social development into the 21st century and beyond.

Almost 650 million people live in the Association of Southeast Asian Nations (ASEAN) region alone, making it one of the largest markets on the globe, while the 45 nations of ‘developing Asia’ have a combined population of 1.7 billion, according to the Organisation for Economic Co-operation and Development (OECD).

Governments do the heavy lifting on funding - for now

The Greater Bay Area and other projects underway or planned in Asia and beyond are, in many cases, components of China’s staggering vision for transnational infrastructure known as the Belt and Road Initiative (BRI). A project of historic proportions, it will eventually interconnect more than 70 countries in Asia, the Middle East and Europe to forge immense new global opportunities for economic and social development, trade and investment. When complete, some observers say it will transform the face of global trade.


Private investment will require improved structuring of projects

The availability of future financing, however, is not the primary challenge for Asia’s infrastructure transformation. Huge sums of private capital seeking infrastructure projects are poised on the global sidelines. The bigger issue is that few of these futuristic infrastructure projects or pipelines are structured to attract private capital from international investors, who expect and require prioritized and financially feasible projects, institutional stability, and confidence in the rule of law and contract certainty.

Five fundamentals for enticing private funding

For now, Asia’s governments will continue to do the heavy lifting on financing. But emerging-market governments will clearly need to sharpen their focus on five key fundamentals if there’s hope of enticing private investment that’s critical to bringing their grand infrastructure visions to life:

  1. Create institutional capacity by improving regulatory systems, forging equitable dispute-resolution mechanisms, and developing transparent procurement processes.
  2. Prioritize projects and selection based on economic and social priorities, allowing investors to focus on projects delivering the most in benefits.
  3. Improve project preparation at national, local and agency levels to optimize their structure prior to procurement, including assessment of financial feasibility and risk.
  4. Mobilize private capital by MDBs and other public financing institutions developing mechanisms to support the provision of private finance to projects.
  5. Promote international cooperation by partnering with global institutions and companies, emerging-market governments and infrastructure investors.

Asia is poised at the threshold of an exciting and truly historic new golden era of economic and social development. But it will be up to the regional governments of its emerging markets to kick open the door to the vast benefits of globalization that await.

Multilaterals to the rescue as Asia gets connected?

Asia’s dramatic flurry of infrastructure planning and development comes with a remarkably hefty price tag. China’s Belt and Road Initiative is estimated to cost US$8 trillion. Beyond that, the Asian Development Bank estimates that the developing Asia and Pacific region will need to invest up to US$26 trillion between 2016 and 2030 – or about US$1.7 trillion annually – just to maintain its growth momentum, compared to annual current investment in infrastructure estimated at US$881 billion.

Multilateral banks will have a significant role to play if Asia hopes to bring its infrastructure visions to life within any given time frame. But how effectively can the world’s multilateral banks — as they currently pursue strategies tochange their own ways — position themselves to perform and capitalize on Asia’s historic initiatives? The reality is that Asia’s infrastructure transformation comes at a time when traditional multilateral models are failing, prompting mostto pursue dramatic reforms and new approaches.

Amid significantly weaker returns in the low-interest environment – and an inability to keep up with demand as global infrastructure projects proliferate in number and soar in size — many of the world’s multilaterals are pursuing a new role, one that’s more about mobilizing and facilitating private capital versus lending stakeholder capital. They are exploring opportunities to ‘open up’ markets for private investment and looking for new ways to move deals out of the pipeline.

So far, however, most are responding slowly to today’s rapidly evolving global environment amid the challenges they face. These include the required change in culture toward mobilizing money instead of lending it; a lack of skills to sustain a new model; the need to provide innovative new products that offer simplicity rather than complexity; and the lingering preference among stakeholders for straight loans with clear structures.

These are significant challenges in a world where megaprojects, the new normal in developed and developing markets, are creating unprecedented demand for massive amounts of funding. It remains to be seen if multilateral can innovate capabilities and offerings in time to capitalize on Asia’s ambitious journey into the future.