Growing Together: Economic Integration for an Inclusive and - escap

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CHAPTER FOUR 97 Enhancing regional financial cooperation TABLE TITLE IV.2. Comparison of selected regional and national development banks (In billions of US dollars) Year established EIB 1958 EBRD 1991 WB 1944 ADB 1966 BNDES 1952 CAF 1970 Total assets 563 52 283 100 331 18.5 Total loans 482 20 120 46 218 13.9 Subscribed capital 311 28 190 144 n.a. 2.8 Paid-up capital 16 8 12 7 .. .. Equity 54 17 38 16 40 5.7 Loans disbursed 2010 79 12 29 6 101 7.7 Net income 2010 3 2 -1.1 0.6 6 0.2 Return on equity 5.3 % 10.8 % -2.9 % 3.8 % 15.2 % 3.0 % Source: 2010 financial statement of each institution. Notes: The abbreviations are: EIB: European Investment Bank; EBRD: European Bank for Reconstruction and Development; WB: World Bank; ADB: Asian Development Bank; BNDES: Brazillian Development Bank; and CAF: Development Bank of Latin America. Data for EIB, EBRD and BNDES converted into US dollars using market exchange rate of 31 December 2010: US$/Euro = 1.3412 and US$/Real = 0.6024 can subsequently be recouped through user charges – by collecting road tolls, for example. Many governments have been keen to encourage private participation in infrastructure, seeing this as a way to reduce fiscal burdens. Consequently, since the 1980s, they have privatized some infrastructure, notably in telecommunications and power supplies. By doing this, the state, instead of being an owner and provider, serves as the regulator for privately provided public services. This has paved the way for many private-sector companies to own and manage infrastructure assets, with expectations of attractive returns. While this model has been employed extensively in developed countries, it has been slower to get off the ground in poorer developing countries, where the private sector has more limited access to funds. Such funds come from four main sources: banks, institutional investors, bond markets and equity markets. Bank lending Commercial banks may be wary of lending for infrastructure since they are likely to face a maturity mismatch. Infrastructure requires long-term funding while the bank funds are primarily short-term in the form of deposits and interbank borrowing. Nor do banks necessarily have the skills to assess the risks related to such lending. Risk officers with limited experience will find it difficult to price the risk involved in infrastructure projects in which there is often a high degree of uncertainty. In these circumstances, when funds are offered, they are likely to be expensive. As indicated in figure IV.1, in projects with lower ratings the credit spread can be higher than 20 percentage points. Institutional investors An alternative to bank funding is to seek other investors that take a longer-term view. Insurance companies, pension funds and other institutional investors are likely to have a more suitable asset-liability maturity structure, but this assumes that these institutions have the necessary in-house resources for acquiring, managing and disposing of infrastructure assets. The Asia-Pacific region has relatively few institutions with this capacity. Bond markets In many countries, privately developed infrastructure has been funded by issuing bonds. In most Asia-Pacific countries, however, bond markets are either non-existent or in their infancy. Moreover, most projects in less developed Asia-Pacific countries are likely to be rated below a single B, for which the premia charged over government bonds can be prohibitively high (figure IV.1). An alternative would be to issue bonds in international markets, though few companies in Asia and the Pacific have sufficient access
to them. In addition, international issues are often denominated in foreign currencies, raising the prospect of currency mismatches, of which many countries are very wary after the experience of the Asian financial crisis. This could be addressed by issuing bonds in domestic currency, though this would effectively pass the foreign exchange risk to foreign investors, which would require effective hedging facilities. Bond financing is likely to become more important in the future as bond markets become more efficient, though this is unlikely to happen quick enough to fund urgent infrastructure projects. Equity markets Similar constraints apply to equity markets. Equity funding could be attracted either through investment in infrastructure companies or through the securitization of infrastructure assets. At present, however, only a few infrastructure companies in the Asia- Pacific region are listed on stock markets. With the exception of activity in Australia and Japan, FIGURE TITLE there has been relatively little securitization of infrastructure assets; globally listed Asia- Pacific infrastructure securities make up only 3 to 4 per cent of global market capitalization. At present, without the necessary market and regulatory infrastructure and improvements in corporate governance, equity funding is unlikely to finance infrastructure needs in the poorer developing countries. Public-private partnerships One way of addressing government budgetary constraints and opening up more opportunities for private sector participation is through public-private partnerships (PPPs). A major motivation for using PPPs is to improve the value for money of service delivery. Another is affordability. Because of their ability to relieve pressures on government budgets and improve service delivery, PPPs are a promising avenue of infrastructure financing. To make it an effective tool, a robust legal and regulatory framework must be set up. In addition, it is crucial to follow IV.1. Credit spreads and bond premia for five-year term loans or issues, for different ratings of borrowers or issuers, January 2012 Source: HSBC, “Asian curve”. Available from www.hsbcnet.com/research/asian-curve (accessed February 2012). Note: One basis point is equal to 1/100th of 1per cent. Credit spread is the difference between US treasury yields and the lending rate for borrowers with different credit rating. Bond premia are the differences between US treasury yields and those for Asian issuers with different ratings. 98
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ii Photo by Warren Field
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iv Growing Together articulates a n
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vi The following experts prepared t
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viii CONTENTS (continued) Page Chap
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x FIGURES I.1. Real rates of growth
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xii TABLES I.1. Transitions from mi
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xiv ABBREVIATIONS (continued) CEPA
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xvi ABBREVIATIONS (continued) RCM R
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xviii The term “Pacific” in thi
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xx opportunities for all social gro
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xxii Many of the labour flows withi
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xxiv development gaps. Land routes
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xxvi development agencies and priva
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xxviii weighted mean Gini coefficie
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CHAPTER ONE 1 UNDP Photo The case f
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CHAPTER ONE 3 FIGURE TITLE The case
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CHAPTER ONE 5 The case for regional
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CHAPTER ONE 11 The case for regiona
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CHAPTER TWO 19 Towards a broader in
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CHAPTER TWO 21 FIGURE TITLE Towards
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Page 170 and 171: 139 Annex Technical notes Photo by
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References 147 __________ (2009). E
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References 149 Brenner, Cath (2009)
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References 151 __________ (2010b).
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References 153 Hertel, T., ed. (199
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References 155 __________ (2005). P
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References 157 Quah, Danny (2010).
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References 159 Thailand, National E
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References 161 United Nations, Econ
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