Growing Together: Economic Integration for an Inclusive and - escap

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CHAPTER FOUR 105 Enhancing regional financial cooperation been estimated that Asia and the Pacific will need to spend about $8 trillion on infrastructure. 11 This projection is based upon estimates on how infrastructure investment has increased in each country of the region in line with a number of variables, including income per capita, agriculture value added, manufacturing value added, the extent of urbanization and population density using data for the period 1960-2005. 12 However, this assumes that countries will maintain their historical investment patterns. It does not estimate the true scale of the need. Most developing countries in the region have been underspending on infrastructure, so if they continue as before they will not be investing enough to close their infrastructure gaps. Hence, the real funding requirements of funds for closing these gaps may be larger than $8 trillion. For instance, India alone is projecting a $1 trillion requirement for infrastructure investment in its twelfth five-year plan (2012- 2017), that is $200 billion a year. Experience shows that investing in infrastructure is highly profitable in economic and financial terms, justifying cooperation. Infrastructure assets offer stable and predictable cash flows, long-term income streams, low default rates and opportunities for socially responsible investing. 13 In Asia and the Pacific, they will offer higher returns than those from developed country sovereign bonds. This observation is based on the performance of existing infrastructure securities, which although still on a modest scale, offer yields far above those of United States Treasury bonds (figure IV.4). For instance, Standard and Poor’s Asia Infrastructure Index, which incorporates the 30 largest listed infrastructure firms in the region, has been outperforming the Global Infrastructure Index by a large margin; it registered (annualized) returns of 19.8 per cent versus 5.7 per cent for the Global Infrastructure Index at the end of 2010 after one year and 16.1 per cent versus 6.8 per cent after five years. Investing in infrastructure across the Asia- Pacific region also offers risk diversification opportunities. Due to the local nature of demand for and supply of infrastructure investment, infrastructure markets are not very well correlated, thereby offering an opportunity to diversify risks across economies/subregions and types of infrastructure. In addition, the infrastructure capital endowment of economies/subregions differs widely, providing another opportunity for diversification. The two main methods of investing in infrastructure assets – infrastructure funds and listed assets (table IV.4) – exhibit different liquidity and access conditions as well as offer different degrees of diversification and risk profiles. Consequently, they target different types of investors. Infrastructure funds seek larger investors, in particular institutional investors. They carry low risk, but entry costs are high and liquidity is low. They provide a promising avenue for insurance companies or pension funds that need to match their long-term liabilities with long-term assets and that may not require liquid assets, but rather security of investments. Asia and the Pacific, faced with ageing populations and the consequent extension of systems of social protection, is likely to boost insurance companies and pension funds. These institutions will need more long-dated assets to match their portfolios with their liabilities and be required to do so on a marked-tomarket basis as dictated by recent regulatory changes. 14 Listed infrastructure assets, in contrast, may be better suited for individual investors as expenses are low and liquidity is high, though risk is also high. To realize these financial and economic returns, existing forms of cooperation could be complemented with a new large-scale lending facility, as proposed in this study, to finance regional infrastructure with an initial paid-up capital of no less than $100 billion. The actual financing triggered by such a new facility would be of a much larger scale as it could also issue bond securities and would attract private investment into the projects it participates in. The facility would benefit from low-funding costs as it would be backed by highly rated countries, as is the case of the largest multinational issuer, the EIB, which has a triple-A rating. 15 Unlike many of its competitors, by issuing long-term securities,
FIGURE TITLE IV.4. Returns on selected infrastructure assets and major treasury bonds over 2002-2007 Source: ESCAP calculations based on data from CEIC Data Company Limited. Available from http://ceicdata.com/; and MSCI, available from www. msci.com/products/indices/thematic/infrastructure/performance. html?undefined. Notes: MSCI Emerging Markets Infrastructure Fund, annualized returns 2003-07 (i.e. 5-year returns as of 31 December 2007). MSCI Asia Infrastructure Fund, annualized returns 2003-07 (i.e. 5-year returns as of 31 December 2007). Country-specific returns reflect the compound aggregate growth rates of infrastructure-related stock market indices in each country during 2002-2007. the facility would not face maturity issues. In addition, it can mitigate currency risks by issuing in local currencies and could use swap markets for hedging. Credit risk is expected to be skewed towards the initial phase of projects and to decrease disproportionately thereafter. Given the underdeveloped bond markets in the poorest countries, the best option for financing infrastructure development would be direct lending. Nevertheless, the new largescale facility to finance infrastructure in Asia and the Pacific could also buy infrastructure securities and thus help spur the development of a market for such securities – debt or equity – in the region. Any new forms of cooperation should seek synergies with existing efforts. The proposed new facility would focus on projects with identifiable revenue streams. It would complement lending activities by the ADB, owing to its large scale. Available lending facilities in the region tend to be small and tailored to national needs and incapable of meeting the financing requirements of infrastructure megaprojects with regional dimensions. The new facility could also help coordinate different potential financial institutions such as multilateral and bilateral development agencies as well as private-sector sources. If needed, it could head a consortium of lenders. Its backing for infrastructure projects could also signal opportunities to private investors, which could help tap some of the $7 trillion of personal wealth market. As a regional body, the facility would also be in a position to take into account intraregional 106
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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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Page 178 and 179: References 147 __________ (2009). E
Page 180 and 181: References 149 Brenner, Cath (2009)
Page 182 and 183: References 151 __________ (2010b).
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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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References Photo by Warren Field 16
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