China Daily: Reshaping regional connectivity on agenda

As economies in South and East Asia rely on domestic consumers for a greater proportion of their GDP, they are increasingly aware of the importance of strong infrastructure.
Hard infrastructure like roads, ports, railways and telecommunication networks facilitate trade and commerce and make goods more easily accessible to consumers. Soft infrastructure like good finance and stable legal environments attract investment and make it possible to turn the hard infrastructure into visible economic gains.
Achieving a high level of both is a key focus for economies in the region, particularly in China, India and the rapidly growing economies of the Association of Southeast Asian Nations (ASEAN).
Massive investments are underway in infrastructure, education and telecommunications, said Zhou Li, publisher and editor-in-chief of China Daily Asia Pacific during a China Daily Special Forum co-hosted with the Asia Society Hong Kong Center on Sept 22. The roundtable event was titled Unleashing Asian Dragons: Infrastructure Investments for the Asia Century.
“Asia is going through a momentous period of economic development,” said Zhou. “The 21st century has been dubbed Asia’s century and will see Asia, and ASEAN in particular, experience unprecedented economic growth with massive investments in infrastructure projects and other sectors such as energy, telecommunications and education.”
A key example of how infrastructure can facilitate economic growth and trade is a proposal by Chinese President Xi Jinping to develop a maritime Silk Road, which could lead to “enormous investment opportunities for Asia, especially (the Chinese mainland) and ASEAN in such areas as trade, infrastructure and cultural exchanges”.
But building infrastructure is expensive and the need for domestic and foreign investment is great, along with the need for private and public participation. Over the next few years, South Asia will require $250 billion per year in infrastructure investment to keep its rate of growth.
East Asia, including ASEAN, will need another $600 billion. By 2025, worldwide capital spending on infrastructure could rise by $5 trillion to $9 trillion, at current rates of growth.
The biggest hurdle to developing efficient and cost-effective infrastructure skeletons is finding the capital. Governments want to attract more private capital to cut down on their costs but private capital wants some guarantees that their investments will generate returns. So the focus of infrastructure financing is, increasingly, on public-private partnerships (PPPs).
“Without infrastructure, no country can achieve sustainable growth,” said Li Yao, CEO of the China-ASEAN Investment Cooperation Fund. “Infrastructure is the key for an economy to achieve efficiency.”
The benefits of a strong infrastructure backbone go well beyond smooth roads and fast ports. Connectivity that good infrastructure provides can make societies more fair and equitable by giving everyone access to the means of production, said Li.
Another important area is the Internet. Digital connectivity, currently lacking in countries in the region like Myanmar, Laos and Cambodia, can “help people offset the gap between the poor people and the rich countries”, said Li. His fund is already supporting the construction of a fiber optic network in Southeast Asia that would help connect more people.
One key proposal put forward by China is to create an Asian Infrastructure Investment Bank. Those who have shown interest are the 10 ASEAN members, South Korea, Pakistan, Kazakhstan, Mongolia, along with Canada, Australia and New Zealand.
But more public funding is only part of the puzzle. Private participation is also important. And over the last year, private sector participation in infrastructure PPPs has dropped. In India, where the drop is particularly pronounced, the number of PPP projects fell from 119 in 2012 to 31 last year. A big challenge is a lack of trust in regulatory environments.
Both governments and investors want to see more PPPs, however. On the one hand, private investment helps lower the financial risks for governments. On the other, government involvement can help overcome challenges brought about by the developing nature of most markets in Asia.
“That is the name of the game, consistency in terms of the rules of engagement,” said Cledan Mandri-Perrott, lead finance officer and PPP specialist for the Singapore Infrastructure Hub at the World Bank Group. “The reality, whether we like it or not, is that in the ASEAN region regulatory risk faces uncertainty.”
Thailand is a case in point. The country is solid from a financial perspective. It is strong enough, for example, to issue bonds for infrastructure investment. And yet, there is a lack of political certainty. And uncertainty is a turnoff for investors.
Through 2013, regulatory uncertainty rose visibly and the number of PPP projects under way dropped, not only in India but also in other countries around the region. At the moment, China may have the most PPP projects underway with around 60 in the pipeline.
To attract more projects, governments need to make the returns attractive to private investors.
“That is one of the biggest challenges that we have in the region, to be able to push the pipeline (for PPP projects),” said Mandri-Perrott.
New entities like a BRICS (Brazil, Russia, India, China, and South Africa) bank or the proposed infrastructure investment bank can work with more established players like the Asian Development Bank (ADB) or the World Bank to backstop government obligations and, in turn, offset liquidity concerns.
“(We) need the right mechanism to develop and manage contingent liabilities,” said Mandri-Perrott. Achieving the “right network effect” is essential, he added.
“If we can use the capital markets to look at projects on their merits, I think that would be a big driver,” said Mandri-Perrott. “The challenge in PPPs, particularly in greenfield projects, is involving the capital markets early on. Today (PPPs) don’t, because if you have a bond issuance, you want to have solid capital returns to pay off the bondholders.”
As things stand, it is not always easy to attract private players. Banks are reluctant to participate because there are concerns in terms of the cash flow and size of the investment, said Jason Yeung Chi Wai, deputy chief executive at Bank of China (Hong Kong), which is involved in one PPP project in China.
“When we talk about infrastructure, most people (think) about the bricks and mortar projects,” said Yeung. “For us, as an investment bank, we look at the financial infrastructure.”
“We need to work on a framework that can give confidence for banks,” he added.
Even with banks reticent in their involvement, infrastructure investment has gone up by about a quarter in China in the first seven months of this year. Infrastructure investment is responsible for about 10 percent of China’s economic output. Traffic congestion, flooding, sewage and water treatment needs, air quality, food safety and high-speed railway development are all areas that must be addressed.
Ultimately, more and better infrastructure does create significant opportunities for the private sector, said Geert Peeters, group director and chief financial officer at China Light and Power (CLP) Holdings, a Hong Kong energy provider with long experience in PPPs.
“These days, project financing goes around the world in different formats,” said Peeters. “But with PPPs it is important to look not just at individual projects but also at how they fit with the socioeconomic priorities in each economy,” he added.
For CLP, its ultimate goal when taking on projects is to balance sustainability, a reliable and safe supply of energy and reasonable tariffs.
“These three objectives very often compete and you need to look for a global optimum,” said Peeters. “This balancing act is our mission and … it needs to be sustainably profitable as well.”
Emerging markets have competing priorities and try to balance the environment and their need for growth.
“China and India are markets that have created opportunities for us and are moving in the area of PPPs,” said Peeters.
There are challenges in both. In China, for example, there is a pollution issue and concerns over the reliability of electric grids, so more focus is needed on environmental concerns and network connectivity.
In India and China, it is important to consider connectivity to power networks. For many cities, Hong Kong may offer a useful model, thanks to its combination of government involvement in developing its good infrastructure and the role of private investors in providing working capital. The model, said Peeters, could be used elsewhere just as easily.
“As other megacities around the world emerge, more and more are looking at this model,” said Peeters.

http://www.chinadailyasia.com/2014-09/26/content_15171144.html