May 3, 2023
SINGAPORE – Asean economies will need infrastructure investment of at least US$2.8 trillion (S$3.7 trillion) from 2023 to 2030 to sustain economic growth, reduce poverty and respond to climate change, said a report from the Asian Development Bank (ADB).
The investment needs, after adjusting for climate events, are estimated at US$3.1 trillion for the same period, said the ADB report, produced in partnership with the 10-member Association of South-east Asian Nations plus China, Japan and South Korea (Asean+3).
In a region where 92 per cent of all social infrastructure development is traditionally financed by public resources, private capital will be needed to bridge the financing gap, according to the report launched on Tuesday at the ADB’s 56th annual meeting in South Korea’s port city of Incheon.
Rapid economic development, urbanisation and population growth in the region have resulted in an ever-widening gap between current spending and finances required to meet the increasing demand for infrastructure.
At the same time, inflation, the Covid-19 pandemic, weather-related disasters and adverse impacts of climate change have further exacerbated the demand for and the cost of developing sustainable infrastructure.
The report asked governments and regulators to take an innovative approach to attract private and institutional capital, alongside public funds, to back critical infrastructure development.
Closing the infrastructure financing gap is difficult, but not impossible. It is estimated that currently more than US$200 trillion of private capital is invested in global capital markets.
“Innovative finance mechanisms, therefore, need to be devised and curated to catalyse private and institutional finance for the infrastructure sector,” said the report.
While there are wide-ranging constraints limiting infrastructure development, innovative finance provides novel approaches that could mobilise increased capital investment to bridge the gap.
“Innovative finance requires collaboration among private, public and institutional investors to ensure the success of social and environmentally sustainable projects,” noted the report. “It creates new sectors for investment by sharing or redistributing risk, reducing volatility and ensuring capital adequacy – which combined provide positive risk-adjusted returns.”
ADB said the report is intended as a user-friendly policy toolkit for companies, investors, policymakers and financing agencies to promote the use of creative infrastructure-financing models.
“This report systematically presents various innovative models of merging public, private, institutional and other forms of capital to deliver resilient, sustainable and future-ready infrastructure in the Asean+3 region,” said Mr Ahmed Muneeb Saeed, ADB’s vice-president for East Asia, South-east Asia and the Pacific.
“From blended finance and asset securitisation to municipal and green bonds, and from crowd finance to carbon-credit markets, the report examines how innovative finance can become a magnet for the private and institutional funds needed to back public-private infrastructure partnerships,” he added.
ADB said innovative finance mechanisms can be defined as new and evolving models beyond commercial debt finance that are able to attract private and institutional capital, along with public funds, for developmental activities. More importantly, innovative finance is primarily focused on the delivery of positive social and environmental outcomes through market-based financing instruments.
“Raising investor awareness of innovative financing approaches will be key to encouraging greater investments in marginally bankable projects,” said Ms Indranee Rajah, Minister in the Prime Minister’s Office and Second Minister for Finance and National Development in Singapore.
“The critical success factors from actual case studies in the report provide useful lessons for governments seeking to apply the financing approaches in their respective economies,” she added.