Crowding in private sector to boost infrastructure dev’t

IN the world of infrastructure, the funding deficit is a well-established fact. Asia needs US$26 trillion by 2030 for new buildouts, and Africa requires US$93 million a year to scale up projects. Much of the money has so far come from direct government financing or funding support from development banks. Infrastructure projects often have social benefits which are not priced into project revenues, and traditionally considered better addressed by subsidized public finance. While gaining in popularity in emerging markets, private funding for infrastructure projects is still insufficient to meet the evergrowing demand.

During the recent World Bank Singapore Infrastructure Finance Summit 2018, ASEAN finance ministers unanimously agreed on the need for greater private- sector participation to fund the region’s infrastructure. Of the US$3 trillion that ASEAN needs for infrastructure by 2030, only 30% is being met by existing funding. To address this shortfall, ASEAN aims to attract private investors by improving laws and regulations to make infrastructure a more attractive asset class. In addition, better financing coordination can boost publicprivate partnerships (PPPs).

Private funding sources have in recent years grown in diversity, from commercial banks, specialist infrastructure funds, pension and insurance funds to green bonds. This development has provided ideal conditions for cofinance and blended finance in infrastructure. Blended finance combines grants, budgetary support, and concessional assistance from development organizations with private funds to create a bigger pool of infrastructure financing. Co-finance involves market priced public and private financing in partnership to finance projects. An example is the use of partial guarantees by public entities to increase projects’ bankability and attract private-sector participation.

The preferred creditor status of multilateral development banks ( MDBs), alongside the use of grants, subsidized loans, and additional financing from commercial banks and private investors, are a winning combination. However, co-finance and blended finance have yet to take off in Asia. According to the Asian Development Bank (ADB), public funding still accounts for about 92% of the region’s infrastructure investments.

There remain challenges to accelerate the use of the blended finance approach.

Infrastructure stakeholders prefer direct funding on concessional terms, but there is a finite amount of available aid, concessional finance, and budgetary support. MDBs and development finance institutions’ ( DFIs) loans and guarantees are defined by country exposure limits. And while private investors are growing more open to long-term infrastructure investments, ineffective projects structuring continues to keep private money at bay. There are also gaps in information flows and coordination between the private and public sectors which inadvertently crowd out private investors.

To crowd in private money, the public sector needs to invite participation from commercial banks which are key interme-