Infrastructure financing regulations need liberalising

Experts espouse the need for Asian nations to liberalise their infrastructure funding mechanisms in order to attract private investment.

Infrastructure costs a lot -- just ask any denizen of Hong Kong who recently protested a proposed $8.6 billion high-speed rail line. Most of the funds for that project are due to come from the government's coffers, but many other infrastructure investments throughout Asia are not as financially lucky.

According to Karin Finkelston, director of East Asia and the Pacific at the World Bank Group's International Finance Corporation, there is a $2 billion annual infrastructure investment deficit in the region. Speaking at the Asian Financial Forum in Hong Kong last week, she was joined by a panel of industry experts who urged governments around the region to liberalise infrastructure financing restrictions to encourage private investment.

"Infrastructure is more central to the development agenda here than ever before," said Finkelston. She said the World Bank estimated that the credit crunch in 2008 impacted 37% of East Asian infrastructure projects.

Calls for private participation in public projects are hardly new. Well before the 1997 Asian financial crisis, governments were debating the merits of private investment in infrastructure; some projects succeeded (many of Southeast Asia's toll roads) and some did not (Hopewell Holding's Bangkok Elevated Road and Train System). These days, debate is focused more on extending private financing to more project types than the actual merits of the investment.  

Despite more than two decades of experience, regulatory restrictions continue to hamper private investment. For example, in China foreign investors are allowed to take majority stakes in ports but not in rail or power transmission projects -- two sectors the country is actively expanding. Jing Ulrich, managing director and chairman of China equities and commodities at J.P. Morgan, said that while the country's investment in public works increased due to the stimulus package that was announced in November 2008, liberalisation to allow for additional foreign investment in infrastructure would be good.

And where China has the capital to fund many of its projects itself, like the Guangzhou-Wuhan high-speed rail line that opened in December, other countries around the region do not. Private financing would seem like the obvious alternative to government funds, but regulatory restrictions in many of these locales simply do not allow for such funding models.

Lee Jong-Wha, chief economist at the Asian Development Bank (ADB), said the private sector currently contributes only about 20% of total infrastructure financing in the region while governments contribute 70% and international organisations 10%. He argued that the ratios "need to change" in order to meet the estimated $8 trillion in infrastructure funding needed by 2020.

One country that is moving to change its investment guidelines is Indonesia. At the conference, Bambang Susantono, a vice-minister at Indonesia's Ministry of Transport, said the country implemented a new regulatory framework last year that opens the door to more private investment in infrastructure, including port, rail and subway projects.

All the speakers agreed the development of a local currency bond market in Asia would benefit investment in public works. Lee recommended the region develop its debt markets in order to tap into the more than $400 billion in surplus savings.

"Much of these savings are currently invested in low-yield, international currency instruments," he said. "Why not use the money to invest in regional infrastructure and give appropriate returns to the savers?"

The call for an Asian currency bond market is not new. Ian Greer, a managing director at Standard & Poor's Asia-Pacific, wrote two years ago that a local debt market would add complexity and improve due diligence, oversight and disclosure requirements.

But despite all the calls for regulatory reform to allow for private infrastructure investment, ADB's Lee reminded listeners that countries' need to get the basics right first. "Political stability and economic stability are needed [first] for infrastructure investment, then you can add regulatory reform," he said.

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