Great Insights Vol2 Issue4 MayJune2013final

8/14/2019 Great Insights Vol2 Issue4 MayJune2013final

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T R A D E

A G R I C U L T U R E

E C O N O M I C S

R E G I O N A L I N T E G R A T I O N

G O V E R N A N C E

Volume 2Issue 4

May/June 2013

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Infrastructure is key for development. Yet, mostdeveloping countries face a chronic deficit ofinfrastructure facilities (in transport, energy, water,etc.). One billion people in developing countrieshave no access to all-weather roads, includingtwo-thirds of the rural population in Africa. Over 1.5billion people have no access to electricity, includingover 60% of the African population. With thehigh economic growth rates over the last decade,the need to improve infrastructure frameworkshas become even more pressing, not only toaddress poverty and equity, but also to enableproductive activities. How to take advantage ofnatural resources endowments, foster productionand climb up the value added chain in theabsence of proper infrastructure? Infrastructuredevelopment is also a critical condition forreaping the benefits of regional integration andpotential cross-border network externalities.

Over US$800 billion is invested in infrastructurein developing countries every year. But the needsare estimated to be more than twice thatamount, with the infrastructure financing gapestimated to amount to about US$57 trillion until2030. In Africa alone, the financing needs forinfrastructure are estimated at close to US$100billion per year, mainly in electricity and transport.Currently, however, infrastructure investmentamounts to less that half this amount. Fundingthe infrastructure gap is thus a major challenge.

The bulk of the financing comes from domesticresources. Official development finance, asreported by the OECD, amounted to over US$10billion in 2010 for African infrastructure alone,80% of which qualified as official developmentassistance (ODA). Given the infrastructure needsand the current fiscal constraints in many donorscountries, it is illusory to expect aid to meet the gap.

The emphasis is thus on increasingly relyingon other sources of financing for infrastructuredevelopment. Whether such alternativefinancial mechanisms (such as blending loansand grants, public-private partnership, bonds,etc.) are truly innovative, or simply newlydiscovered by the development community,is a debatable matter. The relevant point is tomobilize new energy and funding mechanismsto meet pending infrastructure needs.

Combating current inefficiencies and creatingnew synergies, notably at the regional level, isa required starting point. Most significantly,Africa must take leadership of its owninfrastructure development, in terms ofplanning, financing and implementation.

To this end, the Programme for InfrastructureDevelopment in Africa (PIDA) has become astrategic rallying anchor for policy makers andfinanciers at the continental level, centred on aregional agenda. It cannot become a planninginstrument for the US$68 billion needs forregional infrastructure projects identified. Butit can help prioritize key regional projects andfocus the attention on a number of potentialfinancing mechanisms and opportunities.Following a bottom-up approach, buildingon national and regional initiatives, it canalso help harness energies to promote sub-regional dynamics and enhance the focus onproject preparation at country and regional.

Domestic sources of financing, through public andprivate funding (including sovereign wealth fundsand other innovative channels), should be furtherdeveloped. External financing can also play a usefulrole, mainly in terms of leveraging capacities.The decision by the African Development Bankat its annual meeting at the end of May 2013to create a dedicated African fund to financeinfrastructure is a welcome move. So is thedecision earlier this year to create a BRICS Bank tofinance infrastructure in particular. Developmentfinance institutions have a useful role to playin leveraging financing for infrastructure.

It is in a contribution to this end that thecollection of articles in this issue of GREATInsights attempts to draw on some of thecurrent experiences and approaches tofinancing infrastructure development - anissue that will continue to dominate thedevelopment agenda for the coming years.

San Bilal

Regulars

1 Editorial ...........................................................................14 EPA Update ...........................................................................15 Monthly Highlights Talking Points Blog

& Weekly Compass

...........................................................................16 Calendar & Resources

Featured

2 Financing Infrastructure throughInnovative Strategies in Africa

Mark Pearson...............................................................

4 Development Finance Institu-tions and Infrastructure

Lily Ryan-Collinsand Stephen Spratt

...............................................................6 CAF Development Bank of Latin

Americas approach for infra-structure financing

Germn Ros...............................................................

7 Unlocking InfrastructureDevelopment in Africa throughInfrastructure Bonds

Cedric Achille Mbeng Mezui...............................................................

9 Support to Enhance PrivateInvestment for DevelopingCountry Infrastructure

Kaori Miyamoto

...............................................................11 ADB Assistance for Public-PrivatePartnership in InfrastructureDevelopment Aura Abon

and Anand Chiplunkar...................................................................

13 Closing the Infrastructure Gap -A Three-Pronged Approach

Andrea Engel and Lorenzo Nelli Feroci

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Thematic Focus:Financing Infrastructure


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GREATInsights Volume 2 | Issue 4 | May/June 2013

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Africas infrastructure needs are substantialand go well beyond what donors andcontinental, regional and multilateraldevelopment banks can provide. The AfricaInfrastructure Country Diagnostic (AICD)estimates Africas current infrastructurefinancing requirements at US$93 billion orabout 15 per cent of Africas GDP. Two thirdsof this US$93 billion is needed in investmentand one-third in maintenance. Africangovernments, infrastructure users, theprivate sector, and external sources togetheralready contribute about US$45 billion.About two-thirds of the existing spendingis domestically sourced, from taxes or usercharges, and channelled through publicinstitutions, making the public sector (thesebeing governments and non-financial publicenterprises) the most important financier ofcapital investment.

Evidence suggests that a lot more canbe done within Africas existing resourceenvelope if inefficiencies totalling about $17billion a year could be eliminated. However,even without these inefficiencies, the AICDestimated a minimum funding gap of aboutUS$31 billion per year for Africa.

In the past, governments in Africa have beenalmost wholly responsible for the provisionof infrastructure, which has traditionallybeen regarded as a public good. Governmentprovision of infrastructure has been justifiedon grounds of infrastructure being aprerequisite for economic development, butthat users would not be able to bear thefull costs for provision and maintenance;practical difficulties in charging users; andthat infrastructure provides benefits togroups other than the direct users 2 so thatbenefits of the investment may exceed thepotential revenue from user charges.

In the developing world, the involvement ofthe private sector in infrastructure financinghas been slow to take place except in theareas of ICT and energy generation. This isbecause of the low level of users of transportinfrastructure facilities especially, whichhas resulted in infrastructure not havinga positive financial rate of return, and

because of the difficulties of charging all thebeneficiaries of the infrastructure.

Private sector investment in Africaninfrastructure is constrained by:

Limited locally denominated long termfinancing;

Poor local business environment; Corruption; Low average per capita incomes and

Gross National Income; A lack of institutional capacity; A lack of an educated and/or skilled

workforce; Perceived and real risk; and Lack of well-structured and prepared

projects to sustain deal flow.

Private sector funding of infrastructure canbe facilitated by measures such as:

Providing political risk cover on aprogramme basis;

Making project preparation assistancemore effective;

Focusing on the areas where returns aresufficient to attract the private sector;

Blending and leveraging public funding(including Official Development Aid) tosecure additional private funding;

Using viability gap funding i.e.increasing returns by using grantfunding and subsidies;

Using ring-fenced structures to fundprojects, such as Special PurposeVehicles; and

Exploring additional innovativesolutions.

All of these potential measures requirecloser analysis in the quest for mobilisingadditional resources from the private sectoras no single measure provides a panaceafor closing the gap. The funding of regionalinfrastructure presents a particularlycomplex challenge, and instruments suchas regional bonds (possibly issued by usingan intermediary) and a regional road levycould be investigated, the latter to promotea more equitable arrangement between thebeneficiaries and the funders of regionalroads.

Project risk can be reduced by goodmanagement. The financing vehicle maybetter align incentives for managing arange of project risks with responsibilityfor risk management. For example, Public-Private Partnerships (PPPs) may assist intransferring construction and operationalrisks to private partners, while governmentretains regulatory and demand risk witha commitment to underwrite minimumrevenue from user charges.

The following would appear to be the mainfeasible instruments or potential sources offinance.

Use of Public Sector Financing

The use of the Government Budget remainsthe primary source of financing for theregions transport infrastructure although,over the last 10-20 years, significant changeshave been introduced in the way publicsector funding takes place. There is anincreasing acceptance enter into PPPs andconcessioning arrangements on transportinfrastructure financing, even when it isclear that, in the short-term anyway, theuser-pays principle will not cover all costs.Some governments enter into concessioningarrangements (such as build-operate-transfer arrangements) and then subsidisethe concessionaire until the tolls or taxesfrom users cover the costs of construction,maintenance, overheads and profit andwhen these costs are met, revenue flows arereversed, with the concessionaire paying thegovernment a dividend.

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Financing Infrastructure through InnovativeStrategies in Africa

If Africa is to effectively participate in the global trading environmentand reach its true economic potential it will require a level of

investment in infrastructure that goes well beyond the capacity ofgovernments. The private sector will need to be involved and if this isto happen then instruments to reduce risk levels and increase returns

will need to be developed.1 ...........................................................................................................................................................................

Mark Pearson

In the developingworld, the involve-ment of the privatesector in infrastructurenancing has been slow totake place except in the areasof ICT and energy generation.


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Governance, Regional integration, Economics, Agriculture and Trade

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Financing on a pay-as-you-go basis avoidstransaction costs of raising finance. Moreover,infrastructure investment can be presentedas fiscally responsible and financially prudent

if governments spend only what they cancurrently afford. This approach avoids adirect liability on future revenues, which maybe important to keep credit ratings intactand preserve borrowing capacity for othercircumstances.

Public-Private Partnerships

PPPs bring in private sector managementskills and can lead to efficiency gains by usingone entity to do the design, constructionand operation and provide finance. Thereis evidence that private sector partnersare more realistic in their estimates ofconstruction time and costs than publicagencies. Private partners have an incentiveto develop a realistic financial model thattakes into account all costs and revenueflows. PPPs work best where governmenthas the necessary and detailed skills incontract negotiation and management, andwhere there is adequate competition for theprojects.

The main advantage of PPPs comes fromlowering the total cost of the project throughimproving project risk management. Contractnegotiation can be lengthy but PPPs providea more flexible, and potentially, more timelysource of finance for important infrastructureinvestments that might otherwise beconstrained by public debt pressures.

The risks of PPPs lie in the amount of rentgovernments expect to obtain. If the rent istoo low then a valuable source of revenueis wasted. If the rent is set too high theprobability of failure increases and the risk ofcontingent liabilities for government increase.

Franchise Arrangements

Government franchising involves agovernment or public-sector agency (thefranchisor) granting an exclusive right toa private or other independent entity (thefranchisee) to occupy, operate and maintainpublicly owned infrastructure facilities todeliver services over a predetermined periodof time. This approach differs from licensingarrangements whereby businesses aregranted permission to supply infrastructureservices with their own assets.

Franchising schemes should assign risk tothe parties best able to manage and controlthem. Infrastructure franchises have usuallybeen awarded on a fixed-term basis, oftenexposing franchise holders to considerabledemand risk, which investors are oftenunwilling to assume without governmentguarantees. These contracts are also

inflexible, since it is difficult to determine afair level of compensation to the franchiseholder if the contract is terminated early ormodified. Under an alternative mechanism,

the franchise is awarded to the firm that asksfor the least present value of user fee revenuefor a given tariff structure, and the franchiseends when the present value of user feerevenues is equal to the franchise holders bid.

Parastatal Financing

Where there are parastatals in operation,such as the railway sector or in the portssector, it may be possible for the parastatalto increase its debt-to-equity ratios and soincrease their levels of leveraging. However,in Africa, many parastatals have high debt-equity ratios and it it is neither feasible norpractical to advocate this type of instrumentto be used to finance infrastructure.

Infrastructure Bonds

Infrastructure bonds are debt instrumentssuch as bonds, debentures and stocksissued for the purpose of financing specificinfrastructure by the public sector. Theseborrowings are usually secured on the asset,or against the revenue stream arising fromthe asset. They do have a number of risks inthat the issuing governments are not able toavoid contingent liability. 3

Financial Transaction Taxes

Transaction taxes 4 can be raised on thesale of specific financial assets (such asstock, bonds or futures); can be applied tocurrency exchange transactions; or can begeneral taxes levied against a mix of differenttransactions. With the rise in the number ofstock exchanges in Africa, transaction taxesmay become a viable way of raising funds astrading in stocks and shares grows. Equally, asmost countries in the Tripartite region haveliberalised their current and capital accounts,there are now large numbers of currency

transactions taking place in the region whichalso adds to the practicality and feasibility ofusing transaction taxes to raise finances topay for regional integration programmes. An

in-depth analysis on the efficacy of financialtransaction taxes would need to be done. 5

None of the above instruments are withoutcomplication. However, only by consideringthe concrete implications of combiningdifferent sources of finance and instrumentscan we then hope to put in place theinfrastructure required in Africa to promotebroader-based development.

Notes1. These issues are discussed in depth in a

forthcoming TMSA paper on InfrastructureFunding and Delivery in the COMESA-EAC-SADC Tripartite Region Potential Role of thePrivate Sector by Johan Kruger and LoletteKritzinger-van Niekerk.

2. Modern day examples would includethe effect of public transport on roadcongestion and green-house gas emissions.

3. Contingent liabilities are possible futureliabilities that will only become certain onthe occurrence of some future event.

4. Examples include: Keynes FinancialTransaction Tax; Currency TransactionTax (such as the Tobin Tax and theSpahn Tax); Stamp Duty Swedish tax onequity securities, xed income securitiesand nancial derivatives (1984 1991;Brazilian bank transaction tax; Peruviangovernment general nancial transactiontax (domestic)

5. Honohan and Yoder (2010) concluded thatattempts to raise a signicant percentageof GDP in revenue from a broad-basednancial transactions tax are likely to raisemuch less revenue than expected, whilealso generating far-reaching changes ineconomic behaviour.

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Author

Mark Pearson is the Director of TradeMarkSouthern Africa programme.

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(..) only by consideringthe concreteimplications ofcombining different sourcesof nance and instrumentscan we then hope to putin place the infrastructurerequired in Africa to promotebroader-based development.


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Development Finance Institutions and Infrastructure:Findings from a Systematic Review of Evidence for Development Additionality

By leveraging private investment,

Development Finance Institutions (DFIs) aim to reduce theinfrastructure nancing gap in the developing world.

This article summarises the ndings of a Systematic Reviewof the evidence on the development impact of DFI support for

private participation in infrastructure.......................................................................................................................................................................

Lily Ryan-Collins and Stephen Spratt

Infrastructure is vital for development butis seriously underprovided in much of thedeveloping world. The financing shortfall isestimated at $48 billion per year in Africaalone. 1 With public finance insufficientto fill this gap, recent decades have seenan increasing focus on mobilising privateinvestment. The volume of private financeflowing to infrastructure in developingcountries, however, has been well below thatanticipated by many following deregulationin the 1990s. 2 There has been progress, butnot enough: if this situation is to be resolved,new combinations of public and privateinitiatives will be required.

Development Finance Institutions (DFIs) aimto leverage private investment for projectsthat are close to commercial viability, havelarge potential developmental impacts, butare in sectors or countries where commercialbanks are reluctant to invest due toperceptions of excessive risk. By investingtheir own resources in projects, DFIs seekto mitigate these risks and so give privateinvestors the confidence to invest. A numberof instruments are employed to achievethis: investment (loans and equity), riskmitigation (for example loan guarantees),advisory services (to governments), andproject preparation and developmentservices.

As well as the quantity of investment,however, quality also matters. New facilitiesthat provide low quality services, or whichpoorer sections of society cannot accessor afford, may tick boxes with respectto quantity, but do badly in terms ofquality. Accordingly, Development FinanceInstitutions (DFIs) seek to use their resourcesto improve outcomes in both areas: toattract more private investment, but also toenhance the development impact that thisfinance can achieve.

It is within this context that the systematicreview upon which this article is basedaddressed the following questions: What isthe evidence of the impact of DFI support for private-participation-in infrastructure (PPI),on economic growth and poverty reduction?

What conclusions can be drawn from thisevidence to help DFIs better target theirinvestment to maximise their impact oneconomic growth and poverty reduction?

In approaching these questions we focusedon the additionality that DFIs mightcreate with respect to growth and poverty.Additionality is defined as impact beyondthat which would have occurred without DFIparticipation. For example:

I. Financial additionality , raises thetotal quantity of investment, both interms of DFI resources and the privateinvestment they can leverage asco-investors.

II. Demonstration effects increasethe quantity of investment bydemonstrating to private investorsthat the risks are lower than they hadperceived, resulting in a significantincrease in private investment that isindependent of DFI activity.

III. Policy additionality may increaseboth the quantity and quality ofinvestment by creating an enablingenvironment that is attractive toinvestors, and influencing the nature ofthis investment to boost developmentimpacts

IV. Design additionality increases thequality of investment by amplifyingthe development impacts of a projectthrough the use of particular designfeatures.

The review proceeded in two phases. Phase1 examined publicly available evidence inthe literature, including DFIs own material.Much relevant evidence, however, is to befound in DFIs internal evaluations, which areusually not publicly available due to issuesof commercial confidentiality. To addressthis, Phase 2 reviewed internal evaluationsfor a group of 5 major DFIs. 3 In total, morethan 400 documents were reviewed, roughlyhalf in each phase of the review. Throughout,evidence that DFIs do (or do not) createthese different forms of additionality wasgathered and assessed.

Overall, the evidence gathered in thereview suggests that DFIs have positivedevelopment impacts. However, the reviewalso identified ways in which they couldenhance the developmental outcomesof their investments, and thus increasethe impact of donor resources. Our mainfindings are as follows:

First, the evidence suggested that DFIs docreate financial additionality, particularly inless commercially viable sectors. Specifically,we found support for the propositions thatDFIs are able to: a) supply long-term finance,which is often essential for infrastructurebut frequently unavailable in low-incomecountries; b) mitigate early-stage projectrisk, thus leveraging additional finance byimproving the attractiveness of deals; andc) provide and leverage finance counter-cyclically.

Second, we found support for the viewthat DFIs influence project design andthe policy context to boost growth. Bothin terms of project selection (e.g. projectsthat remove bottlenecks to growth), andduring the project design phase, DFIsseek to enhance growth effects. Similarly

though to a lesser extent some DFIsseek to influence regulatory frameworkswith the aim of enhancing growth (e.g.through liberalisation) or by building publicsector capacity to pursue private sectordevelopment.

Third, we found little to suggest that DFIsinfluence project design and policy toimprove direct poverty impacts. As well asits indirect effects via growth, infrastructurecan have direct effects on poverty by,forexample, providing affordable access toservices that were previously not available,or access to new markets, will have directpoverty impacts. Certain aspects of projectdesign will greatly influence the extent ofthese direct effects, such as the ability ofthe poor to physically access services, ortheir ability to afford fees. We found verylittle evidence that DFIs actively seek toinfluence these design features to increasedirect poverty effects. There was also limited




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evidence that DFIs proactively seek to createlocal employment and stimulate broader

economic development through, for example,forging linkages with local suppliersincluding SMEs. Importantly, we found asmall number of examples of this type ofactivity, demonstrating that it would befeasible to do more. Indeed, in many of theseareas, it was not clear why greater effortsare not habitually made by the DFI sector, asthey appear to have scope to do so.

Fourth, it is clear that more emphasis shouldbe placed on project selection. If the goalof DFI activity is to maximise the impactof scarce donor funds, they should selectthose projects with the potential to createthe greatest impacts. While this may seemobvious, it is not generally reflected incurrent practice. DFIs often appear to acceptthe projects that come their way and clear acertain hurdle, rather than choosing projectson the basis of a comparison of alternativesand their likely development impact. Whilethis may be justified because of a lack ofinvestable options a better approach mightbe to devote more efforts to identifyingand preparing projects with the greatestpotential impacts. In our view, the drawbacksin terms of additional cost and time areoutweighed by the greater impacts thatcould be achieved.

Given that the funds available to DFIscannot fill the infrastructure financinggap, the demonstration effect they createthat increases private financing is, in someways, their core task. This needs to be put inperspective, however. Our fifth finding is thatthe ability to achieve such demonstrationeffects may have real limits. In part, DFIs areable to do what they do because they areDFIs. Political backing allows them to borrowon favourable terms as there is no defaultrisk. Further, DFI-backed loans are less riskythan pure commercial loans: borrowersare reluctant to default due the harm thiscould do to their relationship with the donorgovernment (or institution in the case ofthe World Bank and Regional DevelopmentBanks). Given these factors, DFIs can lendon better terms (e.g. for longer maturities)and hold riskier portfolios than is possiblefor private actors. It is therefore not alwayspossible for private actors to follow DFIsexample and make the same investments.

While we found very few projects whereDFIs appeared to have had direct povertyeffects, it was striking that all projects forwhich this was the case were part-fundedby concessional finance. This suggests thatachieving some forms of impact may not becompatible with a purely commercial model.To maximise development impacts, therefore,

public agencies will have to perform differentroles in different projects. In many cases,

this will be to demonstrate commercialattractiveness, thereby mobilising a futureincrease in private investment. In otherprojects, however, maximising impacts mayrequire concessional finance to be deployed,implying that public actors will need to beengaged in the sector for the longer term.

Our sixth finding, therefore, is that projectsshould be assessed and categorised moresystematically. This will enable support frompublic agencies to be structured in the mostappropriate and effective way.

As a first step on this road, we developedthe following framework for categorisingprojects:

I. Fully commercially viable, could goahead without DFI involvement 4

II. Commercially viable but DFI politicalinsurance essential to mitigate riskssufficiently to assure investors.

III. Project commercially viable but only iffinance is structured in ways that onlyDFIs will or can do.

IV. Only commercially viable if blendedmodel of concessional and commercialfinance is used.

V. Not commercially viable, should bepublicly funded.

In our view, DFIs should not be engaged incategories (i) and (v) (although we foundsome cases where they were). For categories(ii) and (iii), financial additionality is aresult of the particular qualities of DFIs,particularly their ability to offer politicalinsurance and favourable forms of finance.In these circumstances, we suggest thatthe premium paid for this insurance shouldbe a greater commitment to social andenvironmental standards by the privateinvestor, as well as commitments on localemployment and supply chain linkages.Projects in category (iv) are those where, toensure access and affordability of the poor,the project is only commercially viable ifconcessional finance is used in conjunctionwith private investment. Category (iv)projects are therefore fundamentallydifferent from categories (ii) and (iii).

One option would be for DFIs to undertakecategory (iv) projects using concessionalfinance to realise development impacts.They may feel, however, that their primarypurpose is to create demonstration effects,which would mean they should restrictthemselves to categories (ii) and (iii). 5 In thiscase, other public agencies would need tostep in to fill this gap.

In sum, the evidence studied led us toconclude that there is a set of projects that

are neither fully commercially viable norsuited to full public funding. Attempting toshoehorn these into either camp is likely tolead to sub-optimal development outcomes,which fail to achieve the commercial successneeded to create a positive demonstrationeffect, or to realise the full set of potentialdevelopment impacts. There is a realopportunity here for public agencies (DFIsor other) to both mobilise private financeand create developmental impacts throughthe use of blended finance. However,crucially, the projects in this category mustbe recognised so that support from publicagencies can be structured appropriately.Where this does not happen, scarce publicfunding will not be put to best use.

The full review is available here:http://www.ids.ac.uk/publication/development-finance-institutions-and-infrastructure-a-systematic-review-of-evidence-for-development-additionality

Notes1. Foster, V. and Briceo-Garcia, C. (Eds.)

(2010) Africas Infrastructure: A Time forTransformation, Washington D.C.: WorldBank

2. Estache, A. & Fay, M. (2007) CurrentDebates on Infrastructure Policy. WorldBank Policy Research Working Paper No.4410. Washington D.C.: World Bank

3. IFC, KFW, CDC, AsDB and FMO. 12 DFIswere approached to participate. Those notnamed were not prepared to release theirinternal documents.

4. In the case of category, (i) projects DFIadvisory services can still play a valuablerole in mobilising nance for projectsthat are commercially viable without DFIinvestment.

5. As well as advisory services in the case ofcategory (i).

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Authors

Lily Ryan-Collins is an Infrastructure Adviserat the UK Department for InternationalDevelopment.

Stephen Spratt is a Research Fellow at theInstitute for Development Studies.

The views expressed in this paper are those ofthe authors alone, and do not necessarily reflectthe UK Governments position.

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CAF Development Bank of Latin Americas Approachfor Infrastructure Financing

CAFs approach to infrastructure is integral.

In every stage of a project the economic, social andinstitutional issues are taken into account.

Financial and environmental sustainability issues must beconsidered during the evaluation process.

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Germn Ros

CAF Development Bank of Latin Americais a multilateral bank created in 1970 thatstarted with five Andean countries: Bolivia,Colombia, Ecuador, Peru, and Venezuela.Today, CAF has eighteen shareholdercountries from Latin America, the Caribbeanand Europe, as well as fourteen private banks.CAF obtains most of its funding from globalfinancial markets. The institution promotessustainable development and regionalintegration through credit operations, grantsand technical support, and offers financialstructuring to public and private sectorprojects in its member countries. Withheadquarters in Caracas, Venezuela, it hasoffices in Asuncin, Buenos Aires, La Paz,Brasilia, Bogota, Quito, Madrid, Panama City,Lima and Montevideo.

The four fundamentals of CAFscomprehensive development agenda topromote sustained and quality growth are:macroeconomic stability, microeconomicefficiency, social equity and inclusion, andenvironmental sustainability. To achievethese, CAF works closely with its membercountries investing in all forms of capital(physical, human, natural), as well as workingon the design of projects and programs tosupport the productive transformation ofthe region and a competitive insertion in theglobal economy, to improve the quality ofinstitutions, and to promote environmentalconservation.

CAF borrows in international capital marketsthrough a funding strategy that aims todiversify sources of financing, mitigateinterest rate and currency risks, whilematching the average maturity of its assetsand liabilities to maintain sufficient liquidityin its portfolio. CAF obtained its first creditratings in 1993 from the three main ratingagencies, and these have steadily increased,even during several economic crises thathit the region. Currently, CAF is the highestrated frequent bond issuer in Latin America.Prudent financial policies have madeCAF a profitable institution that reinvests,through grants and technical cooperation,in programs and projects to support itsmember countries. Today, CAF has becomethe main source of multilateral financing forinfrastructure and energy in the region, withapprovals of close to USD10 billion at the end

of 2012, which represents around 30% of thetotal multilateral lending for Latin America.

CAF considers infrastructure a powerfultool for development. Infrastructurecontributes to articulating Latin Americasimportant natural resource endowmentwith production and consumption centers.It also helps in the fight against povertyand improves quality of life by providingopportunities and public service accessto the population. A key Latin Americanchallenge is to increase its interregionaltrade, and given the complex geography ofthe region, investments in infrastructure arecrucial for connecting neighborhoods, cities,regions and nations, and increasing thepossibilities of expanding trade among them.

More than 60% of CAFs portfolio iscomprised of infrastructure projects. Thisreflects the priority the institution gives tophysical integration in Latin America, andresponds to the shortcomings this sector iscurrently facing in the region. According toseveral international indexes that measureboth coverage and quality of infrastructure,Latin America is lagging behind OECDcountries and even some emerging areassuch as Southeastern Asia, Middle Eastand North Africa. However, the situationis very heterogeneous by sector. In termsof electricity and telecommunications, theregion has adequate coverage and qualityof service, while ports and airports requiremore investment and efficiency in theiroperations. The greatest challenges are inwater and sewerage, roads, urban transportand railroads.

Considering the prospects of fast growthfor Latin America in the next years, andthe steady expansion of its middle-class, the challenges to catch-up ininfrastructure investment, and keep-upwith economic and population growthare enormous. To overcome the currentdeficit on infrastructure and to accompanythe development process in the region,investments of around 5% of GDP per yearare required. This does not take into accountmaintenance expenditures, which shouldbe included in national budgets as currentexpenditures. This means annual investmentin the range of USD 200.000-250.000

million. To obtain and invest these funds, the joint efforts of the private and public sectors,and the International Financial Institutions(IFISs) are needed. CAFs approach to infrastructure is integral.In every stage of a project the economic,social and institutional issues are takeninto account. Moreover, financial andenvironmental sustainability issues must beconsidered during the evaluation process.The environmental impact of a project isanalyzed from the beginning of its design, toprevent future problems. Each project CAFundertakes is seen as a source of knowledgethat can provide feedback and learningopportunities for similar projects. CAF hasa special unit that uses this knowledge toprovide policy advice and best practices tomember countries, and also produces studiesand publications on infrastructure.

CAFs main areas of interventions ininfrastructure in Latin America are: transportand logistics, energy, water and sewerage,telecommunications and ICT. To satisfythe demand for projects, CAF provides thefollowing products: direct loans to centralgovernments, with and without sovereignguaranteed, direct loans to sub-nationalentities, structuring of PPPs, co-financingwith other IFIs and co-financing with otherregional and national development banksand agencies.

As Latin America continues to grow anddevelop, the challenges of increasing tradeand urbanization will demand more andbetter infrastructure. Obtaining financingwill be an important issue, and institutionssuch as CAF must innovate in products andservices to attend the growing demand forfunding. In this regard, it is essential to formalliances with other financial institutionsand public and private actors.

..........................................................................................

Author

Germn Ros is the Director of StrategicAffairs, Europe at the CAF Development Bankof Latin America.

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...................................................................................................................................................................................

Financing the much needed investment inAfricas infrastructure is one of the crucialchallenges facing the continent. The AfricanDevelopment Bank and the World Bankestimate the financing needs to be inexcess of $93 billion per year. 1 A Program forInfrastructure Development in Africa (PIDA)study on key regional projects estimatesinvestment needs of $68 billion per annumuntil 2020 for regional projects alone. Thesenumbers are daunting, but the challenge tobuild sustainable infrastructure in Africa has to be met. And one of the ways this canbe done is by the continent taking ownershipof this challenge, rethinking infrastructurefinancing, and mobilizing resources alreadyavailable on the continent to promoteinclusive growth.

As Africa has been growing, so have itsfinancial resources. African countries havebeen growing at rates in excess of 5 percent.Indeed seven of the ten fastest growingcountries in the last few years are in Africa.This has created a growing middle class anda flourishing financial sector. Savings areaccumulating with institutional investorssuch as pension funds and insurancecompanies, and the capital markets inseveral countries are doing very well. Thecurrent state of the market is such that it issure to welcome an opportunity for furtherinnovation in the financial sector.

Understanding Infrastructure Bonds

The interest in financing Africaninfrastructure projects with infrastructurebonds has recently increased; prompted inpart by certain unique features of the bonds.

An infrastructure bond is a debt instrumentissued by governments or private companiesto raise funds from the capital markets forinfrastructure projects. The interest paymentsassociated with infrastructure bonds (andrepayment of the principal) are typicallyfunded with a direct linkage to the cashflow revenue generated from the underlyinginfrastructure project such as a toll road.Infrastructure bonds can be issued by privatecompanies without a need for governmentassistance.

Bonds such as these can also benefit fromcredit enhancements such as viabilitygap funding, or partial guaranteed tomake projects more bankable. Creditenhancements can be especially usefulwhere there is a project with strong revenuepotential and good management structurebut where the issuing entity may haveinstitutional or credit weaknesses. Theunderlying project itself can therefore bestructured to assume its own standalonerisk profile which is distinct from that of itssponsors.

Thus, infrastructure bonds in their broadestsense can mean any structured debt raisedthrough local or international capital marketssecured by or serviced from the cash-flowsof a specific project or a portfolio of projects,without recourse to the sponsors. Fully non-recourse project bonds for infrastructure aremuch less common however.

As infrastructure projects involve a capital-intensive construction phase that must befinanced, loan structures are more commonin infrastructure project finance than bondsas they are more flexible. Loans can bedrawn down gradually during construction(avoiding so-called negative carry). Forsyndicated loans, borrowers are generallygiven a call option for free, whereas bondsare difficult to refinance. Loans are thereforemore efficient for smaller financings, sincebond issuance involves greater overheads

associated with getting a credit rating,documentation and governance.

Nonetheless, there are benefits to bondsover loans: (i) it is cheaper to finance withbonds, (ii) bonds are available for incrementalfunding, (iii) they normally have longermaturity dates and (iv) they are sometimesavailable in different currencies.

The state of the infrastructure bondsmarket in Africa

If we consider the definition of aninfrastructure bond per se, those fromAfrican countries such as Kenya, Cameroon,Chad and a large part of the transactionsin South Africa are strictly speaking notinfrastructure bonds. They are generalgovernment bonds with some promiseto spend the money in infrastructureinvestment. They have no income streamassociated with the underlying asset, andcash flows for the bonds are paid directly outof government tax revenues. There is also noguarantee that the money raised goes intothe project as promised, and neither is therea dedicated Fund Manager, raising concernsabout the ability of central government tochannel the funds to actual developmentof infrastructure projects. In such situations,government credibility becomes critical toensuring investor confidence, particularly inthe issuance of future bonds and in creatinga viable infrastructure bond market.

Unlocking Infrastructure Development in Africa through Infrastructure Bonds

This article focuses on international experiences

gained in nancing infrastructure through local currencyrevenue bonds and the applicability of such

methods to Africa.......................................................................................................................................................................

Cedric Achille Mbeng Mezui

(..)to buildsustainableinfrastructure inAfrica by the continenttaking ownership of thischallenge, rethinkinginfrastructure nancing, andmobilizing resources alreadyavailable on the continent to promote inclusive growth.

Thus, infrastructurebonds in theirbroadest sense canmean any structured debtraised through local orinternational capital marketssecured by or serviced fromthe cash-ows of a specicproject or a portfolio ofprojects, without recourse tothe sponsors.


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...................................................................................................................................................................................South Africa, with a large and sophisticatedinvestor base totaling $600bn (more thanthe other countries combined), stands outon the continent in terms of local market

liquidity, capital market development andexperience with project finance. However,local currency infrastructure bonds have notbeen considered to date as the governmentfeels that such bonds are too far removedfrom projects, preferring that parastatalsissue bonds and the government provideguarantees for certain projects.

For example, Eskom is an integrated powerutility wholly owned by the governmentand with a track record of issuing bondslocally in Rand as well as internationally inEuro and Dollars. It currently has ZAR 105bnoutstanding in the market, with 2033 as thecurrent longest maturity. Similarly, the SouthAfrican National Roads Agency (SANRAL)has a domestic capital markets programtotaling ZAR 44bn. In 2008 it issued fourbonds totaling ZAR 2bn to fund new tolledhighways in Gauteng as well as other roadupgrades. This included inflation-linkedfloating-rate bonds and three fixed ratebonds with maturities up to 20 years. Itwas the first time SANRAL issued without aguarantee from the National Treasury. Also,the Airport Company of South Africa (ASCA)rolled out a ZAR 1bn three month commercialpaper program in 2008-09, which itsubsequently refinanced using long-termbonds.

Beyond Africa, other emerging countriessuch as Chile, Brazil and Malaysia are usingproject finance bonds as a way to catalyzeinvestor interest in infrastructure project.Such examples can serve as a template forAfrican countries on how to develop theirown markets.

But it is important to understand all thedifferent policy measures and governmentactions that went towards the creationof the market for these project bonds. Inparticular government policy has beensupportive in pension regulation to build theinvestor base and in building an enablingenvironment for infrastructure whichallowed financeable projects to be structured.

These are important case studies andtemplates for informing the future actions ofAfrican governments and how their policiescan shape the market in the future.

Things that need to be done

International experiences offer lessons forAfrican countries in terms of institutional,financial and regulatory prerequisites thatcan stimulate the successful issuance ofinfrastructure bonds. Specifically, for theissuance of infrastructure bonds to besuccessful, the following reforms need to beundertaken:

Macro fundamentals: Fiscal andmonetary policies need to be stabilized;inflation needs to be tackled verystrongly; there needs to be a level ofstability in interest rates; and domesticsavings rate need to significantlyimprove;

Capital Market: Public securitiesmarket should be put in place; effectiveindependent regulation should becrafted; and bond listing rules andprocedures need to be well established;

Pension Sector: There is a need toincentivise citizens to contributeinto pension schemes; the use ofprofessional asset management needsto be encouraged; effective independentregulation needs to be established,and there should be flexible sectorallocation of portfolio;

Issuers: The forms of bonds in themarket should include long-termgovernment bonds; parastatals andmunicipal bonds; corporate bondsin different sectors; and innovativestructures such as Asset BackedSecurities (ABS);

Infrastructure: Infrastructure needs tobecome a policy priority; regulation andtariff reform need to be implemented;Independent Power Producers (IPPs)need to be encouraged; enabling law forconcession/PPP need to be enacted.

Conclusion

Africa has the potential to meet a significantpart of its infrastructure investment needsfrom domestic sources. Specifically, someAfrican capital markets across the continentalready have the capacity to provide part ofthe financing that is needed to help tacklethe infrastructure needs across the continent.

One area where more progress is requiredin all markets is in providing an enablingenvironment for infrastructure development.

This includes establishing independentand professionally managed utilities andproviding a regulatory framework forprivate-sector participation. Experience with

private-sector participation in road, rail andports is mixed. Only South Africa and Kenya

have a consistent deal-flow of IPPs, althoughNigeria is undertaking promising reforms.Capacity to develop PPPs and the processfor approving and regulating projects mustbe improved in most markets. Too often,key projects remain at the drawing boardbecause they are perceived to be too risky orthey lack funds for the development phase.

These reforms are needed to increaseprivate sector participation in infrastructuredevelopment in Africa but also forthe issuance of locally denominatedinfrastructure bonds. As shown above, theprocess has begun in a few markets, butacross the continent there is still a long wayto go. It takes time to build a strong capitalmarket, but the broad rules for doing thisare available from other countries. Africancountries need to learn from them.

Further reading on infrastructure bonds1. Mbeng Mezui, C.A, and B. Hundal, (2013)

Structured Finance - Conditions forinfrastructure project bonds in Africanmarkets. Nepad, Regional Integrationand Trade Department, AfricanDevelopment Bank, Tunis, Tunisia.

2. Clifford Chance. 1991.Project Finance.London: IFR Publishing

Note1. AICD 2009...........................................................................................

Author

Cedric Achille Mbeng Mezui is SeniorFinancial Economist at the RegionalIntegration Department of the AfricanDevelopment Bank where he focuseson Innovative finance products forinfrastructure.

Africa has thepotential to meet asignicant part of itsinfrastructure investmentneeds from domesticsources.

Experience withprivate-sectorparticipation in road,rail and ports is mixed....Capacity to developPPPs and the process forapproving and regulating

projects must be improvedin most markets.




...................................................................................................................................................................................

The Need for Private Investment inInfrastructure

Infrastructure is critical for the delivery ofpublic services and economic development.Road networks, energy, and ICT easeconstraints to doing business by reducingtransport costs and linking local and globalmarkets, particularly when combined withappropriate trade policies. Infrastructuresupports the development of the privatesector, which provides the majority of jobs in developing countries. Improvinginfrastructure is also key in addressing theneeds of the poor by enabling better accessto safe water, electricity as well as healthand education services. The MillenniumDevelopment Goals (MDGs) includetargets to improve water and sanitationinfrastructures as well as ICT, recognisingtheir importance for human development.

As developing countries see infrastructureas key in achieving development, theirgovernments have been allocating their ownpublic funds to build, operate and maintainit. In sub-Saharan Africa for instance,between 2002 and 2006, more than half ofthe amount spent for infrastructure camefrom the developing countries public sector.At the same time, many developing countries,particularly low-income countries (LICs), alsorely on aid for their infrastructure financing.In this respect, traditional bilateral andmultilateral donors have been increasinglysupporting developing country infrastructure,amounting to roughly US$44 billion in 2011.

However, developing countries still face alarge financing gap for infrastructure. Forinstance, 1.3 billion people still lived withoutelectricity in 2011. In the target year for theMDGs of 2015, 605 million and 2.4 billionpeople will still not have access to safe waterand sanitation facilities, respectively. Theprivate sector will also need reliable sourcesof energy in order to thrive. Thus morefunds are needed: in sub-Saharan Africa, anadditional US$50 billion a year is requiredto meet all the infrastructure needs. Inorder to minimise environmental damage,build resilience and avoid costly renovation

at a later date, massive investment is alsorequired to establish low-carbon, climate-resilient green infrastructure. While theBRICS have recently agreed to create adevelopment bank to provide funding forinfrastructure project initially worth US$4.5trillion, the actual establishment of this bankmay take a few more years.

Therefore, as developing countrygovernments and donor countries arestruggling to mobilise further publicresources, increased private sectorparticipation and investment will beindispensible to meet the infrastructurefinancing gap. This approach is in line withthe Monterrey Consensus on Financing forDevelopment, the G20 High Level Panelon Infrastructure, and the more recentagreements at the High Level Forum onAid Effectiveness in Busan. At the sametime, both developing country governmentsand donors need to ensure that the profitincentive of the private sector do notundermine governments pro-poor and otherdevelopment objectives. As the ultimateobjective is sustainable development, privateinvestment for infrastructure should bepursued when it is deemed to contribute tothe former.

Private sector participation in infrastructureincludes: management and lease contracts;concessions; greenfield projects; anddivestitures. Through these modalities,private investment in infrastructure projectsin developing countries increased fromUS$18 billion in 1990 to US$114 billion in2006. Between 1990 and 2011, Latin Americareceived almost 40% of private investment

for infrastructure, followed by East/SouthAsia and Europe/Central Asia, which receivedbetween 15% and 20% respectively. TheMiddle East and North Africa (MENA) andsub-Saharan Africa accounted for a littlemore than 10% of total investment. Here,while large multinational investors fromOECD countries used to be dominant,emerging market firms are increasinglybecoming prominent.

Challenges in the Financial Sector andEnabling Environment

At the same time, many developingcountries still face challenges in accessinginternational and local finance, whichdepends on a sound financial sectorthat provides adequate banking services,mobilises savings, and allocates financingto firms wanting to invest. In particular,local commercial banks are often too smallto provide funding for large infrastructureprojects. They are also often risk-aversewith excessive collateral requirements,making loan tenures too short for long-term projects. In turn, this limits them inbuilding relevant experience and skills toundertake project financing or to participatein project identification, design, negotiationwith capabilities equal to the investors. Inaddition, non-bank financial services such asbonds and guarantees are also limited in LICs.

On the other hand, there is growinginterest in tapping into local and regionalsources to overcome the dearth offinancing with maturity terms that arecommensurate with long term horizons ofinfrastructure projects. While not suitablefor all countries, substantial sums couldbe available for investment if successfulpension reforms were undertaken, as theycould spur the development of capitalmarkets. Furthermore, foreign institutionalinvestment in infrastructure, although stillvery limited, is rapidly growing in somedeveloping countries.

In order to have a modern financial sector,it is essential to have a sound and enablingenvironment that ensures fair competition,

Support to Enhance Private Investment for DevelopingCountry Infrastructure

Private investment is critical in nancing the signicant

infrastructure needs of developing countries. This requiresa sound nancial sector, enabling environment, and

risk mitigation instruments. These can be supported bymultilateral and bilateral donors.

......................................................................................................................................................................

Kaori Miyamoto

Increased privatesector participationand investment willbe indispensible to meetthe infrastructure nancinggap.


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...................................................................................................................................................................................information transparency, and securityfor the rights of borrowers, creditors, andshareholders. This enabling environmentincludes high standards of public and

corporate governance and the rule of law. Asunderlined in the Organisation for EconomicCo-operation and Development (OECD)sPrinciples for Private Sector Participationin Infrastructure , fiscal discipline andtransparency must always be safeguardedwhen engaging with private partners.

These elements are still challengesespecially in Sub-Saharan Africa. ManyAfrican countries have limited resourcesfor public audits, deficiencies in oversightfunctions by parliament and lack ofco-operation by the executive branch whichtogether compromise budgetary and fiscalmonitoring. More generally, civil servantslack administrative capacities to deal withproject identification, project preparationand the awarding process when engagingwith the private sector. Furthermore, policies,regulatory bodies and laws to prevent anti-competition and anti-corruption practicesare often in their preliminary stages.

Development Partners Support toInfrastructure

As many developing countries facechallenges in mobilising private investmentto finance their infrastructure needs,bilateral and multilateral institutions areproviding financial instruments such asinvestment funds, blending, risk mitigationinstruments (guarantees and insurance),and Output-Based Aid, with the objectiveof attracting private investors who mightotherwise be deterred from entering riskymarkets. Furthermore, they give supportto help improve the enabling environment,especially for public private partnerships(PPPs), when suitable. In Africa, for example,donors disbursed in 2008-10 roughly 22% ofofficial aid for infrastructure to support theenabling environment, with the rest going tothe hardware.

Emerging economies also contribute toinfrastructure development in developingcountries. China is now one of sub-SaharanAfricas biggest partners for infrastructure,outpacing the World Bank: between 2003and 2007, it allocated a total of US$16 billioncompared to the US$8 billion by the WorldBank, although 70% of its activities wereconcentrated in Nigeria, Angola, Sudan,and Ethiopia. China provides many typesof financial instruments going beyond aidto enhance Chinese private investmentin the continent. Its Development Bankprovides non-concessional loans topartner governments who are then boundto contract Chinese companies to buildinfrastructure and to extend rights to extract

natural resources. The Chinese Eximbankprovides export credits and concessionalloans to developing country governments orChinese firms for their investments as well

as export guarantees to sellers and buyers.

Other emerging economies also contributedto a large share of infrastructure financingin Africa. Seven Arab Funds committed atotal amount of US$3.3 billion to Africasinfrastructure in 2010. Other actors includedIndia in power projects and telecoms andBrazil in Lusophone countries. In Africa,stakeholders perceive emerging donors asmore effective than traditional donors, forexample, by being less bureaucratic andinterested in setting policy conditions. Onthe other hand, traditional donors areseen as having a comparative advantagein helping improve governance andhuman capital, thereby being potentiallycomplementary with emerging partners thatprovide more support towards hard aspectsof infrastructure.

(..)many developingcountries still facechallenges in accessinginternational and localnance.

Development Assistance Committee(DAC)s Contribution

Development co-operation to supportconventional procurement for infrastructurewill continue to play an important rolein fragile states or some least developedcountries where conditions for privateinvestment may still remain unfavourablein the medium term. At the same time,the DAC is considering ways to usedevelopment co-operation more effectivelyin leveraging private investment, supportpartner government efforts to create theappropriate enabling environment, as well asengage with the emerging economies thatprovide significant infrastructure financingin developing countries. The DAC and theInvestment Committee are also jointly tryingto dialogue better with the private sector tolearn how development co-operation couldsupport their investment

With this objective, the DAC is currentlygathering information on what key bilateraland multilateral agencies, as well as possiblysome emerging economies, are doing toencourage private investment for developingcountry infrastructure. This will cover, byeach agency: data such as the share of ODAinfrastructure projects that involve private

investment among total ODA infrastructureprojects; views and approaches towardsprivate investment for infrastructure;and institutional co-ordination amongthe development co-operation agency,development finance institution (DFI),export credit agency, and other relevantministries. Once this compendium is puttogether, two or three case studies of specificinfrastructure projects will be carried outin order to document good practices inleveraging private investment.

The DAC is also implementing, inter alia , anew work stream to improve the quality andanalytical value of its statistics on resourceflows to developing countries beyond aid,including in the infrastructure sector, suchas foreign direct investment, export credits,national and international DFIs operations.For example, in this context, a special surveyon guarantee schemes for development hasbeen recently launched to estimate the scaleof these mechanisms in DFIs portfolios andthe amount of private investment mobilisedthrough them.

Based on this information, guidance will bedeveloped on how donors can become moreeffective in supporting private investment fordeveloping country infrastructure.

This article is largely ba sed on: K.Biousseand K. Miyamoto (2013).Support to EnhancePrivate Investment for Infrastructure inDeveloping Countries . Issues Paper OECD.

..........................................................................................

Author

Kaori Miyamoto is a Senior Policy Analyst inthe DAC Secretariat of the Organisation forEconomic Co-operation and Development(OECD).

..........................................................................................

In order to have amodern nancialsector, it is essentialto have a sound and enablingenvironment that ensuresfair competition, informationtransparency, and securityfor the rights of borrowers,creditors and shareholders.
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ADB Assistance for Public-Private Partnership inInfrastructure Development ( 19982010): Charting a Way Forward

Aura Abon and Anand Chiplunkar

Figure 1: The Four Pillars of ADBs PPP Operational Framework

Pillar 1 Pillar 2 Pillar 3 Pillar 4

Advocacyand capacity

Enablingenvironment

Projectdevelopment

Enablingenvironment

Create awareness Invoke leadership Identify PPP

potential in sectorplanning and theprivate sectordevelopmentagenda

Developmentcapacity ofgovernment andADB staff

Enhance externalknowledgemanagement links

Develop policy,legal, regulatory,and institutionalframework tofacilitate, guide,and manage thedevelopment of PPPs(country- or sector-specific)

Align ADB projectcycle to the PPPdevelopmentprocess

Assist in thedevelopment ofpathfinder projects

Provide support(including advisorysupport) throughoutthe process up tocontract award and/or financial closethat can come asexpert support, toolkits, funding costs oftransaction advisors,or procurementsupport

Provide creditenhancementproducts, e.g.,equity, long-termdebt, refinancingsubordinate debt,cofinancing, andguarantees

Establish creditguarantee facility

Provide public sectorfinancial supportthrough schemessuch as viability gapfunding

Regional Department (RD) Responsibility Private SectorOperationsDepartment(PSOD/RD)

Source: Asian Development Bank.

The Asian Development Banks (ADB) long-term strategicframework, 20082020 (Strategy 2020), emphasizes public-private partnerships1 (PPPs) and private sector engagement

for ADB infrastructure operations2 to help developingmember countries (DMCs) achieve greater economic growth........................................................................................................................................................

...................................................................................................................................................................................

Background

Asian infrastructure investment needs upto 2020 were estimated 3 at $8 trillion, or$750 billion per annum over the period 2010-2020. Available funding for infrastructurefrom traditional sources falls far short of theinvestment needs. ADBs sovereign and non-sovereign lending portfolio for infrastructureof $11.02 billion (ADB Annual Report 2009)and the World Banks $23 billion (World BankAnnual Report 2009) can only make modestcontributions to the regions growing demandfor infrastructure investment.

Leveraging resources is therefore a key priorityin ADBs development agenda of Finance++. 4 By leveraging ADBs financial resources andinstitutional strengths, additional resourcesand finance from other sources, particularlyfrom commercial sources, are proposed to bemobilized to make more PPP projects happenon the ground.

Nonetheless, in addition to finance,investment in preparation and pre-development of PPP projects ahead ofbidding and backed by ADB technicalguidance/support is the key to achievingthe maximum leverage for ADB DMCgovernments and ADB itself.

ADB approved the PPP Operational Plan 5 in2012. It has four pillars as depicted in Figure1. Each pillar includes illustrative activitiesthat ADB can undertake to support PPP in theDMCs. Assessment of ADB PPP financing from1998-2010

Public Sector Projects with PPPsADBs public sector PPP portfolio comprised137 projects with actual and indicative PPPcomponents. Of the 137 public sector projectswith PPPs, Pillar 2 (enabling environment)had the highest funding amount, followed by

Pillar 1 (advocacy and capacity development),illustrating the importance of soft invest-ments in support mechanisms for infra-structure development as well as theinvestments in infrastructures themselves(see table 1).

Under Pillar 1, the majority of projects dealtwith providing assistance in designing,piloting and/or implementing model PPParrangements such as performance-basedmaintenance contracts, concessions, andbuildoperatetransfer. The rest sought toexplore PPP and/or private sector participationoptions in subprojects or sector plans,provide training on PPPs and/or privatesector participation, and facilitate knowledgetransfer to promote PPP. One project worth$400 million presented options to financePowergrids (a state-owned firm in India)equity investment at its request for jointventure transmission projects with privatesector investors and financial institutions.

The 63 projects under Pillar 2, mostlyhelped develop policy, legal, and regulatoryframeworks for PPPs, as well as privatesector development strategies. Several ofthese projects also involved componentson encouraging institutional framework forPPPs particularly through tariff reforms, anddeveloping guidelines for promoting PPPs.

One of the 26 projects under Pillar 3, theInfrastructure Reform Sector DevelopmentProgram in Indonesia, supports theestablishment of a project developmentfacility for PPPs. This is expected to helpprepare feasibility studies and providetransaction execution support, includingtendering and procurement, to at least 10national and about 40 decentralized PPPprojects.

Of the 16 projects under the Pillar 4, sixprojects worth $1,325 million supportedinfrastructure financing facilities. Thesefacilities support on-lending activities to PPPprojects. Two of the facilities have alreadyidentified PPP projects, mostly in the roadsector. Five projects are supporting a jointventure, two concession arrangements,performance-based deferred paymentstructure procurement and/or performancemanagement contracts, and onlendingactivities to health service providers.


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Private Sector Projects with PPPsUnder Pillar 4, loan and equity financing of$5,324.24 million was provided to 49 ADBsprivate sector projects structured as PPPs.This included financing equity investmentsof governments in private organizations orspecial purpose vehicles created to implementspecific projects. One project was under Pillar 3.

Financing instruments used by ADB tosupport these private sector projects withPPPs include private sector loans, politicalrisk guarantees, partial credit guarantees,complementary financing schemes, andequity investments. PPP modalities supportedby these projects range from buildoperatetransfer, buildownoperatetransfer,concession, private independent powerproducers, joint ventures, service contracts,buildownoperate, designbuildfinanceoperate, financing facility, and purely privatesector investments such as direct loans to andequity investments in private organizations.

Technical Assistance with PPPsTechnical Assistance (TA) projects supportingPPPs were primarily used to developgovernment capacity to manage PPPs, aswell as to foster an enabling environmentfor PPPs. The TA projects with PPPs numbered219, amounting to $226.04 million. It must benoted that 58 TA projects were simultaneouslyclassified under two or more pillars.

Under the Pillar 1, TA projects on improvinggovernment capacity in designing andimplementing model PPP contracts are themost numerous and have the highest value.Of these TA projects, several were projectpreparatory TAs (see table 2).

Under Pillar 2, TA projects sought to developregulatory and institutional framework forPPPs and private sector participation, as wellas to prepare PPP policies, guidelines, andmanuals. They also focused on policy andlegislative reforms aimed at bolstering legaland business environment for PPPs.

There were 28 TA projects counted under Pillar3. One of these is the project preparatoryTA for the PPP Pilot Project Initiative(Mainstreaming PPP) in India. This supportsproject development collaboration between

ADB and the Government of India-fundedInfrastructure Project Development Fund. Itwill help conduct project feasibility reviewsand PPP options development, structure thePPP model in detail, and assist in the PPPbid process management and transactionand contractual documentation. The projectpreparatory TA will share the developmentcost with the fund on a project-by-projectbasis, with ADB shouldering 25% of the costs.

Several TA projects under Pillar 3 werealso used to structure or establish projectdevelopment facilities, including those onMainstreaming Public-Private Partnershipsand Public-Private Partnership Developmentin the Brunei Darussalam-Indonesia-Malaysia-Philippines East ASEAN Growth Area andIndonesia-Malaysia-Thailand. Others wereused to help prepare or implement projectsthat were structured as PPPs such as those onSolicitation of Private Sector Implementationof the Meghnaghat Power - Supplementaryand Tendering Process for Independent PowerProducer Plants.

Way forwardThe ADB PPP Operational Plan approved in2012 provides a consistent analytical andoperational framework for PPP assistance.ADB strives to include PPP needs into each ofits country partnership strategies (CPSs) andcountry operations business plans (COBPs)with its DMCs.

The need to develop the project to atransaction or bankable level requiresinvestment in Pillars 1 and 2. ADB willcontinue to provide holistic supportto enhance the capacity of DMCs andstrengthen the enabling frameworks forPPPs such as the ADB PPP initiative in India8 and the Philippines. 9 In order to get a macroperspective, ADB had also commissioned TheEconomist Intelligence Unit for evaluatingthe environment for PPPs in 11 Asia-Pacificcountries that were benchmarked withmature PPP countries like Australia and UK. 10These preparatory activities will ultimatelyhelp in identifying candidate PPP projects thatwould be developed under Pillar 3 to feed intoa pipeline of bankable PPP projects.

Notes1. For more details see www.adb.org/

publications/classication-adb-assistance-public-private-partnerships-infrastructure-

development-1998-20102. ADB. 2008. Strategy 2020: The Long-Term Strategic

Framework of the Asian Development Bank,20082020. Manila

3. ADB and ADBI. 2009.Infrastructure for a Seamless Asia. Manila.

4. ADB aims to provide DMCs value addition beyondnance, hence the rst + is for knowledgeenhancement of DMC through ADB involvementand second + is for leveraging ADB nancialresources.

5. See www.adb.org/documents/public-private-partnership-operational-plan-2012-2020.

6. Indicative PPP components refer to envisaged PPPelements in projects that are still in the early stage

of implementation, particularly project approvalsduring 20092010. Other projects with indicativePPP components include those that envisage PPParrangements upon completion of the constructionof project facilities.

7. The number of projects would not equal to 137 sincesome projects were classied under two or morepillars.

8. PPP Cells set up in 23 States and 7 Ministriesover 5 years with $15.3 million of ADB technicalassistance. The TA focused in addressing theconstraints and challenges to PPP developmentby providing capacity development and supportto strengthening of the policy and institutionalframework. Pipeline development and supportfor pilot projects as well as nancing supportfor bankable projects is also provided under theinitiative.

9. Technical Assistance in Strengthening PPPs inthe Philippines. The TAs outcome is an improvedgovernment capacity to promote, develop, andimplement PPP projects. The TA will achieve itsoutcome through (i) capacity building to improvethe governments PPP systems and capacity;and (ii) funding for the PDMF for preparation,competitive bidding, negotiation, and monitoringof environmentally friendly PPP projects.

10. ADB and Economist Intelligence Unit. March2012.Evaluating the environment for public- private partnerships in Asia-Pacic The 2011Infrascope. www.adb.org/publications/evaluating-environment-public-private-partnerships-asia-pacic-2011-infrascope>.

..........................................................................................

AuthorsAura Abon is an Infrastructure (PPP) Officer,Sustainable Infrastructure Division, Regional andSustainable Development Department of theAsian Development Bank.

Anand Chiplunkar is Director, Urban and WaterDivision, Central and West Asia Department ofthe Asian Development Bank.

..........................................................................................

Table 1: Classification of Public Sector Projects with PPPs

Particulars Pillar 1 Pillar 2 Pillar 3 Pillar 4

No. of projects 7 52 63 26 16

Amount ($ million) 3,115.0 6,770.6 2,628.4 2,073.6 Source: ADB

Table 2: Classification of Technical Assistance Projects with PPPs

Pillar 1 Pillar 2 Pillar 3

No. of TA projects 165 102 28

Amount ($ million) 131.42 58.55 36.07 Source: ADB

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http://www.adb.org/publications/classification-adb-assistance-public-private-partnerships-infrastructure-development-1998-2010http://www.adb.org/publications/classification-adb-assistance-public-private-partnerships-infrastructure-development-1998-2010http://www.adb.org/publications/classification-adb-assistance-public-private-partnerships-infrastructure-development-1998-2010http://www.adb.org/publications/classification-adb-assistance-public-private-partnerships-infrastructure-development-1998-2010http://www.adb.org/documents/public-private-partnership-operational-plan-2012-2020http://www.adb.org/documents/public-private-partnership-operational-plan-2012-2020http://www.adb.org/documents/public-private-partnership-operational-plan-2012-2020http://www.adb.org/documents/public-private-partnership-operational-plan-2012-2020http://www.adb.org/publications/classification-adb-assistance-public-private-partnerships-infrastructure-development-1998-2010http://www.adb.org/publications/classification-adb-assistance-public-private-partnerships-infrastructure-development-1998-2010http://www.adb.org/publications/classification-adb-assistance-public-private-partnerships-infrastructure-development-1998-2010http://www.adb.org/publications/classification-adb-assistance-public-private-partnerships-infrastructure-development-1998-2010




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Closing the Infrastructure Gap:A Three-Pronged Approach

Even as crews put the nishing touches on newly built roads, ports,and power stations across Africa, the continents people and itsgrowing economies are demanding more. Africas recent rise is

highlighting -- even deepening -- long-standing structural problems,with infrastructure growth failing to keep pace.

.......................................................................................................................................................................... The reality in many African cities is congestedroads, a lack of clean water, and frequentpower outages. Most of Africas populationhas no access to electricity at all. Overcomingthe obstacles is also one of the keys tohelping the private sector reach its potentialin creating jobs, raising incomes, andimproving lives. The World Bank estimatesthat $93 billion in annual investment ininfrastructure is needed -- an amount thatis more than double the current rate ofspending.

While often primarily the domain ofgovernment, infrastructure is also an areawhere the private sector can have a vitalimpact, providing essential services to largenumbers of users, efciently, affordably, andprotably. Private investors have brought inthe capital, technology, and managementexpertise needed to improve the performanceof high-priority infrastructure assets --giving large numbers of people their rstaccess to electrical power, clean water, orimproved transportation and communication.When incorporating high standards ofenvironmental and social sustainability, suchprojects can have a great impact withoutdepleting the fragile ecosystems on which weall depend.

The demand for such projects, and thenancing needed to make them a reality, isenormous. No one institution can begin tomeet it alone. Partnerships are essential asis a multi-pronged approach that tackles themany challenges involved. IFC works withits partners on every stage of the process,advising governments on structuring public-private partnerships (PPPs), supporting itsclients in the preparation of new ventures,and nancing projects and mobilizingresources from a wide variety of sources.In the scal year 2012, IFC funding forinfrastructure and natural resources projectsin Africa surpassed $1 billion for the rst time.

Paving the way

Much of our emphasis is on structuring andintroducing PPPs to improve the delivery ofbasic services. Developing projects requires

time, effort, experience, and the ability to getthe right balance between private and publicinterests. IFC has successfully counseledAfrican governments, including localmunicipalities, on ways to engage the privatesector in essential public services, and on howto restructure state-owned enterprises.

We supported Africas rst successful airlineprivatization, improving transportation acrossthe continent since the Kenyan governmentsold a controlling stake of its airline to KLM,and received more than $70 million. Weadvised the Kenyan government throughoutthe privatization process. IFC approached atotal of 154 airlines, resulting in four majorinternational carriers showing seriousinterest. The success of this joint ventureled to the doubling of passenger trafc andcargo between 1995 and 2003 and a boost totourism in the country.

Removing early stage obstacles

One of the major constraints private investorsface in infrastructure projects in the worldspoorest countries is the limited availabilityof funds and experienced professionalsdedicated to project development. To tacklethis issue, in 2008 we established theInfraVentures $100 million fund to providerisk capital to nance the early stages of thedevelopment of infrastructure projects, aswell as expertise in critical areas of projectdevelopment. The fund therefore allowsus to successfully bring both private andPPP infrastructure projects to the nancingstage. Half of IFC InfraVentures resources areexpected to be devoted to Sub-Saharan Africa.

In Mali, IFC and Scatec Solar are looking todevelop 60 MW of solar power of whichMopti (10MW) is the rst step. InfraVenturessupports the company in the preparation ofproject documents, including the ConcessionAgreement and the Purchasing PowerAgreement. Additionally, it will nance theEnvironmental and Social Impact Assessmentin compliance with IFCs PerformanceStandards. IFC co-development will result in alower power sale price compared to the priceof the current diesel-generated power in the

off-grid location where the solar plant will belocated and in the relief of pollution currentlycaused by the plant.

Financing the most difficult ones

Even once the regulatory aspect and thestructuring of infrastructure projects aredealt with, some investments have difcultyin attracting nancing. IFIs and donors canplay a critical role in facilitating investmentfor those projects, in particular when theypromise a positive social impact. Blendednance plays a key role in this context.

In 2012 in South Africa for example, IFCsupported Abengoas 50MW concentratedsolar power project by providing $72 millionin nancing and by coordinating $229 millionin parallel loans from ve DevelopmentFinance Institutions. Additionally, it blended$15 million in concessional nancing from theClean Technology Fund, which provided lowerinterest rate nancing to enable climaterelated projects to proceed. The investmentcreated over 300 jobs and 174,000 metrictons per year of GHG emissions are expectedto be avoided, the equivalent of taking 35,000cars off the road each year.

Infrastructure can be a vector of changein addressing some of the most systemicdevelopment challenges of todays world.There is an urgency to work hard to close theinfrastructure gap. Governments and theprivate sector need to work hand in handto improve the delivery of service

Documents

Great Insights Vol2 Issue4 MayJune2013final