Tag Archives: Development bank

Can P3 Help Tackle Asia’s Corruption Problems?

By Henry Teitelbaum, P3 Planet

(A version of this story previously appeared on Aon One Brief)

The Big Picture

Economic growth, supported by huge flows of foreign capital, has expanded prosperity in many countries across the South and East Asian region, leading to declines both in poverty and political risk.

But now, as China’s growth engine for the region subsides, regional competition for capital is likely to increase. While economic challenges in the short term create uncertainty, a renewed focus on anti-corruption efforts in the region could help states remain preferred destinations for foreign investment over the long-term.

The impact of anti-corruption campaigns in China, India, Indonesia and Malaysia are already being felt, according to the 2016 findings of Aon’s annual Political Risk Map. Across the Asia-Pacific region, tackling corrupt practices in both public and private sectors could not only reduce political risk, but also economic inefficiency. This in turn should support resilience in individual Asian economies at a time when emerging economies remain under intense pressure, helping them to more effectively address their growing infrastructure needs.

The challenge is very real. Urbanization and population growth is driving huge demand for basic essentials such as water, sanitation, transportation and electricity. This will place a clear focus on inclusive, sustainable development, that will reduce the already significant impact of development projects on the environment. At the same time, public financial resources are stretched and existing multilateral bank funding is insufficient.

New multi-lateral lenders, including the Asia Infrastructure Investment Bank (AIIB) may help to attract private investment to meet the region’s infrastructure needs. But ensuring this foreign capital remains for the long-term may also depend on progress in anti-corruption efforts. Clearer legal and regulatory frameworks and more transparent procurement structures could become important ways to accomplish both goals.

Deep Dive

Developing countries in Asia – including India, China, Indonesia, Malaysia, South Korea, Taiwan, Thailand and the Philippines – have achieved great success in generating prosperity, alleviating poverty, and encouraging political stability over the past 20 years. Much of this has been due to their ability to attract foreign investment through skilled labor, low wages, pro-market policies and political stability.

Political and economic risks in many Asian countries have also declined as stable currencies, and in some countries the adoption of pro-market policies the spread of democracy have expanded prosperity and created middle classes. But now, the physical infrastructure that is needed to keep apace with the demands of growing and increasingly urbanized populations is proving inadequate to the task. Asia’s infrastructure market is set to grow to 60% of global demand by 2025, according to PwC’s Capital project and infrastructure spending: Outlook to 2025.

Balancing Reform, Growth and Uncertainty

Nevertheless, as the Political Risk Map reported, countries such as China may face uncertainties in economic policy as their governments try to strike a balance between implementing reform and managing growth. In China, President Xi Jinping continues to consolidate power through his anti-corruption campaign – the economic outcomes of which are likely to be positive – while in India, Indonesia and Malaysia measures to counter corruption are expected to improve political and economic resilience.

“Anti-corruption campaigns may rebalance concerns regarding a stalling Chinese economy, but improvements in political risk do not necessarily translate into economic gains,” says Karl Hennessy, President of Aon Broking and CEO of the Global Broking Centre in London.

“Macroeconomic drivers are behind the current slowdown in China,” Hennessy continues. “While a war on graft is likely to have a positive, long-term impact on China, it may also reflect efforts to stabilize an economy going through an unprecedented deceleration. Following stock market uncertainties earlier in the year and a slide in GDP, Beijing may be turning to additional levers to instill greater confidence in its future economic program.”

The Rise Of Institutional And Private Funding

Outside of China, public funding resources for investing in this infrastructure are largely not up to the task. This is especially the case in poorer countries, where scarce government funding is needed to care for poor, largely rural populations. In countries such as India, this leaves little discretionary public funding available to support investments that would allow public infrastructure to keep pace with growing demands for better schools, healthcare facilities, care for the elderly, water, waste, electricity, broadband and other basic requirements.

As long-term investors in developed countries seek ways to diversify globally, opportunities to attract private investment from abroad to help meet this demand are increasing. However, competition for capital from other countries in the region also means that foreign investors will be weighing the relative risks more carefully than ever.
Existing multi-lateral lenders such as the Asia Development Bank (ADB) are inadequately funded to meet expanding demand for infrastructure, bureaucratic and slow. New multi-lateral lenders, such as the Asia Infrastructure Investment Bank (AIIB) and possible increased in capital flows from regional trade agreements like the Trans-Pacific Partnership (TPP) may help to attract private investment to meet infrastructure needs.

The robustness of legal, regulatory and market structures are important factors for determining where this private capital will gravitate. But corruption, in addition being a drain on public finances, is a major risk factor for both public and private investors and is a key determinant in their choice of where to invest.

In China, where state-controlled enterprises, including infrastructure developers, absorb a huge proportion of the country’s financial resources, the government’s current anti-corruption drive is a central part of its goals to make the state more efficient, thereby freeing up capital in the more efficient private sector.

Some Asian countries, notably India, have significant Public-Private Partnership (P3) programs underway to help tackle their infrastructure needs. When they work well, the competitive bidding and need for transparency involved in P3 tendering can itself help to reduce or eliminate corrupt influences. At the same time, the contract forces greater accountability on to the private sector by specifying penalties for inadequate delivery or maintenance of the asset.

Partnership structures such as these can also bring stability to foreign investment flows into the country, create local jobs, encourage the development of a domestic investor base and even respect for the rule of law. At the same time, foreign institutional investors gain investment and currency diversification and the potential to earn strong returns on investment.

For Asian economies to overcome the potential ripple effect of China’s current economic slowdown and secure sustainable long-term growth, increasing political stability can play a key part. While much progress has been made in recent years, as seen in the findings of Aon’s Political Risk Map, there is still work to be done – and political stability is only part of the story.

Climate Change Reshapes Infrastructure Investing Frontier

By Henry Teitelbaum
Editor, P3 Planet

Unless you’ve been living under a rock, you may have noticed that  climate change investing is finally starting to get the widespread attention it deserves.

In this regard, December’s COP 21 Paris Climate Change Conference was the watershed moment we’d been waiting for. The signed document that came out of that particular event legally binds all countries to work towards limiting the rise in average global temperature to less than 2% from pre-industrial levels. In terms of adaptation effort, it also brings clarity to how the government and business need to proceed with their investments in the physical infrastructure.

“COP 21 was a clear signal to business that any investment in infrastructure has to be low carbon,” Laetitia De Marez, senior climate policy analyst at Climate Analytics Inc. in New York tells P3 Planet. She says the international agreement to limit CO2 in the atmosphere means that governments can no longer commit public funds or, for that matter facilitate private sector funding for carbon-intensive projects. Beyond funding issues, she believes there is a growing risk that these investments will create “stranded assets” as economies shift towards renewables.

Stranded assets are investments, such as those in fossil fuels, technologies or related businesses, that suffer premature write-downs or conversion to liabilities. This reduction in their value becomes more likely as regulatory, tax and other indirect costs penalize the burning of carbon.

Climate Change Tops Risk Survey

The speed with which climate change has moved to the top of the global agenda is evident in January’s World Economic Forum 2016 Global Risks Report http://www3.weforum.org/docs/Media/GRR16_ExecutiveSummary_ENG.pdf. The 11th edition of the report found that the possible failure of climate change mitigation efforts is for the first time the top concern among survey respondents. What’s more, concerns about cascading risks related to climate change, including water crises and large scale involuntary migration are now in the top five concerns in terms of potential impact.

There is also a growing recognition of the investment opportunities in delivering the physical infrastructure that addresses climate change risks. Business leaders understand that green infrastructure, whether for public transportation, renewable energy or climate adaptation projects such as flood barriers, sea-walls and coastline conservation, is a good investment in and of itself. Not only do these  investments help to safeguard human and natural habitat, they are capable of generating  stable  long-term returns.

Mobilizing the private sector is important for two reasons. One is that we live in an age of fiscal austerity and constrained public budgets. This means that achieving any of the targets set by the United Nations Framework Convention on Climate Change (UNFCCC) will require private sector funding, particularly in underdeveloped countries. The other is that many investments in public infrastructure generate economic growth in both the short and long-term that more than justifies the initial expense.(http://www.frbsf.org/economic-research/publications/economic-letter/2012/november/highway-grants/)

PPP Model Draws New Interest

One UNFCCC-supported approach to tapping into the financial resources, efficiencies and technologies that the private sector brings to efforts to tame global warming is through the Public Private Partnership model.

PPPs are partnerships between public institutions or non-governmental organizations (NGOs) and private sector developers, who in addition to providing expertise bring their own financing to the table. In the context of climate change mitigation efforts, they have been already been successfully used to support forest and coastal wetlands conservation efforts, among others. Looking ahead to the growing challenge that global warming poses to existing economic and social infrastructure, their use is becoming even more important as the rising cost of adaptation places a greater burden on public finances in both developed and developing economies.

The growing interest in attracting private sector investment to climate change mitigation also comes at a time when there is strong structural investment demand for the assets that are created.

Rising Demand, Constrained Supply

Institutional investors in the developed world, particularly those with very long investment horizons such as public pension funds, are finding it challenging to meet their liabilities as more and more baby boomers reach retirement age. More than a decade of low interest rates has meant that many of these funds can no longer expect government bonds to provide the yield they are committed to paying out to pension recipients. As a result, trillions of long-term investment dollars are searching far and wide for high-quality cash-generating investments backed by physical assets with sufficient yield to cover their liabilities. And this increasingly points them towards investments in green infrastructure projects.

There is much work to do. Years of under-investment and neglect of physical infrastructure in developed and developing economies alike have left many countries with huge infrastructure deficits. McKinsey & Co. has estimated the global infrastructure deficit for the period from 2013 to 2030 at around $57 trillion. http://www.mckinsey.com/insights/financial_services/money_isnt_everything_but_we_need_$57_trillion_for_infrastructure

Governments, typically burdened with shorter-term political priorities, have consistently failed to make the necessary long-term investments that would put a dent on this deficit. Many have also been unwilling or unable to incentivize private sector investment by extending credit guarantees, and some do not even have the legal and regulatory structures in place. A further complication is that some of the private sector banks that used to play leading roles in arranging project financing have withdrawn from the sector since the financial crisis.

Institutions Becoming Early Stage Investors

One important development has been for pension funds, private equity firms and other long-term investors to take on leading roles in the financing of PPP projects themselves. In more and more cases, this means leaving their comfort zone and find new ways to manage the risks involved in early stage investment.

Public sector authorities around the world can do much to encourage this trend at minimal cost. Among the several ways they can help to incentivize private sector investment in climate resilient infrastructure would be to adopt PPP enabling legislation. Beyond this, governments should  provide credit guarantees to enhance the credit quality of debt funding for specific projects, remove structural impediments to infrastructure development, and promote best practice by establishing local centers of excellence.

A multilateral facility whose advancement would also support these efforts is the UNFCCC’s Green Climate Fund. This fund is designed to encourage programs and policies to support thematic investments in climate change mitigation, such as in climate resilient infrastructure for developing countries. It currently has more than $10 billion of funding in place and a goal of raising $100 billion by 2020. But the fund, which was established more than five years ago, is beset by disagreement over board transparency, country ownership and the role private enterprise should play in financing solutions. Developing countries want fund resources to focus on financing locally sourced solutions that support small- and medium-sized businesses. But developed countries are pushing for a Private Sector Facility that focuses on tapping into the huge capital resources available from institutional investors.

Explosive Growth Of Green Bonds

Other facilities for attracting private investment to climate change mitigation projects are faring better. Early progress from multilateral and national development banks in developing a global market for Green Bonds has led to explosive growth in the past three years. New issuance topped $41.8 billion in 2015, and is expected to rise to $100 billion in 2016, according to the Climate Bonds Initiative. https://www.climatebonds.net/

Governments and public sector authorities at every level can help to deepen the liquidity of this market further by issuing their own green bonds. But they should also consider offering credit enhancements such as guarantees to improve the risk profiles of important projects. Tax incentives are another tool that could be used to attract long-term investors. http://www.climatebonds.net/files/files/10%20point%20policy%20guide.pdf

What the world’s climate cannot afford is a drawn out debate over modalities. Global warming is a reality that cannot wait for consensus. We need to act now.

If you’d like to support P3 Planet’s mission to promote sustainable public infrastructure, please contact Henry at hthq@hotmail.com.

US Assails China’s Infrastructure Bank Plan Amid Muddled Policy At Home

by Henry Teitelbaum, Editor, P3Planet.com

In war, the way is to avoid what is strong, and strike at what is weak. Sun Tzu, The Art of War


US opposition to China’s plan for a new pan-Asian infrastructure bank might some day be a case study for explaining why US efforts to contain China’s reach for regional power and influence failed.

The US and China have been locked in conflict on a range of issues for years. On the trade side, long-standing disputes simmer over access to markets, competition for resources, tariffs and the like. There is also conflict bordering on convert war over copyright theft and cyber-espionage, and in most instances the US is not winning. Continue reading US Assails China’s Infrastructure Bank Plan Amid Muddled Policy At Home