Magazine article Global Finance

The Big-Project Funding Gap

Magazine article Global Finance

The Big-Project Funding Gap

Article excerpt

In January, with much fanfare (and $100 billion in capital), the Asian Infrastructure Investment Bank (AIIB) commenced operations under a mandate to help finance Asia's vast need for infrastructure. The AIIB has been portrayed in some quarters as competition to the region's long-standing multilateral development institution, the Asian Development Bank (ADB), which is dominated by the US and Japan. However, rivalry seems irrelevant in the context of $8 trillion worth of projects needing funding; both the AIIB and ADB together are capable of funding only a small portion. With increasing regional integration, cross-border financing is fast rising up the investment agenda-and for good reason. Quality of infrastructure is linked to productivity, and without reforms Asia's lagging infrastructure threatens to derail the region's increasingly fragile growth.

A McKinsey report noted that traditionally infrastructure projects in Asia have been funded by governments or domestic banks, with foreign investors excluded. Regional banks, too, have historically played a significant role In infrastructure projects, but just like multilateral banks, they can only go so far.

Analysts say that gamering the support of the private sector is vital, but so-called public-private partnership commitments remain elusive. According to the ADB, private-sector funding accounts for just 20% of infrastructure financing. Part of the problem is the lack of depth in Asia's debt capital markets, as well as diverse regulatory structures that put off fixed-income investors. …

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