Emerging Financial Instruments and the

Role of the Multilateral Development Banks

Bambang Susantono Ph.D.

Vice-President,

Asian Development Bank

Financing

Asian

Infrastructure

2nd April 2018, Bandung, Indonesia

… So does Asia and the Pacific

Factors shaping the new normal

Economic progress Rapid urbanization

Climate change

Rising inequality

Demographic change Disruptive technologies

Asia grew rapidly in the past 5 decades…

Asia14%

European Union35%

North America29%

Latin America & Caribbean

7%

Middle East & North Africa

3%

Sub-Saharan Africa

2%

Rest of the world10%

1965

Asia29%

European Union24%

North America25%

Latin America & Caribbean

8%

Middle East & North Africa

4%

Sub-Saharan Africa

2% Rest of the world

8%

2015

Global GDP decomposition

Note: Asia includes developing Asia plus Japan.Source: ADB staff calculations from World Bank, World Development Indicators online database, accessed on 22 May 2017.

Development progress in Asia

5

0%

10%

20%

30%

40%

50%

60%

70%

1700 1820 1870 1913 1950 1970 1980 1995 2010 2020 2030 2040 2050

Asian Share of World GDP• Asia became one of three cores of

global economy

• The region will continue its growth momentum

• 5.7% growth in 2017 and 18

• Positive growth in most of the sub-regions

• 60% of global growth

The number of MICs—mostly UMICs—is rising, while the number of LICs is dwindling.

2005 to 2010 – L to LM: Bhutan, India, Lao PDR, Mongolia, Pakistan, Papua New Guinea, Solomon Islands, Timor-Leste, Uzbekistan, and Viet Nam. LM to UM: Azerbaijan, PRC, Kazakhstan, Maldives, and Thailand.2010 to 2015 – L to LM: Bangladesh, Kyrgyz Republic, Cambodia, Myanmar, and Tajikistan. LM to UM: Fiji, Georgia, Marshall Islands, and Turkmenistan.

17 16 13 10 9 7 7 7 6 3 2

18 1820 23 23

23 22 19 2022 24

2 3 4 4 5 7 8 11 11 12 11

5 5 5 5 5 5 5 5 5 5 5

0

5

10

15

20

25

30

35

40

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Low Income(≤ $1,025)

Lower-Middle Income($1,026-$4,035)

Upper-Middle Income($4,036 - $12,475)

High Income(> $12,475)

Source: Based on World Bank Income ClassificationNote: Excludes Cook Islands, Nauru, and Tuvalu. Numbers in parenthesis indicate the range of GNI per capita to be qualified for each income group in 2015.

Poverty in Asia is declining…

0

10

20

30

40

50

60

70

Headcount ratio (% of population)

Developing AsiaSub-Saharan AfricaLatin America and Caribbean

Source: PovcalNet

…but inequality has risen

3635

32 32 31 30 30 30 29 2927

25

31

20

25

30

35

40

Consumption expenditure share of the richest 10%, selected developing Asian economies

1990 or earliest 2014 or latest

Source: ADB staff estimates based on World Bank PovCal data.

Asia-wide Gini increased to 45% in the 2010s compared to 40% in the 1990s, contrasting with “growth with equity” in the 1960s and 1970s

Source: ADB staff estimates based on World Bank PovCal data.

32

40 42 40

35 39 38

46

39

31

38 37 38

25 30 35 40 45 50

Gini coefficient of per capita household consumption, selected Asian economies

1990 or earliest 2014 or latest

Asia’s urbanization is unprecedented…

0

200

400

600

800

1000

1200

1400

1980-2015 2015-2050 (projected)

Increase in urban population in Asia (millions)

Bangladesh Pakistan

Indonesia India

China, People's Rep. of Rest of Asia

Source: United Nations, Department of Economic and Social Affairs, Population Division (2014). World Urbanization Prospects: The 2014 Revision, CD-ROM Edition.

1.24 billion

1.06 billion

Asia’s urbanization is very fast

Source: ADB estimates using Bairoch (2008) and UN (2012).

1750 1775 1800 1825 1850 1875 1900 1925 1950 1975 2000 2025 2050

China, People's Rep. of

Bhutan

Lao PDR

Indonesia

Viet Nam

Asia and the Pacific

Europe

North America

Latin America and Caribbean

Number of Years from about 10% to 50% of Urbanization Rate

10% 49%210 years

9% 51%105 years

12% 51%150 years

11% 51%95 years

12% 50%90 years

12% 54%65 years

10% 52%60 years

10% 51%55 years

11% 51%61 years

…bringing benefits but posing challenges too

12

120,000

migrate

daily

Cities = 80%

energy

consumption

4.5 million

annual death due

to air pollution

Municipal waste

= 75% collected

but < 60%

treated

<90% people

have access to

improved water

supply

Vulnerable to

climate change

hazards

Half of the

world’s slum

dwellers live in

Asia

Cities

effectively treat

a small % of

wastewater

Elderly are

increasing and

also those with

disabilities

Cities = 75%

of carbon

emissions

Megacities, 2025

ASIA: 21/37

Note: The circles indicate population sizes ranging from (10 million) to (39 million). The circles do not reflect the physical extents of the cities and any overlap between them merely reflects their relative population sizes and not any official acceptance or endorsement of any geographical sovereignty. Source: UN (2012).

More megacities are emerging .. ADB is responding

The future is in…secondary citiesCity population size

Number of cities in Asia and the Pacific

2010 2025 2050

Less than 500,000 3,692 5,236 6,878

500,000 to 1 million 203 225 282

1 million to 5 million 179 246 303

5 million to 10 million 17 22 30

Over 10 million 8 13 23

Source: United Nations Department of Economic and Social Affairs

Recognizing Climate Change

Top Global RisksClimate changeLarge scale involuntary

migrationWater crisisNatural catastrophesExtreme weather eventsBiodiversity and ecosystem

collapseEnergy price shockInterstate conflictFiscal crisisWeapons of mass destruction

15Source: WEF World Risk Report 2016

Cumulative human carbon dioxide emissions [Mt C]

0.010.001 0.1 1 10010 1000Data Source: CDIAC 2016 (Andres, R.J., T.A. Boden, and G. Marland. 2016) Animation: PIK 2016Bathymetry: NASA, Earth Observatory

The C-Story of Human Civilization

Adapted from: Professor Hans Joachim Schellnhuber, Director, Potsdam Institute for Climate Impact Research;Professor for Theoretical Physics, University of Potsdam;Senior Research

Fellow, Stockholm Resilience Centre

Asia has a large stake in the global climate change agenda

4.4

3.9

1.2

1.0

0.6

0.2

-1.1

-2 -1 0 1 2 3 4 5

Developing Asia

Middle East and North Africa

Sub-Saharan Africa

Latin America and the Caribbean

Japan, Australia and New Zealand

North America

Europe

Average annual growth rate of greenhouse gas emissions, 1990–2012

Source: Asian Development Outlook 2016 Update

Asia is critical to achieving the 2°C goal

Rest of the world = 75%

1990–1999

Rest of the world = 60%

2012

Developing Asia = 25%

Developing Asia = 40%

Developing Asia’s share in global greenhouse gas emissions

Source: Asian Development Outlook 2016 Update

Demographic dividend was key to Asian success…

0

1

2

3

4

5

6

Bill

ion

s

Estimated and projected population by major area, medium variant, 1950–2100

Asia Africa Latin America & Caribbean Europe Northern America Oceania

Asia

Africa

Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision, DVD Edition.

CHANGING DEMOGRAPHIC STRUCTURE

0

5

10

15

20

25

30

35

Shar

e o

f P

op

ula

tio

n (

in %

)

2010 2025

Richer countries such as Japan, Singapore, and South Korea already have more than 10 percent of their population 65 years or over. Among developing middle-income countries, PRC, Sri Lanka, Thailand, Viet Nam are projected to have 10% or more of their population 65 years or older by 2025.

Young populations gave the region a growth dividend in the past…

0

0.4

0.8

1.2

Developing Asia People's Rep. ofChina

Rep. of Korea India Philippines

% pointsContribution to annual growth rate per capita GDP, 1981–2010

Source: Asian Development Outlook 2011 Update.

…but some countries now facea demographic tax

-0.8

-0.4

0.0

0.4

0.8

Developing Asia People's Rep. ofChina

Rep. of Korea India Philippines

% pointsContribution to annual growth rate per capita GDP, 2011–2030

Source: Asian Development Outlook 2011 Update.

Family support is declining in Asia, but public transfers are underdeveloped

-50 -30 -10 10 30 50 70 90 110 130 150

UruguayMexico

Costa RicaChileBrazil

USASwedenSlovenia

SpainHungary

GermanyAustria

JapanThailand

Taipei,ChinaPhilippines

Korea, Rep. ofIndonesia

IndiaChina, People's Rep. of

%

Support system for people ages 65 and above, selected economies

Private transfers Public transfers Savings

Asia

Europe and USA

Latin America

Source: Asian Development Outlook 2011 Update.

…but developing Asia is aging yet diverse

China, People's Rep. of

India

Philippines

Korea, RepSingapore

Thailand

0

10

20

30

40

50

60

70

2010 2015 2020 2025 2030 2035 2040 2045 2050

Old-age dependency ratio

Source: United Nations, Department of Economic and Social Affairs, Population Division (2015). World Population Prospects: The 2015 Revision, DVD Edition.

Asia is fastest-growing market for industrial robots…

0

50,000

100,000

150,000

200,000

250,000

300,000

2014 2015 2016 2017 2018 2019

Un

its

Annual supply of industrial robots2014–2019

Asia/Australia Europe America

Note: Data for 2016–2019 are forecasts. Source: World Robotics 2016.

…with projected effects on employmentNon-farm jobs potentially impacted by technology in ASEAN, 20301 (million)

1 Comprises Indonesia, Malaysia, the Philippines, Singapore, Thailand, and Viet Nam. 2 Non-farm labor force is calculated as total labor force less employment in agriculture. 3 Knowledge-based jobs in functions such as clerical and administration, legal, finance, engineering, teaching, and general management (e.g., algorithms to support teachers with adaptive learning, for more automated credit decisions, and for fraud and error detection in transfer payments). Note: Numbers may not sum due to rounding. Source: McKinsey Global Institute analysis.

The Infrastructure Gap

Challenge:The Asian Infrastructure Gap

2016 2030

Estimated

Investment

Needs$26 trillion (Climate-adjusted)

Power

Transportation

Telecommunications

Water and sanitation

$14.7 trillion

$8.4 trillion

$2.3 trillion

$0.8 trillion

Central Asia

East Asia

South Asia

Southeast Asia

The Pacific

$0.5 trillion

$6 trillion

$6 trillion

$3 trillion

$0.04 trillion

$1.7 trillionCurrent

investment

per year

$ 881 billion

Sector

Region

Investment

needs per year

Source: ADB

The Asian Infrastructure GapEstimated Funding Sources

Public investment

Investment needs per year*

Private investment

Current CurrentFuture Future

$133bn $63bn $121bn $187bn

Private funding will need to be

300% of current levels

$504bn

*excluding People’s Republic of China, in 2015 prices

Source: ADB

Private Sector Engagement in Asian Infrastructure:

$150

$150

$50

$0

$200 300

250

200

150

100

50

02012 2013 2014 2015 2016

(Billion)

Number of projects (H1)

Price sector investment in emerging markets and developing economies

Private sector investment and project number 2012 – 2016

private sector

investment is

declining?

WHY

1. Inequitable deal

structures by

governments.

2. Lack of a supportive

legal and regulatory

framework.

3. The lack of consistency

and prioritization of

private sector projects.

4. The uncertainty and

lack of transparency

associated with bid

processes.

Source: World Bank Group

The Role of Governments

The Role of Government Authorities

Project pipeline is key

Financing Modalities• Priority project with private sector involvement

• Appropriate feasibility studies.

• Capacity for management and procurement.

• Clear and measurable infrastructure service

delivery objectives

• The commercial requirements of incoming

financiers in bid documents at the outset

The Current Financing Landscape

The Financing Landscape Has Changed

Project

finance

International

commercial

banks

Traditional

source

Global Financial Crisis

Increased capital costs and

regulatory oversight

Significant reduction of

active institutions

Retreat to “core”

markets and

customer base

Limited replacement by

regional lenders

Developing economies particularly affected

Departed institutions

unlikely to return in

near term

Asian infrastructure development requires

alternative funding sources to banks

Private sector

finance thrives in a

robust and active environment

The development of

innovative and diverse financing solutions

Directly influenced by the

delivery of “bankable” projects by governments

The Financing Landscape Has Changed (cont’d)

Key Financing Modalities

Key Financing Modalities

Green Bonds Blended Finance Catalyzing

Green Finance

Credit Guarantees

Green Bonds

2017

$31.5 billion

U.S.

$10.6bn (34%)

Sweden

$2.2bn (7%)

Denmark

$2.0bn (6%)France

$1.1bn (3%)

Others

Developed

$7.8bn (25%)

Mexico

$4.0bn (13%)

India

$2.0bn (6%)

Others

Emerging

$0.6bn (2%)

PRC, Hong

Kong, China

$1.2bn (4%)

2007 Initial issue

Amounting to

$155.5 billion 2017

2020Expected to issue

amounting to

$1 trillionSource: Climate Bond Initiative

Green Bonds

Source: Climate Bond Initiative

Blended Finance

• Combining concessional finance from donors

or third parties alongside DFI’s normal own

account financing activities and/or

commercial finance from other investors to

develop private sector markets, address the

Sustainable Development Goals and mobilize

private resources.

• Blended finance targets the provision of

important benefits to society beyond those

which are captured by the private sector,

i.e. “additionality”.

• Blended Finance can confer “Bankability”.

ADB

Donor

Contributor

+

Blended

Finance

Catalyzing Green Finance

Innovative

financing

Resource

leveraging

Knowledge

collaboration

Green Finance

Catalyzing Facility

(GFCF)

Credit Guarantees

Project borrower

Loan

Commercial bankPolitical Risk

Guarantee

ADB

Tariff/availability

paymentHost government Government Agency/

State owned enterpriseSupport

The Potential for Institutional Investors

Institutional Investors

Investment Companies

$29 trillion

Source: McKinsey Global Institute`

Insurance Companies

and Private Pensions

$26 trillion

Public Pensions and

Superannuation Plans

$11 trillion

Sovereign Wealth Funds

$6 trillion

Infrastructure and

Private Equity Funds

$3 trillion

Endowments and

Foundations

$1 trillion

invested in

infrastructure

1%

$7.8 trillion under management

Pension

Funds

Source: OECD

Institutional Investors cont.

• Institutional Investor mobilization has been achieved e.g.

Canadian, Australian and UK Pension Funds.

• Confirms the value of a stable regulatory environment.

• Focus has been on Mature / Privatized Assets.

• Issues of liquidity, complexity and credit rating will remain.

• MDB (and other) credit enhancement products mitigate this

issue.

• Core issue remains the absence of a “bankable” project

pipeline.

The Role of Multilateral Development Banks

Role of Multilateral Development Banks:

Assisting

• legal and regulatory

frameworks

• project identification and

evaluation

• development of local

currency capital markets

Financing Pioneering

• alternative financing

techniques e.g. Green

Bonds, Sustainability

Bonds.

Convening

• individual or portfolio

project

developments

• Credit enhancement

• exchange of

information between

the private and

public sectors to

stimulate sustainable

infrastructure.

ADB – Asia’s First Green Project Bond

• New asset class: 1st local-currency project bond in Philippines.

• 1st project bond in Southeast Asia (ex-Malaysia) since 1998

Asian Financial Crisis

• 1st certified "Climate Bond" in emerging markets

• Addresses Single Borrower Limits issues for a major developer

Project Bond with

ADB Partial Credit

Guarantee (PRG)

• $226m-equiv. project

peso bonds

• ADB PRG of 75% of P+I

($180m-equiv)

• ADB PRG backstopped

by CGIF's risk

participation on a 1st-loss

basis ($140m-equiv.)

• ADB net exposure is

$40m-equiv. on 2"-loss

basis, amortized <5

years

Financing Package

Project Loan • $38m-equiv. ADB project loan,

5 years amort.

Philippines: Tiwi: MakBan Geothermal

Benefits

Tiwi 289 MW

7th largest geothermal worldwide

MakBan 458 MW

4th largest geothermal worldwide

ADB – Cloud Based Banking

ChallengeSolution

Only 3 out of 10

Filipinos have a

bank account

41% of the unbanked

are in Mindanao

Lack of efficient technology

infrastructure in rural and remote

areas and archipelagos

Higher costs of reaching and servicing

clients for rural banks in high-risk

frontier areas

Financial inclusion Digital finance

Reachthe underserved and

unbanked people

Offernew opportunities to save,

make a payment, get a small

business loan, send a

remittance, or buy insurance.

Mitigatevarious IT, strategic,

and operational risks

Provide personalized and

efficient services

Reduce major IT capital

expenses

ADB – Rantau Dedap Geothermal Project

Source: Mott MacDonald

Government of Indonesia

Public

Service Obligation

ADB Loan,

CTF Loan

Pt. Supreme Energy Rantau Dedap

Advisory Services Contract

Engineering, Procurement,

Construction ContractDrilling

Contract

Business

Viability

Guarantee

Letter

Power

Purchase

Agreement

Commercial Banks

“Senior” Lenders

JBIC Loan Commercial

Bank Loan

Shareholders

Equity

PT Rekayasa Industri

Conclusions

Conclusions

• The Asian infrastructure gap will require a full mobilization of available funding sources.

• Private sector funding will become an increasingly important source of infrastructure funding.

• Project delivery on a “bankable” basis is a government responsibility.

• Privatization and rehabilitation offer opportunities for the recycling of public finance.

• Sustainable development goals should be prioritized by governments.

Conclusions cont.

• Unlocking institutional investment funding is a priority task.

• Multilateral development banks can be critical factor in

addressing the financing of the global infrastructure gap.

• The key issue remains. Host governments should create the

environment for viable, scalable infrastructure projects which

will attract widespread private sector investment and foster

financial innovation.

Thank You