Infrastructure Financing-High

Infrastructure Financing for
Sustainable Development
in Asia and the Pacific
ii Infrastructure Financing for Sustainable Development in Asia and the Pacific
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the views of the United Nations Economic and Social Commission for Asia and the Pacific
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United Nations publication

Sales No. E.19.II.F.11
Copyright © United Nations 2019
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Printed in Bangkok
ISBN: 978-92-1-120792-7
e-ISBN: 978-92-1-004274-1
ISSN: 2522-798x
ISSN (online): 2522-7998
ST/ESCAP/2866
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This publication should be cited as: United Nations, Economic and Social Commission for
Asia and the Pacific (2019). Infrastructure financing for sustainable development in Asia and the
Pacific. Sales No. E.19.II.F.11. Bangkok.
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Infrastructure Financing for Sustainable Development in Asia and the Pacific iii
Foreword
The 2030 Agenda for Sustainable Development

sets out 17 goals that span the economic, social
and environmental pillars of development. Four
years have passed since the agenda’s adoption,
and the Asia-Pacific region has thus far
witnessed slow progress in achieving many of
these goals. At the current pace of progress, the
region is likely to miss every single goal by the
2030 deadline. There is therefore a pressing
need to catalyse collective action by
governments, institutions and individuals alike,
in a concerted bid to accelerate progress
towards the Sustainable Development Goals
(SDGs).
A critical component that connects all the SDGs is the development of

sustainable infrastructure. Although the importance of infrastructure is
specified explicitly in Goal 9, infrastructure development has a direct or
indirect impact in attaining all seventeen of the SDGs. But investing in
infrastructure is perceived as being financially burdensome, complex and
risky, prone to the misallocation of resources, corruption, difficult to make
economically viable, and generally hard to ‘get right’. This in turn can make
it particularly difficult to raise the financing needed to enact high quality
infrastructure projects. There is therefore a need to re-evaluate some aspects
of infrastructure finance and investment, as a key part of any attempt to
accelerate progress towards a more sustainable Asia and the Pacific.
This book advocates a shift in perspective towards infrastructure

financing. In particular, a more informed, strategic and efficient
mobilisation of resources is recommended, focusing not only on leveraging
additional funding and participation from the private sector, but also on
how policy-makers and government agencies go about the process of
infrastructure planning and implementation.
The chapters that follow suggest that a more holistic approach is needed,
one that: i) strengthens efforts in regional collaboration, especially for those
countries most in need of support; ii) focuses on the commercial viability of
infrastructure projects and the wider enabling environment for large-scale
investment projects; iii) recognises the need for a more engaged private
sector; beyond the conventional role of contractor or sub-contractor;
iv) improves the institutional capacity of relevant states agencies and
empowers them to be more effective in their critical inputs; v) looks for
innovative new products and modalities that can stimulate prospective
iv Infrastructure Financing for Sustainable Development in Asia and the Pacific
investors; and vi) mainstreams issues of sustainability into all infrastructure

investment activity, whether related to environment, biodiversity, or
climate change, or other factors. Just as infrastructure development is
a thread that runs through the SDGs, SDGs also serve as a compass in the
pursuit of sustainable infrastructure development.
As the leading inter-governmental organization in the region, the United

Nations Economic and Social Commission for Asia and the Pacific (ESCAP)
enjoys a privileged position in promoting sustainable infrastructure for two
reasons. Firstly, as the United Nations secretariat arm responsible for
implementing and monitoring the 2030 Agenda in Asia and the Pacific,
ESCAP has developed expertise in interventions that seek to address the
complexities and challenges of sustainable development. Secondly, by
providing regional platforms for dialogue, ESCAP has helped drive
cooperation and shared learning among countries at various stages of
development. Lessons learned, both good and bad, need to be analysed,
disseminated and harnessed to inform future planning. The Infrastructure
Financing and PPP Network of Asia and the Pacific, launched in 2018, is a good
illustration of how ESCAP is seeking to pool insights on infrastructure
financing issues in Asia and the Pacific, mobilise valuable financial and
technical inputs from the private sector, and stimulate more effective
regional cooperation. Infrastructure development is increasingly viewed as
something that cannot be enacted by countries independent of each other,
but requires bilateral, sub-regional and regional perspectives, planning and
intervention.
This year, the United Nations General Assembly will convene its first High-
level Dialogue on Financing for Development since the adoption of the
Addis Ababa Action Agenda in 2015. This book seeks to provide timely
contribution to that dialogue and hopefully places sustainable
infrastructure at the core of the financing for development discussions.
I therefore encourage readers to consider the key messages conveyed in this
book, as we seek to improve the way Asia and the Pacific goes about
financing sustainable infrastructure, working together to achieve the SDGs.
Hongjoo Hahm
Deputy Executive Secretary
ESCAP
Infrastructure Financing for Sustainable Development in Asia and the Pacific v
Acknowledgments
This publication was prepared under the overall direction of Hongjoo

Hahm, Deputy Executive Secretary of ESCAP, and coordinated by Hamza
Ali Malik, Director, Macroeconomic Policy and Financing for Development
Division. The core research team, led by Tientip Subhanij, Chief of
Financing for Development, included Alberto Isgut, Masato Abe, Vatcharin
Sirimaneetham, Ulukbek Usubaliev, Rui Almeida and Jyoti Bisbey of the
Macroeconomic Policy and Financing for Development Division and
a group of external experts, namely Naoyuki Yoshino, Fauziah Zen, Lili Li,
Qingyang Gu, Shubhomoy Ray, Mathias Lund Larsen, Seyed Hossein
Hosseini Nourzad, and Valentine Joseph Gandhi Bavanirajan. Nick
Freeman also provided many substantive inputs while editing and revising
the manuscripts of the book. Daniel Lin, Zenathan Adnin Hasannudin,
Yusuke Tateno, Zheng Jian, George Abonyi, Shiqiang Zou, Mathieu
Verougstraete, Roger Kronenberg, Atsuko Okuda, Osama Rajikhan,
Bekhzod Rakhmatov, Francisco L. Rivera-Batiz and Hirohito Toda provided
useful conceptual and empirical inputs to the book. Patchara
Arunsuwannakorn and Sopitsuda Chantawong assisted with the editing
and formatting of the publication, in addition to providing logistical
support. Sharon Amir provided editorial services to chapter 3 of the book.
The team also wishes to acknowledge the following interns for their
substantive contributions to the preparation of the publication: Yujie Chen,
Ching Yuan Chu, Zeinab Elbeltagy, Farhanullah Faizi, Beini Liu, Yuchong
Nam, Caroline Nevouet, Charlotte Nudelmann, Romain Pradier, Yeshay
Thaye, and Yifan Zhang (in alphabetical order). A number of colleagues and
external experts also made valuable comments at the Expert Group
Meeting on Infrastructure Financing in Asia and the Pacific for Sustainable
Development, which was held in Bangkok, Thailand on 7 and 8 March
2019. They included Witada Aukoonwattaka, Edward Chang, Jenny Jing
Chao, Azhar Jaimurzina Ducrest, Neelesh Neel Vikash Gounder, Kohji
Iwakami, Aida N. Karazhanova, Sooyeob Kim, Raymond Mun Lam Lo,
Chanin Manopiniwes, Paul Martin, Channarith Meng, Mia Mikic, Mark
Merlyn Moseley, Martin Naegele, Siope Ofa, Marios Pournaris, Qing Xia,
Faran Rana, Eric Roeder, Man Yiu Samuel Tang, Edward Turvill, Dicky
Khaerul Wallad, Natasha Wehmer, GuangRui Xiao, William Yuen Ping Yu,
and Lana Zaman (in alphabetical order). The Government of China
generously provided financial support to the publication through the
“Developing a Public-Private Partnerships (PPP) and infrastructure
financing network in Asia and the Pacific” project.
Contents
Foreword ....................................................................................................... iii
Acknowledgments ...................................................................................... v
Explanatory notes ........................................................................................ xv
Abbreviations and acronyms .................................................................... xvii
INTRODUCTION
Infrastructure Financing Strategies for Sustainable
Development in Asia and the Pacific ..................................................... 1
References ......................................................................................... 9
CHAPTER 1
Infrastructure for the SDGs: Strategies, Governance and
Implementation .......................................................................................... 11
1. Introduction ............................................................................... 11
2. What kind of infrastructure is needed to achieve the
SDGs and how much will it cost? .......................................... 12
3. Governance and institutional challenges .............................. 16
4. Proposed institutional reform to improve the planning
and delivery of infrastructure for the SDGs ......................... 21
5. Improving efficiency in project implementation through
a whole life cycle approach ..................................................... 26
6. Improving public sector efficiency to encourage private
sector participation in infrastructure ..................................... 29
viii Infrastructure Financing for Sustainable Development in Asia and the Pacific
7. Concluding remarks ................................................................. 32

References ......................................................................................... 33
CHAPTER 2
Infrastructure Financing through the Capital Markets ..................... 37
1. Introduction ............................................................................... 37
2. Infrastructure bond financing: where does Asia-Pacific
stand? .......................................................................................... 40
2.1. The use of bonds for infrastructure financing ............ 40
2.2. Regional cooperation on bond market development 42
3. Why bond financing is not more widely used for
infrastructure ............................................................................. 43
3.1. Factors relating to bond issuers .................................... 44
3.2. Factors relating to bond market structure,
intermediaries and architecture .................................... 46
4. Leveraging capital markets for infrastructure financing:
selected policy options ............................................................. 54
4.1. Ensuring an enabling economic environment ............ 54
4.2. Further strengthening bond market structure,
intermediaries and architecture .................................... 55
5. Towards capital markets for sustainable development ...... 61
5.1. A prudent approach to capital market development 62
5.2. Bonds for sustainable development: the case of
green bonds ...................................................................... 63
5.3. Responsible investment in bond markets ................... 68
5.4. Sustainable securities markets ...................................... 70
References ......................................................................................... 75
Annex 2.1. The use of green bonds for infrastructure
financing in Asia and the Pacific ............................ 79
CHAPTER 3
Enhancing Private Infrastructure Financing through Externality
Effects ............................................................................................................ 85
1. Introduction ............................................................................... 85
2. Externality effects created by infrastructure investment ... 87
Infrastructure Financing for Sustainable Development in Asia and the Pacific ix
3. Capturing tax revenues to increase the rate of return for

private financing ....................................................................... 93
4. Other issues relating to externality effects in
infrastructure financing ........................................................... 98
5. Policy implications and conclusion ....................................... 102
References ......................................................................................... 106
Annex 3.1. An overview of private sector infrastructure
financing ..................................................................... 110
3.1.1. Principal risks associated with private sector
investment in infrastructure ................................... 110
3.1.2. Public policy and private sector investment in
infrastructure ............................................................. 112
3.1.3. Private sector financing schemes for
infrastructure ............................................................. 118
3.1.4. Private sector actors ................................................. 120
3.1.5. Private sector revenue streams from
infrastructure projects .............................................. 121
Annex 3.2. Macro estimations of externality effects ............... 123
CHAPTER 4
Financing Sustainable Cross-Border Infrastructure ........................... 125
1. Introduction ............................................................................... 125

2. Risks and challenges of financing cross-border
infrastructure ............................................................................. 127
3. Engaging with stakeholders ................................................... 133
3.1. Regional and sub-regional institutions ........................ 133
3.2. Multilateral Development Banks .................................. 137
3.3. Private sector firms and foreign investors .................. 138
3.4. Governments and state-owned enterprises ................ 139
3.5. Local communities and civil society organizations ... 139
4. Aiming for sustainable cross-border infrastructure
development with the Belt and Road Initiative ................... 140
5. Three key policy considerations and conclusions ............... 145
5.1. Efficient risk allocation ................................................... 146
5.2. Promoting private sector participation ........................ 150
5.3. Enhancing regional and sub-regional cooperation .... 153
References ......................................................................................... 155
x Infrastructure Financing for Sustainable Development in Asia and the Pacific
CHAPTER 5
Infrastructure Financing Challenges of Landlocked Developing

Countries and Small Island Developing States in Asia and
the Pacific ..................................................................................................... 159
1. Introduction ............................................................................... 159

2. Infrastructure development and financing challenges ....... 161
2.1. Asia’s LLDCs .................................................................... 162
2.2. Asia and the Pacific’s SIDS ............................................ 175
3. Opportunities and policy recommendations ....................... 185
3.1. LLDCs in Asia .................................................................. 186
3.2. SIDS in Asia and the Pacific ........................................... 190
References ......................................................................................... 198
CONCLUSIONS ......................................................................................... 203
Figures
Figure 1.1 Example of multi-tier principal-agent relationships in

an urban infrastructure project .......................................... 19
Figure 1.2 Streamlining government entities for planning and
implementing sustainable infrastructure ......................... 25
Figure 1.3 A life cycle approach to infrastructure development ..... 26
Figure 1.4 Private investment in infrastructure in Asia and
the Pacific, 2000–2018 .......................................................... 30
Figure 2.1 Regional differences in sources of funding for
infrastructure finance, 2018 ................................................ 41
Figure 2.2 The size of infrastructure and project finances in
Asia-Pacific, 2015–2018 ....................................................... 41
Figure 2.3 The size of bond markets, bank credits and stock
markets in select Asia-Pacific countries ........................... 42
Figure 2.4 Investment needs on the SDGs and bond issuance
status ...................................................................................... 44
Figure 2.5 Sovereign credit risk ratings across developing
economies in Asia and the Pacific ..................................... 45
Figure 2.6 Capital market development in Asia and the Pacific:
IMF financial market development index, 2016 ............. 47
Figure 2.7 Capital market development in Asia and the Pacific:
McKinsey Asian capital markets development index .... 49
Infrastructure Financing for Sustainable Development in Asia and the Pacific xi
Figure 2.8 Holders of government bonds in selected Asia-Pacific

economies .............................................................................. 50
Figure 2.9 Total worth of Islamic financial service industry, 2017 .. 52
Figure 2.10 Government and corporate bonds turnover ratios in
selected Asia-Pacific economies ......................................... 52
Figure 2.11 Hierarchy and sequencing of domestic financial
market development ............................................................ 56
Figure 2.12 Cumulative green bond issuance in world’s regions
since 2007 ............................................................................... 64
Figure 2.13 Share of surveyed investors in Asia and the Pacific
who believe ESG factors affect bond yields ..................... 69
Figure 2.14 Share of securities markets that engage in
sustainability activities ........................................................ 71
Figure 2.15 Value proposition of an infrastructure take-out facility 72
Figure 2.16 Issued green bonds by line of business in Asia and
the Pacific, 2013–2018 .......................................................... 80
Figure 2.17 Origin country of green bond issuers in Asia and
the Pacific, 2018-2019 ........................................................... 82
Figure 3.1 Externality effect of a highway .......................................... 88
Figure 3.2 User charges, externality tax revenues and the
projected rate of return ........................................................ 95
Figure 3.3 Linking externality tax revenues with public subsidies
to increase the rate of return ............................................... 96
Figure 3.4 Injection of fraction of externality tax revenues as
subsidies ................................................................................ 97
Figure 3.5 Concessional areas for water supply in the Greater
Manila .................................................................................... 115
Figure 3.6 Public-private partnerships in sub-regions of Asia
and the Pacific, 1997–2016 .................................................. 117
Figure 4.1 Nam Thuen 2’s contractual and financial structure ....... 151
Figure 4.2 Tibar Bay Port’s contractual and financial structure ...... 152
Figure 4.3 CASA-1000’s contractual and financial structure ........... 153
Figure 5.1 Infrastructure financing needs in Asian LLDCs,
2018–2030 ............................................................................... 162
Figure 5.2 Asian LLDCs access to physical infrastructure index,
2015 ......................................................................................... 163
Figure 5.3 Doing business rankings for Asian LLDCs, 2019 ........... 170
Figure 5.4 Six Central Asia Regional Economic Cooperation
(CAREC) corridors ............................................................... 174
xii Infrastructure Financing for Sustainable Development in Asia and the Pacific
Figure 5.5 Infrastructure financing needs in Asia-Pacific SIDS,

2018–2030 ............................................................................... 176
Figure 5.6 Fiji urban WSS and wastewater management
investment programme in the Rewa river ....................... 192
Tables
Table 1.1 SDG targets and the role of infrastructure ....................... 14

Table 1.2 Cost of additional investment required for achieving
the SDGs in Asia and the Pacific ....................................... 17
Table 3.1 Economic effect of infrastructure investment: the case
of Japan .................................................................................. 89
Table 3.2 Increase of GDP by Uzbekistan railways using
externality tax revenues to support private sector
investors ................................................................................. 91
Table 3.3 Changes in tax revenues in three cities along the Star
Highway in Manila .............................................................. 92
Table 3.4 A payoff matrix for a private infrastructure operator
and a private infrastructure investor ................................ 100
Table 3.5 Typology of risks associated with infrastructure
investment ............................................................................. 112
Table 3.6 Private financing, infrastructure assets and nature of
project ..................................................................................... 118
Table 3.7 Typology of private-sector actors ...................................... 120
Table 4.1 ASEAN’s priority infrastructure projects to enhance
cross-border connectivity .................................................... 136
Table 4.2 Key risk allocations of the NT2 project in Lao PDR ....... 147
Table 5.1 Fiscal revenues, grants and expenditures in Asia’s
LLDCs, 2017 .......................................................................... 164
Table 5.2 Fiscal and current account balances to GDP in Asian
LLDCs, 2017 .......................................................................... 165
Table 5.3 Imports and exports through dry ports on the
Nepal-India border, 2017-2018 ........................................... 166
Table 5.4 SWFs in Asia’s LLDCs, 2018 ............................................... 168
Table 5.5 Greenfield FDI in infrastructure in Asian LLDCs,
2011–2015 ............................................................................... 169
Table 5.6 PPP projects in Asian LLDCs, 1990–2019 ......................... 171
Table 5.7 Bilateral and multilateral climate funds used by
Kyrgyzstan ............................................................................ 173
Infrastructure Financing for Sustainable Development in Asia and the Pacific xiii
Table 5.8 Selected key economic indicators of SIDS, 2017 ............. 177
Table 5.9 Selected public finance indicators in Asia-Pacific
SIDS ........................................................................................ 178
Table 5.10 An overview of the Maldives, 2017 ................................... 179
Table 5.11 Top five development partners to, and recipients of,
PRIF, 2009–2016 .................................................................... 181
Table 5.12 Budget allocation for infrastructure in Fiji, 2016-2017
to 2018-2019 ........................................................................... 181
Table 5.13 Comparison of PIF and OECS, 2018 ................................. 184
Boxes
Box 1.1 The government’s multi-faceted role in infrastructure

projects ................................................................................... 21
Box 1.2 Key attributes for infrastructure planning institutions 23
Box 2.1 Examples of infrastructure project bonds in Asia and
the Pacific ............................................................................... 57
Box 2.2 Examples of sovereign green bonds issued in Asia and
the Pacific ............................................................................... 65
Box 2.3 Infrastructure take-out facility: an innovative
infrastructure financing programme ................................ 72
Box 3.1 Viability gap funding ........................................................... 98
Box 3.2 Concession for inclusive water supply in Manila .......... 115
Box 3.3 ‘Land capture’ versus ‘land value capture’ ..................... 122
Box 4.1 Financing cross-border infrastructure through
sub-regional cooperation .................................................... 135
Box 4.2 The Infrastructure Financing and PPP Network of Asia
and the Pacific ....................................................................... 137
Box 4.3 Northern Economic Corridor in the GMS: the role of
MDBs is more than direct finance ..................................... 138
Box 4.4 Environmental and resettlement issues on the
Phnom Penh to Ho Chi Minh City highway project ...... 139
Box 4.5 Using hedging instruments to mitigate ‘forex risk’ ....... 148
Box 5.1 Multilateral and bilateral financing for the cross-border
dry ports of Nepal ................................................................ 166
Box 5.2 The National Fund of Kazakhstan: a potential funding
source for priority infrastructure projects ........................ 168
Box 5.3 Astana International Financial Centre .............................. 170
Box 5.4 Bhutan: pension fund investment in a power plant ....... 172
xiv Infrastructure Financing for Sustainable Development in Asia and the Pacific
Box 5.5 Kyrgyzstan: multilateral climate finance for

low-carbon infrastructure ................................................... 172
Box 5.6 Regional cooperation in financing cross-border
corridors in Central Asia ..................................................... 174
Box 5.7 Maldives’ financing strategies for tourism
infrastructure ........................................................................ 179
Box 5.8 Fund allocation and international cooperation for
infrastructure development in Fiji ..................................... 181
Box 5.9 Developing a Pacific capital market for infrastructure
financing: some lessons learned from the Caribbean .... 183
Infrastructure Financing for Sustainable Development in Asia and the Pacific xv
Explanatory notes
Groupings of countries and territories/areas referred to are listed

alphabetically as follows:
• ESCAP region: Afghanistan; American Samoa; Armenia;

Australia; Azerbaijan; Bangladesh; Bhutan; Brunei Darussalam;
Cambodia; China; Cook Islands; Democratic People’s Republic of
Korea; Fiji; French Polynesia; Georgia; Guam; Hong Kong, China;
India; Indonesia; Iran (Islamic Republic of); Japan; Kazakhstan;
Kiribati; Kyrgyzstan; Lao People’s Democratic Republic; Macao,
China; Malaysia; Maldives; Marshall Islands; Micronesia
(Federated States of); Mongolia; Myanmar; Nauru; Nepal; New
Caledonia; New Zealand; Niue; Northern Mariana Islands;
Pakistan; Palau; Papua New Guinea; Philippines; Republic of
Korea; Russian Federation; Samoa; Singapore; Solomon Islands;
Sri Lanka; Tajikistan; Thailand; Timor-Leste; Tonga; Turkey;
Turkmenistan; Tuvalu; Uzbekistan; Vanuatu; and Viet Nam.
• Least developed countries: Afghanistan, Bangladesh, Bhutan,
Cambodia, Kiribati, Lao People’s Democratic Republic,
Myanmar, Nepal, Solomon Islands, Timor-Leste, Tuvalu and
Vanuatu. Samoa was part of the least developed countries prior
to its graduation in 2014.
• Landlocked developing countries: Afghanistan, Armenia,
Azerbaijan, Bhutan, Kazakhstan, Kyrgyzstan, Lao People’s
Democratic Republic, Mongolia, Nepal, Tajikistan, Turkmenistan
and Uzbekistan.
• Small island developing States: Cook Islands, Fiji, Kiribati,
Maldives, Marshall Islands, Micronesia (Federated States of),
Nauru, Niue, Palau, Papua New Guinea, Samoa, Solomon
Islands, Timor-Leste, Tonga, Tuvalu and Vanuatu.
• East and North-East Asia: China; Democratic People’s Republic
of Korea; Hong Kong, China; Japan; Macao, China; Mongolia and
Republic of Korea.
• North and Central Asia: Armenia, Azerbaijan, Georgia,
Kazakhstan, Kyrgyzstan, Russian Federation, Tajikistan,
Turkmenistan and Uzbekistan.
• Pacific: American Samoa, Australia, Cook Islands, Fiji, French
Polynesia, Guam, Kiribati, Marshall Islands, Micronesia
(Federated States of), Nauru, New Caledonia, New Zealand,
Niue, Northern Mariana Islands, Palau, Papua New Guinea,
Samoa, Solomon Islands, Tonga, Tuvalu and Vanuatu.
xvi Infrastructure Financing for Sustainable Development in Asia and the Pacific
• South and South-West Asia: Afghanistan, Bangladesh, Bhutan,

India, Iran (Islamic Republic of), Maldives, Nepal, Pakistan,
Sri Lanka and Turkey.
• South-East Asia: Brunei Darussalam, Cambodia, Indonesia, Lao
People’s Democratic Republic, Malaysia, Myanmar, Philippines,
Singapore, Thailand, Timor-Leste and Viet Nam.
Bibliographical and other references have not been verified. The United
Nations bears no responsibility for the availability or functioning of URLs.
References to dollars ($) are to United States dollars, unless otherwise

stated. The term “billion” signifies a thousand million. The term “trillion”
signifies a million million.
In the tables, two dots (..) indicate that data are not available or are not
separately reported; a dash (–) indicates that the amount is nil or negligible;
and a blank indicates that the item is not applicable.
In dates, a hyphen (-) is used to signify the full period involved, including
the beginning and end years, and a stroke (/) indicates a crop year, fiscal
year or plan year.
Infrastructure Financing for Sustainable Development in Asia and the Pacific xvii
Abbreviations and acronyms
AAAA Addis Ababa Action Agenda

ABMI Asian Bond Market Initiative
ACIS Advanced Cargo Information System
ACMECS Ayeyawady-Chao Phraya-Mekong Economic Cooperation
Strategy
ACP African, Caribbean and Pacific Group of States
ADB Asian Development Bank
ADBI Asian Development Bank Institute
AF Adaptation Fund
AIFC Astana International Financial Centre
AIIB Asian Infrastructure Investment Bank
APEC Asia-Pacific Economic Cooperation
ARA Autonomous revenue authority
ASEAN Association of Southeast Asian Nations
ASEAN-GBS ASEAN Green Bond Standards
ASYCUDA Automated Systems for Customs Data
BBG Bay of Bengal Gateway
BOOT Build-own-operate-transfer
BOT Build-operate-transfer
BRI Belt and Road Initiative
CA Concession agreement
CAREC Central Asia Regional Economic Cooperation
CASA-1000 Central Asia-South Asia power project
CBI Climate Bonds Initiative
CECIF China-EU Co-investment Fund
CEO Chief executive officer
CFC Climate Finance Centre
CGIF Credit Guarantee and Investment Facility
CIF Climate Investment Fund
CLO Collateralized loan obligation
CoST Construction Sector Transparency
CP Cooperation Priority
CPEC China Pakistan Economic Corridor
xviii Infrastructure Financing for Sustainable Development in Asia and the Pacific
CPPPC China Public Private Partnerships Center

CSN Country with special needs
DBO Design-build-operate
DFI Development finance institution
DFID Department for International Development, United
Kingdom
EBRD European Bank for Reconstruction and Development
EDF Électricité de France
EDFI Électricité de France International
EDL Électricité du Laos
EEU Eurasian Economic Union
EGAT Electricity Generating Authority of Thailand
EGCO Electricity Generating Public Company of Thailand
EIB European Investment Bank
EIU Economist Intelligence Unit
ESCAP United Nations Economic and Social Commission for Asia
and the Pacific
ESG Environmental, social and governance
EU European Union
F$ Fijian dollar
FAO Food and Agriculture Organization
FDI Foreign direct investment
G20 Group of Twenty
GBP Green Bond Principles
GCF Green Climate Fund
GEF Global Environmental Facility
GFDRR Global Facility for Disaster Reduction and Recovery
GHG Greenhouse gas
GIF Global Infrastructure Facility
GIZ Deutsche Gesellschaft für Internationale Zusammenarbeit
GMS Greater Mekong Sub-region
GWh Gigawatt
HCMC Ho Chi Minh City
HSR High speed rail
IBRD International Bank for Reconstruction and Development
ICT Information and communications technology
IDA International Development Association
Infrastructure Financing for Sustainable Development in Asia and the Pacific xix
IDB Inter-American Development Bank

IEA International Energy Agency
IFAD International Fund for Agricultural Development
IFC International Finance Corporation
IFCA Investment Facility for Central Asia
IFI International financial institution
IIGF Indonesia Infrastructure Guarantee Fund
IMF International Monetary Fund
IPO Initial public offering
IsDB Islamic Development Bank
ITD Italian-Thai Development Public Company Limited
ITRC Infrastructure Transitions Research Consortium
IWT Indus Water Treaty
JICA Japan International Cooperation Agency
JV Joint venture
Lao PDR Lao People’s Democratic Republic
LDC Least developed country
LHSE Lao Holding State Enterprise
LLDC Land-locked developing country
MDB Multilateral development bank
Micronesia (FS) The Federated States of Micronesia
MIGA Multilateral Investment Guarantee Agency
MoU Memorandum of understanding
MW Megawatt
NFRK National Fund of the Republic of Kazakhstan
NGO Non-governmental organisation
NISMOD National Infrastructure Systems MODel
NPPF National Pension and Provident Fund
NT1 Nam Theun 1
NT2 Nam Theun 2
NTPC Nam Theun 2 Power Company
O&M Operation and maintenance
ODA Official development assistance
OECS Organisation of Eastern Caribbean States
OOF Other official flow
xx Infrastructure Financing for Sustainable Development in Asia and the Pacific
PCRAFI Pacific Catastrophe Risk Assessment and Financing

Initiative
PCRIC Pacific Catastrophe Risk Insurance Company
PHP Philippine peso
PIF Pacific Islands Forum
PMU Project Management Unit
PPA Power Purchase Agreement
PPCR Pilot Program for Climate Resilience
PPIAF Public-Private Infrastructure Advisory Facility
PPP Public-private partnership or purchasing power parity
PRG Partial risk guarantee
PRI Principles for Responsible Investment or political risk
insurance
PRIF Pacific Regional Infrastructure Facility
PSC Public sector comparator
R&D Research & development
RBI Raiffeisen Bank International AG
RECI Regional Economic Cooperation and Integration
RGSM Regional Governments Securities Market
SAPP Southern African Power Pool
SASEC South Asia Sub-regional Economic Cooperation
SCO Shanghai Cooperation Organization
SDG Sustainable Development Goal
SEZ Special economic zone
SIDS Small island developing State
SME Small and medium-sized enterprise
SOE State-owned enterprise
SOFAZ State Oil Fund of the Republic of Azerbaijan
SPV Special purpose vehicle
SPX South Pacific Stock Exchange of Fiji
SSE Sustainable Stock Exchanges
TAPI Turkmenistan-Afghanistan-Pakistan-India
TCX Currency Exchange Fund
TNC Transnational corporation
TOF Infrastructure take-out facility
UHC Universal health coverage
UNCTAD United Nations Conference on Trade and Development
Infrastructure Financing for Sustainable Development in Asia and the Pacific xxi
UNDP United Nations Development Programme

UNEP United Nations Environment Programme
USSR Union of Soviet Socialist Republics
V20 Vulnerable Twenty
VAT Value-added tax
VGF Viability gap funding
WEF World Economic Forum
WFP World Food Programme
WLCC Whole life cycle costing
WSS Water supply and sanitation
Infrastructure Financing for Sustainable Development in Asia and the Pacific 1
Introduction
Infrastructure Financing Strategies for Sustainable

Development in Asia and the Pacific
Infrastructure financing is a prerequisite in the pursuit of sustainable

economic growth and social development. None of the United Nations
Sustainable Development Goals (SDGs) can be achieved without some
direct or indirect input from infrastructure. And quality infrastructure, in
particular, is the great enabler, serving as the platform on which improved
incomes, livelihoods and human well-being can be delivered. But investing
in infrastructure is capital intensive, and so funding infrastructure
development comes with considerable challenges for policy-makers. These
challenges in turn necessitate well-thought-out strategies that can bring
about the desired economic, social and environmental impacts, and at
a price tag that can be afforded, whether in Asia and the Pacific or beyond.
Since the adoption of the 2030 Agenda for Sustainable Development, much
attention has been devoted to estimating the cost of the SDGs and
conceptualising how to fund them. ESCAP (2019) recently estimated the
additional investment required in the developing countries of Asia and the
Pacific at $ 1.5 trillion per year, equivalent to 5 per cent of their combined
GDP in 20181 . These additional investments can be classified into two
broad categories: i) government ‘transfer payments’, necessary to reduce
poverty, establish social protection floors, reduce the incidence of
malnutrition or fund the operation of schools and public hospitals and
clinics, and so on; and ii) ‘infrastructure investment’. This book builds on
the calculations in ESCAP (2019) by disaggregating the $ 1.5 trillion total
into $ 600 billion per year in transfer payments and $ 900 billion per year
for infrastructure investment2 . Given the importance of the first element,
transfer payments, the achievement of the SDGs will require tax revenues
to increase, an issue that has been already addressed in ESCAP (2018).
Turning to the second element, infrastructure investment, this book argues
that policy-makers in Asia and the Pacific need not only to harness
additional financial resources, but also move towards a more holistic
1 This average figure for the region as a whole may not seem large, but for some countries
the commitment is significantly higher. For example, the average for the region’s least
developed countries is closer to the equivalent of 16 per cent of the GDP per year.
2
It should be noted that infrastructure investments also include transfer payments, such as
for the repair and maintenance of highways. Nonetheless, a significant part of these
investments are up-front construction costs that can be financed by other means.
2 Infrastructure Financing for Sustainable Development in Asia and the Pacific
approach to infrastructure financing. Such an approach has the potential to

unlock considerable efficiency gains, reduce redundancies of effort, and
provide a more conducive (and less risky) enabling environment that will
stimulate greater private sector participation.
Due to the large financial requirements entailed in infrastructure

development, without robust and transparent governance mechanisms,
opportunities for corruption and other illicit practices can be considerable.
For example, the selection of infrastructure projects and their location can
be influenced by powerful stakeholders and interested parties, such as
elected national and local politicians, executives of national and local
authorities, investors and developers, land speculators and others who
stand to benefit from a project’s approval and design. This can lead to the
selection of over-budget and/or under-performing assets, thereby wasting
scarce resources and distorting the allocation of public funds. This can not
only serve to deter legitimate private sector investors and financiers, but
also cause bilateral and multilateral development partners to scale back or
withdraw their funding assistance. To address this risk, and in light of the
additional resources that Asia-Pacific developing countries need to invest
in infrastructure, so as to achieve the SDGs, this book advocates a more
sustainable approach to financing infrastructure development. This
approach includes the creation of a robust governance structure and
conducive enabling environment that leads to a more efficient allocation of
public funds, and creates a more solid basis for mobilising private sector
capital from both domestic and international players. For that purpose,
governments need to consider how best to: i) allocate their own resources
to support the SDGs; ii) leverage the development finance architecture and
related regional cooperation platforms to finance infrastructure; and
iii) incentivise and harness private sector financing sources for sustainable
development.
Selecting optimal infrastructure to contribute to the SDGs requires effective

mechanisms for infrastructure financing that should be: i) inclusive – such
as ensuring universal access to transport, power, water and sanitation,
urban housing, telecommunications, education, healthcare and other public
services; ii) sustainable – such as mitigating against climate change through
energy efficiency, expanding the use of renewable energy, and protecting
eco-systems from further degradation and ameliorating the loss of
biodiversity; and iii) resilient – protecting a country’s citizens and its
economic assets from losses incurred due to intensifying inequality, natural
disasters and climate change. This suggests not only that sensible
investment in infrastructure development is a pre-condition for achieving
the SDGs, but also that the SDGs provide a compass with which to navigate
the process of infrastructure financing.
Consistent with the Group of Twenty (G20) principles for promoting

quality infrastructure3 , this book advocates for the adoption of sustainable
infrastructure financing strategies based on three inter-related pillars. First,
infrastructure financing should be planned and prioritised in accordance
with the aims of the SDGs. Secondly, governments need to provide
adequate support for the planning, funding and implementation of
infrastructure projects and their financing strategies. Thirdly, the private
sector needs to be more meaningfully brought into the implementation of
infrastructure development, whether as investors, financiers or developers
and operators.
The first pillar, orienting infrastructure investment around achievement of

the SDGs, would entail reforms that can help improve infrastructure
planning, and better identify the optimal projects to attain the economic,
social and environmental dimensions contained in the SDGs. The resulting
priorities and implementing plans could then generate a strong pipeline of
sustainable and viable infrastructure projects. Given the long-term nature
of infrastructure projects, it is desirable that governments seek to commit to
implement sustainable infrastructure strategies that extend beyond the
normal political cycles. Of course, such strategies could, and indeed should,
be adjusted over time, as new information and insights become available,
learning experiences are accumulated, and circumstances inevitably
change.
The second pillar requires capable inputs and support from the public
sector to ensure the efficient selection and implementation of infrastructure
projects. It is important to streamline and coordinate the process of
infrastructure project preparation, throughout all sectors and levels of
government. The production and sharing of good-quality information is
essential in the planning stage, as are accurate forecasts of the costs and
benefits of new infrastructure. Streamlined procurement procedures,
rigorous financial planning, and robust contractual arrangements are
needed to ensure the effective execution of projects. As always, the goal is
to maximise value-for-money for taxpayers and expend scarce public
financial resources in the most efficient, equitable and impactful manner
possible.
3
The six principles are: i) maximising the positive impact of infrastructure to achieve
sustainable growth and development; ii) raising economic efficiency in view of life-cycle
costs of infrastructure; iii) integrating environmental considerations in infrastructure
investments; iv) building resilience against natural disasters and other risks in
infrastructure development; v) integrating social considerations in infrastructure
investment; and vi) strengthening infrastructure governance (G20, 2019).
The third pillar is to meaningfully engage the private sector as a partner in

the implementation of sustainable infrastructure development projects. The
private sector is often reluctant to invest in or co-finance public
infrastructure projects because of legitimate (and not inconsiderable) risks
and uncertainties. These need to be allayed in various ways, such as
providing stable legal and regulatory frameworks, having trusted dispute
settlement procedures in place, and the development of appropriate
financial instruments and markets that can help package, diversify and
mitigate the risks of financing infrastructure projects, so as to better align
them with the needs of long-term investors. In sum, the private sector
needs to be offered an attractive value proposition, based both on the
quality of the projects to be pursued, and the effectiveness by which these
projects are to be implemented.
The holistic approach to infrastructure financing outlined in this book is

congruent with a recent report by the Secretary General of the United
Nations (United Nations, 2019) which argues that private sector finance is
constrained by: i) difficulties in identifying a pipeline of ‘bankable’ SDG
projects; ii) weak domestic financial systems and capital markets in many
countries; and iii) a lack of common definitions, standards, measurement
and reporting related to sustainable investments. To address this problem,
the report recommends strengthening national and sub-national capacities
to develop and implement ‘bankable’, transformational projects, and to
manage, monitor and report on project implementation. Similarly, a recent
World Economic Forum report (WEF, 2019) highlights the difficulties that
developing countries face in compiling convincing pipelines of
infrastructure projects that both contribute to a country’s sustainable
development objectives and are structured in a way that is attractive for
private sector financing. The following chapters in this book propose some
answers in both these respects.
With Asia and the Pacific as its geographical frame of reference, this book
aims to identify the key challenges and potential solutions to financing
quality infrastructure that is inclusive, sustainable and resilient. This is
done across five core chapters. Chapter 1 sets out a strategic framework by
which policy-makers can better identify, formulate and go about
establishing a portfolio of sustainable infrastructure projects. It argues that
the practice of infrastructure planning in many countries is often
characterised by fragmentation, typically relying on bottom-up, project-by-
project assessments of costs and benefits to develop new infrastructure
projects. Given the complex inter-relationships that exist between the
economic, social and environmental aspects that characterise sustainable
development, this approach is unlikely to lead to an optimal portfolio of
infrastructure projects that can lead to the achievement of the SDGs.
Further, in-built biases and other factors run significant risks in terms of
wastage and the misallocation of scarce resources. This chapter therefore

advocates the need for the public sector to better coordinate and streamline
the planning and preparation of infrastructure projects, using a holistic,
top-down approach. As incubating projects progress towards potential
implementation, more local stakeholder engagement and consultation is
then needed to help ensure that the specificities of the project design,
construction and operations are sustainable. And private sector inclusion
needs to be considered long before the procurement stage. Governments
have a responsibility to ensure that their public infrastructure projects are
effective in achieving national development goals, and contribute towards
meeting international commitments, such as the SDGs. Further, there is an
inherent obligation to try and implement such projects in the most efficient
manner possible. In so doing, they can not only maximise value-for-money
in the allocation of finite fiscal resources, but also enhance the interest of
private sector investors, thereby harnessing additional funds and reducing
the cost of non-state participation in infrastructure projects. Beyond
potential access to funding, private sector actors have a lot to contribute in
designing and structuring large-scale projects, and it is a resource that
should not be overlooked. But at the very beginning, when a country is
conceptualising how to go about developing a portfolio of sustainable
infrastructure projects, congruent with the SDGs, that is a job for policy-
makers and public consultation.
Both chapters 2 and 3 recognise that public spending alone will not be
enough to meet the infrastructure needs of most countries, and stress the
critical role of private sector participation in infrastructure financing. In this
context, chapter 2 underlines the importance of developing capital markets
for sustainable infrastructure financing, and particularly the utility of
developing bond markets and related debt instruments as a means to inject
greater liquidity into infrastructure financing, particularly from
institutional and portfolio investors. Despite a relatively advanced stage of
economic development in large parts of Asia and the Pacific, bonds and
other ‘fixed income’ instruments still account for only a small fraction of
total infrastructure financing, roughly on a par with the Middle East, North
Africa and Sub-Saharan Africa. Banks are the fundamental basis of
a healthy financial system of a nation, but developing capital markets – and
the various financial instruments that trade on these markets – can provide
additional advantages and are a good complement to bank lending,
particularly in terms of reducing maturity and currency mismatches.
Excessive dependence on bank loans to fund infrastructure projects, which
typically take a considerable time to complete and can have short-term
pay-back periods, expose infrastructure investors and operators – as well as
local banks and financiers as a whole – to greater systemic risk. Not only
can periods of financial distress bring about currency mismatch problems
for banks that have lent aggressively – or even been obliged to lend
aggressively as a result of government directives – to large-scale

infrastructure projects, but the asymmetric lending pattern itself can trigger
financial distress and economic instability. In this sense, bond markets
provide a means by which the funding needs of infrastructure projects can
be better aligned with financial investors also seeking exposure to long-
term debt obligations, and thereby lessen the maturity mismatch risks that
come with bank lending. There is also potential to better harness alternative
financial instruments, such as green and ‘sukuk’ bonds.
Chapter 3 goes beyond the issue of increasing overall liquidity for

underwriting infrastructure investment, and examines the potential of
harnessing positive ‘externalities’ emanating fr om infrastructure
development projects, as an alternative means to generate and distribute
the financial returns achieved, and thereby attract greater private sector
interest and investment. As noted earlier, investment in sustainable
infrastructure is a prerequisite for achieving the SDGs; the socio-economic
impacts and financial rewards emanating from individual infrastructure
projects extend well beyond the specifics of the projects themselves, as
traditionally conceived and financially accounted for in project finance. If
that is the case, and private sector investors are being encouraged to
become more engaged in infrastructure development, then they should also
have an opportunity to share in some of the ‘spill-over’ effects. From the
perspective of finance and investing, it is not unreasonable to explore ways
in which the wider socio-economic benefits, or externality effects,
emanating from an infrastructure project can be monetised and shared by
private sector participants. Just as private sector investors are inherently
expected to share in the risks entailed in an infrastructure project that they
are participating in, they should also be given the opportunity to share – to
some degree at least – in the wider returns, if they can be captured.
However, to successfully capture the externality effects and redistribute
part of them to the private sector, governments need to implement robust
governance structures, necessary not only to attract and assure private
sector infrastructure investors and operators, but also guard against the
potential for abuse and rent-seeking. This includes ensuring transparency
and good governance principles are adhered to when harnessing
externality effects through this mechanism, just as one should in more
conventional public procurement exercises around infrastructure
development. The means used to calculate any ‘externality returns’ also
need to be clear and transparent, and not open to subjective interpretation
or opacity.
Chapter 4 analyses the particular challenges presented by cross-border

infrastructure development, where multiple sovereign jurisdictions and
state agencies are involved, and the process of putting together viable and
sustainable infrastructure projects is inevitably more complex. Despite the
clear benefits arising from cross-border infrastructure, it is perhaps not

surprising that such investment remains scarce, as the challenges of making
such projects work are magnified. To successfully promote cross-border
infrastructure development, countries need to improve their ‘soft’
infrastructure, including the overall business environment, the institutional
capacities of relevant state agencies, the legal and regulatory frameworks,
incentives to attract foreign direct investment (FDI), and regional
coordination and cooperation for smoothly developing cross-border
infrastructure. In so doing, they can lessen the real and perceived risks of
the cross-border infrastructure projects, and increase the likelihood of
success. In an infrastructure project that spans multiple sovereign borders,
investors and financiers will typically deem the overall risks of the project
as a whole to be roughly commensurate to the country with the weakest
enabling environment (i.e. ‘the chain is only as strong as the weakest link in
the chain’). It is also important to guard against geo-strategic and other
political drivers unduly influencing the selection of cross-border
infrastructure projects that ultimately result in an inefficient use of finite
resources, and a sub-optimal set of socio-economic impacts. A regional
approach to project selection, preparation and implementation can help to
guard against these kinds of risks and challenges, and the Belt and Road
Initiative (BRI) is widely regarded as the most ambitious attempt thus far at
such an approach.
Chapter 5 focuses on the more pronounced infrastructure financing

challenges faced by both land-locked developing countries (LLDCs) and
small islands developing states (SIDS). Issues of remoteness, geographical
distances, relatively small economies and private sectors, thinly dispersed
populations, limited small public agencies and capacity constraints all
serve to make the enactment of sustainable infrastructure development in
these countries more difficult, and particularly when it comes to
galvanising private sector participation. And yet an inverse correlation
typically exists between the institutional capacities of the LLDCs and SIDS
to implement quality infrastructure projects and their needs in this regard,
particularly in the context of the SDGs. The impact of climate change, for
example, is often most pronounced in these economies, whether from rising
sea levels or much more erratic weather patterns and other natural
phenomena. This then compounds the risks associated with infrastructure
development in these countries, thereby adding to the financial costs of
getting projects done. In this context, it is clear that the role of international
development partners, including ESCAP, multilateral development banks
and other development finance institutions, will remain front and centre in
the task of co-funding and developing sustainable infrastructure in the
SIDS and LLDCs, leveraging enhanced regional cooperation.
Finally, in the context of limited public funds and the limited borrowing
capacity of developing countries in Asia and the Pacific, private sector
investment in infrastructure projects needs to be stepped up. Unfortunately,
despite numerous initiatives with this precise aim in mind, there has not
been the kind of major pick up in private sector investment that policy-
makers would have desired. To this end, in September 2018, ESCAP, in
collaboration with the China Public Private Partnership Center (CPPPC),
initiated an infrastructure financing and public-private partnership (PPP)
network in Asia and the Pacific, intended to leverage private sector finance
for sustainable infrastructure investment. The objectives of the network are
to help member states overcome difficulties in implementing and financing
infrastructure projects and to encourage private sector participation in
financing infrastructure in the region (Subhanij and Lin, 2018). The network
aims in particular to help countries that may struggle to conceive, develop
and showcase a pipeline of infrastructure projects that are suitable for
private financing, as ESCAP recognises that a lack of well-prepared projects
is a critical challenge to attracting private sector investment. The network
therefore provides for peer learning opportunities, private sector
collaborations, a standardised information platform, as well as capacity
building on PPP and on how to go about blending different financing
sources. The network builds on the sustainable infrastructure financing
strategies explored in this book, and encourages member countries to think
more strategically about how best to harness and combine the range of
public, private, domestic and international financing sources that currently
exist. The network also advocates for the creation of laws and regulations
that not only attract more infrastructure investment, but also better
infrastructure investment, and the kind of infrastructure investment that
will help the countries of Asia and the Pacific attain the SDGs.
It is very much hoped that the ideas proposed in this book will help
stimulate policy discussion around the sustainable infrastructure financing
strategies for Asia and the Pacific.
References
Group of Twenty (G20) (2019). G20 Principles for Quality Infrastructure Investment. Available
from https://www.mof.go.jp/english/international_policy/convention/g20/
annex6_1.pdf.
Subhanij, Tientip, and Daniel W. Lin (2018). Bridging the Infrastructure Financing Gap in the Asia
Pacific Region. Inter Press Service News Agency.
United Nations (2019). UN-Secretary-General’s Roadmap for Financing the 2030 Agenda for
Sustainable Development: Draft—2019-2021. New York.
United Nations, Economic and Social Commission for Asia and the Pacific (ESCAP) (2018).
Tax Policy for Sustainable Development in Asia and the Pacific. Sales No. E.18.II.F.7.
(2019). Economic and Social Survey of Asia and the Pacific 2019: Ambitions beyond
growth. Bangkok: United Nations. Sales No. E. 19.II.F.6.
World Economic Forum (WEF) (2019). From Funding to Financing Transforming SDG finance for
country success, Community Paper. Cologny/Geneva: World Economic Forum.
Chapter 1
Infrastructure for the SDGs: Strategies,
Governance and Implementation
1. Introduction
The achievement of multiple Sustainable Development Goals (SDGs),

which form the core of the 2030 Agenda for Sustainable Development
(United Nations, 2015b), requires not only additional investments in
infrastructure, but also a reorientation of such investments. While recent
policy-oriented research has focused extensively on estimating the
financing gaps that need to be addressed to achieve the required levels of
infrastructure, and the various financing options for that purpose, there has
been relatively less discussion on the kind of infrastructure that is consistent
with the vision of the 2030 Agenda, and how it can be planned, built and
managed in an efficient manner4. This chapter seeks to contribute to the
current policy debate on infrastructure and, as Rozenberg and Fay (2019,
p. 2) put it, the shift “away from a simple focus on spending more and
toward a focus on spending better on the right objectives”. To spend on the
right objectives, we first need to understand what kind of infrastructure is
needed for the achievement of the SDGs. Such infrastructure projects
should be: i) inclusive – ensuring universal access to education, health,
water and sanitation, urban housing, transport and other services;
ii) sustainable – contributing to mitigating the impact of climate change
through, for example, improving energy efficiency throughout the
economy, expanding the use of renewable energy, conserving increasingly
scarce water resources, and protecting ecosystems from further
degradation; and iii) resilient – protecting the population and economic
assets from losses due to natural disasters and climate change.
Infrastructure for the SDGs, whether it is funded and financed by

governments, the private sector, or hybrids like public-private partnerships
(PPP), is ‘public infrastructure’ in the sense that “the government has
a primary role in, and responsibility for, deciding whether and how [it] is
provided in the interests of the broader community and on the source of
revenue streams to pay for [it] over its life” (Poole, Toohey and Harris,
4 For examples of recent work on infrastructure financing gaps and financial tools, see ADB
(2017), Ehlers (2014), ESCAP (2017; 2019a) and OECD (2015). Focus on the second issue
has been more recent. Some useful references include: EIU (2019), Fay and Rozenberg
(2019), Thacker and others (2019), and UNEP (2019).
2014, p. 98). This includes infrastructure provided by private sector firms,

such as telecommunications firms or water and electricity utilities, that
operate under a policy and regulatory framework established by sovereign
governments. Therefore, the tools that governments have at their disposal
for the provision of infrastructure for the SDGs include not only direct
investments in infrastructure projects, but also establishing the right
environment to guide private investment in infrastructure. A major
difficulty in the implementation of large public infrastructure projects has
been the frequency of instances when actual construction and operating
costs significantly exceeded costs forecasted during the planning stage. For
instance, in a large study of infrastructure mega-projects, Flyvbjerg,
Bruzelius and Rothengatter (2003) found that cost over-runs of 50 to 100 per
cent in real terms are common, and in another study of 258 large
transportation projects across 20 countries, Flyvbjerg, Skamris and Buhl
(2002) found that 90 per cent of projects went over-budget. Such disparities
between forecasted and actual costs, as well as disparities that often occur
between the forecasted and actual numbers of users of the infrastructure,
have resulted in projects being less economically viable than anticipated,
and even the enactment of wholly unviable projects5.
Focusing on the strategic planning, governance and implementation of

infrastructure projects, this chapter proposes multi-disciplinary and cross-
sectoral approaches to infrastructure financing that can identify the optimal
projects to invest in for the achievement of the SDGs. It also discusses the
whole life cycle of infrastructure projects, encompassing not only the
construction, design and operation and maintenance (O&M) phases, but
also the planning, preparation, and procurement phases. Such an approach
is expected to enhance effectiveness and efficiency in public infrastructure
that can stimulate the interest of private sector financiers and investors, and
reduce the cost of private sector participation in infrastructure projects.
2. What kind of infrastructure is needed to achieve the

SDGs and how much will it cost?
Infrastructure is defined as “the basic physical and organizational

structures and facilities [...] needed for the operation of a society [...]”6. They
provide essential services to people, such as water, energy, sanitation,
protection from hazards, such as floods, and allow people to access services
5 For instance, Ansar and others (2014) found in a study of 245 dam projects across
65 countries that average construction costs were 96 per cent higher than originally
budgeted for, in real terms, and exceeded the average projected monetary benefits by just
40 per cent higher than the originally estimated costs.
6 Lexico (2019).
such as healthcare and education, and to participate in the economy by

accessing markets and commuting to work. But infrastructure development
can also have negative environmental and social impacts, such as the
displacement of people during construction, the destruction of ecosystems,
enabling urban development in hazardous locations, such as floodplains, or
leading to an excessive use of fossil fuels for power generation or transport
which, in turn, can lead to harmful air quality and greenhouse gas
emissions (Thacker and others, 2019). Because infrastructure assets last for
many decades, the choice of infrastructure to be built today has long-term
consequences, and so developing the right kind of infrastructure is critical
for the prospects of achieving the SDGs.
There is no full consensus about the precise definition of sustainable

infrastructure. The Inter-American Development Bank (IDB) (2018b, p. 11),
for example, defines sustainable infrastructure as “infrastructure projects
that are planned, designed, constructed, operated, and decommissioned in
a manner to ensure economic and financial, social, environmental
(including climate resilience), and institutional sustainability over the entire
life cycle of the project”. The United Nations (2016, p. 3) defines the related
concept of ‘resilient infrastructure’ as “infrastructure systems, including
their interconnected ecosystems and social systems, [that are able] to
withstand disruption, continue to function and retain their structural
capacity [... in the event of] both natural hazards (such as earthquakes,
hurricanes, flooding and drought) and man-made hazards (such as human
errors and malevolent attacks)”. While this definition is comprehensive,
some would argue that resilience is only one of the dimensions of
sustainable infrastructure.
We therefore propose adopting a working definition of infrastructure for

the SDGs that emanates from the specific targets set by the 2030 Sustainable
Development Agenda. The selected targets refer explicitly to infrastructure,
or clearly imply its need for their achievement. They comprise: i) directly
mentioning infrastructure or relate to traditional infrastructure sectors,
such as energy; or ii) aiming at the provision of universal access to various
services; or iii) aiming at enhancing access and use of information and
communications technology; or iv) aiming at increasing resilience to
climate hazards and natural disasters; or v) aiming at restoring natural
capital and eco-systems. Although the resulting list of 19 targets, shown in
table 1.1, is only indicative, it nevertheless covers 11 of the 17 SDGs and
provides a sobering illustration of the required infrastructure7. Thus, we
define infrastructure for the SDGs as the basic physical and organizational
7 Thacker and others (2019) conducted a more thorough exercise to identify the direct and
indirect influence of five infrastructure sectors (energy, water, solid waste, transport and
digital communications) on the SDG targets and came up with a list of 121 targets.
structures and facilities needed for the achievement of the SDG targets, as
listed in table 1.1.
Table 1.1
SDG targets and the role of infrastructure
Goals Targets
2 End hunger, achieve food security and improved 2.a Increase investment, including through
nutrition and promote sustainable agriculture enhanced international cooperation, in rural
infrastructure [...] to enhance agricultural
productive capacity in developing countries [...]
3 Ensure healthy lives and promote 3.8 Achieve universal health coverage (UHC),
well-being for all at all ages including [...] access to quality essential health
care services [...]
4 Ensure inclusive and equitable quality 4.3 By 2030, ensure equal access for all women
education and promote lifelong learning and men to affordable and quality technical,
opportunities for all vocational and tertiary education, including
university
4.a Build and upgrade education facilities

that [...] provide safe, non-violent, inclusive and
effective learning environments for all
5 Achieve gender equality and empower all 5.b Enhance the use of enabling technology,
women and girls in particular information and communications
technology, to promote the empowerment of
women
6 Ensure availability and sustainable 6.1 By 2030, achieve universal and equitable
management of water and sanitation for all access to safe and affordable drinking water for all
6.2 By 2030, achieve access to adequate and

equitable sanitation and hygiene for all [...]
7 Ensure access to affordable, reliable, 7.1 By 2030, ensure universal access to
sustainable and modern energy for all affordable, reliable and modern energy services
7.2 By 2030, increase substantially the share of

renewable energy in the global energy mix
7.3 By 2030, double the global rate of

improvement in energy efficiency
9 Build resilient infrastructure, promote inclusive 9.1 Develop quality, reliable, sustainable and
and sustainable industrialization and foster resilient infrastructure [...] to support economic
innovation development and human well-being, with a focus
on affordable and equitable access for all
9.4 By 2030, upgrade infrastructure and retrofit

industries to make them sustainable, with
increased resource-use efficiency and greater
adoption of clean and environmentally sound
technologies and industrial processes [...]
9.a Facilitate sustainable and resilient

infrastructure development in developing countries
through enhanced financial, technological and
technical support [...]
9.c Significantly increase access to information

and communications technology and strive to
provide universal and affordable access to the
Internet in least developed countries by 2020
Table 1.1 (continued)

Goals Targets
11 Make cities and human settlements inclusive, 11.1 By 2030, ensure access for all to adequate,
safe, resilient and sustainable safe and affordable housing and basic services
and upgrade slums
11.2 By 2030, provide access to safe, affordable,

accessible and sustainable transport systems
for all [...]
13 Take urgent action to combat climate change 13.1 Strengthen resilience and adaptive capacity
and its impacts to climate-related hazards and natural disasters
in all countries
14 Conserve and sustainably use the oceans, 14.2 By 2020, sustainably manage and protect
seas and marine resources for sustainable marine and coastal ecosystems to avoid
development significant adverse impacts, including by
strengthening their resilience, and take action for
their restoration in order to achieve healthy and
productive oceans
15 Protect, restore and promote sustainable 15.1 By 2020, ensure the conservation,
use of terrestrial ecosystems, sustainably restoration and sustainable use of terrestrial
manage forests, combat desertification, and halt and inland freshwater ecosystems and their
and reverse land degradation and halt services, in particular forests, wetlands,
biodiversity loss mountains and drylands, in line with obligations
under international agreements
Source: ESCAP based on United Nations (2015a).
Note: For brevity, the descriptions used for most targets are shortened.
This working definition provides an indication, not only of the sectors, but
also of the characteristics of the infrastructure required to achieve the SDGs.
In addition to facilitating universal access to various services, this
infrastructure needs to be reliable, sustainable and resilient (target 9.1).
Sustainable infrastructure is infrastructure that increases resource-use
efficiency throughout the economy, and relies on a greater adoption of clean
and environmentally sound technologies (targets 7.2, 7.3 and 9.4), while
resilient infrastructure is infrastructure capable of protecting economic
assets and the population from climate-related hazards and natural
disasters (target 13.1). In addition to standard infrastructure sectors – such
as buildings, transport, energy or information and communications
technology (ICT) – the SDGs require investments in marine and terrestrial
ecosystems (SDGs 14 and 15). Such ecosystems can clearly be understood as
physical structures needed for the attainment of selected SDGs; as such,
they fit our working definition of infrastructure for sustainable
development.
Developing such an infrastructural platform to achieve the SDGs poses

substantial technical, organizational and financial challenges, especially in
least developed and developing countries. The United Nations Economic
and Social Commission for Asia and the Pacific (ESCAP) (2019b) has
estimated the additional investment needs for achieving the SDGs in the
developing countries of Asia and the Pacific to be around $ 1.5 trillion per
year, on average, equivalent to 5 per cent of their aggregate GDP in 2018.
These estimates are based on costing models developed by specialized
international agencies, such as the World Health Organization for health,
the United Nations Educational, Scientific and Cultural Organization for
education, and the International Energy Agency (IEA) for energy. ESCAP
(2019b) grouped its estimates into five broad areas: i) basic human rights -
end poverty and hunger; ii) investing in human capacity - health,
education, and gender equality; iii) enabling infrastructure - transport, ICT,
and water and sanitation; iv) securing humanity’s future - clean energy and
climate action; and v) living in harmony - sustainable consumption and
biodiversity8. The estimates presented in that publication include both the
additional cost of investment in infrastructure and other interventions, such
as government transfer payments, which are very important for areas i) and
ii). Table 1.2 disaggregates the cost of additional infrastructure investment
for each of the areas, based on the modelling results and estimates used in
ESCAP (2019b).
The estimated total cost of additional investment in infrastructure in the

five areas is $ 906 billion per year. This represents 62 per cent of the total
cost of achieving the SDGs in the developing countries of Asia and the
Pacific. Of this amount, the largest share (48 per cent) needs to be allocated
to clean energy and climate action, followed by transport, information and
communications technology and water and sanitation (22 per cent),
sustainable consumption and biodiversity (17 per cent), health and
education facilities (13 per cent), and rural infrastructure (1 per cent). The
distribution of additional infrastructure investment is revealing:
investments to protect the planet, represented by areas 4 and 5, amount on
average to almost two-thirds of the total, which is three times the estimated
additional investment requirements in traditional infrastructure sectors
such as transport, ICT and water and sanitation. Similarly, additional
investments in social infrastructure, such as health and educational
facilities, are more than half as high as those for traditional infrastructure.
These estimates clearly illustrate the need to carefully prioritize future
infrastructure investments if the SDGs are to be achieved by 2030.
3. Governance and institutional challenges
The implementation of large public infrastructure projects has frequently

been marred by substantial cost over-runs and/or benefits shortfalls.
8 These areas correspond, approximately, with the following SDGs: i) Goals 1 and 2;
ii) Goals 3 and 4; iii) Goals 6, 9 and 11; iv) Goals 7 and 13; and v) Goals 14 and 15. For
details, see the technical appendix to chapter 3 of ESCAP (2019b).
Table 1.2
Cost of additional investment required for achieving the SDGs
Total cost Infrastructure component
Billions of Billions of Percentage of
Areas United States United States
dollars per dollars per Area Infrastructure
year year cost cost
Area 1: Basic human rights - end poverty 373.1 6.0 1.6 0.7
and hunger
Close the gap between earned incomes and 32.0
the poverty line
Social protection floor 317.0
Package of nutrition-specific interventions 3.5
Investments in agriculture, agroprocessing, 20.6 6.0
rural infrastructure, research & development
(R&D) and extension
Area 2: Investing in human capacity - health, 296.0 115.7 39.1 12.8
education and gender equality
Health facilities 158.0 50.4
Facilities for universal pre-primary to 138.0 65.3
upper-secondary education
Area 3: Enabling infrastructure - transport, 196.0 196.0 100.0 21.6
ICT, and water and sanitation
Roads and railways 126.0 126.0
Fixed broadband and mobile phone 56.0 56.0
subscriptions
Access to improved water sources and 14.0 14.0
sanitation facilities
Area 4: Securing humanity’s future - clean 434.0 434.0 100.0 47.9
energy and climate action
Universal access to electricity; renewable 434.0 434.0
energy; and energy efficiency in transport,
industry and buildings
Area 5: Living in harmony - sustainable 156.0 154.3 98.9 17.0
consumption and biodiversity
Reduce pressures on biodiversity, enhance 156.0 154.3
protected areas, and restore ecosystems
Total cost 1 455.1 906.0 62.3 100.0
Source: Based on ESCAP (2019b).
Notes: For details on the SDG costing exercise, please refer to the online technical appendix of ESCAP
(2019b). For the estimation of the infrastructure component, area 1 includes only rural
infrastructure; area 2 includes estimates of infrastructure investments in education and health
facilities; areas 3 and 4 are assumed to include only physical infrastructure; and area 5 is based
on strategic goals B (i.e. reduce the direct pressures on biodiversity and promote sustainable
use), C (improve the status of biodiversity by safeguarding ecosystems, species and genetic
diversity) and D (enhance the benefits to all from biodiversity and ecosystem services) of the
Aichi Biodiversity Targets.
Authorities responsible for such projects often attribute those disparities to

adverse events that could not have been foreseen at the planning stage, due
to the complexity of the projects, changes in the scope of the project after
work commenced, unexpected geological features, or the opposition of
some stakeholders – in other words, to random ‘bad luck’. However, the
frequency with which such cost over-runs and/or benefit shortfalls occur
invites a need for more systemic explanations. Flyvbjerg (2009) proposes
two alternative explanations based, respectively, on: i) faulty forecasting
methods; and/or ii) mis-alignments of incentives of key stakeholders. Both
affect the planning stage of infrastructure projects and can lead to the
adoption of poor decisions.
The first explanation is based on a cognitive bias that is well documented in

psychology and behavioural economics, known as optimism bias, which is
characterized by an over-estimation of the likelihood of positive events,
and an under-estimation of the likelihood of negative events (Sharot, 2011).
In the context of infrastructure planning, this bias is more likely to arise
when using a bottom-up decision making technique, based on extensive
details of the specific activity being considered, such as a highway project.
This approach, sometimes referred to in forecasting as the inside view,
contrasts with the so-called outside view, which allows for more objective
assessments, by using data from a broad reference class of similar projects
to forecast outcomes for the current project (Flyvbjerg, 2009). The second
explanation is based on the interests of key stakeholders, such as local
authorities, developers and landowners, local politicians, officials and
consultants, all of whom potentially stand to benefit from the project’s
approval and design. In the absence of appropriate mechanisms to ensure
that objective evaluations of prospective projects are conducted, such
stakeholders have an incentive to present the project in the best light, which
can then result in the selection of sub-optimal projects (Flyvbjerg, 2009).
The significant amounts of money involved in major public infrastructure
projects, and the opportunities for rent-seeking that they create, are often at
the root of this problem.
To understand how perverse incentives in the planning stage of

infrastructure projects can lead to inefficiencies and cost over-runs during
their implementation, it is useful to consider the decision to implement
a project within a principal-agent framework9. Figure 1.1 shows an example
9 The principal-agent framework is commonly used in economics to analyse situations

where a person or entity (the principal) engages other persons or entities (the agent) to act
on their behalf, such as a company’s Board of Directors, serving as representatives of all
shareholders, selecting a new chief executive officer (CEO). This framework allows one to
identify situations where an agent may have incentives to act in his or her own best
interests, which may not be adequately aligned with those of the principal, or even at
direct odds with the interests of the principal.
of multi-tier principal-agent relationships for an urban infrastructure

project. The figure and its description are from Flyvbjerg (2009).
Figure 1.1
Example of multi-tier principal-agent relationships in an urban
infrastructure project
Tier 1
Taxpayers
(Principal Tier 1,
Principal Tier 2)
Tier 2
State government
(Agent Tier 1,
Principal Tier 2)
Local government Tier 3

(Agent Tier 2,
Principal Tier 3)
Analysts and
planners Contractors
(Agents Tier 3)
(Agents Tier 3)
Source: Flyvbjerg (2009).
The first tier is the relationship between taxpayers (the principal) and the
national government (the agent), which is supposed to act in their best
interest. Taxpayers expect the project to deliver the largest possible benefits
to the community, by incurring minimal costs, attenuating risks, and
reaching completion within an agreed timeline. However, individuals in the
national government often have their own set of interests, such as getting
re-elected. The second tier has the local government acting as the agent for
both taxpayers and the national government. The local government has
a duty to taxpayers to propose infrastructure that provides the largest
benefits to the community, and that are delivered within the agreed budget
and on time, and it has a duty to the national government to suggest the
best allocation of the taxpayer funds, and to provide accurate forecasts
needed to make an informed decision. However, given the competition
with other local governments for finite national resources, the local
government has an interest in understating the risks and costs, and over-
stating the benefits, in a bid to get the project prioritised and approved by
the national government. The third tier involves local government as the
principal of agents hired to provide specific services, such as analysts,
planners, and contractors. Analysts and planners are engaged to gather the
information necessary for making the final decision on whether to start the
project. They have an incentive to provide information that is compatible
with pleasing the local government, having the project approved, and being
re-engaged on the next project. This illustrative example shows that in each
tier there is the potential for agents to act in their own best interests, rather
than the best interest of the principal, resulting in an undesirable outcome.
The potential for approving poor projects that will end up costing much
more, and bring fewer benefits than planned, is exacerbated when there is
asymmetric information and different time horizons between principals
and agents. Although some government agencies have responsibilities in
ensuring the technical and financial feasibility of projects, they might not
have access to sufficient or accurate information about specific projects on
which to conduct the best analysis (or lack the capacity to do the best
analysis). Also, the time horizon of governments is often limited by election
cycles, whereas taxpayers expect to benefit from a major infrastructure
project for decades. With large projects often taking 10 to 15 years from the
start of planning to the start of operations, governments may be motivated
to approve projects that they believe will most improve their chances of
getting re-elected, rather than projects offering the greatest long-term
benefits (EIU, 2019; Flyvbjerg, 2009). Although the specifics and complexity
of the principal-agent analysis will vary across infrastructure projects,
countries and sectors, the importance of understanding the configuration of
these relationships in specific contexts should not be under-emphasized.
Such analyses can help identify risks arising from a mis-alignment of
interests in each stage of developing infrastructure projects, and provide
guidance on the mitigation of such risks through appropriate contractual or
institutional arrangements.
Additional challenges to effectively design and implement infrastructure

projects that support the achievement of the SDGs are related to the
organizational structures, planning practices and capacities of governments
to select and implement portfolios of projects that provide the most value to
people, and facilitate progress in the three principle dimensions –
economic, social and environmental – of sustainable development. A
difficulty in linking the different elements of sustainable development is
due to the ‘silos’ that commonly exist within governments, and between
those executing different stages of infrastructure (EIU, 2019). These ‘silos’,
which are prevalent even within specific infrastructure sectors, create
barriers to communication across government offices and various line-
ministries dealing with different aspects of infrastructure projects, all of
which need to be considered simultaneously in order to select the optimal

ones for the achievement of the SDGs. The practice of infrastructure
planning in most countries is also characterized by fragmentation. As noted
in a recent study by the International Transport Forum (2017), most
countries rely on bottom-up, project-by-project assessments of costs and
benefits to develop new infrastructure, even though national planning
strategies are predominantly based on estimates of national population and
economic growth. Given the complex relationships between technical,
economic, social and environmental aspects that characterize sustainable
development, such an approach is unlikely to lead to the selection of the
most effective portfolio of infrastructure projects for the achievement of the
SDGs.
Box 1.1
The government’s multi-faceted role in infrastructure projects
Irrespective of whether an infrastructure project is delivered through a public-private
partnership (PPP) arrangement or a more conventional public procurement, the
government should have a significant role in all stages of its implementation. Some of the
responsibilities that the government should undertake for that purpose are identified
below:
• Developing and proposing specific infrastructure projects;
• Providing feedback and suggestions to improve on-going and future projects,
ensuring that they are consistent with the country’s sustainable infrastructure plan
and/or project pipeline;
• Monitoring the legal, regulatory and enforcement framework for the delivery of
infrastructure projects; and proposing their improvement, in consultation with
stakeholders and entities from different levels of government;
• Considering, for example, issues of land acquisition, permits and licenses, and
dispute resolution mechanisms;
• Providing capacity building to staff of regional and local implementing
institutions;
• Monitoring the economic performance, payments, and social and environmental
impacts of on-going projects, and providing feedback to implementing institutions
if any problems are detected; and
• Ensuring that on-going and future projects are adequately funded through budget
appropriations, and that payments to contractors and operators are made on time.
Source: ESCAP.
4. Proposed institutional reform to improve the

planning and delivery of infrastructure for the SDGs
An optimal approach to planning infrastructure development in a manner

that supports the SDGs should ideally include both ‘top-down’ and
‘bottom-up’ elements. The United Nations Environment Programme
(UNEP) (2019) proposes a matrix approach to the restructuring of
institutional arrangements, based on the horizontal integration of all

government bodies responsible for different infrastructure sectors,
combined with a vertical integration between national, regional and local
levels of government. The proposed new institution, which could take the
form of a national commission or council, has the potential to offer
significant improvements in up-stream infrastructure planning, the
identification and reduction of social and environmental risks, and
ensuring consistency between national-level policies and implementation at
the regional and local levels. Such an institution could be mandated to
prepare strategic assessments of the country’s long-term sustainable
infrastructure needs and cross-sectoral sustainable infrastructure plans, as
well as advise the government on new legislation and regulations needed
to facilitate the implementation of the plan (IDB, 2018a). In addition to
increasing coherence across sectors and levels of government, cross-sectoral
sustainable infrastructure plans can help facilitate the creation of
appropriate project ‘pipelines’ of viable and bankable projects that will
attract private sector financing (EIU, 2019).
Recent examples in developed countries of such infrastructure planning

institutions include Australia’s Department of Infrastructure, Regional
Development and Cities founded in 2017, and the United Kingdom’s
independent National Infrastructure Planning Commission, founded in
2015 (EIU, 2019). The latter has a mandate to provide the government with
impartial expert advice on major long-term infrastructure challenges. It
assesses the United Kingdom’s national infrastructure needs and assets, as
well as the technologies that change over time, and at the start of each
five-year parliament it produces a report with recommendations for
infrastructure projects and priorities (EIU, 2019). Box 1.2 summarizes the
key attributes of the proposed infrastructure planning institutions.
In preparing cross-sectoral infrastructure development plans, it is

important that planning institutions consult with key stakeholders from the
private sector and civil society, including professional engineering bodies,
academic researchers in working relevant areas of science and technology,
including social sciences and environmental sciences, businesses, financial
institutions, and representatives from civil society. This consultation
process helps ensure that the widest range of social, economic and
environmental opportunities and challenges associated with infrastructure
development are fully taken into account (UNEP, 2019). This bottom-up
process can complement and improve the effectiveness of top-down
planning, and help ensure that national-level policies are in line with local
needs. Further, for infrastructure planning institutions to work effectively, it
is critical to ensure that they have sufficiently qualified human resources,
with the necessary technical, economic, social, environmental, and financial
knowledge. For that purpose, capacity building efforts may be needed, and
Box 1.2
Key attributes for infrastructure planning institutions
Integrated approaches to infrastructure planning should be supported by independent
planning bodies that provide policy-makers and other stakeholders with consolidated
information upon which to make decisions. They play a critical role in ensuring that
decisions are made across sectors, taking into account issues that might not factor into
short-term political decision-making, and seek to reduce the cost of projects by assessing the
costs and benefits at a systems-level. Some of the key attributes for infrastructure planning
institutions include the following:
• Must include sustainability as a primary guiding concept;
• Must provide an integrated plan for infrastructure development across sectors;
• Must be anchored in clearly defined and long-term objectives, which may take the
form of a national plan or policy;
• Should be open and collaborative, seeking stakeholder engagement from the outset
of the planning process. This is crucial to encourage openness and transparency,
and to add credibility to the planning exercise. At the same time, stakeholder
engagement helps to inform policy-makers about relevant business models and
technological innovations;
• Must be at least quasi-independent, although it cannot be too removed from
political decision-making;
• Should be developed as an apex body to monitor and, if need be, supervise line
ministries’ infrastructure development strategies and plans; and
• Ideally should have greater-than-advisory powers, in that the government must
justify rejecting recommendations.
Source: ESCAP based on International Transport Forum (2017) and UNEP (2019).
this is an area where North-South and South-South cooperation initiatives

could be fruitfully deployed. In addition to human resources, infrastructure
planning institutions can take advantage of new tools and modelling
platforms that are now available. One example is the National
Infrastructure Systems MODel (NISMOD), developed by the United
Kingdom’s Infrastructure Transitions Research Consortium (ITRC) 10.
NISMOD enables academia, industry and policy-makers to access
infrastructure datasets, simulation and modelling results (EIU, 2019), which
can be useful inputs to deliberations on national sustainable infrastructure
strategies and plans.
An infrastructure planning institution should be able to minimize the trade-

offs across the economic, social and environmental dimensions of
sustainable development, and find solutions with positive outcomes in
more than one dimension. For that purpose, it could consider cost-effective,
nature-based solutions, such as planting trees and plants in urban settings
10 ITRC is a consortium of seven universities located in the United Kingdom, led by Oxford
University.
to reduce air pollution, sequester carbon emissions and reduce the

temperature during hot days, or restoring mangrove forests in coastal areas
to protect shorelines and communities from coastal flooding (Cohen-
Sacham and others, 2016). It would also be able to factor in the risks of
future climatic conditions and natural hazards in its infrastructure plans,
for instance by avoiding infrastructure developments in locations that are
most exposed to climate-related hazards (UNEP, 2019). Its plans could also
keep in mind the ‘lock-in’ effect of infrastructure decisions on carbon
emissions, by considering the impact on future carbon emissions associated
with construction and operations11, and include recommendations for
policies and regulations to encourage the transition to more efficient energy
systems, appliances and lighting 12. It can also set up regulations to
streamline processes to promote transparency and efficiency in the
implementation of infrastructure projects throughout the country. For that
purpose, various initiatives and tools are globally available. For example,
the Infrastructure Transparency Initiative, also known as the Construction
Sector Transparency (CoST), a global initiative launched with support from
the World Bank in 2012, aims at promoting the disclosure, validation and
analysis of infrastructure data to empower stakeholders to hold decision-
makers to account. CoST works with governments, the private sector and
civil society to promote reforms that can reduce mismanagement,
inefficiency and corruption on infrastructure projects. Similarly, the
International Infrastructure Support System, developed by the Sustainable
Infrastructure Foundation of the Asian Development Bank (ADB), provides
templates for countries to prepare projects, enables teams to work together
online, and has features that allow the sharing of information with
investors and the public (EIU, 2019).
Effective institutional reform to facilitate the planning and implementation

of infrastructure for the SDGs also needs to consider the implementation
end. And it may be desirable to streamline infrastructure implementation
support functions into a single national entity covering all sectors of
infrastructure. An example of such an institution is the United Kingdom’s
Infrastructure and Projects Authority, established in 2016, which has
a mandate to ensure that infrastructure projects are delivered efficiently
and effectively, and to improve performance over time. For that purpose, it
supports and de-risks the most complex and high-risk projects, develops
the skills and capabilities of the people who deliver projects, and oversees
the project life cycle from policy, initiation, and financing to independent
11 For instance, Muller and others (2013) estimate that if current infrastructure construction
technologies continue to be employed until 2050, they would account for between 35 and
60 per cent of the carbon budget available by that time, if the average temperature
increase is to be limited to 2oC above the pre-industrial era.
12 The IEA (2012) estimates that improvements in energy efficiency could contribute to
a reduction of around half of total carbon emissions by 2050.
assurance. Such a national infrastructure projects institution can support

the delivery of specific projects that are consistent with the vision and
project pipeline proposed by the national infrastructure planning
institution.
A recent initiative in the region to streamline public institutions for the

planning and implementation of infrastructure projects is New Zealand’s
new infrastructure commission. The commission will be an autonomous
state entity with an independent board of between five and seven members,
who will bring a range of perspectives, including private sector expertise
(New Zealand, Treasury, 2019). Its mandate will include improving how the
country coordinates and plans new infrastructure and maintains existing
infrastructure, in consultation with central and local governments, the
private sector, and other stakeholders. The commission will also have
procurement and delivery support functions to help government agencies
and local authorities in planning and implementing major infrastructure
projects (New Zealand, Treasury, 2019). The commission combines the
planning and project implementation institution into a single apex body.
Figure 1.2 shows a schematic representation of such an apex agency, and its
relationships with stakeholders.
Figure 1.2
Streamlining government entities for planning and implementing
sustainable infrastructure
Source: ESCAP.
5. Improving efficiency in project implementation

through a whole life cycle approach
While establishing an effective institutional architecture for the selection of

the most appropriate infrastructure projects for the achievement of the
SDGs should be a top priority, ensuring that those same projects are
delivered in the most efficient and cost-effective manner is also important.
The advantages of bundling various stages of infrastructure project
development – such as design, construction and O&M – in a bid to ensure
effective delivery at minimum cost can also be reaped by both government
and the private sector through appropriate coordination.
Figure 1.3 shows the four stages of the life cycle of infrastructure projects
that governments need to consider in order to ensure their effective
delivery at minimum cost. They span: i) planning, ii) preparation,
iii) procurement and financing, and iv) implementation. While the first
three phases often fall under government responsibility, the
implementation phase can be managed either by the public sector, the
private sector, or as part of a PPP arrangement13. Each phase of a project is
characterized by a decision, as explained below.
Figure 1.3
A life cycle approach to infrastructure development
PHASE
Procurement
Planning Preparation and Implementation
financing
•D Needs •D Feasibility studies •D Select procurement •D Design

D identification D –D Technical D strategy •D Construction
•D Sustainable D – DEconomic D –D Public •D Operation
TASKS
D infrastructure plan D –D Environment DD procurement •D Maintenance

•D Infrastructure D –D Social D –D PPP •D Disposal
D pipeline D –D Legal/regulatory •D Select financing •D Monitoring and
•D Project selection •D WLCC analysis D strategy D evaluation
•D Government •D Contractual
D funding D efficiency
DECISION
Validation of Procurement and Asset management

Investment decision investment decision financing strategy strategy decision
decision
Source: ESCAP.
Note: Whole life cycle costing (WLCC).
13 It must be mentioned, however, that various PPP schemes, such as build-operate-transfer

(BOT) and design-build-operate (DBO), can cover the entire life cycle of infrastructure
projects.
The planning phase starts from identifying needs, and ends with project
selection as a good investment decision. The investment decision should be
based on the net economic, social and environmental benefits of the
selected project, as compared with other projects (Chan and others, 2009),
and the decision should be taken irrespective of whether the delivery mode
will be public procurement or PPP. Given the need to consider how the
project fits within the country’s sustainable infrastructure plan, the
recommendation for its approval should ideally be done by a national
infrastructure planning institution. Stakeholder consultations at the local
level can be conducted by the relevant regional or local implementing
institutions, to better assess the needs for the project, and identify any
problems that need to be considered in the project design and
implementation.
During the preparation phase, the regional or local implementing

institution conducts feasibility studies on the market, technical, economic,
commercial, legal, environmental and social aspects of the project, with
support from the national infrastructure projects institution. These studies
require a proper budget, institutional capacity and the engagement of
relevant stakeholders, in order to cost the project effectively and identify
risks during the whole life cycle. Tools such as whole life cycle cost (WLCC)
analysis are commonly employed in this stage14. This stage should also
consider the government funding requirements of the project and evaluate:
i) whether the investment has the highest rate of return relative to other
uses of public funds (Chan and others, 2009); and ii) the level of subsidy
that may be needed to achieve the desired levels of public access to the
services to be provided. By the end of the preparation phase, the
government should be able to validate the investment decision and decide
whether to go ahead with the project.
During the procurement and financing strategy phase, the government can
first determine how the private sector is to be involved in the provision of
services during the whole life cycle of the project. The main options are
public procurement, through which one or more private sector contractors
are engaged to deliver different parts of the project – such as construction
or O&M – or a PPP, and which typically bundles construction and O&M in
a single contract. The procurement decision determines the optimal way to
procure the project services, and should be taken independently of the
financing modality. If the decision is to procure all services with an
14 The WLCC of a project is the present value of the aggregate cost of procuring, installing,
maintaining, refurbishing, disposing and operating costs directly attributable to owning
or using an asset over its economic or service life (Regan, Love and Smith, 2016). WLCC
analyses often show that projects with higher initial costs are more cost effective, largely
by lowering procurement costs in later stages of the project.
individual private company, then the country’s PPP law, if available, and
related procedures should be followed. In that case, the procuring agency
would be responsible for the overall management of the concession
contract with the private company, while the company would manage any
sub-contracts required for the implementation of the project.
A national infrastructure projects institution would play an important role

in advising the relevant regional or local implementing institution about
what procurement modality would be most appropriate for the project. For
that purpose, tools such as the public sector comparator (PSC) can be used
to determine whether a private sector proposal offers value for money in
comparison with the most efficient form of public procurement (World
Bank, 2014). After determining the best procurement option, the
government can consider financing options. The financing strategy decision
can determine: i) the timing of government funding; and ii) whether public
or private financial instruments should be employed. For instance, in the
case of public financing, debt financing – as opposed to tax financing –
shifts the burden of underwriting the infrastructure from current taxpayers,
who will benefit marginally from the project, to future taxpayers, who will
benefit more from the project (Poole, Toohey and Harris, 2014). During the
procurement and financing strategy stage, it is also important to ensure that
all contractual arrangements for the implementation of the project have an
appropriate allocation of risks, whether delivered as PPP or through public
procurement. For that purpose, contracts should allocate risks to those best
able to manage them, and ensure that any additional transaction costs are
justified in terms of reducing risks or enhancing efficiency (Chan and
others, 2009).
The implementation phase encompasses project design, construction, O&M

and asset disposal at the end of the project cycle. This is typically the phase
when public resources are spent and when the results and outcomes of the
project are delivered. To ensure that the benefits of the project are in
accordance with expectations, and tackle any problems that could occur
along the way, it is important to take an appropriate decision about the
management of the project assets. For that purpose, a systematic and well-
structured contract management approach is necessary. This requires the
regional or local implementing institution to set up a system to monitor and
manage the implementation of the infrastructure contract(s), including
establishing a contract management team. Project monitoring requires the
collection of relevant economic, financial, social and environmental
information. This information should be reported to the national
infrastructure projects institution, which can assess each project according
to relevant benchmarks, and propose correcting measures to the regional or
local implementing institution, if so needed.
6. Improving public sector efficiency to encourage

private sector participation in infrastructure
Much of the recent literature on infrastructure financing has focused on the

size of the financing gaps to be bridged, and the need to further engage the
private sector for that purpose. There is a common perception that the
private sector can mobilize additional resources that complement public
resources, as well as improve project efficiency (Fay, Martimort and Straub,
2018). It is important to keep in mind, however, that the public sector has
traditionally provided, and continues to provide, the lion’s share of public
infrastructure in most countries. According to Fay and others (2019),
globally, the public sector funds between 87 and 91 per cent of
infrastructure investments in low and middle-income countries 15 .
Furthermore, between 2015 and 2016 the private sector’s participation in
infrastructure investment dropped by 37 per cent in developing countries,
reaching the lowest level, measured as a percentage of the GDP, in 10 years
(Harris and Chao, 2017). Although private sector investment in
infrastructure appears to have recovered in 2017 and 2018, it remains low in
relation to historical levels (ESCAP, 2019a). Figure 1.4 shows that private
sector infrastructure investment in Asia and the Pacific increased markedly
between 2000 and 2010, at an average annual rate of 14 per cent; however,
between 2011 and 2018 it was highly volatile and remained below its 2010
peak. Throughout 2000–2018, private sector investment in infrastructure
was heavily concentrated in a few countries; with India, China, Turkey, the
Russian Federation, and Indonesia receiving close to 80 per cent of the total.
Looking ahead, the role of the public sector in funding public infrastructure
is likely to remain large16. This is due in large part to the inclusive character
of infrastructure for the SDGs and its goal of facilitating universal access to
services, such as healthcare, education, water and sanitation, energy and
urban transport. (Also see chapter 3 that discusses the use of ‘externalities’
as a means by which the private sector can be incentivised to engage in
infrastructure by widening the scope of financing available.) In least
developed and developing countries, where large segments of the
population are poor or have modest incomes, the possibility of recovering
15 There are wide variations across regions of the world, from a low of 53–64 per cent in
South Asia, to a high of 98 per cent in East Asia.
16 It is important to keep in mind the distinction between funding and financing. Funding is
about who ultimately pays for the infrastructure, while financing is about the timing of
such payments (with expected larger capital returns in the future). For example, financing
can underwrite the large up-front capital expenditures required in the construction phase
of an infrastructure project to be postponed to the operation and maintenance phase,
when the project will generate revenues from either user fees and/or government
subsidies.
Figure 1.4
Private investment in infrastructure in Asia and the Pacific, 2000–2018
90
80
Billions of United States dollars
70
60
50
40
30
20
10
0
2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
Source: ESCAP based on World Bank (2019), accessed on 10 July 2019.
the cost of providing such services through user fees alone is limited. In
planning such projects, then, governments need to make sure that public
funding is available17.
An important argument in favour of enhancing the participation of the

private sector in infrastructure investment is the expected efficiency gains
associated with better contractual arrangements under PPPs, vis-à-vis
traditional government procurement. This contractual modality transfers
risk from the principal (i.e. the government’s procurement authority) to the
agent (i.e. the private sector operator), thereby contributing to a better
alignment of incentives between principal and agent. Such an arrangement
is expected to reduce the potential for excessive costs during the O&M
phase due to any faults in the design or construction of the assets18. For
example, if a single firm both builds and operates a particular project, it has
an incentive to build it well in order to avoid high maintenance and repair
costs during the operation phase.
17 A mechanism sometimes employed by governments to partially subsidize infrastructure

projects that cannot be fully funded by user fees is viability gap funding (VGF). See Hyun,
Nishizawa and Yoshino (2008) and Regan (2018) for details.
18 In practice, however, other contractual elements can reduce or eliminate these efficiency
advantages. For example, if the government retains demand risk through the provision of
guarantees on the minimum returns for the private operator, the latter will have fewer
incentives to take measures to minimize costs through the project life cycle (Poole, Toohey
and Harris, 2014). It is a form of moral hazard.
These potential efficiency gains have often been highlighted to justify the
higher cost of capital for PPPs, which has been estimated to average around
2 to 3 per cent more than the cost of government debt (Yescombe, 2007).
However, the evidence of efficiency gains from PPPs for infrastructure
projects is somewhat inconclusive (Araújo and Sutherland, 2010; KS and
others, 2016). Engel, Fischer and Galetovic (2010) propose an alternative
explanation for the higher cost of PPP financing, based on inefficient
contractual schemes that assign exogenous risks to the private partner. To
illustrate this point, they consider the example of a fixed-term contract
where the income for the private sector partner comes exclusively from
user fees. If demand is lower than projected during the term of the contract,
the private sector partner will face substantial demand risk, and will factor
this into the return it requires in order to participate in the project. An
alternative that eliminates such a risk is a variable-term contract, which
ends at the time when the cumulative present value of revenues from the
project equals a stipulated amount. Based on their analysis, Engel, Fischer
and Galetovic (2010) conclude that in the absence of efficient contractual
schemes, there is no financial reason to prefer PPPs over public provision
(and they also suggest that PPPs rarely free-up public funds).
However, inefficient contractual arrangements between public and private

partners are not the only reason why private sector investors may be
reluctant to invest in public infrastructure projects, or require a high rate of
return or guarantees to participate in them. Inderst and Stewart (2014)
mention a number of additional reasons, including a lack of political
commitment over the long-term, lack of infrastructure project pipelines,
fragmentation of the market among different levels of government, and
regulatory instability. Indeed, a paucity of infrastructure project deal
‘pipelines’, containing commercially viable infrastructure projects, was
recently highlighted by the Secretary General of the United Nations as
a major challenge to channelling additional finance towards the SDGs
(United Nations, 2019).
All these reasons strongly reinforce the need for the public sector to
streamline the planning and preparation of infrastructure projects.
Governments have an obligation to ensure that their public infrastructure
projects are the most effective to achieve national development goals and
meet international commitments, such as the SDGs, and of implementing
such projects in the most efficient manner. In so doing, they can not only
maximize the value for money emanating from scarce fiscal resources, but
also enhance the interest of private sector investors, and reduce the costs of
private sector participation in infrastructure projects.
7. Concluding remarks
This chapter has sought to make a strong case for improving the quality of
public infrastructure projects in collaboration with the private sector and
other stakeholders so that they support the achievement of the SDGs and
maximize taxpayers’ value for money. While a lot of attention has been put
on the large additional financial resources needed for infrastructure
development, and the need to further engage the private sector for that
purpose, recent literature has emphasized the need to prioritize the quality
of the infrastructure to be built, and to ensure that public funding is used in
the most efficient manner. These considerations are particularly important
for the implementation of infrastructure projects to support the
achievement of the SDGs. This chapter sought to highlight some of the
challenges in effective implementation of infrastructure projects in general,
and infrastructure for the SDGs in particular, with a focus on governance
issues.
With regard to solutions, the chapter discussed the efficacy of streamlining

infrastructure planning and project preparation through new upstream
institutions. These institutions can: i) facilitate the flow of quality
information for the evaluation of infrastructure needs to achieve the SDGs;
ii) systematically reduce social and environmental risks by bringing multi-
disciplinary and cross-sectoral perspectives; iii) maximize efficiencies in
project implementation throughout the country; and iv) ensure consistency
between national-level policies and implementation at the regional and
local levels. Further, streamlining the management of individual projects,
using a whole life cycle approach – encompassing the planning,
preparation, procurement and financing, and implementation stages of
projects – is of significant utility. While the ideas proposed in this chapter
focus mostly on improving the effectiveness and efficiency of public
infrastructure projects, such improvements are also likely to incentivize
private sector participation in infrastructure.
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Chapter 2
Infrastructure Financing through
the Capital Markets
1. Introduction
As discussed in the previous chapter, the scale of investment required for

infrastructure development in Asia and the Pacific is estimated to be
significant, relative to current investment levels. In addition to
infrastructure development, additional spending is needed to tackle
poverty and hunger, provide education, healthcare services, clean energy,
and address climate action and biodiversity. As the total additional
investment requirements amount to $ 1.5 trillion per year on average, or
about 5 per cent the region’s aggregate GDP, a key question is: how to
finance such sizeable investment? Governments have conventionally been
the principal investors in the infrastructure sector in developing countries
worldwide, including in Asia and the Pacific (Fay and others, 2011;
Hansakul and Levinger, 2016; UNCTAD, 2014), but there are competing
demands for finite public funds from numerous other sectors seeking to
provide public goods and services. Clearly, only a portion of the total
infrastructure financing gap in Asia and the Pacific can be met by public
investments alone, especially in the case of least developed countries where
the financing needs are paramount (ESCAP, 2019). However, there is room
for the private sector to contribute more to infrastructure financing,
particularly given that infrastructure service provisioning is considered to
be more commercially viable, relative to other areas of public service
provision, such as health and environmental protection, which are far
harder to ‘monetise’. Indeed, a greater role for private sector participation
in infrastructure development and financing was formally recognized in
the Addis Ababa Action Agenda (AAAA), agreed in 201519. However, for
both governments and private investors to step up their investment in
infrastructure, a suitable mix of financing instruments, platforms, and
vehicles are needed.
Infrastructure development can be financed from various sources. The

taxonomy of such financing mechanisms can be presented from various
dimensions, such as: public versus private sources, domestic versus foreign
sources, money versus capital markets, debt versus equity, and company
19 United Nations (2015, paragraph 8).

versus project levels20. In traditional terms, governments may rely on tax

revenues, sovereign and municipal bond issuances, ‘policy bank’ loans,
state-owned bank and enterprises, as well as grants and subsidized
borrowing from multilateral and development finance institutions to help
underwrite infrastructure development. For the private sector, potential
project financing methods include, among others: commercial bank loans,
equity financing, corporate bonds, project bonds issued by special purpose
vehicles (SPVs), and infrastructure funds. Amid such a wide range of
potential financing options, this chapter focuses on how to strengthen the
role of domestic capital markets and infrastructure-related bonds to help
aid infrastructure financing in Asia and the Pacific.
Compared to bank loans, which are currently the dominant source of

infrastructure financing, bonds have at least two advantages. First, banks
typically hold short-term liabilities (e.g. bank deposits), so they are not well
suited to hold long-term assets (e.g. infrastructure project debt) on their
balance sheets, as this creates a perilous maturity mismatch. Secondly, when
infrastructure project loans to developing economies are provided by
international banks, they are often in an international currency, such as
United States dollars, while the revenues accrued by the projects are
typically in a local currency. This creates a currency mismatch that then
poses convertibility and exchange rate risks (Hyun, Park and Tian, 2017).
Indeed, interest among policymakers in Asia and the Pacific in developing
local-currency bond markets in the region has increased since the 1997-1998
Asian financial crisis, when financial turmoil was triggered in large part by
excessive short-term foreign-currency borrowing that resulted in a perfect
storm of both currency and maturity mismatches (ADB, 2017). Further,
there is some evidence that developing economies with a more developed
local-currency bond market exhibit greater financial stability during
periods of global financial stress (Park, Shin and Tian, 2018). And bond
market development appears to be positively linked with economic growth
in several Asia-Pacific economies (Hue and Tram, 2019).
More broadly, new global capital requirements have the potential to reduce
the capacity of commercial banks to finance long-term projects, such as
those found in the infrastructure sector. For example, Basel III places a limit
on credit exposures to a single counterparty to 25 per cent of a bank’s core
capital. As a result, large banks tend to limit their debt to large projects, and
the ability for smaller banks to finance large projects is significantly
constrained, particularly in countries where perhaps a handful of
companies dominate the infrastructure development ‘space’. Moreover,
20 For example, Della Croce and Gatti (2014); OECD (2015); Regan (2018); Schroders (2017);
World Bank (2019a).
Basel III also requires 100 per cent high-quality liquid assets for the kinds of
SPVs often used in infrastructure project finance.
Despite such advantages of bonds over bank loans, this chapter does not
argue that bonds can fully replace bank loans as the main source of
infrastructure funding in Asia and the Pacific’s developing economies, at
least in the short term. This is primarily because bond markets are either
non-existent or remain modestly small in most countries in the region, and
the process of developing robust and effective domestic capital markets is
a long-term endeavour. Their establishment and operations also entail both
sunk and running costs that need to generate a return of some kind to
justify their existence, not wholly unlike infrastructure projects. (Indeed,
some policy-makers view capital markets as a form of public utility, and
like some high-profile infrastructure projects, capital markets are
sometimes perceived as totems of a country’s economic ambitions.)
Furthermore, bonds are not always suited to all types and stages of
infrastructure projects. For example, the construction phase of
infrastructure projects typically carries high credit and time risks21, which
make them less appealing to ‘fixed income’ (i.e. debt) investors (Ehlers,
Packer and Remolona, 2014). Rather, the principal thesis of this chapter is
that bonds exhibit significant potential to complement bank loans for
infrastructure financing, though this potential remains largely untapped in
many countries in Asia and the Pacific at present. A large part of this
chapter discusses what countries could usefully do to realize such
potential22. It also explores how the region could develop capital markets
that support sustainable development, from the varying perspectives of
governments, bond issuers, investors, and market regulators.
21
Credit risk refers to the risk that the bond will never be paid back, or the collateral will
have to be sold at a loss if the project is not completed. Timing risk refers to the risk of
delayed revenue generation and payments due to construction delays. Relative to bank
loans, bonds are more suitable for the operational phase of infrastructure projects, which
is characterized by stable positive cash-flows (which can even be ‘securitised’) and lower
risk of default.
22 As domestic bond markets do not exist or are small in many countries of the region, the
discussion in this chapter focuses primarily on how countries could develop or expand
a bond market. While this chapter also discusses policies relating to infrastructure bonds,
such as bonds issued by infrastructure companies and projects, the utility of these
relatively advanced financing instruments becomes relevant only after a country has
developed more fundamental elements of the financial sector, such as the banking sector
and a government bond market.
2. Infrastructure bond financing: where does Asia-

Pacific stand?
This section takes stock of where Asia and the Pacific stands on the use of
bonds to finance infrastructure development. It first presents some data on
the sources of funding of infrastructure finance and then highlights some
areas of regional cooperation and integration aimed at promoting the wider
use of infrastructure bond financing in the region.
2.1. The use of bonds for infrastructure financing
The use of bonds to finance infrastructure development in Asia and the

Pacific is not as frequent as some other regions of the world. Figure 2.1
depicts the different sources of funding for infrastructure finance across
different parts of the world in 2018, spanning project finance, corporate
finance (excluding company acquisitions), and public sector finance
transactions (excluding publicly funded infrastructure development)23. The
infrastructure sectors included here are: transport, power, renewable
energy, water and sewage, and telecommunications. The figure shows that
bonds accounted for only 13.1 per cent of total infrastructure finance in
Asia and the Pacific in 2018. This is largely on a par with the Middle East,
North Africa and Sub-Saharan Africa, but markedly lower than in Europe
(at about 20 per cent), and Latin America and North America (both at about
30 per cent). Bank loans accounted for the majority of infrastructure finance
in Asia and the Pacific, at 55.2 per cent. The remaining balance came from
equity financing (13.8 per cent) and loans from development finance
institutions (17.9 per cent).
Overall, infrastructure finance in the region has stood at around $ 125

billion annually (see panel A of figure 2.2), but the value of bonds issued for
infrastructure financing increased from about $ 11.0 billion in 2015 to
$ 16.6 billion in 2018. Nonetheless, the average share of funds raised from
bonds during the period 2015-2018, was just 10.8 per cent; smaller than
both bank loans (50.1 per cent) and equity financing (25.9 per cent). For
project finance only, which typically accounts for close to half of all
23
Project finance includes transactions such as funding ‘greenfield’ and ‘brownfield’ projects,
expansion of existing assets, refinancing existing project finance debt, and funding
straight acquisitions of infrastructure assets. These transactions normally have at least one
private sector sponsor, while debt financing is on a non-recourse or limited-recourse basis.
Corporate finance includes infrastructure financing through equity or debt, or
a combination of both, on a basis that is not non-recourse or limited-recourse. Public sector
finance transactions include infrastructure financing that is entirely driven by state-owned
entities, and/or financed entirely by development finance institutions (DFIs) on the debt
side. Only transactions with a total deal value of at least $ 1 million are included here.
Figure 2.1
Regional differences in sources of funding for infrastructure finance, 2018
Source: ESCAP based on IJ Global (2019).

Note: Development finance institution (DFI).
Figure 2.2
The size of infrastructure and project finance in Asia-Pacific, 2015-2018
Panel A. Infrastructure finance Panel B. Project finance
Source: ESCAP based on IJ Global (2019).

Note: Development finance institution (DFI).
infrastructure finance, the dominance of bank loans over other sources of

funds is even more pronounced (see panel B of figure 2.2).
The limited use of infrastructure bond financing in Asia and the Pacific
mirrors the region’s small bond markets, relative to the size of bank credit
and equity market activity. In China, the Republic of Korea and six
emerging economies of South-East Asia24, which together account for about
24 Indonesia, Malaysia, Philippines, Singapore, Thailand and Viet Nam.
65 per cent of the combined GDP of developing economies in Asia and the
Pacific, the outstanding values of local-currency government and corporate
bonds are smaller than the respective size of bank credits extended to the
private sector (see figure 2.3). Similarly, when comparing the size of
corporate bond markets and equity markets, the stock market
capitalizations of the same six developing economies of South-East Asia are
between three and 28 times larger than the outstanding values of local-
currency corporate bonds. In the less developed countries of the region,
where bond markets are either non-existent or at a nascent stage of
development, the role of bonds as a financing instrument – whether in
general or specifically for infrastructure finance – is even more limited.
Figure 2.3
The size of bond markets, bank credits and stock markets in select
Asia-Pacific countries
Source: ESCAP based on ADB (2019a) and World Bank (2019b).

Notes: Only bond obligations denominated in local currencies are considered here. Government bonds
include obligations by the central government, local governments, the central bank, and state-
owned entities.
2.2. Regional cooperation on bond market development
As figure 2.3 illustrates, the level of bond market development is diverse

even among the key developing economies of Asia and the Pacific. In
South-East Asia, the size of bond markets varies considerably, from
between 76 per cent and 98 per cent of GDP in Malaysia, Singapore and
Thailand, to between 19 per cent and 35 per cent of GDP in Indonesia, the
Philippines and Viet Nam. (Cambodia, Lao People’s Democratic Republic

(Lao PDR) and Myanmar currently do not have fully active bond markets,
although some tentative first steps have been made.) Such variation in
bond market development provides an opportunity for experiences and
lessons learnt to be exchanged between regional peers. Indeed, the
Association of Southeast Asian Nations (ASEAN)+3 (i.e. all the members of
ASEAN, plus China, the Republic of Korea and Japan) countries launched
the Asian Bond Market Initiative (ABMI) in 2003, which is aimed at
strengthening regulatory frameworks and the necessary bond market
infrastructure. Also, under the ABMI umbrella, the Credit Guarantee and
Investment Facility (CGIF) was established in 2010 to provide guarantees
on corporate bonds (mainly in local currencies) issued by firms in the
ASEAN+3 countries. In addition to securing long-term financing, the CGIF
also seeks to reduce firms’ dependency on short-term foreign currency
borrowing, and address both currency and maturity mismatches. As of
end-2018, the CGIF had issued 20 credit guarantees with a combined value
of $ 1.41 billion. Also, under the ABMI, the ASEAN+3 Multi-Currency Bond
Issuance Framework helps facilitate intra-regional fixed income
transactions, by promoting common market practices and standardized
conditions for bond issuance, such as disclosure standards and common
documents. Supported by this initiative, the Lao PDR has issued (baht-
denominated) government bonds on Thailand’s capital market, for use
in financing infrastructure investment. Cambodia has also announced plans
to establish a local currency bond market in the near term. Another
cooperation initiative is the Asian Bond Market Forum, which was
established in 2010 as a common platform for bond market experts from
Asia and the Pacific region, to foster the standardization of market practices
and harmonization of regulations relating to cross-border bond
transactions. And a bond-pricing portal among five banks in Indonesia,
Malaysia, the Philippines, Singapore, and Thailand was launched in 2013 to
serve as a precursor for an electronic trading platform.
3. Why bond financing is not more widely used for

infrastructure
The previous section illustrated that bonds are used much less than bank
loans and equity financing to underwrite infrastructure development in
Asia and the Pacific. Assuming that an adequate number of investable
infrastructure projects are available, this section identifies factors that
explain why governments and other market players, such as infrastructure
companies and SPVs, choose not to – or are unable to – use bonds as
a means of financing infrastructure development projects.
3.1. Factors relating to bond issuers
The issuance of public bonds is not common in the developing economies

of Asia and the Pacific. Between 1995 and 2016, of the 47 countries with
available data, 20 countries have never issued any government bonds, 11
countries have publicly issued domestic bonds only, and just 16 countries
have publicly issued both domestic and foreign bonds (ESCAP, 2018). Most
countries that have never issued a public bond are either a least developed
country (LDC) or a small island developing state (SIDS). As figure 2.4
clearly shows, these are also countries in which the required additional
investments needed to achieve the Sustainable Development Goals are
estimated to be large (ESCAP, 2019), and a kind of inverse correlation exists.
Even among the countries that have previously issued public bonds, the
scale of bond issuances has generally been modest. The average annual
amount of domestic public bond issuance across 24 developing economies
in Asia and the Pacific was equivalent to about 2.6 per cent of GDP during
the period 1995-2016.
Figure 2.4
Investment needs on the SDGs and bond issuance status
Source: ESCAP (2019).

Why are sovereign bonds not more widely used to support public
spending, including on infrastructure investment? A quantitative study
conducted by the United Nations Economic and Social Commission for
Asia and the Pacific (ESCAP) (2018) revealed that countries that have
a larger total debt stock, face wider fiscal and current account deficits,
exhibit a weaker regulatory framework and have less open trade regimes
and less developed financial systems find it more difficult to issue public
bonds25. Most of these economic and institutional factors, together with
public revenue collection capacity and past economic growth records, are
taken into account when calculating sovereign credit risk ratings. In this
context, numerous governments in Asia-Pacific have limited access to bond
markets because of poor (or none) sovereign credit risk ratings26. Figure 2.5
shows that over half of the developing economies in the region are
Figure 2.5
Sovereign credit risk ratings across developing economies
Source: ESCAP based on Trading Economics (2019).

Notes: The ratings are based on Moody’s indicators: (1) is prime; (2) is high grade; (3) is upper-medium
grade; (4) is lower-medium grade; (5) is non-investment grade; (6) is speculative; (7) is highly
speculative; (8) is substantial risks; (9) is extremely speculative; and (10) is in default, with little
prospect for recovery.
25 These results are also consistent with those of other studies, such as Csonto and
Ivaschenko (2013); Mu, Phelps and Stotsky (2013); and Presbitero and others (2016).
26 Not all countries in Asia and the Pacific have a sovereign rating. Three ratings agencies
dominate the field, and there is a charge incurred if one wants to initiate and monitor a
country’s rating. They are therefore often only rated when there is a specific need, such as
an impending sovereign debt issue. Without sovereign ratings serving as a benchmark for
the economy as a whole, it is problematic to get a municipal, bank, company or project
bond rated.
currently rated as non-investment grade or worse (so-called ‘junk bond’

status).
Poor sovereign credit risk ratings for many economies in Asia and the
Pacific have a direct and adverse impact on the credit risk ratings of
corporations and projects in those countries. Although the ratings of
infrastructure companies and projects depend considerably on their
financial flows and risk mitigation measures, the lower sovereign rating in
itself creates a hurdle for bond investors, since virtually all bond issuers are
rated somewhere below the ‘benchmark’ sovereign rating of the host
country. Meanwhile, credit risk ratings are also an issue for corporate bond
markets. As corporate bonds are usually clustered in higher credit ratings,
corporations that do have access to bond market funding are primarily:
i) well-rated and often listed public sector entities such as state-owned
enterprises; ii) large infrastructure companies with a diversified project
portfolio and investment-grade rating; and iii) project finance companies or
special purpose vehicles (SPVs) that have a stand-alone or credit-enhanced
investment-grade rating. In South-East Asia, the top ten bond issuers
account for between 60 per cent and 90 per cent of individual countries’
total corporate bond issuance. Such a high concentration of bond issuers
limits market depth, creates the risk of higher market volatility, and
increases investors’ exposure to sector-specific risks.
3.2. Factors relating to bond market structure, intermediaries

and architecture
Another factor that tends to limit the use of infrastructure-related bond

markets in Asia and the Pacific is the low development level of domestic
capital markets. Except for a few economies in the region, which serve as
some of the world’s leading financial centres, most capital markets in the
region remain generally small, with low levels of market liquidity, which
undermines their potential role in channelling available savings into
investments for sustainable development, including various infrastructure
sectors. Figure 2.6 shows the International Monetary Fund’s (IMF’s)
Financial Market Development Index across 45 countries in Asia and the
Pacific countries in 2016. The index measures the: i) depth (i.e. market size
and liquidity); ii) access (i.e. the ability of individuals and companies to
access financial services); and iii) efficiency (i.e. the ability of institutions to
provide financial services at low cost) of stock and bond markets
(Svirydzenka, 2016). The results clearly show a diverse level of capital
market development in the region. Capital markets in countries such as
Australia, Japan, and the Republic of Korea are considered highly
developed. In contrast, countries in North and Central Asia, and South and
South-West Asia, exhibit largely under-developed capital markets, except in
Figure 2.6
Capital market development in Asia and the Pacific:
IMF financial market development index, 2016
Source: ESCAP based on IMF (2019).
India, Kazakhstan, the Russian Federation and Turkey. Further, capital

market development level remains particularly low in all Pacific island
developing economies.
Another indicator that has been created to measure the level of capital
market development, specifically among selected emerging Asia-Pacific
economies, is the McKinsey Asian Capital Markets Development Index
(McKinsey & Company, 2017). The index comprises three components:
i) funding at scale, which measures the size of equity, government and
corporate bond issuances, availability of long-term debt issuances, the size
of foreign portfolio investment, and inflation-adjusted cost of equity and
debt; ii) investment opportunities, which captures the stock of capital
market assets and risk-adjusted returns; and iii) market efficiency, which
reflects the quality of pricing information, such as availability of
information on past market trends and information that can be used to
predict future market trends. Overall, the result is congruent with the IMF’s
financial market development index (see figure 2.7, panel A). Across the
three components, countries tend to perform better on the funding at scale,
followed by investment opportunities, and market efficiency. For example,
in Pakistan and Viet Nam, while the size of capital markets and investment
opportunities are rated as moderate, the availability of pricing information
is considered to be very shallow (see figure 2.7, panel B).
As the above indices suggest, an effective bond market comprises of several

elements. Overall, the literature highlights the following components: i) an
effective legal framework for the issuance process, such as frameworks for
different types of issuers and investor protection; ii) a sizeable investor
base, such as retail, institutional and foreign investors; iii) a diverse set of
products, such as corporate, sovereign and project bonds; iv) adequate
market liquidity, such as trading volume and secondary bond market;
v) knowledgeable financial intermediaries, such as business analysis
capacity of investment banks and securities firms; vi) an enabling market
infrastructure, such as credit rating agencies, bond pricing agencies, and
clearinghouses; and vii) other broader issues, such as strong corporate
governance, contract enforcements, harmonization of international
standards, and transparency (ADB, 2015; ESCAP, 2018 and Merican-
Cheong, 2014). The capital markets in most developing countries of Asia
and the Pacific region lack several of these elements.
Narrow investor base
In most Asia-Pacific countries, domestic commercial banks remain the

largest group of investors in locally issued corporate bond markets. In
addition to the likelihood that tighter international capital adequacy
requirements may force banks to reduce their exposure to bond markets,
broadening the investor base is important, because it helps to reduce
market volatility and decrease the exposure of one type of investor to
sector-specific risks. However, the role of (non-bank) institutional investors
in infrastructure financing remains limited. Institutional investors typically
refer to a group spanning pension funds, mutual funds, sovereign wealth
funds, and insurance companies. Assets under management by institutional
investors in the developing economies of Asia and the Pacific are estimated
to be large, standing at $ 14.2 trillion in 2016 (ESCAP, 2018). The large
amount of financial assets under management, and the fact that the
liabilities of many institutional investors are longer term in nature, are both
consistent with investment in long-term development projects such as
infrastructure, and thus suggests that institutional investors have
considerable potential to contribute to infrastructure financing. And yet
these funds are generally not being channelled into long-term financing. In
China, for example, institutional investors hold only 3 per cent of total
outstanding government bonds. The equivalent share is also moderate in
Indonesia, Japan, Malaysia and the Republic of Korea, at between 17 per
cent and 38 per cent (figure 2.8). More broadly, institutional investors
accounted for just 0.7 per cent of investment in infrastructure projects with
Figure 2.7
Capital market development in Asia and the Pacific:
McKinsey Asian capital markets development index
Panel A: Overall index value
Panel B: Development level, by component
Funding Investment Market

at scale opportunities efficiency
Japan
Australia
Republic of Korea
Singapore
Malaysia
Thailand
China
India
Philippines
Indonesia
Pakistan
Viet Nam
Source: ESCAP based on McKinsey & Company (2017).

Figure 2.8
Holders of government bonds in selected Asia-Pacific countries
Source: ESCAP based on ADB (2019b).

Note: Institutional investors here are primarily pension funds and insurance companies.
private sector participation in developing economies worldwide in 2018

(World Bank, 2019). As a result, a large part of such financing still comes
from traditional bank loans.
Studies have suggested several reasons why engagement by institutional

investors in infrastructure projects remains limited. First, while liabilities of
institutional investors are long-term, the incentive system still motivates
fund managers to take a short-term view of their investments. About
two-thirds of pension funds review the performance of fund managers on
a quarterly basis, although 60 per cent of them agree that the key
investment period is longer than a year (Aviva, 2014). Secondly, the laws
and regulations that govern the fund management industry in some
countries remain overly restrictive. For example, Biswas (2016) noted that
institutional investors in numerous Asia-Pacific economies are not
permitted by law to invest directly in real estate or infrastructure. Thirdly,
many domestic institutional investors lack the required expertise to assess
and manage the specific kinds of risks associated with infrastructure
projects (Verougstraete and Areas, 2018). Fourthly, the political risks in
financing infrastructure projects are often perceived as high, as returns can
be significantly influenced by abrupt changes in government policies and
regulations (Genberg, 2015). Fifthly, Alexander (2018) has noted that the
profit profile of infrastructure assets tends to exhibit a ‘j-curve’ (i.e.
investors must be willing to tolerate sunk investment for several years,

sometimes due to construction delays, before operations begin and cash
flows are generated). Finally, Della Croce and Yermo (2013) have
highlighted the limited availability of financing vehicles and debt
instruments, as well as the lack of high-quality infrastructure data and clear
benchmarks; a situation that makes it more difficult to assess the levels of
risk.
Limited diversity of products
Among other non-conventional financial products, the potential of Islamic

finance remains largely untapped. Islamic finance refers to financial
services that are compliant with Sharia Islamic law and principles27. Some of
the key features that distinguish Islamic finance from conventional finance
are its emphasis on an asset-based (as opposed to a debt-based) approach,
prohibition of financial transactions with interests or in speculative
activities, and linkages to the real economy, such as production and trade
sectors. Moreover, Islamic finance promotes risk-sharing by forbidding the
sale of debt, thus requiring lenders to share the risk of default. These
principles make Islamic finance particularly suitable for long-term
investment in sectors such as infrastructure. Yet, the share of the total global
worth of Islamic financial services, held by financial institutions based in
Asia and the Pacific, was surprisingly low, at 22 per cent in 2017, or about
$ 425 billion in value terms (see figure 2.9). Although the region has an
important role in sukuk (the Islamic equivalent of bonds), accounting for
close to 60 per cent of the world’s outstanding value of this instrument, this
is mainly attributable to the active market in just one country – Malaysia.
Limited market liquidity
While the primary issuance of bonds has continued to expand in many

Asia-Pacific countries, the trading volumes and overall liquidity of the
secondary markets for ‘fixed income’ paper remain fairly limited.
(Secondary markets are where previously issued securities are bought and
sold to investors). Limited market liquidity is important because illiquid
bond markets cannot provide investors with easy, pre-term exits
at transparent and realistic exit prices. And where this is the case, it is quite
likely that fund managers will be prohibited from buying such bonds, for
fear that they will be unable to ‘offload’ the paper at a later date, should
a pressing need arise. Or if they are not prohibited, they will demand
a higher rate of return on the bond to compensate them for taking on this
27 Sharia is the code of laws followed by the Muslim community based on the Quran (Islam’s
religious book) and the Sunnah (the teachings and lifestyle of Prophet Muhammad).
Figure 2.9
Total worth of Islamic financial service industry, 2017
‘ ’ ‘ ’
Source: ESCAP based on Islamic Financial Services Board (2018).

Notes: Sukuk is the Islamic equivalent of a bond, while takaful is the Islamic alternative to conventional
insurance.
Figure 2.10
Government and corporate bonds turnover ratios in selected
Asia-Pacific economies
Source: ESCAP based on ADB (2019b).

additional risk. One indicator of constrained market liquidity is in the size

of the bid-ask ‘spread’ in the price of a bond on the secondary market,
between investors wishing to buy and those wishing to sell. A large spread
suggests that there is insufficient liquidity. Another indicator is the bond
turnover ratio, which is measured as a ratio between the value of bonds
traded relative to the average amount of bonds outstanding. In several
major Asia-Pacific economies during the period 2015-2018, the average
bond turnover ratio for corporate bonds was low, at 0.1-0.8, compared with
1.2-2.7 for government bonds (figure 2.10). The primary reason for such low
liquidity is that most corporate bonds have shorter-term tenors
(i.e. length of time to maturity) of less than five years, which then adversely
impact secondary market liquidity, because investors tend to hold the
bond to maturity.
Weak credit rating mechanism
Credit ratings seek to provide investors with reliable assessments, and

support them in making informed decisions. Ratings form an important
evaluation instrument in credit markets, especially in emerging markets
where there tends to be significant information opacity and asymmetries.
Overall, credit rating mechanisms in Asia and the Pacific face several
challenges. First, many countries in the region still do not have local credit
rating agencies, partly because of their small market size, which then
impacts on the viability of providing an independent and commercially
sustainable ratings service. Available information suggests that there are at
least 40 national rating agencies that have their headquarters in the region,
but many of these are concentrated in major economies, such as China,
India and the Republic of Korea28. Secondly, many credit rating agencies
have limited and irregular access to authentic corporate information,
typically due to a lack of adequate regulations needed to support strong
governance oversight and reporting mechanisms. Thirdly, despite some
efforts to make ratings by domestic agencies in the region comparable
(IIMA, 2013), the degree of compatibility remains low due to the use of
different methodologies, criteria, definitions, and benchmarks. Fourthly,
local credit rating agencies sometimes operate under a conflict of
commercial interest, as they ‘cross-sell’ their services (e.g. credit rating
agencies earning income from providing consulting services to bond
issuers). Finally, local agencies are often not equipped with sufficient
analytical capabilities to capture the specificities and complexities of large
infrastructure projects. For example, the rating of bonds used to underwrite
greenfield and brownfield infrastructure projects typically require different
forms of analysis, because of divergences in their revenue streams, cost
structures and public financial support.
28 The Association of Credit Rating Agencies in Asia (2019) and Ratingplatform (2019).
4. Leveraging capital markets for infrastructure

financing: selected policy options
This section discusses two broad groups of policies that governments, bond
market regulators and other market players could take to address such
impediments. The two groups are: i) providing an enabling economic
environment; and ii) further strengthening the bond market architecture.
4.1 Ensuring an enabling economic environment
A government’s ability to issue sovereign bonds, and the complementary

role this has in the development of a corporate bond market, depends not
only on the quality of government operations, but also on other economic-
wide factors, including macro-economic stability and financial sector
development. Inflation and currency fluctuations are particularly important
for infrastructure bonds. High inflation pushes up operating costs, which is
one of the main risks in forecasting and managing adequate project
revenues for long-term infrastructure projects. Under the ‘availability
payment’ model, in which regular payment is made by public procuring
authorities to the project company for performance (typically assessed
against the key performance indicators specified in the concession
agreement), irrespective of demand for the project, governments may
consider ‘indexing’ a portion of payments to current inflation rates.
Alternatively, in cases where revenues from an infrastructure project are
based on user charges, building in appropriate increases in user charges to
compensate for inflation is also possible.
Foreign bondholders are also exposed to currency risk, as the project

revenues are typically in a local currency, while bond payments are often in
a ‘hard’ international currency. Foreign investors, therefore, benefit from
hedging instruments, such as swaps, that allow them to mitigate part of
this risk. However, infrastructure assets are widely deemed to be difficult to
hedge for, even when swap markets function well, because project finance
lending is usually based on cash flows, and a common need for waivers
during the construction phase. In this regard, in the case of termination
payments under concession agreements, there should be appropriate
compensation for the additional costs incurred in cases of early termination
of a project. Further, bondholders should also be assured that the relevant
procuring authority has sufficient creditworthiness, or credit support from
a government or multilateral development bank, to make these payment
obligations enforceable.
In less developed economies, commercial banks largely operate in the retail

finance space (i.e. serving individual and small business customers), and
offer short- or medium-term loans in relatively small denominations.
Therefore, notwithstanding their economic roles as financial intermediaries,
their ability to offer long-term debt for large-scale infrastructure projects is
often constrained, due to the risks of maturity and other mismatches.
Nonetheless, a robust banking sector is crucial for the development of
a bond market. In addition to providing lending to smaller infrastructure
projects, local banks can serve as both the issuers of corporate bonds
themselves and subscribers of sovereign and infrastructure-related bonds.
Moreover, the overall availability of bank credit in an economy often
influences liquidity in the bond markets. The banking sector and bond
markets thus play a complementary and potentially synergistic role.
4.2 Further strengthening bond market structure,

intermediaries and architecture
There are various policy actions that can be taken to develop a well-
functioning capital market29. Here we focus on a set of selected policy
options aimed at deepening the sovereign bond market, widening the
investor base, diversifying financial instruments, increasing market
liquidity, improving a risk transfer and credit enhancing mechanism, and
protecting investor rights. This section also highlights selected policy
measures that can be used to specifically support the development of
corporate bonds and infrastructure project bonds. Clearly, depending on
a country’s current stage of capital market development, some policy
options are more relevant than others. For example, for countries at an
early stage of development, establishing (or expanding) a sovereign bond
market is most relevant. For countries with a relatively more developed
capital market, policies aimed at increasing market liquidity and protecting
investor rights become more relevant, while policies to promote
infrastructure company and project bonds in particular can only be
considered once the basic fundamentals of a capital market are in place.
Deepening a sovereign bond market to facilitate the development of corporate and

project bonds
Traditionally, as a debt capital market matures, countries will first see

sovereign bond issuance, followed by the issuance of corporate bonds and
then project-based bonds, including those issued by infrastructure
companies and SPVs (figure 2.11). In a corporate bond structure, the rating
and pricing are based primarily on the balance sheet of a multi-asset
29 For example, ADB (2019b) and Verougstraete and Aras (2018).

Figure 2.11
Hierarchy and sequencing of domestic financial market development
Source: ESCAP based on Karacadag, Sundararajan and Elliot (2003).
infrastructure company that oversees development and operation of the

project, rather than on the project’s actual cash flows. In contrast, a project
bond structure is based purely on the project’s revenues, without recourse
to other flows generated by project initiator, and bond proceeds can be only
used for specified set of project-related investments (see box 2.1 on two
examples of infrastructure project bonds in Asia and the Pacific). As such,
infrastructure project bonds are usually complex because each project is
unique, with different risk allocations and expected rates of return. For
example, different infrastructure sectors have differing profiles for
regulated long-term concession contracts that help secure revenues for debt
repayment. More broadly, a lack of uniform data to benchmark the
infrastructure asset class also weakens a portfolio manager’s ability to
predict returns for investors.
A well-developed sovereign bond market plays a critical role in supporting

the development of corporate and project bonds that tend to be more
complex in nature. In particular, government bonds generally offer the
lowest coupon rates, thus serving as a reference point and providing yield
curve benchmarks and price discovery for other bond issuers. Moreover,
relatively risk-free assets, such as government bonds, also help increase
investors’ familiarity with a bond market, which potentially makes them
more comfortable to invest in riskier assets, such as infrastructure project
bonds.
Box 2.1
Examples of infrastructure project bonds in
Asia and the Pacific
In the Philippines, the Tiwi-MakBan Climate Project Bond was issued
in 2015 with a tenor of 5-10 years. The issuance, which was the first credit-
enhanced local-currency project bond for the Philippines, helped to raise
$ 225 million to finance two of the world’s largest geothermal projects. The
project benefited from a partial credit guarantee by the Asian Development
Bank, which helped it to secure a favourable credit rating. This model
demonstrates an opportunity for Asia-Pacific issuers to access domestic debt
capital markets for projects that would not otherwise qualify for financing.
In Indonesia, the Paiton Energy Debt Refinancing Project Bond was
issued in 2017 for $ 2.75 billion, making it one of the largest transactions in
the project bond space. Listed in the Singapore Exchange, the proceeds were
used to prepay outstanding debt facilities and shareholders loans, and for
general corporate purposes of the independent power producer PT Paiton
Energy. The financing package comprised a 20-year bond of $ 800 million,
a 13-year bond of $ 1.2 billion, and a 6-year corporate loan facility of $ 750
million. The company provided an unconditional guarantee for the debt
financing package.
Source: ESCAP based on Thomas (2016) and Inframation (2019).
Widening the investor base: the role of institutional investors
Governments can pursue a wide range of policy options to increase the

contribution of institutional investors to infrastructure financing. Among
others, the Asian Development Bank (ADB) (2013) and ESCAP (2017)
emphasize the importance of: i) facilitating foreign investment, through
relaxing certain capital controls, increasing the availability of hedging
instruments, and supporting the development of foreign financial
institutions which can act as facilitators of institutional investors;
ii) promoting financial integration through harmonizing standards and
regulations, which helps to reduce cross-border transaction costs;
iii) strengthening the role of local credit rating agencies, which can
potentially provide more in-depth information relative to international
rating agencies; iv) incorporating the concept of shared social and
environmental values into the design of infrastructure projects, thus
making them more appealing to impact-oriented institutional investors;
and v) reviewing tax policies, including potentially offering favourable tax
treatment for infrastructure-linked investment. In addition to improving
the enabling environment for institutional investors, some countries have –
somewhat controversially – adopted financial regulations that mandate
infrastructure financing by institutional investors. For example, in India,
one regulatory agency stipulates that life insurers must invest 50 per cent of
their portfolio in government bonds, 35 per cent in other approved
securities, and 15 per cent in infrastructure firms. However, it is also
required that three quarters of insurance companies’ total funds must be

invested in highly rated securities, so their contribution in financing
infrastructure financing products or infrastructure projects during
construction (which typically carry low ratings) is severely constrained.
Diversifying financial instruments: the role of Islamic finance
There are several policy actions that can be pursued to further increase the
role of Islamic finance (ESCAP, 2018). First, the tax and regulatory
framework can be made more conducive to Islamic finance. In many cases,
while interest payments from some conventional financial instruments are
tax-deductible, returns from profit-sharing ‘sukuk’ instruments remain
fully taxable. Secondly, the standardization of guidelines for structuring
Islamic financial products can help these products become more appealing
to a larger pool of investors. Thirdly, deeper domestic capital markets help
facilitate secondary trading and overall liquidity of Islamic financial
products, and provide a stronger benchmark for their pricing in the
long-term. (Available data show that only a fifth of all ‘sukuk’ issued
globally in 2014 had a maturity period of at least 10 years compared with a
term of up to 20 years for many conventional infrastructure bonds in the
region.) Fourthly, more capable Islamic financial institutions and an
enabling legislative framework are needed to carry out the kinds of
complex structuring usually entailed in infrastructure project financing. For
example, the transfer of assets into SPVs is required in some cases, which
may create a risk that the government will lose control of the asset in case
of a default. Finally, a shortage of Islamic finance experts has led to notable
discrepancies in practices involving Islamic financial transactions, thus
undermining investor confidence in this part of the wider financial
industry.
Governments in Asia and the Pacific are already making efforts to boost
infrastructure investments through greater use of Islamic finance. In
Malaysia, where funds raised from ‘sukuk’ have been used to finance
infrastructure projects like airports, seaports and roads, favourable tax
treatment is given to Islamic financial products. In Pakistan, the
government accorded tax neutrality for ‘sukuk’ issuance, while Islamic
banking institutions are allowed to opt-out from benchmarking certain
products against interest-based benchmarks. In Australia, tax laws are
reviewed to ensure parity between Islamic and conventional financial
products, while tax guidance on Islamic financing is published in Hong
Kong, China. At the multilateral level, a plan to set up an Islamic
infrastructure bank has been put forward by the Islamic Development Bank
(IsDB) and countries such as Indonesia and Turkey. Moody’s, a ratings
agency, has forecast that by 2020, total sovereign and supranational sukuk
issuance will pass the all-time high of $ 93 billion, reached in 2012, up from
$ 78 billion achieved in 201830.
Increasing market liquidity
A policy effort to increase the liquidity of secondary markets for bonds

should seek to create a structured pre-term exit option, which is backed by
a bankable commitment in the form of bond buybacks and exchanges. In
addition, there is also a need to improve cash management capacity and
risk management practices of market participants, broaden the range of
sophisticated market instruments and derivatives, and strengthen the legal
infrastructure and enforceability of repurchase agreements. In this regard,
Park (2016) noted that key reforms might usefully include: i) enhancing the
market architecture to provide greater transparency; ii) promoting market-
making activities; iii) introducing prudential norms and risk management
practices for market participants; iv) increasing the size of benchmark
bonds and extending the yield curve to longer tenors; v) moving towards
market-based implementation of monetary policy by stimulating the
interbank repurchase market; and vi) fostering greater institutional
investment and foreign participation.
Improving a risk transfer and credit enhancing mechanism
The ‘bankability’ of bonds is largely a function of their risk profile.

Improving a bond’s risk profile is possible through a range of potential
fiscal support and regulatory policies, such as tax benefits, duty waivers,
insurance products, and appropriate guarantees against default. On tax
benefits, governments may consider waiving the withholding tax of
infrastructure-related bonds. Meanwhile, as the share of ‘non-bankable’
infrastructure projects in developing countries is often high, at between 55
and 65 per cent in Asia and the Pacific, according to an estimate by Marsh
& McLennan Companies (2018), guarantees against default may need to be
provided by governments and multilateral financial institutions (ASIFMA–
ICMA, 2016). For example, on infrastructure projects where private
investors bear the demand risk (e.g. toll payments on road projects), state
guarantees on a proportion of the company’s revenue stream can help to
increase the perceived ‘bankability’ of the project as a whole. One example
of an initiative to de-risk infrastructure projects is the Indonesia
Infrastructure Guarantee Fund (IIGF). The Fund aims to improve the
creditworthiness of public-private partnerships (PPPs) for infrastructure
projects by providing guarantees on the financial obligations of public
contracting agencies participating in PPP consortia. The IIGF provides
30 Moody’s Investors Service (2019).

compensation if the economic feasibility of the PPP project is compromised

due to events, such as early termination or project default, as a result of
changes in law, expropriation, currency inconvertibility, or force majeure.
Hyun (2017) and Ashurst (2018) have highlighted other case studies in
Bangladesh, India and the Republic of Korea. Outside Asia and the Pacific,
the Project Bond Credit Enhancement in Europe takes the form of a loan
that is given to the project company from the outset, or a contingent credit
line in event of a project revenue shortfall.
Protection of investor rights
Bond buyers face various risks, such as: i) expropriation risk; ii) lack of
transparent, adequate and timely business reporting by bond issuers; and
iii) insider trading and preferential off-market deals. A strong regulatory
framework that provides a suitable level of protection of bondholders’
rights is crucial for market participation by large investors, and for the
overall growth of domestic capital markets. In this regard, a robust investor
protection framework should usefully include: i) a bankruptcy law that
helps to determine the rights and obligations of market participants;
ii) effective contract enforcement; iii) separate treatment and management
of assets owned by intermediaries and clients; iv) acquisition of licenses for
brokers and advisors to operate; and v) legal resources in support of market
participants and efficient conflict resolution, which allow investors to
initiate legal actions against entities such as brokers, dealers, corporate
issuers, clearinghouses and the government itself. At a contract level,
a provision on cross-default agreements, which puts a bond issuer in
default if it defaults on a different obligation, also helps enhance investor
protection.
Policy measures to support corporate bond markets
In several emerging Asia-Pacific countries, various measures to promote

the development of corporate bonds have been in place (Goswami and
Sharma, 2011). Among others, initiatives to facilitate the issuance process of
corporate bonds include allowing corporate entities to issue project bonds
(China); introducing a bond pricing agency to provide reference bond
prices (Indonesia); waiving the listing fees or providing tax incentive for
issuing debt securities (Malaysia and Thailand); and allowing foreign
governments and financial institutions to issue local currency bonds
onshore (Thailand). Moreover, there are also supportive measures
introduced for corporate bonds that have already been issued, such as
allowing locally-listed banks to trade bonds on the stock exchanges
(China), setting up an electronic trading platform for government and
corporate bonds (Hong Kong, China), introducing a bond market
stabilization fund (Republic of Korea), and increasing the limit on foreign
institutional investors to invest in local currency corporate bonds (India). In

December 2018, Wuhan Metro Group in China issued $ 400 million in
“green senior unsecured perpetual securities”, listed in Hong Kong, China.
The company has a mandate from the municipal authorities of Wuhan, the
capital of Hubei province in China, to exclusively own and operate the
city’s growing metro system. The funds raised from the bond issue are
being used to help underwrite a series of eligible activities consistent with
the International Capital Market Association’s ‘Green Bond Principles’31.
Regulatory and financing frameworks to support infrastructure project bonds
In emerging markets, the regulatory frameworks for debt offerings often

contain requirements that are not well suited for projects structured on
a limited or non-recourse basis. Examples include a requirement for issuers
to meet specific financial ratios or have a minimum number of years of
operation. In this regard, securities regulators should review and adjust
certain regulations, such as disclosure practices of sensitive information on
infrastructure projects and flexibility for tailor-made solutions aligned with
the diversity of infrastructure assets. Meanwhile, as infrastructure project
financing typically has many creditors (such as commercial banks, export
credit agencies and individual bond-holders), managing inter-creditor
arrangements to provide waivers and consents in the underlying project
can be challenging, due to divergent interests, and project companies need
to work with procuring authorities and legal advisors to determine the best
arrangement. On finance structuring, infrastructure projects usually require
underlying products that address some of the distinctive issues in
infrastructure projects, such as liquidity and tenor, user charges and
exclusivity, changes in law cover, first loss default, and change in
ownership. Tailoring financial products should aim to leverage the
attributes of different infrastructure sectors and projects, while keeping in
mind those risk factors that pertain to the nature and complexity of
a specific infrastructure project. An example is the use of an ‘availability
payment’ model to reduce project risks. Under this model, the government
regularly pays the project company, based on its performance, rather than
on actual user demand for the project.
5. Towards capital markets for sustainable development
This chapter has so far discussed some of the factors that constrain the use
of bonds and capital markets for infrastructure financing, and identifies
policy options to address such impediments. A broader contextual issue,
31 For details, see: ICMA (2018)

however, is how to develop a capital market that not only fulfils its primary
economic objective of channelling savings into investments, but also one
that supports the achievement of the 2030 Agenda for Sustainable
Development. As the introductory chapter of this book points out, funding
and developing sustainable and quality infrastructure is fundamental to
attain the SDGs. So how can countries in Asia and the Pacific move towards
capital markets that simultaneously support medium-term macro-economic
and financial stability, and the pursuit of social inclusiveness and
environmental sustainability?
5.1. A prudent approach to capital market development
A prudent approach to capital market development should focus not only

on promoting the growth and depth of the market, but also needs to be
mindful of potentially adverse economic (and other) impacts that capital
market development – like any act of ‘development’ – may have. We have
already noted that more active market participation by institutional
investors and foreign investors can help to increase market size and
liquidity. Yet, policy-makers need to be careful when pursuing policies
aimed at unlocking the potential of these investors. For example, relaxing
regulations that currently constrain institutional investors from investing
directly in infrastructure projects, such as through bond issuance, may well
result in increased portfolio risk. Clearly, any attempt to liberalise the
existing legal and regulatory frameworks needs to be done at a pace that
allows the relevant agencies to observe the net effects, and potentially be
able to counter-act any unanticipated and unwelcome consequences that
might pose a systemic risk of some kind. More active participation by
foreign investors means that local bond markets become more exposed to
global financial conditions and the perils of contagion. In cases of capital
flight and financial distress, this could lead to exchange rate volatility and
weaken the balance sheets of financial institutions, firms and domestic
investors. Meanwhile, rapidly liberalizing capital controls can potentially
lead to greater financial instability, especially amid weak regulatory
supervision (Genberg, 2015), while closer financial integration can increase
currency risks. Thus, a prudent capital account liberalization that keeps in
mind these potential risks, as well as other country-specific contexts,
should be pursued.
Another area where a prudent approach to capital market development is

important is in the use of state guarantees to de-risk bond-holding. While
such guarantees help support investor confidence and make infrastructure-
related bonds more attractive, an accountable and transparent de-risking
process is needed (Sundaram and Chowdhury, 2019). In particular, the
amount of committed fiscal resources needed to provide guarantees, which
could otherwise be spent on different development projects, should be
weighed against the potential benefits that such guarantees entail. A

guarantee that actually fails to unlock greater investment and/or induce
a lower rate of investment return means that the funds earmarked to
underwrite that guarantee have effectively been wasted, and would have
been better used in another way. Guarantees need to be very specific, relate
to specific issues over which the relevant government agencies have some
control, and should not be sweeping in scope. Interest groups and civil
society organizations can play a role here in ensuring that the public is fully
aware of the opportunity costs surrounding the commitment of finite fiscal
resources to de-risk investments in infrastructure projects. Finally, while
it was noted earlier that appropriate increases in user charges on
infrastructure projects could be allowed to lessen the risk of high inflation
on the operating costs of companies, the extent of such increases should be
carefully considered. For example, user charge increases should be
reviewed in conjunction with other socio-economic variables that allow for
the overall financial strength of user households, and particularly low-
income groups within the population. If high inflation is broad-based, then
poor and near-poor households will also be struggling to meet higher
living costs, just as much as the infrastructure service providers on whom
they may depend, with virtually no chance of some kind of indexed
adjustment in their incomes offered to mitigate the consequences.
5.2. Bonds for sustainable development: the case of green

bonds
Asia and the Pacific is becoming a key global player in green bond markets.
As of end-2018, the cumulative amount of green bonds (i.e. bonds that are
earmarked for funding environment-friendly projects such as renewable
energy, clean transport and sustainable water management32) that have
been issued domestically and internationally by Asia-Pacific economies
since 2007 was $ 120 billion. Although this is smaller than the amounts
issued in Europe ($ 190 billion) and North America ($ 137 billion), the
number of issuers in Asia and the Pacific was higher than those in other
regions of the world (see figure 2.12). When considering 2018 alone, Asia
and the Pacific accounted for about 35 per cent of the global issuance value
of green bonds (CBI, 2018a), of which China accounted for close to
a quarter of the global share, issuing $ 31 billion worth of green bonds,
thereby making it the world’s second largest green bond issuing country
32 Green bond is one example of sustainability-oriented bonds, broadly defined as bonds

whose proceeds are used for promoting social development and environmental
sustainability. Other examples of sustainability-oriented bonds are: i) blue bond which is
primarily used to finance marine and ocean-related projects, and ii) social impact bond,
which allows private investors to invest in public projects that deliver measurable social
and environmental outcomes.
Figure 2.12
Cumulative green bond issuance in world’s regions since 2007
Source: CBI (2018b).
after the United States. Other large issuing countries in Asia and the Pacific
during 2018 included: Australia, India, Indonesia, and Japan. Box 2.2
highlights some of the past and forthcoming sovereign green bond
issuances in the region. Annex 2.1 also provides a profile of green bond
issuance for infrastructure financing in Asia and the Pacific.
Green bonds hold significant potential for issuers in Asia and the Pacific, as
global investors are increasingly interested in sustainable infrastructure
assets in emerging markets. However, the Global Sustainable Investment
Alliance (2017) noted that only 0.8 per cent of total funds under
management in Asia and the Pacific (excluding Japan) used strategies that
included a sustainability component; much lower than the 50 per cent
reported in Europe. A recent survey revealed that around two-thirds of
Asian investors are willing to make their investments more sustainable,
compared to 97 per cent of European investors (HSBC, 2017). To increase
the issuance of green bonds in Asia and the Pacific, and enhance the
region’s access to international green bond markets, three policy issues are
highlighted here: i) creating a common framework on green bonds;
ii) facilitating green bond issuances through knowledge sharing and
financial incentives; and iii) increasing demonstration effects through
sovereign bond issuances33.
33 ADB (2018) has explored other policy areas, such as incorporating green bond markets in
national policy goals, and regional initiatives in the ASEAN+3 economies.
Box 2.2
Examples of sovereign green bonds issued in Asia and the
Pacific
Past issuances in Fiji and Indonesia
As part of Fiji’s strategy to transition to a low carbon and climate-
resilient economy, the country issued a sovereign green bond worth $ 50
million, with dual 5-year and 13-year tenors in 2017. This makes it the first
developing country to issue such a bond type. Among others, eligible
projects include renewable energy, energy and water efficiency, resilience to
climate change, clean and resilient transport, pollution reduction, and
wastewater management.
In Indonesia, the country issued the world’s first green sovereign sukuk
in 2018. It also became the second country to issue green sukuk, following
several issuances in Malaysia in 2017. The issuance of this five-year
sovereign green sukuk, which raised $ 1.25 billion, appealed to both Islamic
investors and green investors. The proceeds are used to support the
implementation of climate change mitigation targets and climate adaptation
plans, including projects on renewal energy efficiency, resilience to disaster
risk reduction, sustainable agriculture and transport, green tourism, and
green buildings.
Forthcoming issuance in Bhutan
Over the years, the Government of Bhutan has mainly relied on
external grants, concessional borrowing, treasury bills and bank loans to
finance its capital expenditures. While such a financing modality has
supported fiscal spending and contributed to rapid economic development
in Bhutan, these financing sources have some limitations. For example, the
ability to tap external grants and concessional borrowing will diminish as
Bhutan’s income level rises. The use of treasury bills and bank loans to
finance fiscal shortfalls also carries related risks, such as volatility in interest
rates, asset-liability mismatches, and limited options to finance specific
finance needs. Meanwhile, the country’s financing gap is estimated to be
sizeable. For the 12th Five-Year Plan (2018-2023) an outlay of 310 billion
Ngultrum is foreseen, with financing gaps amounting to about 29 billion
Ngultrum. There is, therefore, a need for Bhutan to explore an alternative
financing strategy, and enhance the role of government debt securities in
expanding the fiscal space. ESCAP has been providing technical assistance
to Bhutan since December 2017 to issue a sovereign (green) bond in 2019.
This would make Bhutan the first country that is classified as both
a less developed country and a landlocked developing country to issue
a sovereign (green) bond. With assistance from ESCAP, a Committee on
Government Bond Issuance has been successfully set up to work on key
implementation issues, such as the amount of funds to be raised, potential
bond-holders, bond yield, maturity period, and the value of each unit of the
bond.
Sources: CBI (2017), Dorji (2018) and ESCAP (2019).
Creating a common framework on green bonds
The lack of clarity in the definition of green bonds is one of the principal
challenges to the establishment of a global and/or regional green bond
market (G20, 2017; Paulson Institute, 2017). Although the first green bond
was issued by the European Investment Bank in 2007, an effort to create
conceptual clarity was only initiated with the release of the Green Bond
Principles (GBP) by the International Capital Market Association in 2014.
The GBP has four central components: the use of proceeds; the process for
project evaluation and selection; the management of proceeds; and
reporting. Importantly, the first component contains a list of 10 project
categories that are considered eligible to be funded with green bond
proceeds. Examples of infrastructure-related categories in this first
component include: renewable energy, clean transportation, sustainable
water and wastewater management, and green buildings (ICMA, 2018).
Several countries in Asia and the Pacific have acknowledged the need for
a common framework on green bonds. In 2017, Japan adopted the ‘Green
Bond Guidelines’, and India released the ‘Disclosure Requirements for
Issuance and Listing of Green Debt Securities’, while ASEAN introduced
the ‘ASEAN Green Bond Standards’ (ASEAN-GBS). These initiatives
closely resemble the GBP. Nonetheless, there remain differences in the lists
of eligible green projects across countries in the region. For example, the
ASEAN-GBS explicitly excludes all power generation projects based on
fossil fuels, while China includes clean coal as a green category. When
green bonds are issued in markets with different lists of eligible green
projects, these bonds may then require an external review to verify that
they comply with the green guidelines in both the issuer’s and the
investor’s home country. As this process increases the transaction costs of
issuing green bonds, having a common green bond framework is critical.
Facilitating green bond issuances through knowledge sharing and financial

incentives
Two of the main challenges in establishing an efficient green bond market

in Asia and the Pacific are: i) a lack of knowledge of green finance among
potential green bond issuers; and ii) a failure to compensate these market
players for the additional expenditure that green bond issuances typically
require. In this regard, capacity building and financial support could play
a more active role. On capacity building, several governments have taken
concrete steps in this direction. In Indonesia, for example, regulators have
issued policy guidance to Indonesian non-sovereign issuers (i.e. companies)
who intend to issue green bonds internationally. In particular, the
‘Roadmap for Sustainable Finance in Indonesia 2015-2019’ aims to expand
learning networks for capacity building through a university research
centre on sustainable finance (CBI, 2018b). Also, through a university

research centre, China has set up a platform for knowledge sharing on best
practices of scaling up green and sustainable finance.
On providing financial support, countries have initiated measures that

render green bond issuance more attractive for some financial institutions
and corporates. In Singapore, for example, the monetary authority carries
the costs of the external review process to verify the green character of
bonds for investing parties, while in Hong Kong, China, the government
subsidizes 50 per cent of such costs. In China, local governments offer
various kinds of support, such as interest subsidies, guarantees for green
bond financed projects, fast-track approval processes, and coverage of
issuance costs. Moreover, China’s central bank introduced the green macro-
prudential assessment system in 2017, which gives scores to banks based on
the proportion of their portfolio consisting of ‘green loans’, and by the
banks’ history of green bond issuance. The central bank also expanded the
guarantee scope of its medium-term lending facility to include green
finance instruments as suitable collateral.
Increasing demonstration effects by sovereign issuances
When sovereign governments and development banks have successfully

issued international bonds, past experience suggests that the demonstration
effect stimulates the private sector and other financial institutions to follow
suit. Such demonstrations allow other market players to derive insights on
how to issue their own green bonds that comply with green bond
regulations in both the issuers’ and the investors’ home countries. The
process typically begins with the highest credit rated public institutions,
and gradually evolves through semi-public, corporate, asset-backed, and
then project-specific bonds. In 2017, the Chinese Development Bank issued
a quasi-sovereign international green bond in Germany, which met both
conventional European and Chinese ‘green’ requirements. As a sovereign-
backed Chinese institution, this provided a clear demonstration effect,
leading to a rapid increase in Chinese green bonds being issued abroad.
And in 2018, the Indonesian government became the first Asian sovereign
to sell a green bond internationally, through the issuance of a ‘green sukuk
bond’ joint listing in Singapore and Dubai. The Islamic character of the
bond also led Islamic investors in Asia and the Pacific to buy a large
proportion of the bond, even though such investors are usually not
associated with sustainability strategies (Vizcaino, 2018).
5.3 Responsible investment in bond markets
Mainstreaming environmental, social and governance (ESG) factors into the

investment analyses and strategies of bond issuance and trading could help
promote sustainable capital markets, and could be particularly potent in
the context of bonds used to underwrite infrastructural development. The
traditional focus of bond investors has typically been on stable financial
returns, which are determined by factors such as the interest rate, inflation
rate, liquidity risk and credit risk rating. To contribute to the development
of sustainable capital markets, investors could also incorporate ESG factors
into their investment research, processes, and decisions. Examples might
usefully include: i) air pollution and water and energy resources for
environmental issues; ii) human rights and workers’ health and safety for
social issues; and iii) business integrity and audit and tax practices for
governance issues. By considering these kinds of factors, ESG integration
can also help enhance investors’ risk management strategies by identifying
risks that are not revealed by financial information alone. For example, one
study shows that bonds issued by American companies with better ESG
ratings tend to yield higher rates of returns than the comparable market
benchmark (Hoepner and Nilsson, 2017).
Among these three dimensions of ESG, investors usually view corporate

governance issues as having a more tangible impact on financial returns
than environmental and social issues. In a 2017 survey of financial
professionals in major economies within Asia and the Pacific, up to 43 per
cent of respondents believed that governance issues ‘always’ or ‘often’
affected corporate bond yields/spreads, relative to only 15-17 per cent for
environmental and social issues (figure 2.13). Nonetheless, perceptions of
a link between environmental and social issues on financial returns is
gaining momentum, particularly as they pertain to infrastructure finance
instruments, such as bonds issued to help underwrite the costs of
construction and operation. At least 40 per cent of respondents believe that
environmental and social issues will affect the yields of corporate bonds
and sovereign debts by 2020 (CFA Institute and PRI, 2019).
The process of ESG integration can be viewed as having three components

(CFA Institute and PRI, 2018). The first component is research, which
identifies and collects relevant ESG information that affects a company,
sector and/or country. The second component is fundamental securities
and portfolio analysis, in which investment managers assess the impact of
relevant ESG factors on the investment performance of a specific company,
sector and/or country. For example, ESG information may be used to adjust
credit risk assessments and projected future cash flows that were
previously based solely on financial information. (The impact of ESG
factors on different maturities of bonds issued can be also be analysed.) The
Figure 2.13
Share of surveyed investors in Asia and the Pacific who believe ESG
factors affect bond yields
Source: CFA Institute and PRI (2019).
third component is the investment decision itself; that is, whether to invest
in a bond, based on data collected and assessments carried out in the first
two components.
Despite a rising interest among fund managers in ESG integration, which is

driven by a mix of client demand and regulatory requirements and
incentives, the implementation of ESG integration faces several barriers.
Among others, these include: i) a limited understanding of ESG concepts;
ii) different investment cultures; and iii) the availability, timeliness and
consistency of ESG data. A limited understanding of ESG concepts partly
arises because, as noted earlier, there are currently no agreed definitions on
ESG integration. Different corporations, sectors and countries adopt
different lists on ESG factors and terminology. On investment culture, even
a broad view that sustainable investments are deemed to be desirable may
not be as widespread as one might think. For example, in one survey of
institutional investors in Asia and the Pacific, close to one fifth of the 175
respondents did not believe in sustainable investments, while another
14 per cent of respondents noted that their investment committees were not
comfortable making sustainable investments (Schroders, 2018). Finally, on
ESG data availability and consistency, pertinent information is often limited
in developing economies, while there remain significant variations in
disclosure and reporting standards and analytical approaches (e.g. the
relative weighting of environmental, social and governance factors). While
these barriers are applicable for ESG integration in general, implementing
ESG integration for fixed income assets, such as bonds, pose additional
challenges (Inderst and Stewart, 2018). For example, in the case of a
sovereign bond, the challenge is how to engage with the relevant
government agencies, as such an interaction tends to be uncommon. More
broadly, fixed income indices are typically difficult to compile than for
equities, as this involves multiple bond types and issuers, unlisted
companies, and non-corporate entities.
5.4. Sustainable securities markets
Launched in 2009, the Sustainable Stock Exchanges (SSE) Initiative is

a United Nations Partnership Programme, comprising the United Nations
Conference on Trade and Development (UNCTAD), the United Nations
Global Compact, the United Nations Environment, and the Principles for
Responsible Investment (PRI). It serves as a global platform that explores
how securities exchanges can enhance performance on ESG issues34. The
SSE initiative currently tracks the sustainability activities carried out by 95
securities exchanges in 70 economies worldwide, including 25 securities
markets in 18 Asia and the Pacific (Sustainable Stock Exchanges, 2018).
These activities include whether a securities exchange: i) requires ESG
reporting as one of the listing requirements for some or all listed
companies; ii) reports on social and environmental impact and corporate
governance on an annual basis; iii) offers a written guidance on ESG
reporting; iv) has offered interactive ESG training over the past year;
v) adopts any sustainability-related index (which may include an
environmental index, a social index or an index for specific themes, such as
low carbon indices); vi) has developed rules and regulations allowing for
sustainability bonds to be listed in a separate segment; and vii) offers
a listing platform specifically for small and medium-sized enterprises
(SMEs).
Overall, securities exchanges in Asia and the Pacific are actively engaged in
sustainability activities. Figure 2.14 depicts the share of securities
exchanges in Asia and the Pacific, and those outside the region, that carry
out sustainability activities tracked by the SSE initiative. Relative to stock
markets outside Asia and the Pacific, the region’s securities markets are
active in requiring ESG reporting as a listing rule, offering ESG training and
guidance on ESG reporting, and providing a sustainability-related index.
However, the sustainability activity that the region appears to lag behind
34 While this chapter has primarily focused on the bond part of a capital market, the SSE
initiative, which focuses on the equity part of a capital market, still offer valuable insights
because a majority of corporate bond issuers are listed companies. Besides, there appears
to be no initiative that tracks the sustainability activities carried out by national bond
market regulators around the world.
Figure 2.14
Share of securities markets that engage in sustainability activities
Source: ESCAP based on Sustainable Stock Exchanges (2018).
most is in offering a dedicated listing platform for sustainability bonds. Out

of 25 securities markets in Asia and the Pacific included in this database,
only Indonesia provides such a listing platform, compared to about a
quarter of securities markets outside the region.
At a country level, the securities markets in Hong Kong, China, India,

Malaysia and Singapore are seen to be more active in promoting
sustainability issues than others. Except for providing a separate segment
for sustainability bonds, the SME markets in these four economies engage
with all six sustainability activities highlighted above. Other relatively
active SME markets in this space include Japan, Thailand and Turkey. In
contrast, available information shows that there is still potential for the
stock markets in Bangladesh and Mongolia to step up their efforts towards
sustainable stock markets.
Box 2.3
Infrastructure take-out facility: an innovative infrastructure
financing programme
Although private capital is beginning to play a key role in the funding
of infrastructure projects, the potential of raising capital for infrastructure in
the debt markets remains largely untapped in Asia and the Pacific. Among
other non-conventional and innovative financial products, securitized
project financing solutions are gaining momentum in the region.
Infrastructure take-out facility (TOF) is an emerging instrument of such debt
securitization.
TOF refers to the sale of contractual debt related to infrastructure
assets, by banks, to an off-balance sheet SPV, and issuing tranches of
securities bought by a syndicate of institutional investors (figure 2.15). It,
therefore, belongs to the collateralized loan obligation (CLO) asset class. To
mitigate the risks for institutional investors, the SPV buys back
infrastructure loans from various countries in Asia and the Pacific and in a
broad range of sub-sectors industries. Through the TOF, banks facing strong
capital requirements can free up their balance sheets, and recycle capital to
originate new projects and infrastructure loans. However, in Asia and the
Pacific thus far, securitization has been mainly used for consumer loans and
mortgages, rather than for corporate and infrastructure debt (Macfalane,
2015).
Figure 2.15
Value proposition of an infrastructure take-out facility
Source: Clifford Capital (2018).

The first fully project finance-backed CLO, or TOF, in Asia and the
Pacific, was developed by Clifford Capital in Singapore, through the
creation of an SPV – Bayfront Infrastructure Capital. There was a strong
demand from a variety of institutional investors (the loans of Class A were
2 times oversubscribed). The portfolio of the SPV is backed by 37 projects
and infrastructure loans located in 16 countries and eight sub-sectors
(Bayfront Infrastructure Capital, 2018). The use of such a ToF model could
well enhance infrastructure financing through the capital markets in Asia
and the Pacific (G20 Sustainable Finance Study Group, 2018).
Bonds exhibit significant potential to complement bank loans, which are

currently the main source of infrastructure financing in Asia and the Pacific,
in helping to underwrite the significant costs of infrastructure development
in the region. Even in small developing countries, such as Bhutan, bonds
provide an alternative infrastructure financing option, and increase
investment opportunities for institutional investors to gain long-term
investment exposure in the country. However, there remains a wide range
of policy issues that governments, market regulators, issuers, and portfolio
investors need to address in order to fully realize such potential. There are
at least three main messages that can be drawn from this chapter. Firstly, at
present, infrastructure bond financing remains limited in Asia and the
Pacific, and can be explained in large part by generally poor sovereign
credit risk ratings, which constrain governments’ ability to issue
‘benchmark’ sovereign bonds, and under-developed capital markets in the
region.
Second, two broad groups of policy issues should be considered in any

concerted bid to increase the role of infrastructure bond financing. The first
is the need to provide a conducive and stable enabling economic
environment, such as macro-economic stability, supportive financial
markets, and an effective legal and regulatory framework. The second is the
need to enhance the capacity of the capital markets and their participants in
various aspects. This includes widening the investor base, diversifying the
range of financial instruments available, increasing market liquidity,
improving the credit support mechanism, enhancing the credit rating
system, and protecting investor rights. Third, while aiming to create
effective capital markets, governments and market participants alike
should seek to ensure that these capital markets are in a position to support
the 2030 Agenda for Sustainable Development. In addition to their primary
economic objective of channelling excess funds to where they can be used
to best economic effect, capital markets should also contribute to socio-
economic stability, social inclusiveness and environmental sustainability.
Examples of this include adopting a prudent approach to capital market
liberalisation, the issuance of ‘green bonds’, the incorporation of

environmental, social and governance factors into bond investment
decisions, and promoting sustainable securities exchanges.
Overall, this chapter points to the critical role of governments and market
regulators in delivering effective and sustainable capital markets. Sovereign
credit risk ratings directly influence ratings for corporations (and projects)
seeking to issue bonds, and a well-functioning sovereign bond market
provides a critical benchmark for corporate bonds. The development of
sustainability-oriented capital markets is also possible through reforms in
regulatory requirements and incentives. Clearly, achieving an effective and
sustainable capital market is a multi-dimensional and long-term process
with numerous moving parts. Countries may therefore wish to initially
embark on infrastructure financing strategies that involve less complex
projects, and ones that have built-in revenue adequacy mechanisms, such
as ‘brownfield’ projects on well-established toll roads and water supply
concessions. In the meantime, for less developed countries, bank loans and
external sources of finance, such as official development assistance and
global development partnerships, will remain critical for infrastructure
financing in Asia and the Pacific.
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Annex 2.1.
The use of green bonds for infrastructure financing in
Since the Paris Agreement entered into force in November 2016, green
bonds have been garnering considerable attention. Green bonds tend to
have a wide definition as their label has been applied to various debt
instruments, including private placement, securitization, covered bonds as
well as ‘sukuk’ paper. The Climate Bonds Initiative (CBI) refers to green
bonds that invest at least 95 per cent of proceeds or refinanced funds into
climate related activities for environmental and/or climate benefits
consistent with the 2-degree global warming target set under the Paris
Agreement (CBI, 2018a). Green bonds are typically earmarked for
investments in a wide array of sectors35 but a majority are infrastructure
related (CBI, 2018b). Indeed, the overlap between green and infrastructure
projects is significant, at over 75 per cent (Lake, 2017).
Over recent years, green bonds have been used in Asia and the Pacific on
a large variety of infrastructure projects. The projects included notably the
installation of wind turbines, the creation of photovoltaic farms, the
construction of mini hydro cascades, the development of geothermal and
biomass facilities, the rehabilitation of power and heating plants and
transmission/distribution facilities, the modernization of industrial
installations, the deployment of waste water treatment plants, the
rehabilitation of municipal water infrastructure and investments in existing
buildings (insulation, lighting, heating and cooling systems)36.
The green, or climate-related, bond market has expanded significantly, to

reach a total of $ 1.45 trillion globally in 2018. It has also ballooned in
ESCAP member states (see figure 2.16) in terms of both volume and
number of issuers. In 2018, issuers located in Asia and the Pacific issued
a total volume of $ 0.47 trillion of labelled green bonds, next to the
European market ($ 0.62 trillion). The amount issued by Asia-Pacific
entities also out-paced the volume of green bonds of North American
issuers ($ 0.39 trillion). With growing market appetite for green bonds in
the region, the range of issuers and investors in the green bond market has
expanded significantly. The number of issuers in the region (170 in 2018)
35 Those sectors include information and communications technology (ICT) with projects
related to the installation of broadband networks and the implementation of ‘Internet of
Things’ solutions, land use and marine resources, with projects ranging from the creation
of wild fisheries to the adoption of environmentally friendly agricultural practices, or
industry with projects such as electric rail supply chain.
36 Various sources.
Figure 2.16
Issued green bonds by line of business in Asia and the Pacific,
2013–2018
(Billions of United States dollars)
Billions of United States dollars
North America (c)
Source: ESCAP based on CBI (2019), accessed on 5 June 2019.

Notes: In Asia and the Pacific, the following 11 economies have so far issued climate-related bonds
according to the CBI database: Australia, China (and the Taiwan Province of China), India,
Indonesia, Japan, Republic of Korea, Malaysia, New Zealand, Singapore, and Thailand. CBI is
an investor-focused not-for-profit international organization, and its database aims to track all
self-labelled green bonds, for which at least 95 per cent of proceeds were used for financing or
refinancing green/environmental projects. All the screening criteria are explained in CBI Green
Bond Database Methodology. (a) Others encompass companies with cross sectoral line of
business. (b) In Europe, the database covers the following countries: Austria, Belgium, Denmark,
Finland, France, Germany, Iceland, Ireland, Italy, Lithuania, Luxemburg, Netherlands, Norway,
Poland, Scandinavia, Slovenia, Spain, Sweden, Switzerland and the United Kingdom. (c) North
America encompasses Canada and the United States.
has been increasing at an exponential rate and now exceeds the number of
European issuers (160 in 2018).
The development of the green bond market in Asia and the Pacific has been
mainly motivated by governments’ growing awareness of the need to steer
economic growth and development onto a more environmentally
responsible pathway. The region hosts five of ten most vulnerable
countries to climate change (i.e. Bangladesh, Nepal, Sri Lanka, Thailand
and Viet Nam), while contributing to over half of the world’s total
greenhouse gas (GHG) emission (Eckstein, Hutfils and Winges, 2018). The
green bond market presents an opportunity to help underwrite the
additional financing requirements needed to mitigate and adapt to climate
risks for multiple sectors across the countries in the region. Somewhat in
contrast to European public institutions, central and local governments in
Asia and the Pacific have generally been less involved in sovereign green
bond markets, rather like their North American counterparts. Historically,
the United States held back from the market system, while its minimal
involvement made way for financial institutions and private-owned
businesses. In 2018, banks and companies accounted for 90 per cent of the
total green bond issuances in the United States.
In the region, most green bonds pass through banks and financial
institutions which have been in the past few years the largest issuers and
have played the role of middle-person by selecting investment projects,
managing risks, and allocating foreign investors’ funds to domestic
projects. At present, however, there is no consistent reporting framework
on the use of the proceeds, and the environmental impact assessment, of
green infrastructure projects in the financial and banking communities. This
condition limits banks to lend mainly for eco-friendly commercial
properties or housing (CBI, 2019). There is clearly a pressing need for
financial intermediaries to develop a shared framework in the assessment
of the ESG performance of entire green infrastructure projects (UNEP,
2016).
The issuances of non-financial companies have been recently increasing (41

per cent in 2018 versus 30 per cent in 2016). The energy sector’s issuances
have developed at a robust pace, driven by the upsurge of solar, hydro and
nuclear power infrastructure projects. Interestingly enough, transport
companies in Asia and the Pacific have started to issue green bonds, and
attracting the attention of foreign investors, although the market is still
nascent. In addition to this, the participation of construction and water and
waste issuers in the market has been increasing steadily. The construction
sector accounts for up to 3 per cent of the total issuances. In recent years, a
dramatic upswing in real estate sector issuances in Asia and the Pacific has
also been observed, entailing the construction of eco-friendly buildings,
which include green and smart houses. This recent shift foreshadows the
burgeoning of ‘smart cities’, which is inherently dependent on close
collaboration between private sector and public entities, aimed at making
conurbations more liveable, workable and sustainable.
Although not involved in the green bond market as early as Japan and
Australia, China has recently been leading the Asia-Pacific region’s shift
toward financing infrastructure through green bonds (see figure 2.17). The
rise of Chinese green bond issuers has created an opportunity for

investment both domestically and in neighbouring countries, as the market
is still at a nascent stage in the rest of the region. China has encouraged the
usage of green finance instruments with public incentives and has
developed a green bond market framework broadly compatible with
international practices. The government subsidizes up to 12 per cent of the
interest rate and allows companies to use these green bonds as collateral
(Morris, 2019). China also became the first country to issue official rules on
issuing green bonds in the region (Clifford Chance, 2018). The People’s
Bank of China and National Development and Reform Commission have
also published tangible definitions and green bond guidelines, along with
a list of green projects that would be eligible for a green label domestically.
Moreover, the China Securities Regulatory Commission is working with
industry to verify that green bond issuers fulfil their environmental pledges
(HKEX, 2018).
Figure 2.17
Origin country of green bond issuers in Asia and the Pacific, 2018-2019
(Percentage of total volume)
Philippines
1% Russian Federation
1%
Thailand
2%
India
Indonesia 2% Water and waste
2%
1%
Singapore
3% Central and local
governments
3%
Republic of Korea
Real Estate 6%
4% Construction
Energy 4%
12%
Australia Transport
9% 12%
China
67%
Japan Banks and financial
9% institutions
62%
Source: ESCAP based on CBI (2019).

While green bond issuance is becoming more common across Asia and the
Pacific, developing a shared definition and taxonomy for green bonds is
critical to enhance investors’ confidence in the credibility, consistency and
integrity of the green bond markets. In this sense, the recent launch of the
ASEAN-GBS could be a good example to enhance transparency, and act
towards the success of green bond standardization in the region. The
ASEAN standards focus mainly on the “use of proceeds, the process for the
project evaluation and selection, the management of proceeds, and
reporting” (ASEAN, 2018, p. 4). This shared taxonomy for green bonds
aims to align the documentation, disclosure and arbitration of green bonds
through greater collaboration amongst all major market participants, such
as regulators, institutional investors (including impact investors), the
private sector, international bodies and local think-tanks, philanthropists,
non-governmental organisations (NGOs) and foundations, academia and
civil society. Such a regional platform would aim at both catalysing and
supporting the rapid scale-up of green bonds, by engaging with key
institutional players and harnessing the market intelligence of private
sector stakeholders. Such regional cooperation could adopt a wider
strategic approach that might also include the development of a credit
rating system to broaden the investor base and attract foreign investors in
particular. The strategy could also include a capacity building component,
as government agencies will need training if they are to secure
opportunities to develop their own green bond markets.
Chapter 3
Enhancing Private Infrastructure Financing
through Externality Effects37
1. Introduction
While infrastructure provides necessary public services and is vital for the
socio-economic development of a nation, public funds alone are usually
insufficient to finance all infrastructure needs. This funding shortfall in
developing countries can be considerable, and so private financing has
typically been encouraged by governments and multilateral development
banks (MDBs) to support infrastructure development (ESCAP, 2019). In
Asia and the Pacific, roughly two thirds of infrastructure investments are
currently funded by national and sub-national governments, MDBs and
bilateral donors, and just one third is funded by the private sector (ADB,
2017). Indeed, the share of private investment in infrastructure in the region
has been in decline in recent years, from an annual average of $ 64 billion
per year between 2008 and 2012, to $ 50 billion between 2013 and 2017,
hitting a low of $ 20.4 billion in 2016; the lowest level since 2005 (ESCAP,
2019). This decline in private investment in infrastructure can be attributed
in large part to inadequate institutional frameworks and implementation
capacity in the region (Nishizawa, 2018).
Given this trend, there is a need to enhance the private sector’s involvement
in infrastructure projects, including through public-private partnerships
(PPPs), and overcome the hurdles that many infrastructure projects face in
attracting private financing. Electricity and water supply are two areas of
infrastructure where attracting non-state finance can be particularly
challenging, most notably in countries where the tariffs for these public
goods are deliberately kept low by governments, for understandable social
reasons. However, this then adversely impacts on the (risk-adjusted) rate of
37
This chapter was prepared by Naoyuki Yoshino, Dean, Asian Development Bank Institute
(ADBI) and Masato Abe, Economic Affairs Officer, Macroeconomic Policy and Financing
for Development Division, ESCAP. The authors appreciate the useful comments provided
by Hongjoo Hahm, Hamza Ali Malik, Tientip Subhanij, Alberto Isgut, George Abonyi and
Zheng Jian who enhanced the quality of the chapter. The authors are also grateful for a
number of substantive comments made by participants in the Expert Group Meeting on
Infrastructure Financing for Sustainable Development in Asia and the Pacific, which was
held at the United Nations Conference Centre in Bangkok, Thailand, on 7 and 8 March
2019. Sharon Amir edited an early version of the manuscript and Nick Freeman
conducted the technical editing of the final manuscript. Charlotte Nudelmann, Romain
Pradier and Yifan Zhang provided useful research assistance.
return for private sector investors, and thereby makes an infrastructure

project a less appealing business prospect, relative to other business
opportunities also seeking funding. The reason why this is a source of
concern is not that the public purse should be used to help construction
companies, financiers and other private sector actors involved in
infrastructure projects, but that there is a need to tap those private sector
resources, and especially private sector funds, to help underwrite the
infrastructure needs of most countries in Asia and the Pacific. Public
spending alone will not be sufficient to meet the infrastructure needs of
their citizens, so the key challenge – and one of the principle theses of this
book – is how to incentivise greater private sector participation in
infrastructure financing, construction and operations, by mitigating the
risks and increasing the rates of return in such a way that projects proceed
without an undue strain being placed on the finite budgetary resources of
the state.
As depicted in the first chapter of this book, there are significant inhibiting
factors that constrain the private sector in being more actively and
significantly involved in financing and co-financing infrastructure
development projects in Asia and the Pacific, and indeed globally. Just as
these inhibitors are multiple, so too is the range of potential solutions. This
chapter focuses on identifying and leveraging the externality effects of
infrastructure development as a potential new source of financing, in
addition to conventional public funds and user charges. An externality
effect is defined as being additional value creation from newly constructed
infrastructure projects, over and above the immediate benefits of the
projects themselves. It is argued here that externality effects – such as
increased tax revenues and land values, through to new commercial and
residential activities – can be captured to increase the feasibility of private
financing for long-term infrastructure investments.
This chapter proposes that governments explore ways to use projected

externality tax revenues, created by newly developed infrastructure, to help
underwrite some of the costs incurred. These increased externality tax
revenues can then be shared with private investors and operators in
infrastructure development. Since positive externality effects could create
incremental tax revenues to the area where infrastructure is being
developed, infrastructure investors and operators may receive a proportion
of tax revenues, in addition to user charges. This allows financiers,
constructors and operators of infrastructure projects to receive a higher rate
of return on the project, and quicker cost recovery, as long as the
infrastructure project succeeds in creating positive externality effects. In the
United States, property tax revenues are sometimes used to increase the
rate of return for infrastructure investors using ‘infrastructure dedicated
funds’ (Chapman, 2017). However, this proposal does not propose only
capturing property tax revenues, but also considers accessing other tax
revenues streams, such as corporate taxes, income tax and sales tax, all of
which may increase as a result of the externality effects of newly developed
infrastructure. This is congruent with the fact that developing countries in
Asia and the Pacific have often been encouraged to provide suitable
subsidies to enhance private investors’ cash flows in infrastructure
development (Sundaram and Chowdhury, 2019a).
This chapter also discusses several related issues, such as voluntary efforts
by private investors, financing start-ups and smaller business, and tax
collection and evasion. The chapter concludes with some specific policy
recommendations. Annex 3.1 also provides an overview of private sector
financing for infrastructure and its major modalities and players.
2. Externality effects created by infrastructure

investment
One policy option to enhance private sector financing and participation in

infrastructure development is to capture and leverage the positive
externality effects of newly developed infrastructure. For example,
increased tax revenues from newly established businesses and residential
areas, as well as employment generated around newly constructed roads
and railways, could be partially harnessed to provide incentives (e.g.
subsidies, grants or service fees) that would encourage greater private
sector financing. Externality effects, also sometimes referred to as spill-over
effects, network effects and/or indirect effects, are defined as positive
socio-economic benefits that accrue outside the specific target area of the
infrastructure activity and its direct service provision, derived by
establishing a network of physical assets, functions and stakeholders
(Cantos, Gumbau-Albert and Maudos, 2005; Hulten, Bennathan and
Srinivasan, 2006; Hurlin, 2006; Nakahigashi and Yoshino, 2016). Externality
effects are observed in the environment that surrounds the infrastructure
project, and gradually spreads through networks of people, entities, and
services to a wider geographical area38. Externality effects can also be seen
as an extension of ‘value capture’, derived from the public sector through
taxation (e.g. property tax) and the sale of assets (such as land), transport
and parking levies, betterment levies39, and sales of surplus publicly held
38 It should be noted that empirical support for the existence of significant externality effects
shows mixed results (cf. Cantos, Gumbau-Albert and Maudos, 2005; Holtz-Eakin and
Schwartz, 1995).
39 “A betterment levy captures part of the land-value gain attributable to infrastructure
investment by imposing a one-time tax or charge on the land-value gain” (Peterson, 2009,
p. 6).
land, or rights of development and use (Chapman, 2017; McIntosh and

others, 2017). This is not to suggest that there is always an automatic
externality effect emanating from all infrastructure projects, as much
depends on the utility of the project itself to drive the positive impact
desired. Conversely, a badly designed and/or undesirable infrastructure
project will likely have little or no net externality effect.
Figure 3.1 provides a simple visual model of the externality effects of

infrastructure investment. Suppose that the middle line is a new highway
to be constructed. Then, in the area along the highway ‘corridor’, new
companies may emerge, initiating manufacturing or other commercial
activities. Houses and apartments may also be constructed along the new
highway, as well as new restaurants, retailers and other services (including
public services, such as schools and health centres). As a consequence, the
periphery and adjacent areas surrounding the infrastructure enjoy
externality effects created by the new highway. This geo-economic
development should then increase revenues for the government in this
locale, through land and property tax, income taxes and corporate tax, as
well as sales tax and others. Typically, these additional tax revenues
generated by the newly developed infrastructure project solely go to the
local and/or central government, and do not benefit the infrastructure
project’s investors and operators. These latter players must typically rely
only on up-front public grants and subsidies for infrastructure construction,
and user charges for their returns on investment. A detailed macro
estimation of externality effects is presented in annex 3.2.
Figure 3.1
Externality effect of a highway
Unaffected areas
Areas affected by externality effects (investment, business, employment)
Areas affected by externality effects (resident, tax, network)
Unaffected areas
Source: ESCAP.
Table 3.1 presents estimates of the direct effect of nation-wide infrastructure

investment in Japan on tax revenues, and its externality effects as indirect
effects, using macro-economic data, based on a translog production
function 40 . The first row of table 3.1 presents the direct effect of
infrastructure investment. The externality effects from private capital and
labour are shown in the second and third rows. In the 1966-1970 period, for
example, the direct effect of infrastructure investment was increased output
of 0.638 (see the first row)41. But the externality effect of increased output,
induced by an increase of private capital, is 0.493 (see the second row), and
the externality effect of increased output by increasing employment is 0.814
(see the third row)42.
Table 3.1
Economic effect of infrastructure investment: the case of Japan
1956- 1961- 1966- 1971- 1976- 1981- 1986- 1991- 1996- 2001- 2006-
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Direct effect 0.696 0.737 0.638 0.508 0.359 0.275 0.215 0.135 0.135 0.114 0.108
Indirect effect 0.452 0.557 0.493 0.389 0.207 0.203 0.174 0.146 0.110 0.091 0.085
(private capital)
Indirect effect 1.071 0.973 0.814 0.639 0.448 0.350 0.247 0.208 0.154 0.132 0.125
(employment)
Additional tax 0.305 0.306 0.261 0.206 0.144 0.111 0.084 0.071 0.053 0.045 0.042
revenues
Increased rate 0.438 0.415 0.410 0.404 0.400 0.402 0.392 0.392 0.390 0.390 0.391
of return
Source: ESCAP based on Yoshino, Nakahigashi and Pontines (2017).

Note: The rate of return increases when half of the incremental tax revenues are used for supporting
private infrastructure investors or operators.
Consequently, these increases in output translate into increased tax

revenues (whose corporate income tax rate is average around 20 per cent in
Japan). The amount of additional tax revenues is shown in the fourth row
of table 3.1. If half the anticipated incremental tax revenues had been
returned to help co-finance the infrastructure investment, such as through
public subsidies to private investors, it is illuminating to see how much
their rate of return would have increased. Since the economic impact of
infrastructure decreases over time, tax revenues created by infrastructure
development also gradually diminish, as shown in the fourth row. The fifth
and last row of table 3.1 suggests that this would have increased the rate of
40 The detailed method of estimation can be found in Nakahigashi and Yoshino (2016).
41 This number is calculated using a translog production function (see annex 3.2 for the
detailed model). The higher the number is, the larger the impact of infrastructure
investment on tax revenues.
42 Ibid.
return by about 43.8 per cent, for the period 1956 to 1960, and in 2006-2010
half of the incremental tax return would have increased the rate of return
by 39.1 per cent. If harnessed correctly, these significant increases in the
rates of return could have attracted greater private sector investment into
infrastructure. However, in practice, all these incremental tax revenue gains
were absorbed by the government and not used to finance infrastructure
development. Thus far, private investors and operators in infrastructure
have had to rely on user changes and other direct revenues in their bid to
attain an adequate rate of return.
The positive impact of externality effects, in the form of increases in tax

revenues, has been explored in a number of studies. Using micro-economic
estimations, Yoshino and Abidhadjaev (2017a) estimated the impact of
railways on externality effects in Uzbekistan, while Yoshino and Pontines
(2015) investigated the impact of highways in Manila, the Philippines.
Yoshino and Abidhadjaev (2017b) also estimated the impact of the Kyushu
high-speed railway in Japan. All these studies found that the externality
effects of infrastructure investment can raise tax revenues, and that the
right kinds of infrastructure development do indeed create significant
externality effects in the region.
First, Yoshino and Abidhadjaev (2015) estimated the impact of Uzbekistan’s

Tashguzar-Baysun-Kumkurgan railway on regional economic output, as
measured by: i) the regional domestic product growth rate; ii) the
agricultural output growth rate; iii) the industrial output growth rate; and
iv) the services valued added growth rate (table 3.2). The data suggests that
if 20 per cent of additional tax revenues generated by the railway
connection were earmarked to support private sector investors in
developing new infrastructure projects, the average rate of return would
have increased by 5.2 per cent in (2009-2010). And if 50 per cent of
additional tax revenues were similarly earmarked, the rate of return would
have increased by a not insignificant 13.0 per cent (2009-2010). And if all the
additional tax revenues generated by the rail project were allocated to
support private sector investors, the rate of return would have increased by
26.1 per cent (2009-2010). This kind of empirical modelling suggests that
a government’s infrastructure investment policies should factor in
allocating some proportion of additional tax revenues emanating from the
anticipated externality effects of projects, to private sector investors, as a
means to bolster the forecasted rate of return, and thereby make the project
more attractive as a commercial business proposition. Such an arrangement
is preferable to a government subsidy that does little to align the design
and construction of the project with the economic impacts of its usage. Not
only does that externality effect entice greater private sector participation in
infrastructure projects, driven by the increased rate of return, but
participating firms are motivated to ensure that the project is designed,
constructed and operated in a way that is most economically beneficial to

the surrounding local, from which they will directly benefit. The interests of
the private sector investor and the government become better aligned in
seeking the optimal, long-term impact from a project. Conversely, in the
case of a subsidy offered by a government to help get an infrastructure
project off the ground, the relationship with the private sector investor and
developer is much more short-term and contractual, with the firm’s interest
in the project probably limited to just getting it done, regardless of its
economic utility. The sense of engagement and shared interests is not
present, and the kinds of knowledge and insights that the private sector
firms have are less likely to be shared43.
Table 3.2
Increase of GDP by Uzbekistan railways using externality tax revenues to
support private sector investors
Using 20 per cent Using 50 per cent of Using 100 per cent of
Period of externality tax externality tax externality tax
revenues revenues revenues
2009-2010 105.2 113.0 126.1
2009-2011 104.0 110.1 120.2
2009-2012 103.0 107.5 115.1
Source: ESCAP based on Yoshino and Abidhadjaev (2017a).
Table 3.3 shows the case of the Star Highway in Manila (Yoshino and
Pontines, 2015). The periods t-1 and t0 indicate periods under construction.
At the end of t0, the highway was completed and started its operation. In
the last row, for Batangas City, t-2 was a period when construction was not
going on, and t-1 and t0 were periods under construction. Tax revenues in
Batangas City increased from 490 million Philippine peso (PHP) to PHP 622
million and PHP 652 million in the period from t-2 to t0. During the highway
construction, construction workers and related workers came to the area,
which increased the GDP of the area. At the end of t0, the Star Highway was
completed, and at t +2 , tax revenues diminished compared to the
construction period. But after the fourth year, tax revenues increased
drastically. At t+4, tax revenues reached PHP 1 208 million; more than twice
as much as before construction began. These developments are externality-
driven tax increases coming from infrastructure investment in the Star
Highway. If the highway had not been constructed, the tax revenues would
likely have remained at PHP 490 million (t-2) in Batangas City, excluding
43 Table 3.2 also presents that the rate of return declines over time. However, this might be
due to the short period of data observation after launching the railway in August 2007.
other economic factors. Because of the highway construction and increased

economic activities along the highway that followed, Lipa City gained tax
revenues of PHP 371 million at the t+4 period. If just part of these additional
tax revenues from the period t-2 to the period t+4 (i.e. PHP 134 million to
PHP 372 million) in Lipa City were allocated to support private sector
investors, they would be more incentivised to invest their funds in
infrastructure construction work. The same kind of commercial stipulation
could be applied to the construction of other infrastructure projects, such as
water and electricity supplies and rail links.
Table 3.3
Changes in tax revenues in three cities along the Star Highway in Manila
(PHP millions)
City t-2 t-1 t0 t+1 t+2 t+3 t+4 forward
Lipa City 134.36 173.50 249.70 184.47 191.81 257.35 371.93

Ibaan City 5.84 7.04 7.97 6.80 5.46 10.05 12.94
Batangas City 490.90 622.65 652.83 637.89 599.49 742.28 1 208.61
Sources: Yoshino and Pontines (2015; 2018).
Within this context, part of the incremental tax revenues could be used to
finance project pre-investment (pre-feasibility/project preparation) studies.
The private sector is often (and understandably) reluctant to undertake
such pre-investment, as it can be costly for major projects, yet it is not yet
clear if the project will be viable, and many infrastructure projects are often
found to be not financially appropriate for private sector participation.
Such pre-investment studies therefore entail a sunk cost, with no guarantee
that any business activity will subsequently be forthcoming, and managers
of firms have a fiduciary responsibility to their shareholders not to expend
costs if the genuine prospects of a return are unclear. Alternatively, part of
these incremental tax revenues could be set aside as ‘contingency funds’ to
finance potential demand shortfalls. For example, given the inherent
uncertainty and inaccuracy of demand projections on transport projects
(e.g. toll roads and mass rapid transit systems), funds can be earmarked for
a “minimum ridership guarantee” for such projects. These are funds that
may or may not be spent, depending on actual demand, but such
guarantees can help trigger an infrastructure project to go ahead that
otherwise might have been seen as too risky by private sector investors to
bear that risk alone44.
44 It should be noted, however, that such funds need to be reflected in the public budgeting
process, as they are contingent liabilities.
Yoshino and Abidhadjaev (2017b) confirm the positive impact of a Japanese

high-speed rail line on tax revenues in an affected area, and their study
supports the notion that the economic impact of an infrastructure
investment can induce positive changes in tax revenues after the
infrastructure project is in operation. The Kyushu high-speed rail line
began construction in 1991, the rail line started operating in 2004, and the
entire line was completed in 2011. The study compared the tax revenues of
the affected areas along the high-speed rail line with other regions that
were not affected by the rail line. The results found a statistically significant
and economically growing impact of the high-speed rail line on tax
revenues in the affected areas. These findings again strongly suggest that
additional tax revenues, created by the externality effects of an
infrastructure project, could be used to encourage increased private sector
financing in such projects, by using some of that additional tax derived to
improve the rate of return on infrastructure projects.
3. Capturing tax revenues to increase the rate of return

for private financing
Externality tax effects provide an opportunity for private sector

infrastructure investors and operators to earn additional revenues, by
allowing players to enhance the rate of return from their investment, and
thereby make their infrastructure operations sustainable for the long-term.
This is done by addressing a classic externality problem, in which none of
the indirect benefits of an activity – in this case, an infrastructure project –
accrue to the party that helped create them – private sector infrastructure
investors and operators (Dahlman, 1979). Subsidies and other project-
specific inducements may, or may not, prompt private sector financiers and
constructors to proceed to undertake a project, largely by mitigating some
of the risk entailed and/or raising the anticipated rate of return, but it is not
a sustainable solution in the long-run, and comes at a direct cost to the
public purse. But allowing the same private sector financiers and
constructors to share in some of the benefits, the externality effects, of a
proposed project is a means by which their involvement can be more
fundamentally and sustainably ensured, both as a viable commercial
proposition (not one that is artificially sweetened by a subsidy), and one
that sees their own interests aligned in ensuring the best possible outcomes
from the projects subsequent operations. In least developed and developing
countries, in particular, public funds available for subsidies tend to be
meagre and hard to secure, if at all, but earmarking a portion of future
additional tax revenues (i.e. tax revenues that would otherwise not be
forthcoming) is a more viable proposition for policymakers and
government budget planners.
The key to harnessing externality effects is to find a means of measuring

and internalizing the spill-over from capturing incremental tax revenues
that then further support private financing for infrastructure projects.
Externality tax revenues can be considered in infrastructure development
projects, especially those with a low rate of return, to boost other additional
revenues, such as subsidies to operators. If the expected rate of return is
increased, private sector investors will be more willing to invest in the
construction and other upfront costs of infrastructure. This scheme could
prevent shortages of indispensable public services, such as fresh-water and
electricity supplies, which are often sold to customers at discounted rates
for various socio-economic reasons, thereby making private sector
participation extremely difficult, because the rate of return from direct
revenues is insufficient to be viable. But a water supply project, which can
capture not only user charges but also part of the externality tax revenues
derived, could earn sufficient revenues to make its construction and
operation a viable commercial prospect. In the developing countries of Asia
and the Pacific, governments often regulate infrastructure operators to
charge users of public utility services fees and tariffs that are less than the
total (and sometimes considerable) costs of constructing, operating and
maintaining infrastructure, such as expressways and water supplies
(Regan, 2017)45. Although governments may be able to provide subsidies to
help offset the low rate of return on the private sector’s investment in such
projects, for instance under the terms of a PPP structure46, the availability of
government funds for such subsidies is typically limited. And it is precisely
this dichotomy that often constrains greater private sector participation in
infrastructure investment and the provision of public goods and services. It
is impossible for policy-makers to ‘square the circle’.
Figure 3.2 illustrates the relationships of user charges, increased tax

revenues generated by infrastructure investment, and the rate of return on
the investment, on a hypothetical infrastructure project. The flat horizontal
line at the bottom represents the inflows of user charges, and the dotted
line indicates increased tax revenue made by externality effects. The upper-
most line denotes the total rate of return on the infrastructure investment,
as the summation of user charges and incremental tax revenues. An increase
in regional GDP stemming from the project will increase tax revenues, as
shown by the dotted line. Supposing that some or all of these incremental
tax revenues are used for public subsidies to the infrastructure investors or
operators, part of the dotted line becomes the investors’ total revenues on
45 Governments’ options to implement incentive regulations, such as price-caps and

revenue-caps, may not be feasible in many developing countries in the region, principally
due to weak institutional capacities in both the public and private sectors (Harris, 2003).
46
For example, public subsidies to operators can increase dividends to investors indirectly.
the project 47. The rate of return rises from the user charges (the flat
horizontal line) to somewhere near to the dotted line. If these externality
tax revenues, which are created by the new infrastructure project, were
fully linked with public subsidies to the infrastructure investors, then the
actual rate of return on investment rises significantly to the upper-most
line. This can then encourage private investors to participate more in
infrastructure investment.
Figure 3.2
User charges, externality tax revenues and the projected rate of return
Time
Source: ESCAP.
Supposing that a portion of these incremental tax revenues in the target

area of the infrastructure is used for long-term public subsidies to
infrastructure investors and operators, part of the dotted line becomes the
investors’ total revenues from the project. If these externality tax revenues,
which are created by the new infrastructure, were ‘partly’ linked with
public subsidies provided to the infrastructure investors, then the actual
rate of return on investment rises significantly. In figure 3.3, the rate of
return rises from the horizontal flat line (user charges) to the upper-most
line (user charges plus subsidies). This can encourage private sector
financiers and investors to participate more in the infrastructure project. In
addition, the incremental tax revenues may link with the fixed amounts of
public subsidies, instead of letting them fluctuate (see the dotted line).
47 Alternatively, public authorities could provide service fees to infrastructure operators,

linked with incremental tax revenues, in accordance with the contract.
Figure 3.3
Linking externality tax revenues with public subsidies to increase
the rate of return
Source: ESCAP.
Figure 3.4 proposes a model for the partial injection of externality-derived

tax revenues to private infrastructure investors and operators through
public subsidies48. At the top of the figure, private infrastructure operators
receive user charges, in this case, highway tolls. At the bottom are increased
tax revenues generated by the externality effects of the infrastructure. Then,
part of the externality effects is injected, through subsidies by the
government, to private sector infrastructure operators. The operators also
pay dividends to private sector investors, if the infrastructure project makes
a profit, according to the operator’s corporate governance system. In this
case, the model envisages the government fully passing on the externality
tax revenues, but it may only need to inject a proportion of the increased
tax revenues to private operators49.
When part of this net increase in tax revenue is associated with public
subsidies to infrastructure operators, the prospects for the infrastructure
project itself, and the sustainable development of the target area, are
enhanced. Once the infrastructure firm diversifies its revenue streams with
48 Viability gap funding (VGF) can be used for this purpose. See box 3.1 for details.
49 Another benefit of externality tax revenues is related to funds that are borrowed from
overseas. Supposing that the ADB, World Bank or another MDB makes loans to
a developing country to help underwrite the costs of infrastructure construction, general
tax-payer money is traditionally used to service repay those loans, when they become
due. But ear-marking and utilizing externality-driven tax revenues, generated in the
affected areas, could make it easier to repay those borrowed foreign funds.
Figure 3.4
Injection of fraction of externality tax revenues as subsidies
Source: ESCAP.
the subsidy emanating from part of the incremental tax gains, infrastructure
operators may even opt to lower user charges, and thereby benefit the
surrounding society even more. These can also positively affect the local
economy and raise the marginal productivity of the capital, resulting in
increased tax revenues, even when holding tax rates constant.
However, it is imperative that policy-makers design and implement

a robust mechanism to effectively link the incremental tax revenues to the
subsidies. If such a mechanism is not implemented in a fair and transparent
manner, governments can come under legitimate suspicion and criticism
from taxpayers. In particular, the rate of injection of the incremental tax
revenues gained must be carefully determined, using a transparent process
agreed by all stakeholders. While the government’s fiscal spending is
strictly regulated, taxpayers may see such tax-linked subsidies to specific
infrastructure operators as an irregular deviation from established
procedures and regulations. To minimize abuses and to protect the public
interest, governments should ensure full transparency and accountability of
the subsidy schemes. Public interest agencies, civil society organizations
and the media can also help closely monitor such ‘de-risking’ schemes, and
help to make wider society better aware of their costs, and risks (Sundaram
and Chowdhury, 2019b). It is similarly important to ensure that the
necessary agreements and contracts between the public and private sector
are clear and transparent. In some least developed and developing
countries in the region, contracts between the government and private
sector entities – or between the government and state-owned enterprises –
are sometimes less than clear, and the cost of infrastructure development
may be greater than widely believed (World Bank, 2019). If MDBs, such as
the Asian Development Bank (ADB) and World Bank, which have
institutional reputations to protect, jointly participate in infrastructure
projects with the government and the private sector, they too will closely
monitor the contractual arrangements, and seek to ensure that the costs of
infrastructure investment are kept at acceptable norms.
Box 3.1
Viability gap funding
Infrastructure projects may not all be fully financially viable on their
own. Viability gap funding (VGF) is a mechanism that provides
government’s financial support to subsidize the various costs of
infrastructure projects, even partially, when infrastructure projects cannot be
fully funded by user fees (Hyun, Nishizawa and Yoshino, 2008; Regan,
2018). VGF can be set up as a special facility of the government to provide
such financial support to unviable infrastructure projects (World Bank,
2006). VGF allows to budget future government expenses to fund
infrastructure projects, and reduce uncertainty for private investors, as the
funds will be committed through the VGF mechanism (Regan, 2018). The
VGF modality also allows for a foreseeable fiscal planning and avoids the
problem of contingent liabilities that would occur in the case of revenue
guarantees. Contingent liabilities that are not recorded in government
accounts, which can create problems of fiscal sustainability. Instead, having
a dedicated public fund for infrastructure, like VGF, assures the recording of
future expenses on ‘the books’ of the government, thereby making the
process more transparent.
4. Other issues relating to externality effects in

infrastructure financing
In order to enhance efficiency and increase the rate of return on private

investment in infrastructure, using externality effects and/or incremental
tax revenues, it is necessary to have the appropriate governance
frameworks. Such frameworks typically contain such elements as:
i) voluntary efforts by private infrastructure investors and operators;
ii) financing smaller and start-up businesses; and iii) proper tax collection
to prevent tax evasion. Let us briefly look at each of these in turn.
Voluntary efforts needed for enhancing externality effects
It is important that the public sector provides a conducive regulatory and

policy environment that allows private sector infrastructure operators and
investors to have sufficient trust, and be able to fully capture the benefits of
externality effects, so as maximize the rate of return on their infrastructure
investment. However, both private investors and operators need to also be
pro-active in their efforts to increase income and reduce the costs of

infrastructure projects, including those relating to establishing new
businesses associated with the infrastructure project being developed.
Without such efforts by the private sector, even when conducted under an
enabling business environment and public investment promotion strategy,
the impact of externality efforts is unlikely to meet expectations, and the
government’s assistance will not be sufficient to enhance the anticipated
rate of return. Put another way, the ‘additionality’ of using the externality
effect approach is only going to trigger additional private sector investment
in infrastructure if it is not used, or even abused, in a wasteful manner by
contractors. In a variation of the moral hazard issue in banking, it is
important that private sector actors do not come to think that any subsidies
derived from externality-driven tax revenues are a licence to act recklessly
or with less regard for costs.
Table 3.4 shows a hypothetical pay-off matrix on the presence, or absence,

of efforts made by an infrastructure operator and investor. If neither the
operator nor the investor makes any effort, the operator gains 50 units in
revenue and the investor receives dividend income r. It is assumed that the
operator could increase operating income to 100 units by improving the
salary system, such as paying staff bonuses based on the entity’s revenues.
Furthermore, the investor could raise its dividend income to ar (a>1) with
efforts to reduce costs and increase revenues, such as increasing the number
of highway turnoffs or the number of users. The lower right cell of the pay-
off table represents the revenues when both the operator and the investor
make maximum efforts to increase revenues and improve service. In this
case, the total income of both the operator and the investor is higher than in
the normal case. The income of the operator increases from 50 to 100 units,
and the dividend of the investor from r to ar. This illustrates the importance
of designing robust corporate governance mechanisms, such as the salary
system of the operator to incentivize its staff, and the dividend policy for
the investor, to improve revenues (Nakahigashi and Yoshino, 2016). This
theory suggests that the voluntary efforts of the operator and investor can
significantly enhance the externality effects of the infrastructure project yet
further.
To reiterate, it is necessary to improve the efficiency of infrastructure

projects using private sector financing, and to introduce proper
corporate governance mechanisms, for example, to incentivise the staff of
infrastructure operators (e.g. paying staff bonuses tied to increases in profit
through externality effects). Dividend payments for private sector investors
will also vary based on a project’s revenues, including user fees and public
subsidies, as well as incurred costs (e.g. of construction and operation),
which could be linked to externality effects.
Table 3.4
A pay-off matrix for a private infrastructure operator and a private
infrastructure investor
Investor / operator Normal case Effort case
50 r 50 αr
Normal case
Operator Investor Operator Investor
100 r 100 αr
Effort case
Operator Investor Operator Investor
Source: ESCAP based on Nakahigashi and Yoshino (2016).
Financing smaller businesses to enhance externality effects
In addition to direct incentives to private infrastructure operators and

investors, such as price-cap regulations and revenue-cap regulations, one
indirect incentive scheme for infrastructure development is support in co-
financing business start-ups and small or medium-sized enterprises (SMEs)
that operate around the infrastructure (Abe, Troilo and Batsaikhan, 2015). If
infrastructure, such as railways and roads are developed in a new area,
entrepreneurs and SME owners will be more interested in starting new
businesses, such as hotels, restaurants and retail shops. However, these
entrepreneurs and the SME owners often find it difficult to raise capital,
and banks often deny loans to start-ups and smaller businesses without any
credit history or adequate physical assets to pledge as collateral (Abe and
others, 2012). In this case, providing partial debt (or even grant) financing
for start-ups and SMEs, for example, through geographically concentrated
or sector-dedicated public infrastructure funds, or sub-national
development funds and highway trust funds (Inderst and Croce, 2013),
could be part of the answer50. This would help enhance externality effects,
such as increased tax revenues around the area where more businesses are
being developed, and may then in turn increase cash flows for the
infrastructure operators and the rate of return for investors, if such positive
externality effects are properly captured. At the same time, financing for
smaller businesses, and the job creation that occurs, will mitigate income
inequality and create business opportunities for entrepreneurs and start-
ups. A virtuous economic cycle is attained in the locale around the
infrastructure project, with improved tax revenues as the ‘return’, which is
then distributed in ways that catalyse and cultivate greater economic
activity, and have a greater social impact than would be the case if the tax
gains were simply pumped directly in the treasury of the national
government.
50 Those funds can be financed with various sources, such as general funds, user charges,
land and property tax, taxes on fuels and tires and so on.
Hometown crowdfunding can also lend capital to start-ups and smaller

businesses in the target area of new infrastructure. This financing scheme
for developing local businesses began in Japan about 20 years ago and then
expanded to Cambodia, Peru, and Viet Nam (Yoshino and Kaji, 2013).
Hometown crowd funds collect individuals’ smaller contributions in
a certain geographical area where new infrastructure is being developed.
For example, when new water supply begins, people in the target area
contribute a relatively modest amount of money, say $ 50–100 per person,
across 200–300 people, to local business entrepreneurs. Hometown
crowdfunding can finance not only water supply, but also provide funding
to develop new businesses within the water-supplied area, which then
creates larger externality effects.
Proper tax collection to prevent tax evasion
This chapter has argued that the use of externality tax revenues can
encourage greater private sector financing in infrastructure. But this
argument can only be supported if the relevant government collects taxes
fairly and effectively, which can be a difficult task, particularly in some
least developed and developing countries (Slemrod and Yitzhaki, 2000). For
example, tax authorities often face challenges in tracing revenues and
profits generated in the informal sector, as SMEs may seek to avoid paying
tax, and even large businesses sometimes find ways to hide their true
revenues (Abe and others, 2012; OECD, 2015a). In developing countries,
there are many challenges related to tax administration, including tax fraud
and poor compliance, as well as unregistered business. Modern taxation
has gradually shifted away from an emphasis on excise, customs and
property taxes, through corporate income and progressive individual
income taxes, and towards broad-based consumption taxes, such as value-
added tax (VAT) (Slemrod and Yitzhaki, 2000). Autonomous revenue
authorities (ARA), which are semi-private agencies, have taken on an
increasing number of tasks relating to tax administration, independent of
the traditional tax authorities like the finance ministry (Ahlerup, Baskaran
and Bigsten, 2015). These developments have been supported by the
changing technological landscape of tax administration, including the
on-going fintech revolution that can help keep administrative and
compliance costs low.
In the developing countries of Asia and the Pacific, however, most

governments still face difficulties in implementing and enforcing their tax
policies, and thereby maintaining adequate tax revenues (ESCAP, 2018).
Trends in globalization, the fintech evolution, intensifying state-level tax
competition, and growing mobile assets have cumulatively served to create
new opportunities for increased tax avoidance, and potentially constrained
effective taxation of corporate and personal incomes (OECD, 2017; Swank,
2016). Critical issues include poor governance and a lack of technology to

implement tax policies with reasonable administrative and auditing costs.
In this context, capturing incremental tax revenues through new
infrastructure projects becomes more challenging for governments, as
quantifying the true impact of infrastructure development on tax revenues
is made more complex. Moreover, governments are confronted with the
challenging task of deciding how to fairly assign additional tax revenues in
cases when two or more infrastructure projects are implemented
simultaneously, in the same area. Since economic growth and the associated
increase of tax revenues are influenced by many factors, such as natural
and human resources, the business environment, market access and
openness, trade and investment and technology, it can be difficult for
government agencies to demarcate the source of additional tax revenues
properly and fairly. Indeed, exogenous factors can cause overall economic
growth and tax revenues to decline, despite the positive impact derived by
one or more infrastructure projects.
One option to help collect taxes more efficiently and effectively is to apply
new technologies, such as satellite imagery data collection. Satellites can
provide various socio-economic data that then serve as reliable proxy
indicators on critical tax collection issues. For example: measuring how
many people are visiting shopping malls or restaurants every day, as
measured by the number of cars, cycles or motorbikes seen in the car park.
Logging how many hours the restaurant is open for business. Counting the
number of trucks going to and from a factory or industrial zone. Or
counting how much farmland is under cultivation, and with what specific
crops. In this way, satellite data can provide tax authorities with indicative
figures for a range of business activities. Further, such satellite data can be
triangulated with additional geographic data, such as electricity and water
usages and transportation and logistics, to help capture externality tax
revenues more easily, particularly in those developing countries where
governments struggle with other forms of tax-related data.
5. Policy implications and conclusion
As we have seen, incremental tax revenues derived from the externality

effects of newly developed infrastructure projects provide a new
opportunity for governments to enhance private sector financing for
infrastructure development. For this purpose, governments need to
develop proper governance and institutional frameworks, while actively
engaging with private infrastructure investors and operators. Some key
policy implications in this regard are presented here.
First, governments need to design and implement astute and attractive

incentive schemes, such as subsidies to private infrastructure investors and
operators, that encourage private sector investors and operators to pursue
profits, while keeping user charges within reasonable limits. They can also
provide additional finance to help catalyse and support start-ups and SMEs
around new infrastructure projects. These incentives need to be linked with
the growth of tax revenues in the adjacent area to the infrastructure. By so
doing, private sector actors can envisage an adequate rate of return on their
investment in a particular infrastructure project and are encouraged to
allocate greater investment resources in this space. For this purpose,
coherent regulatory policies and associated institutional and governance
frameworks are necessary if the goal of boosting private sector financing
and participation in infrastructure is to be attained.
Secondly, governments should further develop and strengthen financial

markets for both debt financing and equity financing. Private investors and
operators rely heavily on the financial markets: including commercial and
investment banks, insurance funds and pension funds, bond issuance,
corporate and project finance specialists, etc. But without well-functioning
financial markets and financial institutions in a country, neither the public
nor the private sector can fully harness the benefits of using the externality
effects to enhance private financing for infrastructure projects. The funding
sources still need to be there, to get projects commissioned and underwrite
construction costs, before the gains from the externality effect start can be
harvested (typically sometime after the project is completed and its
externalities have started to take effect). Indeed, capital markets can also
play a role in creating financial derivatives – such as futures contracts,
default risk hedging instruments, and securitization products – that allow
those anticipated externality effect revenues gains to be ‘locked in’, and
made part of an infrastructure project’s financial equation.
Thirdly, the opportunity of land ‘capture’ by private sector infrastructure

investors and operators can provide additional incentives to encourage
private sector financing in infrastructure. As previously discussed,
businesses operating in the adjacent area of the infrastructure project can
significantly contribute to externality effects, and thereby increase tax
revenues to public authorities. However, the direct involvement of private
sector infrastructure investors and operators, in the land and business
development around the infrastructure, can promote even more financing
for infrastructure development if they can foresee the additional cash flows
emanating from newly developed businesses surrounding the
infrastructure. There have been some successful examples of such land
capture schemes in Japan. However, governments must carefully develop a
proper governance structure when offering this opportunity to private
sector investors, in a way that is fair and transparent, and thereby avoid
unwelcome accusations of impropriety, whether real or perceived, and to

protect public interests51.
Fourthly, to successfully capture the externality effects of infrastructure,

governments must collect incremental taxes effectively and fairly. Without
proper taxation administration, and high rates of tax evasion, governments
are unlikely to collect the anticipated incremental taxes fairly and
adequately. Also, if there is some discrimination in taxation among different
groups of society, people may not support the government using
incremental tax revenues to support privately-funded infrastructure
projects. In this regard, the government may wish to adopt advance
technology, such as satellite data, to better capture incremental taxes
efficiently and comprehensively.
Fifthly, governments must reduce informality in their economies. With high

informality, it is not possible to measure and then capture externality effects
effectively, missing many commercial and private activities in the targeted
area around newly developed infrastructure, from which additional tax
revenues should emanate. Indeed, there may be a need to reform the
governance structure over the private sector in a way that encourages small
informal businesses to make themselves formal52. This is often done by
creating a more conducive business enabling environment for formalised
businesses, with improved trade and investment opportunities, better
property rights, and incentives to support private sector development.
Policy-makers can also implement simpler and cheaper enterprise
registration schemes, such as ‘one-stop-shop’ service centres, to increase
formality in the wider business community.
Finally, governments in Asia and the Pacific can request technical assistance
from international development partners to help build up their institutional
capacity to fully capture the externality effects of infrastructure. In addition,
they can also facilitate the exchange of experiences and knowledge with
neighbouring countries in the region.
51
For details on the ‘land capture’ scheme, read annex 3.1.5 and box 3.3.
52 Perhaps the most common factor behind high levels of informality in developing
countries’ business sectors is the desire by small firms to avoid paying taxes by staying
‘under the radar’. Therefore, any government scheme that seeks to leverage tax revenues,
such as the externality effect, automatically needs to address high levels of non-
compliance in tax reporting and payment. It is important to note that many firms seek to
avoid paying taxes because the tax regime itself is perceived as being arbitrary and
potentially punitive, and so the key reform is improving the system by which taxes are
consistently administered and fairly enforced.
This chapter has argued that externality effects could bring new
opportunities for governments to enhance private sector financing for
infrastructure projects in Asia and the Pacific. A new ‘string’ to their ‘bow’,
as they aim to achieve the SDGs. New infrastructure is expected to trigger
incremental tax revenue increases, principally through associated business
and residential development, and increased land values in the periphery
and adjacent areas. Governments can then use those incremental tax
revenues partly, through properly designed long-term subsidy schemes to
private sector infrastructure investors, to guarantee – and even increase –
the long-term profitability of infrastructure projects that will improve the
livelihoods of their citizenry. To capture this opportunity fully, however,
governments must implement adequate governance structures that provide
proper incentives to private infrastructure investors and operators,
sufficient that it will indeed trigger genuine ‘additionality’ (i.e. greater
private sector participation in infrastructure investment), and ensure
transparency and accountability when using externality effects through
taxation and other mechanisms.
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Annex 3.1.
An overview of private sector infrastructure financing
Infrastructure development is vital in any economy, providing an adequate

standard of essential public services. It also typically requires a substantial
investment of capital for construction and operations. Mobilizing the
necessary scale of financing can be challenging, particularly in least
developed and developing countries where public funds are often the most
constrained, yet the needs are most apparent. An inverse correlation often
exists between the demand for public services provided by infrastructure,
and the supply of capital needed to underwrite the cost of providing these
services. It is here that private sector capital can play an important role in
helping fill the funding gap, through the design and development of
commercially viable business models and robust governance structures.
The principle objective of the vast majority of private sector businesses is to

engage in profit-making activities, which they typically do by pursuing the
optimal (risk-adjusted) rate of return on their investments. Indeed, in many
countries, business executives have a fiduciary duty to generate the best
returns for their shareholders. This is typically done by blending capital
with other (non-financial) resources and core competencies in a bid to take
advantage of the most lucrative business opportunities. That capital may
come from retained earnings or their balance sheets, but often includes
elements of debt (i.e. borrowed money) also. In this context, infrastructure
development projects – which are often large in scope, can be slow to
generate a return, typically have a significant debt component, and usually
contain considerable project risks – can have limited allure when there is
considerable uncertainty regarding the anticipated net rate of return,
relative to the perceived risks entailed (Iossa and Maritimort, 2015). This
uncertainty then hampers the channelling of private sector financing into
many infrastructure projects. This annex presents a succinct view of key
issues of private sector financing for infrastructure: i) the principal
associated risks; ii) public policies to facilitate private-sector financing;
iii) major private-sector financing scheme; iv) private-sector actors; and
v) revenues from infrastructure.
3.1.1. Principal risks associated with private sector

investment in infrastructure
In addition to the uncertainties around the investment returns on numerous

infrastructure projects, other factors that can make infrastructure projects
less attractive for private sector investors include: i) the heightened risks
associated with large scale investments; ii) inefficient pricing policies for
user charges, and other concerns around subsequent revenues; and iii) the
likelihood of cost overruns. Such issues are often exacerbated by weak

and/or incoherent government regulations, and a lack of assistance
provided to the private sector (Égert, 2009; Henckel and McKibbin, 2017).
Efficient and effective management of infrastructure design, construction,
and operation is required if private sector investors are to allay their
legitimate concerns around infrastructure investment and service
delivery 53. While public-private partnerships (PPPs) have often been
promoted to enhance the private sector’s involvement in infrastructure
development, it has also been recognized that new policy options are
needed to facilitate greater private sector financing for infrastructure
projects (ESCAP, 2019).
Private sector investors often stress that infrastructure investments are

particularly risky and involve high costs, which are difficult to bear without
some form of government support (OECD, 2015b). Nevertheless, some
infrastructure projects – for example, in the water, power,
telecommunications and transport sectors – are profitable and have
attracted private financing without public support (Bjornlund, van Rooyen
and Stirzaker, 2017; Iordache, Schitea and Iordache, 2017; Pargal, 2003).
Table 3.5 summarizes various risks associated with private infrastructure
investments. The private sector cannot control those risks alone or fully,
which suggests that support from the public sector may sometimes be
required.
The development and operation of infrastructure projects are typically

characterized by long construction times, require intensive use of fixed
assets, and can in some cases rely on quite advanced technology.
Infrastructure development also tends to be heavily regulated by
governments, in order to ensure that public services are provided equitably,
safely and sustainably, at a reasonable cost to users, and without incurring
harm to society and the environment. One crucial issue for private sector
investors is the high-risk levels associated with the illiquidity and
irreversibility of large project-based investments, coupled with difficulties
in long-term business forecasting, such as cost predictions and long-term
revenue streams. As a result of these elevated levels of risk, the costs
associated with infrastructure construction and operation tend to be high,
and may exceed the projected revenues expected from user charges
(ESCAP, 2018; Quiggin and Wang, 2019).
53 One example is the recent verdict over an extensive 60-kilometre elevated rail project,
intended to link central Bangkok with Don Muang airport in Thailand. In April 2019, the
Supreme Administrative Court of Thailand ruled on the disputed contract and ordered
the Thai Ministry of Transport and the State Railway of Thailand to pay baht 12 billion in
compensation to a Hong Kong-based developer for wrongful termination of the
concession (Thaiger, 2019).
Table 3.5
Typology of risks associated with infrastructure investment
Risk group Examples
Political, Complex regulations with political interventions; unstable and short-time
macroeconomic and regulations; consumers versus shareholders; regulations for user charges
regulatory risks inconsistent incentives; inflation; unfavourable business environment; real
estate costs.
Supply-side risks Cost over-runs for both construction and operation; availability and cost of
technology and inputs; high cost, illiquidity and irreversibility of infrastructure
assets; difficulty in deciding timing of investment; lower or higher cost of
present and future capital; change in economic conditions; large and ‘lumpy’
investments to attain adequate economies of scale.
Demand-side risks Negative- or over-demand; high fluctuations in demand; difficulty in
revenues and profit forecasting; difficulties in pricing; brown-field versus
green-field; loss of customers to competitors or other ‘substitutional’
services; cash-flow management issues.
Cross-border risks Exchange rate fluctuations; different legal and regulatory regimes; different
cultural and social norms; difficulties with financial transactions; cost of
international trade and logistics.
Environmental risks High cost for mitigation and adaptation; natural disasters; corporate
reputation; community and stakeholder relationships.
Source: ESCAP.
Note: This table excludes force majeure risks, such as wars, natural disasters and ‘acts of God’.
3.1.2. Public policy and private sector investment in

infrastructure
In recent decades the public sector in Asia and the Pacific has faced
increasing pressure to provide adequate public services to its citizens, while
simultaneously facing growing debt levels in financing infrastructure
(ESCAP, 2019). Governments have therefore moved to introduce a number
of policies and initiatives aimed at enhancing the private sector’s
involvement in infrastructure development, and thereby help share some of
the financial burdens. These can be broadly categorized into: i) public
procurement; ii) operational licences and infrastructure leases;
iii) concessions for infrastructure; iv) corporatization and privatization of
state-owned utilities firms; v) third sector organizations; and vi) public
private partnerships. Each has its own unique features, characterized in
large part by the modalities used to elicit private sector participation in
infrastructure development and operations, and the financing schemes
used. They are briefly reviewed here.
Public procurement
Public procurement refers to the public sector’s purchase of supplies and

services in the market, chiefly from private sector entities. The main
objectives of public procurement are to harness market principles of
efficiency and effectiveness, competition, accountability and transparency,

ethics, and industry development (Raymond, 2008). In other words,
governments participate in the market as an institutional buyer, while also
regulating those same markets in various ways, such as through
competition laws (McCrudden, 2004). One challenge encountered in public
procurement is that the government’s purchasing power is often
considerable, and sometimes even the single largest purchaser in a market.
This asymmetry can then lead to inefficient and ineffective purchasing
practices.
On infrastructure projects, private sector entities usually participate as

contractors or sub-contractors, typically through formal tender and bidding
processes, dictated by specific governance laws and regulations to prevent
irregularities. Under such contracts with public authorities, the winning
private contractor designs, constructs, operates, maintains, and may even
remove the infrastructure project. It provides the necessary materials,
supplies, technology, as well as skills and knowledge, but it is the
government that bears the overall financial risks of the project, while the
private sector contractor’s risks are limited to only those conditions laid out
in the contract it signs with the government agency that procures their
services.
Operational licences and infrastructure leases
The private sector can also be involved in infrastructure operations through

operational licences and leases. Upon obtaining an operational licence from
the government, a private entity may supervise the management of public
utilities (e.g. water or electricity supplies), and collect user fees on behalf of
the government. The private sector operator will in turn pay an agreed fee
to the public authority. An infrastructure lease can also provide a private
entity with the right to operate and maintain infrastructure, which the
government has developed while collecting user fees. Under operational
licences and infrastructure leases, governments are still responsible for
financing infrastructure development, while private sector entities need
only finance their own operations, thereby limiting the scale of their risk
exposure (Harris, 2003). These practices can be an extension of public
procurement, thus requiring concrete rules and transparent regulations to
enhance their efficiency and effectiveness.
Concessions for infrastructure
The private sector may also participate in infrastructure development by

obtaining concessions from governments. Such a concession allows
a private entity to develop and operate an infrastructure project that
provides a public service. In this case, a private sector firm typically has the
exclusive right to construct and operate the asset, under the governing laws
and regulations, with specific requirements provided by the public
authority, and to collect usage fees to maintain the infrastructure for
long-term (Harris, 2003). Concessions for infrastructure often require
private sector investment across the entire development and operation
stages of the infrastructure project, and so the risks become higher on the
private sector’s side.
Within this format, government agencies have implemented rate-of-return

regulations and incentive regulations (e.g. price-cap regulations and
revenue-cap regulations) to encourage private sector investment in
concessions for infrastructure. Rate of return regulations aim to assure the
degree of profits resulting from the private infrastructure investment, while
incentive regulations, such as price and revenue caps, encourage private
infrastructure concessioners to reduce the costs of development and
operations, and maintain usage fees low, while securing adequate profits
for private investors. The common objective is to keep fees and tariffs
sufficiently low, in keeping with the provision of a public good, while
generating adequate cash flows for private sector investors and operators
to be sufficiently attracted to undertaking infrastructure concessions
(Cambini and Rondi, 2010).
Privatization
In Asia and the Pacific, state-owned enterprise (SOE) reform through

privatization has been a popular means to enhance private sector financing
for infrastructure development and operations since the 1980s (Turner,
O’Donnell and Kwon, 2017). A number of governments aimed at improving
the deteriorating performance of SOEs due to growing social demands and
intensified competition fuelled by deregulation, liberalization, and
globalization in the economic sectors where the public sector has
dominated, such as transport, communications, and utilities. (Gakhar and
Phukon, 2018). The privatization of SOEs can be done by selling off entire
SOEs, such as utilities firms, to be operated as commercial concerns (i.e. full
privatization), or by inviting private sector investors to acquire part of an
SOE’s equity (i.e. partial privatization).
Although it has been widely promoted that the transition of ownership

from the government to the private sector can enhance efficiency and
sustainability of SOEs, empirical research has shown mixed results (Gakhar
and Phukon, 2018). Some researchers found a significant improvement in
the post-privatization performance of former SOEs, by avoiding political
interferences and focusing on the economic objective of maximizing returns
from their investment. However, other researchers disclosed that while
privatization may provide room to improve efficiency, it can also convert
Box 3.2
Concession for inclusive water supply in Manila
In 1997, the government of the Philippines awarded long-term
concession contracts to private consortia for water supply and wastewater
and sanitation management in the Greater Manila, which were previously
handled by the government-owned entity. Under the performance-based
concessions that set ambitious performance targets in terms of quality,
sewerage and outreach, Manila Water (in the west zone) and Maynilad
(in the east zone) were responsible for operating and expanding water-
treatment and supply (PPPLRC, 2016). Figure 3.5 presents concessional
areas for water supply in Manila.
Figure 3.5
Concessional areas for water supply in the Greater Manila
Source: Rivera (2014).
While they successfully increased their services’ coverages, customer

base and productivity, the concessionaires significantly reduced water fee
for over 1.6 million people of marginalized communities who enjoyed
a subsidized price of $ 0.20 per cubic meter (Rivera, 2014; Verougstraete
and Enders, 2014). The success of this concession scheme is attributable to:
i) utilizing private-sector’s knowledge and skills; ii) mobilizing private-
sector financing; and iii) providing an adequate legal and regulatory
framework. Furthermore, ADB provided its technical assistance to the
government by developing medium to long-term investment plans and
conducting feasibility studies for the urban water supply (ADB, 2014).
a former SOE into a privately-owned monopoly, which can then be more

harmful to society than a public-owned monopoly, particularly if operating
within an ecosystem of competition and anti-monopoly regulation. Besides,
some others suggest that privatization does not have any significant effect
on a firm’s performance, as the real problem is not a lack of operational
efficiency, but the lack of capacity to set proper pricing and collection of
user charges. Given those different views toward the performance of
privatized SOEs, governments and their development partners have
recently been experimenting with public-private partnerships (PPPs) that
can allow increasingly diverse forms and cooperation modalities with
private-sector investors (Turner, O’Donnell and Kwon, 2017).
Third sector organizations
The third sector was once popular as an alternative vehicle to mobilize

private sector financing for infrastructure development, and tends to have
a very loose definition, as it sits in-between the public and private sectors
(Anheier and Seibel, 1990), and tends to be non-profit in orientation. Such
organizations can take a variety of forms, such as a public-private joint
venture, a social enterprise, a business association, a credit union,
a voluntary organization or a charity, which operates using a mixture of
private sector financing, government funding, philanthropic donations
and/or their own commercial activities. However, the use of third sector
organizations to deliver public services has often been found financially
unsustainable, mainly due to their non-profit nature, with regulatory
constraints and a lack of adequate incentives to generate revenues and
reduce costs (Enjolras and others, 2018).
Public-private partnerships
In the past decade, one popular solution to enhance private infrastructure

financing has been the use of public-private partnerships (PPPs), such as
build-operate-transfer (BOT) and build-own-operate-transfer (BOOT)
schemes, and design-build-operate (DBO) arrangements. PPPs had been
expected to play an important role in infrastructure development and
public service delivery by increasing the role of the private sector. A PPP is
broadly defined as a formal agreement whereby a public sector body enters
into a long-term contractual arrangement with a private sector entity for
the development and/or operation of public infrastructure services
(Grimsey and Lewis, 2002). In this context, PPPs may also contain some of
the traditional infrastructure development practices outlined above, such as
public procurement, operational licences, infrastructure leases and
concessions and third sector organizations, which also require a long-term
contract. To propagate PPPs, robust legal and regulatory frameworks are
needed, as well as a framework that guides the public sector, streamlines
project preparation and implementation, and provides the necessary degree

of certainty to private sector investors (ESCAP, 2019). Private sector
companies have an understandable dislike for uncertainty, and so having
an adequate level of trust in their public sector counterpart on a PPP deal is
paramount.
Although PPPs have been promoted among governments and development

partners, such as multilateral development banks, their use has not been as
great as many had expected, particularly in developing countries (Hodge
and Greve, 2018; Leigland, 2018). Figure 3.6 portrays trends of PPPs in Asia
and the Pacific over the past two decades. While private financing through
PPPs continuously increased, until the five-year period of 2007 to 2011, it
then declined in the period from 2012 to 2016. Looking into each
sub-region, the growth of PPPs has also been inconsistent.
Figure 3.6
Public-private partnerships in sub-regions of Asia and the Pacific,
1997-2016
Source: ESCAP (2019).
In this regard, the United Nations Economic and Social Commission for
Asia and the Pacific (ESCAP) has developed a composite index that can be
used to assess the extent of a government’s readiness to implement PPPs in
infrastructure projects. The PPP Enabling Environment Index identifies
several key elements to PPP readiness at the national level, spanning:
i) institutional arrangements for PPP projects; ii) past experiences with
PPPs; iii) macro-economic stability; iv) financial market development; and
v) an economy-wide legal and regulatory framework (Sharma and
Sirimaneetham, 2018). In economies with a more conducive enabling

environment for PPP environment, private sector financing for
infrastructure development is expected to be more viable, with better risk-
adjusted rates of return.
3.1.3. Private sector financing schemes for infrastructure
Private sector financing for infrastructure development can be broadly

categorized in five areas: i) bank loans; ii) pension funds; iii) insurance
funds; iv) bond (fixed income) investment; and v) equity investment
(table 3.6). The first four formats essentially entail debt financing, while the
final one is a non-debt ownership investment format (OECD, 2015b).
Table 3.6
Private financing, infrastructure assets and nature of project
Nature of infrastructure
Private financing Infrastructure asset
project
Safer asset Brownfield
Bank loan
Insurance funds
Pension funds
Bond investment (revenue bond)
Equity investment
Riskier asset Greenfield
Source: ESCAP.
In terms of investment risk, there are different kinds of asset classes in

infrastructure. The assets of a ‘brownfield’ project tend to be perceived as
safer. An established railway or highway that has already been in
operation, for example, but requires the private sector’s involvement in
expanding facilities or improving operations, contains relatively modest
risk, as revenue flows from these facilities are already known. Conversely,
wholly new infrastructure projects, where revenues are less certain, pose
a greater commercial risk. Thus, private investors are often less willing to
invest in such ‘greenfield’ infrastructure projects, unless the anticipated
returns are sufficient to ameliorate the additional risk. But if private sector
investors foresee the rate of return to be large and relatively certain, even
risky infrastructure assets can become potentially attractive business
propositions. Thus, increasing the rate of return and/or lessening the risk
can help to entice private sector capital, such as pension and insurance
funds, which tend to be highly risk-averse, both by nature and by
regulatory mandate.
Bank loans are usually relatively short-term, ranging from one to five years,
and granted directly to infrastructure projects. Without support from public
schemes, such as concessional funding or sovereign guarantees, the cost of
bank loans is typically more expensive than other forms of debt financing,
particularly in developing countries. As a result, private sector investors
typically seek additional public support for infrastructure projects, in
addition to bank loans54. Both insurance funds and pension funds are
sometimes able to provide long-term financing for infrastructure
development, as the length of insurance contracts is typically more than
10–20 years, and so they ideally wish to invest in longer-term assets that
have a similar maturity. Therefore, well-designed infrastructure
development projects can be a promising target for long-term investment
by both insurance and pension funds.
Both debt and equity financing through capital markets can also provide
necessary private sector capital for infrastructure development. One type of
bond investment for infrastructure, which shares some similar
characteristics to equity financing, is revenue bonds. Revenue bonds can be
used to finance a wide range of infrastructure projects, by which debt
servicing comes from future revenues generated by the relevant
infrastructure project (e.g. Chapman, 2008; Hyun, Nishizawa and Yoshino,
2008). Revenue bonds may be purchased by a mix of different entities, such
as central government agencies, local and municipal governments, and
various kinds of private sector investors. The entities then share all the risks
together, along with the profits, each in proportion to the scale of their
investment. This mixed entity approach can help to ‘de-risk’ the revenue
bonds and thereby attract more investors.
One recent development in facilitating private sector financing of

infrastructure projects is the emergence of blended finance. Blended finance
can be defined as coordinated fund mobilization, in this case for
infrastructure development, among domestic and international public and
private entities. They may consist of public grants and subsidies,
concessional or soft loans, official development assistance (ODA), private
sector financing and even philanthropic contributions (Gavas and others,
2011; Leigland, Trémolet and Ikeda, 2016). Blended finance aims to increase
the private sector’s involvement in infrastructure investment through
providing additional financial flows that can reduce borrowing costs
compared with a fully commercial investment proposition (Leigland,
Trémolet and Ikeda, 2016). As a result, blended finance can reduce the
54 A number of MDBs also provide guarantees for equity investment in infrastructure

projects. For example, the Multilateral Investment Guarantee Agency (MIGA), a World
Bank organization, provides guarantees covering long-term equity investments against
the risk of breach of contract for infrastructure projects.
financial risks of infrastructure projects, lower entry barriers to new

entrants, and ‘leverage in’ the private sector’s resources. However, blended
finance in the developing economies of Asia and the Pacific has yet to be
widely used at scale (MDBs, 2018).
3.1.4. Private sector actors
The range private sector actors involved in infrastructure projects can be

very extensive, spanning a host of institutional financiers, investors,
construction companies, to other private sector actors providing operation
and maintenance services, as well as professional services like lawyers and
consultants. A taxonomy of the various actors in provided in table 3.7.
Table 3.7
Typology of private sector actors
Actors Descriptions
Commercial banks Providing the main sources for project financings with flexibility to
borrowers. Term loan is the most common type that commercial banks
use for project financing.
Investment banks Providing alternative financing sources for large-scale infrastructure
projects through stock and bond markets and as intermediaries with
other institutional investors and lenders.
Insurance companies Providing financial protection to clients in the event of an accident or
disaster relating to infrastructure construction and operations. They have
the objective of achieving yields that could match or exceed their liabilities.
They also invest in infrastructure projects through capital markets, mainly
on sovereign debt.
Public pensions funds Filling the financial gap of infrastructure development through their
long-term financial investment, similar to insurance companies.
Sovereign wealth funds Accommodating investments with lower yields as their strategic objectives
in infrastructure projects directly, or indirectly through capital markets.
Infrastructure developers Investing at an earlier stage of infrastructure projects, where risks are
or infrastructure private relatively higher (e.g. greenfield projects), typically taking an equity
equities position and targeting a higher return on investment to compensate for the
risk, e.g. through initial public offering (IPO) or other sell-out schemes.
Corporate investors Investing in infrastructure principally for directly operational reasons.
Sixty per cent of private sector investment in infrastructure is accounted
for by corporate investors, such as transnational corporations (TNCs).
Construction firms Providing designing, engineering and construction services to develop
infrastructure.
Operation and Ensuring and enhancing the sustainability of existing infrastructure and
maintenance contractors assets through providing operation and maintenance services.
Professional services Providing professional services and advice to infrastructure projects.
They include, among others, lawyers, accountants, consultants, engineers
and architects.
Source: ESCAP based on EBAC (2016) and Morrison (2016).
3.1.5. Private sector revenue streams from infrastructure

projects
Successful and commercially sustainable private sector investment in

infrastructure typically requires stable revenue streams over the long-term.
While there are multiple ways to generate such revenues, they can broadly
be divided into: i) direct revenues, such as public procurement
arrangements, public grants, subsidies or public service fees, user charges
and third-party financial aids; and ii) indirect revenues, generated through
‘land capture’ and associated business and residential activities.
Governments often procure private sector services to design, construct,

operate, and maintain infrastructure that then provides public services to
society (Akintoye and Kumaraswamy, 2016). Public procurement can be
done through various modalities, such as construction contracts,
management contracts and maintenance service contracts. In such
arrangements, private sector contractors receive payments from the
government as they deliver specifically defined tasks, goods or services by
contracts with the public sector. Grants, subsidies, or public service fees are
often used as financial incentives to encourage the private sector’s
participation in infrastructure projects using capital transfers (te Velde and
Warner, 2007). Public sector agencies may provide up-front, direct grants to
private sector beneficiaries, often in the form of a one-time capital transfer
or a specialized fund. Subsidies or public service fees can also be
channelled to the private sector directly (e.g. capital transfers, lower import
duties and/or lower interest rate loans), or indirectly by mitigating the
investor’s degree of risk (e.g. lower capital costs with state guarantees, land
concessions and preferred access to public services). Subsidies or public
service fees can be provided up-front, or offered for future operations and
maintenance of the infrastructure.
User charges (e.g. fares, tariffs and tolls) are the extent to which users fund
public services, as provided by infrastructure projects, based on the user-
pay-and-benefit principle (Cao and Zhao, 2011). However, in least
developed and developing countries in particular, user charges – such as
subway fees, highway tolls and water and electricity tariffs – must be at
reasonable levels, and often cannot fully cover the cost of infrastructure
investment. Water supply and access to electricity in particular are widely
viewed as essential public goods, and a government cannot easily increase
user charges. The rate of return that private investors can expect from user
charges alone is often too low to cover the significant costs of infrastructure
development, and therefore it can be difficult to attract private sector
participation. As a result, ‘capturing’ land to indirectly help finance
infrastructure projects has gained popularity. Foreseeable land value
increases stemming from current and future infrastructure development
can be used to help finance infrastructure projects, and can facilitate private
financing with upfront capital investment. Highways, railways, power and
water supplies, and the provision of other public goods, provide new
business and development opportunities for private sector investors on
land that they can acquire, prior to developing that infrastructure. For
example, new apartments can be constructed, and new businesses can be
established along the lines of infrastructure.
In the case of PPPs for new railway lines in Japan, for example, private
investors used land capture to help underwrite the cost of new
infrastructure investment. Private railways purchased farmland,
constructed their tracks on parts of that farmland, and then developed the
remaining farmland into residential areas. They also developed commercial
facilities adjacent to the railway stations, constructing department stores
and other commercial facilities. These infrastructure-driven development
activities benefit the private sector as they help guarantee future revenue
streams and encourage greater private sector financing of infrastructure
projects. For this reason, government agencies may favour private sector
infrastructure investors and award them concessions to develop associated
businesses around the infrastructure.
However, governments must be careful to develop proper governance

structures when tendering such opportunities to private sector investors
and operators, to avoid public accusations of preferential treatment or
favouritism, due to a lack of transparency and accountability in the
concession procedures. It can also inadvertently make land markets more
volatile, and prone to undesirable speculative activities, such as
inadvertently creating land asset bubbles that inevitably inflate and then
subsequently burst (Peterson, 2009).
Box 3.3
‘Land capture’ versus ‘land value capture’
The private sector’s ‘land capture’ is different from the public sector’s
‘land value capture’ although both of them could be explained as land-
related schemes to utilize externality effects. Private sector infrastructure
investors or operators could ‘capture land’, or buy land, adjacent to newly
developed infrastructure, and become involved directly in the land and
business development, so that they can generate additional cash flows from
such new businesses. On the other hand, ‘land value capture’ refers to “the
process of using various fiscal instruments to capture a portion of land
value increments to support the financing of public investments and
services” (ESCAP, 2018, p. 9). Land values, including property values and
rental premiums, are strongly and positively associated with the level of
infrastructure investment, such as road construction, mass transit
development, and water supply (Peterson, 2009). Governments can increase
their revenues using various tax schemes, such as increasing land and
property taxes, toll fees and parking levies, and use them to help finance
new infrastructure projects directly (McIntosh and others, 2017).
Annex 3.2.
Macro estimations of externality effects
In their macro estimations, Yoshino and Nakahigashi (2004) and

Nakahigashi and Yoshino (2016) use a trans-log production function to
estimate the direct effect of infrastructure investment and externality effects
(i.e. indirect effects) in Japan. The direct effect of infrastructure investment
is created by the construction of infrastructure that will then increase the
output and productivity of the target area, through establishing its
functions and providing public services. The externality effects have two
channels. One is that public services, such as water supply and electricity,
prompt the construction of new office buildings and/or new housing,
which will increase the efficient use of land. New roads also invite
businesses and manufacturers along those roads. The second channel is to
increase employment in the target area by attracting new businesses,
restaurants and residents into the area. New businesses bring additional
employment to the area, which will contribute to the increase of
consumption and housing development. Consequently, GDP in the area
will further increase.
Whether or not infrastructure investment is effective for production

activities is verified by estimating the productivity effect of infrastructure.
Estimates are made in the following manner using a production function.
(1)
Where Kp is private capital, L stands for labour and KG is stock of

infrastructure investment. General type of the production function is
a trans log production function.
(2)
To examine the productivity effect of infrastructure in greater detail,

estimates are made by classifying direct effects and externality effects, or
indirect effects, according to Yoshino and Nakano (1994). Direct effects refer
to incremental increases in production in the marginal productivity of
production factor (i.e. private capital and private labour), due to an increase
in infrastructure. In this case, externality effects refer to the increased
production amount generated by private enterprises that maximises profits,
in addition to investing production elements, based on the increase in the
marginal productivity of each production element, due to those direct
effects. Supposing the production function of equation (2), and that factor
prices and infrastructure are given to the producers of the private sector,
the productivity effect of infrastructure is classified into three terms. In
equation (3), the first term on the right comes under the direct effect, the
second term is the externality effect with regard to the private capital, and
the third term represents the externality effect related to the labour input.
The effects of the productivity effect of infrastructure are expressed in
marginal productivity.
Using the following form of the production function, we derive the direct
and indirect effects, or externality effects, thus:
(3)
(4)
Incremental tax revenues from externality effects can be written in the

equation (5) as follows:
(5)
There are two portions in the externality tax revenues. The first part comes
from the contribution of private capital, and the second part is created by
the increase in employment.
Incremental tax revenues from the direct effect of infrastructure is written

in the equation (6) as:
(6)
Total tax increase created by infrastructure is the summation of equations

(5) and (6).
The externality tax revenues are the part of the increase of total tax
revenues in the area, which is shown in equation (5). dTspill in equation (5) is
created by private capital and employment, which should be used to
support infrastructure investors and construction companies (for example,
through additional public subsidies). dTdirect is the incremental tax revenues
generated by the government and the private sector through their
infrastructure investment.
Chapter 4
Financing Sustainable Cross-Border
Infrastructure
1. Introduction
Cross-border infrastructure is broadly defined as infrastructure that

facilitates connectivity between two or more countries, and thereby brings
benefits to two or more countries involved. It is widely agreed that
enhanced connectivity facilitates the movement of goods, services and
human resources; enhances economies of scale; promotes trade and
investment; creates new business opportunities; and improves regional
productivity and competitiveness through expanded regional production
networks (ESCAP, 2014). For these reasons, the development of cross-
border infrastructure is an important component of the 2030 Agenda for
Sustainable Development, as adopted by the General Assembly of the
United Nations in September 2015. Of the 17 goals set out in the Sustainable
Development Goals (SDGs), the ninth focuses on infrastructure, industry
and innovation, and sets a target of developing “quality, reliable,
sustainable and resilient infrastructure, including regional and trans-border
infrastructure, to support economic development and human well-being,
with a focus on affordable and equitable access for all” (United Nations,
2019).
For its part, the United Nations Economic and Social Commission for Asia
and the Pacific (ESCAP) is committed to supporting regional economic
cooperation and integration through four fundamental pillars, one of them
being the ‘development of seamless connectivity in the region’55. The 2013
Bangkok Declaration on Regional Economic Cooperation and Integration
(RECI) calls for “seamless connectivity” that can enable “the freer
movement of people, goods, energy and information”, recognizing that
infrastructure gaps “hamper economic growth by limiting economic
diversification, movement of goods, people-to-people contacts, access to
55 The Bangkok Declaration on Regional Economic Cooperation and Integration (RECI) in

Asia and the Pacific, adopted at the first Ministerial Conference on Regional Economic
Cooperation and Integration in December 2013, set out an agenda consisting of four
elements: i) moving towards the formation of an integrated market; ii) development of
seamless connectivity in the region; iii) enhancing financial cooperation; and
iv) increasing economic cooperation to address shared vulnerabilities and risks.
See: (ESCAP, 2017).
energy and the development of global value chains” (ESCAP, 2017, p. viii).
To achieve such a vision typically requires investments in both physical,
‘hard’ infrastructure (i.e. physical assets, such as roads, ports and power
stations), and so-called ‘soft’ infrastructure (such as legal, regulatory,
procedural, and other supporting policy frameworks, as well as human and
institutional capacities) to link countries and economies56. Indeed, the
linkages and synergies between ‘hard’ and ‘soft’ infrastructure tend to be
even more closely entwined in the case of cross-border infrastructure
projects.
A number of studies have sought to quantify the potentially significant

benefits of developing cross-border infrastructure in Asia and the Pacific
(Gilbert and Banik, 2012; Stone, Strutt and Hertel, 2012; Zhai, 2012).
However, despite the apparent benefits, developing and financing such
initiatives remains a considerable challenge. This is largely because cross-
border infrastructure projects have to contend with various transnational
factors that make them more complex to implement and underwrite than
domestic infrastructure projects. For example, cross-border infrastructure
projects often have – or are simply perceived by some to have – a political
and/or geo-strategic component, which may then require additional
institutional arrangements. Decisions around their design, financing,
construction, and operations also need to be coordinated across different
sovereign governments and their respective agencies, and bridge any
differences in their respective operational modalities. Add to these, any
additional challenges stemming from the size and/or technical
complexities of the project, and it becomes easy to see why cross-border
infrastructure projects are hard to finance and implement.
Attempts have been made to address and overcome such coordination

challenges through regional and sub-regional policy frameworks, such as
ASEAN’s ‘Master Plan on Connectivity 2025’ (ASEAN Secretariat, 2016).
RECI is another example, seeking to address critical constraints in the
56 The Association of Southeast Asian Nations (ASEAN) views regional connectivity across
three complementary dimensions: i) physical connectivity (e.g. telecommunications cables
and transport infrastructure); ii) institutional connectivity (e.g. trade facilitation,
investment and services liberalization); and iii) people-to-people connectivity (e.g.
education and tourism exchanges). See: ASEAN Secretariat (2016).
development of cross-border infrastructure projects57. A key determinant of

success is having a shared regional vision across countries, so as to bring
about region-wide planning and coordination mechanisms, including for
financing infrastructure development projects that span borders. This kind
of holistic approach is now being pursued on an unprecedented scale with
the Belt and Road Initiative (BRI); a multi-modal network that aims to
coordinate an ambitious array of infrastructure investment activities across
more than 60 countries, most of which are in Asia and the Pacific.
This chapter examines the risks and challenges entailed in financing

sustainable cross-border infrastructure, and provides some specific
recommendations on how to overcome or mitigate such challenges.
2. Risks and challenges of financing cross-border

infrastructure
There are several obstacles that need to be considered when financing

cross-border infrastructure, and particularly the factors impeding foreign
direct investment (FDI) and private sector investment in infrastructure
projects. Although cross-border infrastructure can improve regional or
sub-regional connectivity 58 , the intrinsic inter-connectedness and
inter-dependencies of these complex infrastructure systems inevitably come
with additional risks that would not otherwise be found in purely domestic
projects of a broadly similar nature (Haimes and Longstaff, 2002; Petit and
Verner, 2016). This is something that must be properly acknowledged
and addressed, since both equity investors and debt financiers alike are
57
RECI sees these as mostly relating to a lack of planning and coordination. “First, most
cross-border connectivity projects are typically negotiated bilaterally between parties.
This results in projects that are fragmented, not well coordinated and, consequently,
burdened with high transaction costs. Second, regional infrastructure projects invariably
involve asymmetric costs and benefits across countries and groups of people, which
entails large externalities and thus need fair compensation. Third, careful planning and
coordination are often absent because of a lack of resources, appropriate institutional
mechanisms, and/or differences in legal and regulatory regimes. Finally, as most
infrastructure networks are domestically centred, with cost-benefit analyses typically
assessed from a domestic return-on-investment perspective, the regional public good
value associated with the projects is heavily discounted” (ESCAP, 2017, p. ix).
58
Regional connectivity refers to “the level and effectiveness of regional networks to
facilitate flows of goods, services, people and knowledge“ (ESCAP, 2014, p. xiii),
comprising physical infrastructure and soft infrastructure in four dimensions: i) trade and
transport connectivity; ii) information and communication technology (ICT) connectivity;
iii) energy connectivity; and iv) people-to-people connectivity.
typically reluctant to take on risks that they cannot adequately measure and
find means by which to partially mitigate59. Those risks span the following:
• Large investment requirements
Cross-border infrastructure projects tend to be larger in scale

when compared with most domestic infrastructure projects, thus
requiring greater up-front capital investment. Furthermore, such
projects must often compete with other budgetary demands from
wholly domestic infrastructure projects, with the latter often
given a higher priority by local governments. The large size of
cross-border infrastructure projects also implies that only
a limited pool of companies and investors have the financial,
technical and human resources to undertake and operate them
on a long-term basis. This can then limit the competitive
pressures when tendering such projects, and thereby lead to poor
value for money assessments, among other issues. In addition,
private sector investors typically prefer to engage with a single
counter-party when negotiating terms and agreements, instead of
multiple agencies (as tends to be the case with cross-border
infrastructure projects).
• Lengthy maturation cycles
Cross-border infrastructure projects tend to entail longer-term

time horizons, particularly when coordination between the
relevant agencies of participating countries is sub-optimal, and/
or when approval and implementation of a project passes
through multiple political cycles in one or more countries. For
example, the origins of the Turkmenistan-Afghanistan-Pakistan-
India (TAPI) natural gas pipeline project can be traced back to the
1990s, but project construction only started in 2015, after
59 One useful way to think of this is in terms of the anticipated rate of return. All
investments have a rate of return hurdle rate, below which the investment will not
proceed, and above which it is potentially possible to proceed. But that hurdle rate itself
shifts according to the perceived level of risk involved in making the investment; a project
with higher levels of risk demands a higher hurdle rate. Therefore, we can say that the
key issue is not simply the rate of return, but the risk adjusted rate of return, of an
investment. Not all investment projects entail the same rate of return, and that is due in
part to the fact that not all projects entail the same level of risk, as well as such other
factors as the cost of capital. Determining the right hurdle rate therefore necessitates being
able to establish the level of risk, and if the risks are unknown, or at least unquantifiable,
then the hurdle rate cannot be established, and the investor or financier is effectively
being asked to take a ‘leap into the dark’.
completed protracted negotiations between the relevant

governments60. Furthermore, some cross-border infrastructure
may entail long-term sales contracts with just a few customers
(Sawant, 2010), thereby making the project vulnerable to ex-post
renegotiation issues. If the interests of private sector investors
and host country governments start to diverge after up-front
investments have been completed, the latter may unilaterally
make ex-post changes in laws and regulations that favour the
state (Jandhyala, 2016). Cross-border infrastructure projects,
therefore, tend to include appropriate dispute settlement
mechanisms, which then add to the overall project costs.
• Insufficiently clear rationale

The socio-economic benefits and commercial viability of
domestic infrastructure projects are often better researched than
the equivalent justifications provided for cross-border projects.
The principal reason for this is that it tends to be easier to define
a domestic project’s scope and benefits, and thereby quantify its
viability. For example, it is easier to determine user demand,
revenues, and costs projections for a conventional domestic
project, when compared with a project that spans sovereign
boundaries. (There is also the potential for ‘big ticket’ cross-
border projects to be viewed in far more than strictly socio-
economic terms, with a political, military, diplomatic or strategic
dynamic that then dilutes the importance of providing a clear
economic rationale before proceeding61.) Nonetheless, even when
the cost-benefit analysis is feasible and relatively more
straightforward for a proposed cross-border project, these costs
and benefits may not be equally distributed, or at least perceived
not to be so, among the countries concerned. This adds another
level of complexity, and potential tension, to the terms of the
negotiation.
60 The project’s construction and operation are being financed by a special purpose vehicle
(SPV) – the TAPI Pipeline Company Limited; a consortium corporate entity, founded in
2014, by Turkmengaz in Turkmenistan, Afghan Gas Enterprise in Afghanistan, Interstate
Gas Service in Pakistan, and GAIL in India.
61 The developed and developing world has witnessed numerous large, high profile
infrastructure projects that were initiated for more intangible – and sometimes even
spurious – reasons, such as political statements, legacy projections, or symbolic totems of
a country’s aspirations for modernity. In such cases, the economic case for their
construction has often been less than clear.
• Long-term foreign currency denominated liabilities
Cross-border infrastructure projects can have differing foreign

exchange, inflation (including key commodity prices), credit, and
demand risks. Appropriate risk management instruments are
therefore needed to manage such risks, such as demand
guarantees, exchange rate guarantees, commodity price-linked
risk mitigation instruments, inflation-linked guarantees, currency
hedging instruments, etc. But each of these comes at a cost, and
therefore further add to a project’s budget. The precise kinds and
degrees of risks – and therefore the right mitigation instruments
to be used – tend to differ by sector within the infrastructure
‘space’. The costs of getting foreign exchange risk coverage for
a less developed country, for example, can be extremely
expensive to attain, or virtually impossible to secure. The degree
of capital intensity, as well as the long pay-off periods, also mean
that cross-border projects tend to have high sunk-costs,
sometimes with large direct and contingent liabilities.
Guarantees on foreign exchange convertibility and transferability
may be required in cases where the project’s main debt is
denominated in one currency, but the project’s revenues are
denominated in another currency62.
• Political risks
As intimated above, commercial arrangements between
governments of sovereign states can often be driven more by
political and geo-strategic factors than purely economic
considerations. Thus, compared with domestic infrastructure
projects, the political risks of cross-border infrastructure projects
are heightened, thereby adding to the legitimate concerns of
private sector actors. Potential political risks include socio-
political developments (including conflict or civil disturbances),
breach of contract and sovereign default risks, unexpected
government interference leading to expropriation, and
coordination risks entailed in coordination across multiple
government entities. Foreign and domestic private sector
investors may opt to decline involvement due to concerns
around the degree of default risk (also sometimes referred to
as counterparty risk), such as when government agencies or
62 In the case of the Trans-Anatolian Natural Gas Pipeline Project, national governments
provided loan guarantees, and the World Bank provided $ 400 million to the Southern
Gas Corridor Closed Joint Stock Company (Azerbaijan), with a 30-year maturity term and
5-year grace term, plus a further $ 400 million to the Boru Hatlari Ile Petrol Tasima
Anonim Sirketi (Turkey), with a 24-year maturity term and 5-year grace term. For details,
see: World Bank (2016; 2019b).
state-owned commercial entities fail to meet their contractual

obligations. Even when a project has a dispute resolution
agreement in place, the risks and costs of actually taking
a sovereign state to court are considerable, and any ruling can be
hard to enforce. Political election cycles and/or leadership
changes can also result in the need for ex-post renegotiations of
a cross-border project, or even its sudden cancellation. This may
be as a result of a change in government that triggers a change in
socio-economic priorities, or simply a deterioration in relations
with other countries involved in a planned cross-border project.
For example, the planned 350 km Kuala Lumpur–Singapore
high-speed railway had to be postponed after Malaysia’s
national election in 201863.
• Differences in regulatory and policy frameworks

The level of complexity in most cross-border infrastructure
projects is exacerbated by the multiple regulatory systems and
policy frameworks that need to be navigated, some of which may
even be in contradiction with each other. Participating firms may
face regulatory concerns in one or more countries involved, such
as adverse and abrupt changes in fiscal regimes, laws and
regulations (e.g. on environmental regulation, the setting of
tariffs, royalty payments, tax waivers), FDI restrictions and/or
incentives, land acquisition related risks, and the cancellation of
licenses or approvals. These kinds of inconsistencies and
discrepancies also imply that the overall project risk is effectively
determined by whichever country has the least favourable
business and regulatory environment (Verougstraete, 2018).
• Institutional capacity and coordination issues

Due to their complexity, the development of cross-border
infrastructure projects can place a high degree of pressure on the
capacities of participating countries’ state institutions. There is
also the potential risk of delays in project implementation due to
the need for both horizontal and vertical institutional
coordination when more than one sovereign state is involved.
Participating governments may have conflicting views and
interests regarding the consortium members selected to build,
operate, and maintain the whole infrastructure, or disagree on
the procurement procedures to be followed. In such situations,
63
In September 2018, Singapore and Malaysia formally agreed to postpone the construction
of the Kuala Lumpur-Singapore High speed rail (HSR) until end-May 2020, with Malaysia
having to pay Singapore compensation for costs incurred in suspending the project. The
two governments announced the HSR will be delayed until January 2031, instead of
December 2026, as originally planned. Also see: Shukry and Park (2018).
a quasi-independent and trusted third party may be necessary to

help facilitate the process, such as a multilateral development
bank (MDB).
• Social and environmental concerns

The environmental and social risks of cross-border infrastructure
projects can be considerable. For example, cross-border oil or gas
pipeline projects, or electricity transmission line projects may
traverse over long distances64. Cross-border projects cannot be
beneficial to the origin and destination countries only, as benefit
sharing must include transit countries and their communities65.
Such projects can also face cultural obstacles, language barriers,
differences in labour practices and management approaches, all
of which can hamper project progress (Chua, Wang and Tan,
2003). Looking ahead, it is likely that environmental and climate
change policies will become more stringent in many countries. If
so, investments in infrastructure projects that contribute to
pollution and/or climate change (e.g. fossil fuel-based electricity
infrastructure) could be exposed to policy changes that then
render them as stranded assets.
• Heterogeneous technical standards

Infrastructure projects typically need to be built according to one
standard, even when traversing national borders. And yet the
national infrastructure of two neighbouring countries may not be
built using the same technical standards, such as the gauge of
their railway lines. This can also become an issue for a private
sector firm seeking a single concession agreement, irrespective of
the multiple country contexts. For example, in an inland water
transport project, the depth of dredging needs to be agreed by all
participating countries, prior to project development, and during
subsequent operations the technology used for river navigation,
types of permitted craft, customs clearance requirements, border
security, etc., all need to be aligned. Variations in design
specifications, construction codes and/or material standards can
become a critical problem, especially if the project is to be
competitively tendered.
64 For example, the environmental and social risks of a cross-border electricity transmission
project connecting Afghanistan, Kyrgyzstan, Pakistan and Tajikistan (‘CASA-1000’), was
rated as “high” by the World Bank, with substantial social risks identified in Afghanistan.
See: World Bank (2014a).
65 In the case of the CASA-1000 project, community support programmes aim to share the
project’s benefits with those communities living along the way, in a bid to increase local
support and decrease social risks.
3. Engaging with stakeholders
There are usually multiple stakeholders involved in cross-border

infrastructure projects, including regional and sub-regional institutions,
MDBs, sovereign and local governments, the private sector, local
communities, and civil society organizations. They all have a critical role to
play in supporting cross-border infrastructure development, and therefore
should not be overlooked in project planning, as early engagement is of
particular importance. Conversely, decisions that are taken by policy-
makers and planners without early consultations can result in significant
risks that will subsequently imperil a project, or require changes in design
that add to the project costs.
3.1. Regional and sub-regional institutions
There is a strong role for regional and sub-regional institutions in

developing soft infrastructure to support physical cross-border
infrastructure. Cross-border infrastructure projects require not only long-
term planning and inter-governmental agreements, but also a high degree
of coordination in the implementation phase. Regional and sub-regional
institutions or cooperation programmes, such as ASEAN, the Central Asia
Regional Economic Cooperation (CAREC), the Greater Mekong Sub-region
(GMS) and ESCAP are all important in formulating transnational policy
frameworks, ensuring proper regulatory environments, harmonizing
technical standards, and building institutional capacity. The inputs of such
regional and sub-regional institutions or cooperation programmes are also
of utility in supporting governments to engage with stakeholders and in
managing emerging conflicts or disputes (Kuroda, 2006), often serving as
respected and impartial arbiters. At every stage of project development,
effective institutional arrangements can be important for promoting
coordination among stakeholders, and ensuring each party’s responsibility
and accountability (Zhang, 2011).
As previously noted, one major difficulty in the implementation of cross-

border infrastructure projects is ineffective coordination among different
governments on crucial decisions regarding project design, financing and
operations. As such, cross-border infrastructure initiatives can seek to
establish common frameworks to facilitate international coordination from
the beginning (Massoni and Abe, 2019). It is therefore worth considering
the utility of preparation activities conducted at the regional level, rather
than at the national level, where the necessary skills maybe scarce. Project
preparation at the regional level also helps to build and disseminate best
practices, capture learning, and leverages the momentum to implement
other successful projects in the region. A regional approach is often better
suited to the implementation of cross-border projects, especially when these
involve: i) the management of shared resources (such as river basins

bordered by multiple countries); ii) the need to harmonize policies and
regulations among multiple countries (such as the interconnection of
countries’ power systems within a regional power pool); or iii) reconciling
the sometimes competing development objectives of different countries.
Adoption of a common policy framework helps strengthen stakeholders’

commitment. The case of the Bay of Bengal Gateway (BBG), a submarine
communication cable aimed at supporting bandwidth growth between the
Middle East, the Indian sub-continent and Southeast Asia, offers some
useful insights in this regard66. The BBG had a common policy framework
and standards, which helped significantly to improve common
understanding in the market, and encouraged the establishment of
a regional infrastructure based on these standards. A critical issue that
emerged in the operational phase of the project, however, was the lack of
‘peering agr eements’ among the participating countries. Peering
agreements, a mainstay of the Internet and other large data mobility
systems, define how data routing responsibilities across multiple networks
will be shared between different network administrators. Without such
peering agreements between two carriers from different countries, the data
traffic delivered by a cable, such as the BBG, can be delayed as it goes
through numerous local nodes before reaching the other operator’s
network (Houpis and others, 2016). This process not only adds delays to
data transmission, but also discourages different parties from accessing
newly established cables, choosing instead to remain reliant on existing
cables. Such behaviour hinders competition in the network market, lessens
the rate of coverage for the broader population, and potentially hinders
innovation in the countries concerned.
Cross-border initiatives can also provide benefits for both producers and
consumers through economies of scale, generating additional revenues for
producers, while consumers gain from lower cost. For example, the Nam
Theun 2 (NT2) hydro-electricity project in Lao People’s Democratic
Republic (Lao PDR) generated $ 1.9 billion in foreign exchange earnings
over a period of 25 years, through the sale of electricity to Thailand, and
thereby helping the latter to meet its electricity needs, but it also provided
an electricity ‘off-take’ to meet Lao PDR’s own, far more modest, power
needs67. Regional platforms can facilitate dialogue between countries, and
thus help in the identification and prioritization of cross-border projects. It
can also help establish regional regulatory mechanisms to ease the
implementation of cross-border projects, and prepare guidelines for
66 For further details, see: Bay of Bengal Gateway (2019).

67 For a profile of the project, see: Nam Theun 2 (2019).
cross-border procurement. In instances where there are multiple buyers

and sellers, harmonized policy guidelines and a common standard on
contractual agreements should be adopted, in order to protect public
benefits and ensure fair treatment over power exchanges. The case of the
Southern African Power Pool (SAPP) provides a notable example of efforts
to adopt best practices for such a harmonized framework68.
For some cross-border infrastructure in the transport sector, benefit sharing

among the origin, destination and transit countries can become a delicate
issue. Differing from state-level projects, cross-border infrastructure
projects involve no single jurisdiction to enforce a fair system of costs and
benefits. In a bid to ensure the benefits of the transit countries, inter-
governmental dialogue is important, and a strong emphasis should be put
on environmental and social safeguards. In the case of the GMS Northern
Economic Corridor project, for example, as most of the immediate benefits
accrued to China and Thailand, these two countries provided Lao PDR
concessional resources and took on most of the project investments. The
Asian Development Bank (ADB) also regularly monitored implementation
of the resettlement and social action plans in Lao PDR, addressing issues
such as primary health care, non-formal education, income restoration, land
zoning and titling, community rural access roads, community
infrastructure, water and sanitation, and road safety awareness.
Box 4.1
Financing cross-border infrastructure through sub-regional
cooperation
Under the Master Plan on ASEAN Connectivity 2025 (ASEAN
Secretariat, 2016), ASEAN member States, in cooperation with the
Government of Australia and the World Bank, selected 19 priority
infrastructure projects in the transport, energy, and information and
communication technology (ICT) sectors to enhance sub-regional cross-
border connectivity (see table 4.1). Those priority projects are expected to
complement and strengthen the existing cross-border economic and
transport corridors by enhancing connectivity and mobilizing investments
along them. Feasibility studies will be undertaken to determine appropriate
financing options for each of the projects through an assessment process of
the projects’ strategic relevance, impact on sub-regional connectivity,
environmental, social and governance (ESG) impact, and contracting
agencies’ implementation capacity. In so doing, ASEAN member States aim
to build their capacity to design proper financing modalities for cross-
border infrastructure as they frequently face budget constraints and
competing demands for financial resources to address infrastructure
investment needs. Feasibility studies, including financing options, are
scheduled to be launched in November 2019.
68 See: SADC (2019).

Table 4.1
ASEAN’s priority infrastructure projects to enhance
cross-border connectivity
Project name Country Sector Type
Jalan Rasau, Kuala-Belait District Brunei Road Brownfield

Upgrading Roadwork from Single Lane to Darussalam
Dual Carriageways
Siem Reap to Rattanakkiri National Roads Cambodia Road Brownfield
Upgrading
Kuala Tanjung International Hub Port and Indonesia Port Greenfield
Industrial Estates
Expansion of Passenger Terminal Hang Indonesia Airport Brownfield
Nadim International Airport (Batam)
Development of Kijing Port Indonesia Port Greenfield
Upgrading National Road No. 2W on the Lao PDR Road Brownfield
Asian Highway (AH13)
Upgrading National Road No. 8 on the Lao PDR Road Brownfield
Asian Highway (AH15)
Lao PDR-Viet Nam Power Transmission Lao PDR Power Greenfield
Line
Lao PDR-Viet Nam Power Transmission Lao PDR Power Greenfield
Line (Lao PDR side)
Lao PDR-Viet Nam Power Transmission Myanmar Power Greenfield
Line (Myanmar side)
Nay Pyi Taw-Kyaukphyu Expressway Myanmar Road Greenfield
Muse-Tigyaing-Mandalay Expressway Myanmar Road Greenfield
Yangon-Mandalay Expressway Improvement Myanmar Road Brownfield
Tarlay-Phasho-Kyainglat Road Upgrading Myanmar Road Brownfield
ASEAN Digital Hub Thailand ICT Greenfield
Hat Yai-Sadao Motorway Thailand Road Greenfield
Bangkok-Nong Khai HSR Development for Thailand Railway Greenfield
Regional Connectivity
Southern Coastal Corridor Project, Phase 2 Viet Nam Road Brownfield
HCMC-Moc Bai Expressway Viet Nam Road Greenfield
Source: ASEAN Secretariat (2019).
Notes: High speed rail (HSR); Ho Chi Minh City (HCMC).
Box 4.2
The Infrastructure Financing and PPP Network of
As part of the United Nations’ mandate to support member states meet
the challenges of the 2030 Agenda for Sustainable Development, ESCAP is
mainstreaming infrastructure financing issues into its work. In this regard,
the organization launched in 2018 a regional network on infrastructure
financing and public-private partnerships (PPPs), intended to provide
a regular platform on which experts can exchange best practices, share their
experiences and knowledge products, and provide capacity-building
support. The Network’s main goal is to support countries’ efforts in
efficiently attracting private sector participation in public infrastructure
projects, especially through PPP arrangements.
With the support of China’s Public Private Partnerships Center
(CPPPC), the first meeting of the network focused primarily on enhancing
the institutional capacity of the existing national PPP units of the region.
The event gathered government officials from 23 member countries,
infrastructure and capital market specialists and representatives from
development partners (ADB and World Bank). In future events, the private
sector is also expected to participate and make a strong contribution. These
regional events highlight the network’s privileged position in facilitating
open discussions between stakeholders.
The Infrastructure Financing and PPP Network is also developing
web–based knowledge sharing resources to consolidate information on PPP
institutions, project pipelines, investment demand and market environment
in the region. This online platform is expected to serve as a powerful tool for
capacity building and motivate dialogue and cooperation among member
states.
3.2. Multilateral development banks
MDBs can support the development of cross-border infrastructure

development from multiple aspects. First, they can provide financial
instruments and project preparatory technical assistance. For instance, the
World Bank Group has two lending arms, the International Bank for
Reconstruction and Development (IBRD) and International Development
Association (IDA), providing grants and loans for projects in less
developed countries to reduce poverty and build shared prosperity. The
ADB provides technical assistance in support of cross-border infrastructure
projects in Asia and the Pacific region, such as providing project
preparation assistance, helping develop public-private partnerships in
some cases, and capacity building services. Secondly, MDBs can also
provide risk management instruments to attract commercial investments.
Guarantees and risk insurance products are important tools to stimulate
FDI and private sector investments in infrastructure projects. And they are
particularly important for cross-border infrastructure projects, given the
high-risk profile of these projects. Thirdly, MDBs can help in addressing the
asymmetric distribution of costs and benefits across different countries or
communities, with due diligence on environmental and social plans. This

can be particularly important when landlocked and less developed
countries are involved in projects. And finally, participating governments
have shown a commitment to mitigate long-term environment and social
risks as part of their compliance with MDBs’ safeguards policies, and other
best practice ‘conditionalities’ attached to the latter’s participation.
Box 4.3
Northern Economic Corridor in the GMS: the role of MDBs
has been more than direct finance
In the case of the GMS Northern Economic Corridor project, which
connects Thailand and China through a road link via Lao PDR, the ADB
provided $ 33.4 million in concessional ordinary capital resources lending
(ADB, 2014). The cost-sharing among the other parties was that China
financed $ 38.9 million, Thailand financed $ 44.4 million and an additional
repair cost of $ 11.3 million, and Lao PDR financed $ 3.2 million. The ADB
also contributed to project monitoring and coordination, and took special
care to secure a relatively fair distribution of costs and revenues across the
three countries, and assisted the Lao government in negotiating with the
other two countries. As a result, an evaluation of the project suggested that
the project had a significant and equitable socio-economic impact on local
communities.
Source: ADB (2014).
3.3. Private sector firms and foreign investors
It has already been noted that there are relatively few cases of FDI and
private sector participation in cross-border infrastructure projects in Asia
and the Pacific. Private sector and foreign commercial investors often have
too few incentives to finance cross-border infrastructure, principally due to
the additional challenges and risks associated with them. Some countries –
such as China, Indonesia, Malaysia, and the Philippines – are also deemed
to high degrees of restrictiveness with regard to FDI activity, further
disincentivising potential investors69. Private sector investors sometimes
need to compete with state-owned enterprises (SOEs), MDBs or other
sources of development assistance and ‘soft funding’ (e.g. loans provided at
discounted rates of interest and other beneficial terms). In practice, the
private sector’s involvement in cross-border infrastructure tends to be at
the implementation phase, typically as contractors, but it can and should be
involved earlier. The private sector can be an immensely useful resource,
and provide a range of competencies, skills and experience. It can also
sometimes be more adept at forecasting the expected costs, benefits, and
returns of individual projects. To attract domestic private sector
69 See OECD’s FDI restrictiveness index (OECD, 2019).

investments or FDI, engagement with the private sector and foreign

investors should be institutionalized at an early stage, so that they too can
express their valid interests and concerns. The case of ESCAP’s
Infrastructure Financing and PPP Network illustrates a way to successfully
engage member countries, the private sector, and development partners.
3.4. Governments and state-owned enterprises
For cross-border infrastructure projects, the role of national governments

and SOEs is often fundamental, as most cross-border projects are financed
by the public sector. Governments have a major role in providing clear
political support for creditworthy projects, ensuring an enabling
investment environment for private domestic and foreign investors, as well
as building capacity of contract management and inter-agency
coordination.
3.5. Local communities and civil society organizations
As discussed earlier, cross-border infrastructure projects tend to face more

complex and challenging social and environmental risks than most
domestic projects. Appropriate environmental and social risk management
procedures can reduce these risks as well as maximize the benefits to users,
as well as the population at large. Since the affected local communities bear
much of the cost, even to the extent of losing their traditional livelihoods
and land (Kuroda, 2006), civil society organizations can provide a critical
channel for their voice to be heard, and for the right compensation
arrangements to be made and honoured.
Box 4.4
Environmental and resettlement issues on the Phnom Penh to
Ho Chi Minh City highway project
The ADB-funded project’s goal was to improve connectivity through
the rehabilitation of an existing road connecting Phnom Penh in Cambodia
with Ho Chi Minh City in Viet Nam. The environmental impacts of the
project were initially estimated to be relatively limited. The civil works
contractors, however, did not fully comply with the environmental impact
mitigation measures laid out in the contract documents, which then caused
more environmental issues than expected. Complaints were filed in
Cambodia, claiming that the compensation payments were not enough to
restore the economic and social bases of the people affected. These
resettlement issues hampered the completion of the whole project. In a bid
to resolve the problem, the ADB undertook resettlement audits involving
the project-affected people and communities, which were then used to
enhance the resettlement arrangements and determine the appropriate
compensation to be provided.
Sources: ADB (2007); Zhang (2011).
4. Aiming for sustainable cross-border infrastructure

development with the Belt and Road Initiative
Cross-border infrastructure initiatives have considerable potential to

overcome the complexities of trans-boundary infrastructure issues. In Asia
and the Pacific, the Belt and Road Initiative (BRI) is the largest of such
initiatives, both in terms of geographic scope and in the level of ambition.
This section outlines how the BRI is seeking to address the challenges and
risks of cross-border infrastructure projects, highlighting in particular its
efforts to include a sustainability component in the projects it supports, and
the links with the 2030 Agenda. The BRI was initially proposed in 2013 by
China’s President Xi Jinping as a new strategy and framework to support
the development of the ‘Silk Road Economic Belt’ and the ‘21st Century
Maritime Silk Road’. By improving transport, energy and ICT infrastructure
connectivity, as well as promoting trade and industrial development, the
BRI aims to accelerate the integration of regional markets and people across
Asia, Africa and Europe 70. Geographically, it is expected to connect
65 countries that collectively represent one-third of global economic
output, and around two-thirds of the world’s population. However, as of
March 2019, official data suggested that 125 countries had already signed
collaboration agreements (World Bank, 2019a)71. The potential of the BRI to
stimulate economic and social development in Asia is deemed to be
considerable, with landlocked, less developed and developing economies
most likely to benefit from a new-found ability to participate in global
value chains. But given the numerous risks and challenges faced by
cross-border infrastructure projects, can the BRI adequately address them to
achieve the envisioned benefits? The BRI’s ambitious scope may well be
crucial in its ability to overcome these challenges. Key issues include:
• Large and complex investment needs: As the BRI covers so many

countries and sectors, it can be a venue for coordination to
reduce the risks arising from dealing with many countries. The
BRI, for example, is the only scheme covering numerous railway
projects in Asia, such as between the European Union (EU) and
China, and therefore be a vehicle to coordinate between all
country stakeholders on cross-border transport;
70 These objectives are set down in the BRI’s five cooperation priorities: i) policy
coordination; ii) facilities connectivity; iii) unimpeded trade; iv) financial integration; and
v) people-to-people bonds (China, NDRC, 2015).
71 China announced from the beginning that the BRI was an open arrangement, welcoming
any country to participate, regardless of their location.
• Lengthy maturation cycles: With MDBs and development finance

institutions (DFIs) signing memoranda of understanding (MoUs)
to participate in the BRI, projects can gain access to long term
financing from such institutions;
• Long-term foreign currency denominated liabilities: The MDBs play
a critical role in addressing this challenge, and so MDBs’
participation in the BRI can help addressing this issue;
• Political risks: The BRI can provide a long-term planning
framework that member countries (and not just China) can work
to shape;
• Regulatory risks: A core purpose of the BRI is to align ambitions
on infrastructure development between participating countries.
By signing on to and taking part in shaping the BRI, countries
will be less likely to subsequently carry out policy reversals on
infrastructure projects that involve other BRI countries, having
already made pledges to each other and aligned their plans;
• Institutional capacity and coordination issues: The BRI Forum takes
place every two years and has a clear focus on capacity building
for participating countries and organizations, as well as on
coordinating efforts;
• Social and environmental risks: The BRI Green Investment
Principles were launched at the BRI Forum in 2019 as voluntary
principles for participating organizations to address
environmental risks; and
• Harmonizing technical standards: Again, the BRI can provide a
venue for settling such discrepancies by providing a forum for
dialogue and agreement on standards.
Even though the BRI was designed independently from the 2030 Agenda
for Sustainable Development, they are clearly inter-connected. One of the
stated objectives of the BRI initiative is to contribute to “diversified,
independent, balanced and sustainable development” of the partner
countries72. The BRI’s official document, ‘Vision and Action’, highlights the
principles shared with the United Nations Charter: mutual respect for each
other’s sovereignty and territorial integrity, mutual non-aggression, mutual
non-interference in each other’s internal affairs, equality and mutual
benefit, and peaceful coexistence73. These same principles are at the core of
the 2030 Agenda. On a more pragmatic level, one can easily identify links
between the 17 Sustainable Development Goals (SDGs) promoted by the
72 For a comprehensive profile of the BRI, see: BRI (2019).

73 The full document can be found at: China, NDRC (2015).
United Nations, and the five BRI Cooperation Priorities (BRI-CPs)

established by the Government of China. Perhaps the most obvious and
direct link is between SDGs 7, 8 and 9 (“affordable and clean energy”,
“decent work and economic growth” and “industry, innovation and
infrastructure”) and BRI-CPs 2 and 3 (“facilities connectivity” and
“unimpeded trade”). Further, in the same year as the adoption of the 2030
Agenda for Sustainable Development, the Addis Ababa Action Agenda
(AAAA) was also launched. This occurred during the Third International
Conference of Financing for Development in 2015. The AAAA’s main
objective was to set down the various means of implementation for the
SDGs, categorising them into seven action areas. Also aligned to these
action areas are the BRI-CPs. For instance, the complexities of financing
infrastructure projects with private sector participation are mentioned in
action area B (domestic and international private business and finance),
along with a call for action for both private and public sectors alike.
Similarly, BRI-CP 3 (financial integration) emphasizes the need to
encourage commercial equity investment funds and private funds to
participate in the construction of the projects supported by the Initiative.
Despite the BRI and the 2030 Agenda being closely aligned in their core
values and principles, some issues could arise that, if overlooked, might
negatively affect the implementation of the 17 SDGs. In particular,
environmental threats are particularly alarming. These include higher
pollution and greenhouse gas (GHG) emissions, biodiversity loss, as well as
land and ecosystem degradation. The China-Pakistan Economic Corridor,
for instance, will pass through an already narrow strip of cultivated land in
western Pakistan, which may well adversely impact on existing farmland
and orchards74. Other concerns, such as social dislocation due to loss of
land, voluntary resettlement or marginalization of minority groups, are also
present. The China-Central Asia-West Asia Corridor, for example, must
contend with tensions around ethnicity75. There is therefore a need to
protect local cultures and the identities of various communities. Some other
corridors, like the New Eurasia Land Bridge Corridor, will run through
areas with low population density (such as some regions in Kazakhstan
and the Russian Federation)76. This tends to suggest that construction
projects may need to rely on migrant labour, and attention will need to be
paid to ensuring decent working conditions, and avoiding discriminatory
behaviour towards migrant workers. With the increased connectivity
promised by the BRI, the flow of illicit trade across borders could also
potentially increase. Human trafficking, whether for illegal labour or sexual
74 For details on the China-Pakistan Economic Corridor, refer to: CPEC (2019).
75 For an insightful comparison of these two economic corridors, see: Fulton (2016).
76 See: HKTDC Research (2019).
exploitation is a threat, especially in the China-Indo-China Peninsula

Corridor 77. The level of drug trafficking may also increase in the
Bangladesh-China-India-Myanmar Corridor78. And as a result of these illicit
flows, there are growing and legitimate concerns regarding the spread of
HIV/AIDS.
Looking beyond the BRI, a number of other regional and sub-regional

infrastructure initiatives also exist. They include:
• ASEAN: Adopted in 2016, the key infrastructure plan under the

ASEAN framework is the Masterplan on ASEAN Connectivity 2025
(ASEAN Secretariat, 2016). With a broad coverage of physical,
institutional, and people-to-people connectivity, the creation of
sustainable infrastructure is a key sub-component. Key initiatives
under this component include a pipeline list of projects,
a platform to measure infrastructure productivity, and
developing sustainable urbanization strategies for ASEAN
countries.
• European Union (EU): On the western edge of the BRI, the EU is
a key stakeholder, both as a significant market and financier of
BRI projects. The EU’s core strategy in this regard is the
‘Connecting EU and Asia Strategy’, launched in September 2018,
with a focus on transport, energy, digital, and human
dimensions79. The EU and Chinese leadership clearly indicated
their desire to cooperate in the Joint Statement of the
20 th EU-China Summit of July 2018, which included a strong
focus on sustainability and climate change. In a bid to jointly
promote infrastructure investment and funding, the EU-China
connectivity platform was launched by the European
Commission in late 2015, leading to initiatives like the Trans-
European Transport network and the upcoming China-EU
Co-investment Fund (CECIF) (EIF, 2018).
• United States: The Department of State’s launch of the ‘Free and
Open Indo-Pacific Strategy’, in 2018, includes provisions on
sustainable infrastructure, and initiated the Infrastructure
Transaction and Assistance Network as an inter-agency body to
coordinate efforts to assess projects, direct development finance,
and give technical assistance (United States, Department of
Defense, 2019). Further, the United States International
Development Finance Corporation was established in 2018, with
77 Ibid.
78 Ibid.
79 For further details, see: EEAS (2018).
$ 60 billion in funding, and has the potential to play an important

role in supporting Asian and Pacific infrastructure80.
• Japan: As a historically important provider of funds for
infrastructure development in Asia and the Pacific, Japanese
initiatives continue to play a critical role. Together with the ADB,
Japan aims to deliver the ‘Partnership for Quality Infrastructure:
Investment for Asia’s Future’ plan, which includes $ 110 billion
for infrastructure investment in the 2015-2020 period. Further,
there is the Japan-India joint ‘Asia Africa Growth Corridor’ plan.
• Ayeyawady-Chao Phraya-Mekong Economic Cooperation Strategy
(ACMECS): ACMECS is a cooperation agreement between
Cambodia, Lao PDR, Myanmar, Thailand and Viet Nam. At the
8th meeting in 2018, the countries established an ‘ACMECS
Master Plan’ for 2019-2023, under the vision of ‘Building
ACMECS CONNECT by 2023’. The plan specifically mentions an
ambition to narrow the development gap, contribute to the
process of ASEAN community building, and to achievement of
the SDGs, as well as the 2015 Paris Agreement on Climate
Change81.
• Greater Mekong Sub-region (GMS): With a similar scope to
ACMECS, but adding the Chinese provinces of Yunnan and
Guangxi, the GMS was launched in 1992 to enhance economic
relations between countries. The GMS’ two current strategic
documents, the Hanoi Action Plan and the Regional Investment
Framework, were approved in March 2018. Many of the projects
being pursued by the GMS include cross-border infrastructure
components82.
• Shanghai Cooperation Organization (SCO): Established in 2001,
currently with eight members, the SCO has increasingly
prioritized cooperation on infrastructure. This was the key
outcome of the 2015 meeting where transport infrastructure was
identified as the most pressing issue for the region. In terms of
coordination with other initiatives, the SCO is well aligned with
BRI efforts, given the key role of China in both initiatives83.
80
In addition, in 2018, Secretary of State Michael R. Pompeo announced $ 133 million in
funding for initiatives relating to Asian digital economy, energy, and infrastructure, and
particularly to support the ASEAN Connect initiative, the Asia-Pacific Economic
Cooperation (APEC), the Lower Mekong Initiative, and the Indian Ocean Rim
Association.
81 For details, see: ACMECS (2019).
82
See: ADB (2019).
83 For details, see: SCO (2019).
• Eurasian Economic Union (EEU): As both a political and economic

union, the EEU comprises Armenia, Belarus, Kazakhstan,
Kyrgyzstan and Russian Federation, and is centred around a
single customs market that was established in 2010. Energy and
transport infrastructure is a key priority for the EEU, and the
union has focused considerable attention on establishing a
common gas market84.
• Central Asian Regional Economic Cooperation (CAREC) Programme:
Made up of 11 countries, CAREC was initiated in 2001 to develop
regional projects and initiatives for sustainable economic growth
and prosperity in the region. By 2018 the initiative had mobilized
$ 32.9 billion worth of investments spanning multi-modal
transportation networks, increased energy trade and security,
facilitated free movement of people and freight, and had laid the
groundwork for economic corridor development. The initiative
has strong multilateral involvement, officially partnering with
the ADB, the European Bank for Reconstruction and
Development (EBRD), International Monetary Fund (IMF),
Islamic Development Bank (IsDB), United Nations Development
Programme (UNDP), and the World Bank. With China as
a member, and both CAREC and BRI having a strong
connectivity focus, the overlap between the two initiatives is
clear, and efforts have been made to support each other85.
It is clear that some BRI-labeled infrastructure projects overlap significantly

with the ambitions of these various other regional initiatives, and project
developers and financiers will need to take into account these initiatives as
well86.
5. Three key policy considerations and conclusions
In light of the discussion of cross-border infrastructure financing outlined

above, there are three key factors that policy-makers should be mindful of
when addressing the issue of cross-border development. They relate to:
risk, private sector participation, and regional collaboration. Let us briefly
review each of these in turn.
84 For details, see: EAEU (2019).

85 See: CAREC (2019).
86
A number of additional sector-specific infrastructure initiatives exist in Asia and the
Pacific, such as: i) the South Asia Sub-regional Economic Cooperation (SASEC)
programme; ii) the Inter-governmental Agreement on the Asian Highway Network; iii)
the Inter-governmental Agreement on the Trans-Asian Railway Network; and iv) the
Inter-governmental Agreement on Dry Ports.
5.1. Efficient risk allocation
Key risks need to be allocated between private and public sector actors
throughout the various stages of a project’s development. Efficient
allocation of risk reduces uncertainties over the distribution of rights and
obligations when things do not work out as planned, and a risk allocation
matrix can help to identify the optimal risk mitigation measures to be
adopted. A strong correlation exists between proper risk identification and
management and successful project outcomes. Even private sector-led
projects require effective public sector capacity to oversee, monitor,
regulate, co-fund, and undertake other obligations, with a contract
management authority often established in the case of large infrastructure
projects.
In the case of the NT2 hydropower project in Lao PDR, the project’s risk
allocation was shared by the Lao government, private sector participants
and two multilateral guarantees from IDA and the Multilateral Investment
Guarantee Agency (MIGA), broadly following the risk allocation format of
the traditional build-own-operate-transfer (BOOT) model. The project was
implemented by a special purpose vehicle (SPV) – Nam Theun 2 Power
Company (NTPC) – formed by the Électricité de France (EDF) (with
a 40 per cent stake), the Lao Holding State Enterprise (LHSE) (25 per cent),
and the Electricity Generating Public Company of Thailand (EGCO) (35 per
cent). The structure of the project allowed risks to be allocated to various
parties that were responsible for specific project activities. For example, as
head contractor, EDF had full responsibility for overall project management
and delivery of the completed project. EDF sub-contracted the construction
work through five principal sub-contracts (three for civil works and two for
electro-mechanical packages), thereby passing some of the construction
risks on to these sub-contractors. Revenue risk was covered by the Thai
utility, Electricity Generating Authority of Thailand (EGAT), in the form of
a ‘take or pay’ Power Purchase Agreement with NTPC. Table 4.2, below,
provides a breakdown of the risk allocations.
Macro-economic risks can occur unexpectedly, and can influence multiple

countries simultaneously, and so the adoption of appropriate mitigation
measures through effective and systematic coordination is necessary.
Evidence from NT2 project illustrates how hedging mechanisms can also be
adopted to help mitigate foreign currency risk, using a tariff profile that
was structured into two tiers (local and United States dollar indexed), so as
to match the project financing.
Regional projects can also involve more local financing from local
development banks and domestic capital markets. In this way, there is
limited need for a derivative product or indexation to mitigate currency
Table 4.2
Key risk allocations of the NT2 project in Lao PDR
Allocation of key risks
Phase Risks/ Project Lao PDR IDA partial MIGA
obligation sponsors and risk guarantee
private guarantee
participants
Pre-construction Project design •
Pre- •
construction
works
Financing •
Construction Cost overruns •
Construction •
delays
Operations Operation •
and
maintenance
Tariffs •
Transmission •
Hydrological •
Concession Thai baht •
terms devaluation
Lao PDR • • • •
political force
majeure87
Changes in • • •
Lao PDR Laws
Natural force • • • •
majeure88
Lao PDR • • •
expropriation
Thailand • •
political force
majeure
Thailand • •
expropriation
Thailand/ • •
Lao PDR
transfer
restrictions
and
inconvertibility
Source: World Bank (2005).
87 Political force majeure includes: political violence, war, national and regional strikes,
coups d’etat, etc.
88 Natural force majeure includes: ‘acts of God’, earthquakes, fires, typhoons, etc.
and cross-border risks89. However, as the examples show, there is limited

long-term financing available in local markets at such scale. Countries with
incumbent legal tenders as United States dollars – Timor-Leste, Marshall
Islands, Micronesia (Federal States of), and Palau – are exposed to risks of
currency mis-matches if they introduce their own domestic currencies
during the long concession periods. In this instance, Timor-Leste’s Tibar
Bay Port gives a precedent. The project’s concession agreement established
that in case of a change of currency, and if the concessionaire is required by
the Government of Timor-Leste to start operations in the domestic currency,
an automatic monthly tariff adjustment mechanism would apply, to reflect
the exchange rate fluctuations and eliminate the foreign exchange risk90.
Box 4.5
Using hedging instruments to mitigate ‘forex risk’
As noted earlier, an important financial risk factor for infrastructure
projects – and indeed, other investment activities in pursuit of the SDGs – is
that of foreign exchange risk. So-called ‘hard currency’ tends to dominate
financing flows into developed and developing countries, including
funding assistance for infrastructure projects. But these countries often have
quite volatile exchange rates, which makes predicting the volume of local
currency needed to service hard currency debt tricky. Worse still, any
significant depreciation in the value of the local currency, relative to hard
currencies, can spell significant financial distress for the recipient country. A
similar risk is evident in hard currency financing of individual
infrastructure projects. For example, a loan to help underwrite an
investment in an infrastructure project is denominated in one currency, such
as United States dollars, but the anticipated revenue stream from the
project’s subsequent operations will be denominated in a different, local
currency (or even multiple local currencies in the case of cross-border
projects). As the exchange rate for those currencies will inevitably change
over time, this risk is typically passed on to the lead developer of the
project, often a sovereign government, and/or passed on to the users of the
project through higher fees. For infrastructure projects that are seeking to
bring essential public services to poor communities, the risk that these same
communities will have to pay considerably higher fees for those services,
solely because of foreign exchange rate fluctuations, is not an acceptable
risk. Indeed, it is a serious flaw in the conventional model of hard currency
financing of development projects that can actually result in more harm
than good.
Until now, the most common way of mitigating this risk has been the
issuance of guarantees that seek to protect the recipient from any adverse
shift in exchange rates. But these can be costly to arrange, and may also
pose some degree of moral hazard for the lender. Another way of mitigating
this risk is to use cross-currency hedging instruments that entail agreements
between relevant parties to exchange currencies at pre-agreed times and
89 Further details can be found at: World Bank Blogs (2017).

90 Further details can be found at: World Bank (2017).
rates. These instruments were initially developed to assist micro-finance

institutions to tap larger pools of funding (‘liquidity’) from outside the local
market by allowing them to borrow hard currency funds from overseas, but
with hedging cover to protect them from ‘forex risk’ (i.e. that repaying the
principle and the interest on the loan would not increase in local currency
terms as a result of a local currency depreciation). But they have now been
extended to other development fields, including infrastructure.
There are two common forms of such hedging instruments: forward
contracts, and cross-currency swaps. In forward contracts, an agreement is
reached to buy or sell an agreed amount of a currency as a specific price and
date in the future. The exchange rate is ‘locked in’, even though the trade
will not occur until a pre-agreed point in the future. Cross-currency swaps
essentially bundle forward contracts together, and are agreements to
exchange multiple fixed amounts (e.g. the principal on a loan, plus interest
payments) in two different currencies. This allows for a stream of payments
denominated in one currency to be exchanged for a stream of cash flows
denominated in another currency, at an agreed rate. Cross-currency swaps
are either in the form of ‘deliverable contracts’, where all cash flows are in
a local currency, or ‘non-deliverable’, whereby cash flows are ‘settled’ in
a ‘hard currency’, such as United States dollars, despite actually being
denominated in a local currency. Either way, such instruments remove much
of the ‘forex risk’ entailed in the infrastructure financing, making for a more
attractive business proposition for private sector actors, and a much less
uncertain prospect for planners and policy-makers.
Such hedging instruments have been used on a wide range of
infrastructure investment projects, ranging from green energy and off-grid
solar distribution, to clean water supplies, and transport services. They have
also been used to support the issuance of local currency bonds, issued
offshore to tap overseas investors’ appetite for exposure to these countries,
including in the currencies of Armenia, Azerbaijan, Kyrgyzstan, Myanmar,
Pakistan, Papua New Guinea, Sri Lanka, Tajikistan, and Uzbekistan, among
others91. The funding raised by these bonds can then be used for a range of
public spending needs, including infrastructure investment. One company
that offers such a service is The Currency Exchange Fund, or TCX, with
products spanning over 70 local currencies, many of which are in Asia and
the Pacific. This wide spread of countries and currencies provides a degree
of diversification that can allow TCX to absorb much of the risk associated
with currency fluctuations and volatility. An impact assessment, conducted
in 2017, into the first ten years of TCX’s operations found that 15 per cent of
its hedging work had been in Asia (excluding Central Asia and the Pacific),
that less developed countries accounted for 15 per cent of the hedging
portfolio, and a further 15 per cent was in low income countries, and that
infrastructure projects accounted for just 7 per cent of all hedging finance
provided, compared with 64 per cent for micro-finance and 17 per cent
for SME finance92. In the specific context of infrastructure, TCX argues that
91 For more on TCX and currency hedging in developing and less developed countries, see
ODI (2018).
92 See Carnegie Consult (2018).
“... for the required long-term financing structures needed for most
infrastructure projects, local currency [and not hard currency] is, over time,
generally the most cost-effective solution”93.
5.2. Promoting private sector participation
Thus far, there has been relatively modest private sector participation in
cross-border infrastructure projects. In Asia and the Pacific, only a few
cross-border infrastructure projects have been able to attract private sector
interest after a full international competitive process. They include the NT2
Hydropower project in Lao PDR, the Tibar Bay Port project in Timor-Leste,
and the CASA-1000 project across several Central Asian countries. Key
common success factors include: i) proper strategic planning of the overall
regional framework; ii) strong project preparation; iii) a robust
understanding of the risks and mitigation measures needed; and iv) budget
efficiency. All three projects also had strong financial involvement and risk
mitigation arrangements with MDBs, and the involvement of SOEs, which
helped mitigate counterparty risk. As noted earlier, cross-border
infrastructure projects often carry additional political or geo-strategic
significance, and as a result tend to be driven by governments. But even
here, the involvement of the private sector as co-financiers and/or investors
is often desirable. The modalities for private sector participation in
infrastructure projects have largely tended to comprise of: i) special
purpose vehicles (SPVs); and ii) joint ventures (JVs).
Special purpose vehicles
A special purpose vehicle (SPV) is usually set up by investors exclusively

for a specific project. It is an entity that constructs and operates the project,
and has no other business interests. Individual investors all work through
93 See TCX (2019). The article goes on to argue: “One key driver of the persistence of hard
currency infrastructure funding in developing markets, is the hard currency off-take
agreement model, where exchange rate risk is borne by the off-taker, e.g. the national
power utility. Project developers, investors, lenders and even host governments have
become so accustomed to this model, that it is now hard to depart from. The [United
States dollar] off-take agreement conundrum, i.e. that energy supply in the poorest
countries is financed with hard currency, associated often with great economic, social and
political cost, can be tackled in different ways. One is to move towards local-currency
off-take agreements and hence to local-currency project finance, which will stimulate local
debt and capital markets to the extent available and otherwise take the [foreign exchange]
risk outside the country and onto the books of foreign lenders and/or their hedge
providers. To avoid industry disruption, however, this would have to be phased in
gradually, allowing stakeholders to adapt, and debt and hedge markets to adjust and
scale up. An example of this gradual approach is seen in Nepal, where projects below
a certain [megawatt] threshold are given a rupee off-take contract. Another way is to
hedge a utility’s currency mismatch resulting from [United States dollars] off-take
agreements”.
the SPV, and it serves as the main vehicle for the project, operating with its
own balance sheet. In the case of NT2 in Lao PDR, ‘NTPC’ was the SPV
responsible for designing, constructing and operating the project, for
a concession period of 25 years, after which it will be transferred to the Lao
government for continued operation and maintenance (figure 4.1).
Figure 4.1
Nam Thuen 2’s contractual and financial structure
Sponsors’ agreement
NT1 EDFI EGCO ITD ADB MIGA World Bank
Shareholder agreement and equity PRG/PRI

Thai baht United States
banks dollar banks
EGCO’s Technical services and Coverage
subsidiary management services
agreements Loans Bilateral Export credit
agencies agencies
EDF
European
Investment Bank
Nam Theun 2 Power Company
Head construction
contract Concession
agreement Agence Française
de Développernent
Construction EDL EGAT
sub-contracts PPA PPA Government
of Lao
Construction undertaking
sub-contractors EDL EGAT Government of Lao PDR
Source: MIGA (2006).

Notes: Asian Development Bank (ADB); Électricité de France (EDF); Électricité de France International
(EDFI); Électricité du Laos (EDL); Electricity Generating Authority of Thailand (EGAT); Electricity
Generating Public Company of Thailand (EGCO); Italian-Thai Development Public Company
Limited (ITD); Multilateral Investment Guarantee Agency (MIGA); Nam Theun 1 (NT1); partial
risk guarantee (PRG); political risk insurance (PRI); power purchase agreement (PPA).
The Tibar Bay Port project was also implemented by an SPV – in this case
referred to as the project management unit (PMU) – that oversees all
aspects of the project. The concession was awarded to a private sector
operator, Bolloré Logistics, through a competitive bidding process,
resulting in a 30-year build-own-operate-transfer (BOOT) contract, with the
possibility of a further extension of 10 years. The PMU is mandated to
ensure necessary preparation, effective execution, and constant monitoring
of the project from the government side. Bolloré Logistics, under the
guidance of the PMU, is responsible for the design, financing, construction
and operation of the facility, consistent with the government’s masterplan
(figure 4.2).
Figure 4.2
Tibar Bay Port’s contractual and financial structure
Government of
Technical support Timor-Leste
DFIs
Concession
agreement
WB, ADB, IFC and PPIAF
Project management unit Users

Lenders Debt financing
(SPV)
User charges
Viability gap financing Guide and monitor
Bollore Logistics
Construction Operation and

maintenance
Source: Bisbey (2019).

Notes: Asian Development Bank (ADB); development finance institution (DFI); International Finance
Corporation (IFC); Public-Private Infrastructure Advisory Facility (PPIAF); special purpose
vehicle (SPV); World Bank (WB).
Joint ventures
A joint venture is a formal business arrangement where different parties

come together for a specific task. Taking CASA-1000 as an example,
a contractual joint venture was established, with four countries each
responsible for their own sections of the transmission line. Four power
purchase agreements (PPAs) were signed between Kyrgyzstan and
Pakistan, between Kyrgyzstan and Afghanistan, between Tajikistan and
Pakistan, and between Tajikistan and Afghanistan94. Under the contractual
joint venture, the four participating countries are each responsible for their
own sections of the transmission line, and each government manages its
own independent loan financing arrangements with the development
finance institutions. Private sector participation is fairly limited, principally
taking the form of a Swiss firm, ABB, responsible for the construction of the
two converter stations.
94 Each PPA starts with an initial term of 15 years, and specifies the electricity quantities and
prices for each five-year period. After the initial 15 years, each PPA can continue for
a further five-year period, or be terminated.
Figure 4.3
CASA-1000’s contractual and financial structure
Intergovernment Council
Procurement
Committee Joint Working Group Finance Committee
(only for joint packages)
Intergovernmental Council
Joint Project Coordination Group
National Transmission and Da Afghanistan Breshna Joint Stock Company

Barki Tajik National Electric Grid
Despatch Company Sherkat (Tajikistan) of Kyrgyzstan
(Pakistan) (Afghanistan)
(Kyrgyzstan)
1. Contractor 1. Contractor
2. High voltage direct 2. High voltage alternating
current owners’ engineer current owners’ engineer
Source: World Bank (2014b).
It is often the case that an SPV or joint venture will retain the services of
private sector companies as sub-contractors, such as operating logistics
centres, overseeing supplies of necessary and specialized inputs,
maintenance, and/or management of day-to-day operations.
5.3. Enhancing regional and sub-regional cooperation
There is clearly a need for a strategic and coordinated regional approach to

the development of cross-border infrastructure projects in Asia and the
Pacific. This, in turn, requires regional frameworks and agreements that can
serve as platforms for improved connectivity and development planning,
such as those envisaged along various economic corridors in the region.
Regional interventions that can also support the development and adoption
of common technical standards and operational rules in member states
could do much to bring about more seamless connectivity. The kind of
multi-sectoral expertise and capacities that need to be strengthened would
also benefit from shared regional learning, including the instruments and
modalities by which to infrastructure financing can be improved. The use
of blended finance and greater private sector involvement in cross-border
infrastructure projects would undoubtedly benefit from enhanced regional
and sub-regional interventions that can aid the efficient allocation of
resources, and improve the commercial prospects of large-scale projects.
But perhaps one of the most important areas where enhanced regional and
sub-regional collaboration could play a role in cross-border infrastructure,
and its financing, is around issues of sustainability and inclusivity. There is
clearly a need for advances to be made in applying greater social and

environmental standards and practices to infrastructure development, and
mainstreaming issues such as the impact of climate change and fragile
ecosystems into all major infrastructure planning. Cross-border
infrastructure activity that can help address challenges of poverty and
economic development in large parts of Asia and the Pacific is undoubtedly
a field where organizations such as ESCAP can play a critical role, and in
a number of valuable ways. The pursuit of the 2030 Agenda and attainment
of the SDGs requires bold steps in areas such as environmental and social
sustainability, and to bring poor and less empowered communities – some
of which straddle sovereign borders – into a more inclusive approach to
cross-border infrastructure development, spanning employment, health,
land rights, human rights, and potential dislocation. The experience of
regional bodies, such as ESCAP and others, have much to contribute in this
field, and to ensure that efforts to achieve the SDGs are always a core
component of cross-border infrastructure projects of whatever kind.
In conclusion, this chapter has examined the particular challenges entailed

in enacting cross-border infrastructure in the region. Such projects are
developed and operated under multiple sovereign jurisdictions and state
agencies, and the process of putting together and financing viable and
sustainable infrastructure projects is inevitably more complex. To
successfully increase the financing of cross-border infrastructure,
particularly from the private sector, governments in Asia and the Pacific
will need to improve the institutional capacities of the relevant state
agencies, further develop their legal and regulatory frameworks, and strive
to deliver more conducive business enabling environments. By so doing,
they will lessen the real and perceived risks of cross-border infrastructure
projects for all stakeholders, including state agencies, private sector
investors and financiers, infrastructure constructors and operators, among
others. A regional approach to project selection, preparation, and
implementation can also help to guard against unwelcome risks and
inefficiencies. Close coordination and regional cooperation are needed at
multiple layers, including through various sub-regional, regional and
international fora. The BRI is widely regarded as the most ambitious
attempt at such an approach to date. For its part, ESCAP has worked to
provide regional platforms, especially the Infrastructure Financing and PPP
Network of Asia and the Pacific as discussed in this chapter, and facilitate
dialogue between countries in Asia and the Pacific region, and thus help in
the identification and prioritization of cross-border infrastructure projects.
Establishing regional regulatory mechanisms that could serve to ease the
implementation of cross-border infrastructure projects, and prepare
guidelines for cross-border transactions and procurements, would also
have merit.
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Chapter 5
Infrastructure Financing Challenges of
Landlocked Developing Countries and
Small Island Developing States in
1. Introduction
The land-locked developing countries (LLDCs) and small island

developing States (SIDS) of Asia and the Pacific are two groups of
economies that span a diverse range of geographical and climatic
conditions, as well as differing economic profiles, infrastructural
frameworks and financing capacities. There are 12 LLDCs in Asia:
Afghanistan, Armenia, Azerbaijan, Bhutan, Kazakhstan, Kyrgyzstan, the
Lao People’s Democratic Republic (Lao PDR), Mongolia, Nepal, Tajikistan,
Turkmenistan, and Uzbekistan. More than half are transition economies95.
Similarly, there are 14 SIDS in Asia and the Pacific: Fiji, Kiribati, Maldives,
Marshall Islands, the Federated States of Micronesia (Micronesia (FS)),
Nauru, Palau, Papua New Guinea, Samoa, Solomon Islands, Timor-Leste,
Tonga, Tuvalu, and Vanuatu.
The geographical circumstances of the Asian LLDCs generally put them at

a disadvantage in comparison to the coastal countries. Their infrastructural
constraints limit access to regional and global markets, negatively
impacting their export competitiveness and hindering economic growth. To
access foreign markets, Asian LLDCs must go through multiple cross-
border facilities and checkpoints, including customs, subjecting them to
various weaknesses in regulatory and corridor management systems that
can cause border crossing delays and transportation safety issues. All these
infrastructure deficiencies can increase transport cost, adding 30-60 per cent
to the cost of production (UNCTAD, 2015). LLDCs are therefore typically
dependent not only on neighbouring countries’ transit infrastructure,
cross-border policies and administrative practices but also bilateral political
relations. While some LLDCs have better access to international markets
indirectly through maritime services, others, such as those of Central Asia,
95 They are Armenia, Azerbaijan, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan,

Turkmenistan, and Uzbekistan.
depend more on land access to reach their major trading partners. As

a result, most discussions on the economic difficulties of LLDCs tends to be
dominated by the assumption that the remedy for their situation lies in the
development of adequate transportation infrastructure that would facilitate
access to the major markets in the world (UNCTAD, 2014).
As a consequence of their small populations and distances between small

atolls, the challenges for most SIDS in Asia and the Pacific to provide public
services are mainly related to the lack of economies of scale, extreme
isolation and remote sources of inputs. Furthermore, many residential areas
are located in low-lying coastal areas imperiled by climate change and
rising sea levels96. Cyclones, flooding, earthquakes and tsunamis are all-
natural disasters that have repeatedly impacted on the SIDS. Consequently,
for infrastructural frameworks to be sustainable, they must take such
natural disasters into account, be of an appropriate scale, and support the
main economic sectors. However, weak government planning capacity in
SIDS often results in the absence of comprehensive development plans
needed to address the state of poor infrastructure. In addition, the
operating and maintenance costs of infrastructure in SIDS tend to be
considerable, notably on a per capita basis, given both the challenging
geographies and the relatively modest and sparsely located consumer base.
The scale of funding that the LLDCs need to close their current
infrastructure gap is, on average, about 10.5 per cent of their respective
GDP (Branchoux, Fang and Tateno, 2018). The reliance on infrastructure –
and the need for financing – is extensive, from roads and bridges to power
generation and transmission lines, airports, water supply and sanitation,
access to internet and other telecommunications networks; the list goes on.
Investment in efficient infrastructure is an essential prerequisite for future
prosperity. A similarly wide gap in infrastructure financing is apparent for
the SIDS, at approximately 6.5 per cent of GDP (Branchoux, Fang and
Tateno, 2018). On average, household access to electricity in the SIDS of
Asia and the Pacific is only around 30 per cent, with a high urban-rural
coverage disparity, and the cost to build roads can reach four times as much
as other locations in Asia and the Pacific (PRIF, 2016). There is a lack of
modern seaports, as well as low quality and unsafe airports. Disparities in
96
Nine of the world’s 20 most vulnerable countries to climate change are SIDS in the Pacific,
along with four of the region’s LLDCs. The ‘Vulnerable Twenty’ (V20) consist of:
Afghanistan, Bangladesh, Barbados, Bhutan, Burkina Faso, Cambodia, Colombia,
Comoros, Costa Rica, Democratic Republic of the Congo, Dominican Republic, Ethiopia,
Fiji, The Gambia, Ghana, Grenada, Guatemala, Haiti, Honduras, Kenya, Kiribati,
Lebanon, Madagascar, Malawi, Maldives, Marshall Islands, Mongolia, Morocco, Nepal,
Niger, Palau, Palestine, Papua New Guinea, Philippines, Rwanda, Saint Lucia, Samoa,
Senegal, South Sudan, Sri Lanka, Sudan, Tanzania, Timor-Leste, Tunisia, Tuvalu, Vanuatu,
Viet Nam and Yemen.
access to clean water and sanitation services are also considerable between
urban and rural areas.
In this context, increasing targeted investments and accelerating

infrastructure development have become a pressing policy issue in the
LLDCs and SIDS of Asia and the Pacific. At a time of greater regional
economic integration, strengthening infrastructure investment is necessary
to ensure ongoing regional development. In both LLDCs and SIDS,
providing adequate infrastructure means fulfilling basic human needs,
providing connectivity (both domestic and regional) and improving
economic resilience. The ongoing expansion of cross-border trade, people-
to-people exchange and capital flows among neighbouring countries
increasingly demands greater infrastructure capacity.
A common denominator for LLDCs and SIDS is the challenge of

infrastructure financing. Both groups of countries tend to have relatively
under-developed domestic financial systems and narrow capital markets,
limited public funds, modest private sector, and limited capacity to
mobilize financing for infrastructure projects. This chapter aims to provide
readers with insights into the challenges and opportunities of infrastructure
financing in LLDCs and SIDS with their unique geographic characteristics.
It is hoped that the policy-oriented recommendations provided here will be
of benefit to all stakeholders seeking to improve the quality and extent of
infrastructure provision in Asia and the Pacific.
2. Infrastructure development and financing challenges
The United Nations Economic and Social Commission for Asia and the
Pacific (ESCAP) has estimated that in countries with special needs (CSNs)
in Asia and the Pacific – which includes least developed countries (LDCs),
LLDCs and SIDS – on average, 65 per cent of infrastructure projects are
funded from government budgets. Of the remaining 35 per cent: i) 15 per
cent are financed by the private sector, including foreign direct investment
(FDI) and public-private partnership (PPP) arrangements; ii) 10 per cent are
financed by loans and credits from multilateral development banks
(MDBs); and iii) the remaining 10 per cent are financed by the official
development assistance (ODA) (ESCAP, 2017). In contrast, in developed
countries, on average only 30 per cent of infrastructure projects are publicly
funded, with the majority being financed through other means (World
Bank, 2015). This would suggest that policy-makers in many LLDCs and
SIDS have yet to find ways to leverage private and other non-public
sources of funding to meet their infrastructure financing needs and explain
in part why they are typically struggling to adequately fund their
infrastructure requirements.
2.1. Asia’s LLDCs
There are constraints in Asia’s LLDCs on both public and private resources,
as well as foreign investment across countries, which make it challenging
for them to finance their infrastructure needs. The funds required to
develop integral infrastructure project, i.e. water, sanitation, transport,
energy and information, in Asian LLDCs are expected about 10.5 per cent
of their GDP. (Branchoux, Fang and Tateno, 2018). Among the region’s
LLDCs, Afghanistan has the highest needs in infrastructure financing (up to
29 per cent of GDP), followed by Nepal and Kyrgyzstan with up to 19 per
cent of GDP (figure 5.1). The largest investments are required in the
transport and energy sectors, followed by ICT and WSS (Branchoux, Fang
and Tateno, 2018).
Figure 5.1
Infrastructure financing needs in Asian LLDCs, 2018–2030
(Percentage of GDP)
Source: ESCAP, based on Branchoux, Fang and Tateno (2018, table 4 in Appendix F).
In addition, for those LLDCs that were formerly part of the Union of Soviet
Socialist Republics (USSR), their economic reliance on a limited number of
economic sectors (such as natural resources) and the volatility in global
commodities prices add to the challenges of long-term financing of major
infrastructure projects. This has been further exacerbated in recent years by
the economic ramifications of international economic sanctions imposed on
the Russian Federation, with which they maintain close economic ties. The
cumulative result has been severe pressure on public and private funds,
thereby limiting financing options for infrastructure investments in most of

the former Soviet LLDCs in Asia. As a result, deficiencies of physical
infrastructure are major obstacles for Asian LLDCs, amplified by their
geographical constraints. ESCAP’s Access to Physical Infrastructure Index,
which assesses Asian LLDCs’ access to physical infrastructure in the
transport, energy, ICT and WSS sectors, confirms insufficient access to all
types of infrastructure in Asian LLDCs (figure 5.2). While Kazakhstan,
Azerbaijan and Armenia are positioned well above the average score of
developing countries in Asia and the Pacific, Afghanistan, Nepal, Lao PDR
and Mongolia are around or less than the average of CSNs. Kyrgyzstan,
Uzbekistan, Tajikistan, Bhutan and Turkmenistan are more or less between
the average scores of developing countries and CSNs.
Figure 5.2
Asian LLDCs access to physical infrastructure index, 2015
Source: Based on ESCAP (2017).
The funding for infrastructure investment in Asian LLDCs mostly comes

from the public sector, and particularly from fiscal budgets. The way public
resources are mobilized tends to vary across countries. In resource-rich
LLDCs, for example, the share generated from non-tax revenues, such as
licenses, royalties and rents levied on the extraction of natural resources is
higher than tax revenues, while a large part of public expenditure is,
usually, financed from tax revenues in other LLDCs (table 5.1). In terms of
financing instruments, due to the dominance of the public sector,
concessional public financing has dominated infrastructure finance in some
LLDCs, while non-concessional private finance participation remains low.
Table 5.1
Fiscal revenues, grants and expenditures in Asia’s LLDCs, 2017
(Percentage of GDP)
Net
Revenues, Current Capital lending
Country Revenues excluding Grants Tax expen- expen- (+) / net
grants revenue ditures ditures borrowing
(-)
Afghanistan 54.0 10.1 43.9 7.6 36.9 18.4 -1.3
Armenia 23.7 23.1 0.7 20.9 25.1 3.4 -4.7
Azerbaijan 34.2 34.2 0.0 15.6 24.8 12.1 -2.7
Bhutan 26.6 19.0 7.5 13.8 18.9 8.5 -0.8
Kazakhstan 14.1 13.7 0.4 9.8 15.5 1.0 -2.4
Kyrgyzstan 32.4 30.1 2.3 16.8 27.2 6.2 -1.0
Lao PDR 20.3 15.8 4.5 13.5 14.9 9.2 -3.7
Mongolia 23.4 22.6 0.9 11.8 24.0 4.1 -4.7
Nepal 21.1 19.3 1.8 16.7 15.9 4.2 1.1
Uzbekistan 25.3 25.3 0.0 17.5 19.4 2.5 3.4
Source: ESCAP based on World Bank (2019b).
Capital expenditures (mostly on infrastructure) in Asian LLDCs tend to be

much lower than current expenditures despite considerable infrastructure
financing needs. In recent years, Afghanistan and Azerbaijan have recorded
the highest shares of capital expenditure, while Kazakhstan has the lowest
(see table 5.1 again). The main source of public resources in non-resource-
rich LLDCs is tax revenues, which tend to be low due to the largely
informal nature of their economies coupled with the low capacity and
inefficiencies of the tax administration systems. In addition, tax avoidance
and evasion, particularly by domestic individuals and companies, are also
an issue. In this context, the presence of fiscal and current account balance
deficits, or “twin deficits”, presents a crucial challenge, constraining
infrastructure financing capacity and turns LLDCs into net borrowers
(table 5.2). The “twin deficits” of the LLDCs will continue to be financed by
a combination of external borrowings, FDI and remittance inflows, mostly
from China and the Russian Federation (IMF, 2017d; 2017e; 2017f; 2017g;
2017i).
As a result, harnessing public debt as a potential source of infrastructure

financing may not be a viable answer for some Asian LLDCs, especially
for those with the “twin deficits”. At the same time, infrastructure
development without incurring debt may simply not be possible for these
countries: unlike private entities that can raise funding through either debt
or equity, governments cannot issue equity. For many Asian LLDCs,
funding through public debt financing may therefore be the only choice,
however undesirable that may be.
Table 5.2
Fiscal and current account balances to GDP in
Asian LLDCs, 2017
(Percentage to GDP)
Country Fiscal balance Current account balance
Afghanistan -0.7 -20.0
Armenia -5.6 -2.9
Azerbaijan -1.4 5.6
Bhutan -2.1 -24.4
Kazakhstan -2.8 -3.2
Kyrgyzstan -5.9 -6.5
Lao PDR -0.4 -7.0
Mongolia -5.3 -10.4
Nepal -0.5 -0.4
Tajikistan -3.8 0.0
Turkmenistan .. ..
Uzbekistan .. 2.8
Source: ESCAP based on World Bank (2019b).
One common denominator across Asia-Pacific LLDCs is the heavy reliance

on ODA funding to underwrite the costs of infrastructure development.
The majority of ODA available to Asian LLDCs is concessional debt, with
long-term maturity, low interest rates, and often includes a grant element.
Concessional debt accounts for the highest proportion of Nepal’s total
external debt (at 85 per cent), as well as Afghanistan (75 per cent) and Lao
PDR (42 per cent) (World Bank, 2016). Indeed, ODA is the most important
single source of international financing for low-income LLDCs, accounting
for more than 70 per cent, while the ODA for lower-middle LLDCs is
between 35 per cent and 65 per cent of total non-national funding
(UNCTAD, 2014). During 2012-2017, the largest share of ODA was
provided to Afghanistan – the country with the highest infrastructure
financing needs. The second largest ODA recipient among Asia’s LLDCs
was Nepal.
Box 5.1
Multilateral and bilateral financing for the cross-border dry
ports of Nepal
Nepal, an LLDC in South Asia, is surrounded by two large countries,
India and China. The country has promoted foreign trade and investment
through the development of dry ports that aim to connect the Nepalese
markets with India particularly through the Kolkata Port. The dry ports are
inland terminals, often developed adjacent to customs, providing logistics
services for the handling, temporary storage and trans-shipment of
containers that move through any mode of transport such as roads,
railways, inland waterways or airports (ESCAP, 2015). Dry ports can reduce
border crossing and transit lead-time and facilitate a deeper integration of
hinterland areas with international trade.
For the development of its dry ports, Nepal has received financial and
technical assistance from MDBs and neighbouring countries, not only to
help bridge project funding gaps, but also to learn from their experience of
managing, constructing and operating the infrastructure assets. For
example, Nepal has benefited from the World Bank’s assistance in the
construction of the three dry ports at the Nepal-India border, i.e. Birgunj,
Biratnagar and Bhairahawa, during the 2000s (World Bank, 2013). The
World Bank helped mainly in reducing transport costs associated with
Nepal’s imports and export through the supervision of the construction of
inland container depots and in streamlining trade and transit procedures
through the installation of the Automated Systems for Customs Data
(ASYCUDA) and Advanced Cargo Information System (ACIS) and
hands-on trainings for trade facilitation. In 2010, the Asian Development
Bank (ADB) financed Nepal’s fourth dry port in Kakarbhitta through
a national road project in Nepal and a cross-country corridor project
between Bangladesh and India (India, Ministry of Road Transport and
Highways, 2018).
Those four dry ports in operation have facilitated the integration of
Nepal into regional and global markets as they channel almost 70 per cent
of Nepal’s total imports and 60 per cent of its total exports (see table 5.3 for
more details). The rest of the import and export flows are concentrated
Table 5.3
Imports and exports through dry ports on the Nepal-India
border, 2017-2018
Imports Imports share Exports Exports share
(thousands (Percentage) (thousands (Percentage)

Dry ports
of of
Nepalese Nepalese
Rupees) Rupees)
Birgunj 421 939 564 33.9 14 063 766 17.3
Bhairahawa 224 037 171 18.0 3 510 935 4.3

Biratnagar 152 944 627 12.3 24 558 279 30.2
Kakarbhitta 37 580 934 3.0 6 730 357 8.3
(Mechi customs office)
Rasuwagadhi(a) (Rasuwa) 22 648 766 1.8 1 166 232 1.4
Source: Nepal, Department of Customs (2019).

Note: (a) Under construction.
either in the Tribhuvan International Airport based in Kathmandu (30 per

cent of the total exports and 12 per cent of total imports) or in other special
economic zones (SEZs) and industrial districts97.
As a result of the dry ports’ initial success, the Government of Nepal
has planned to develop additional dry ports, which will benefit from the
support of neighbouring countries. On the Nepal-China border, China has
provided financial assistance for the reconstruction of the Tatopani dry-port,
which was closed for four years due to the devastating earthquake of 2015
(Himalayan Times, 2019). On a similar note, as part of the Belt and Road
Initiative (BRI), Chinese development assistance is expected to reach
124 million yuan for the construction of an inland container depot in
Rasuwagadhi (Kathmandu Post, 2019). In addition, the feasibilities of the
following dry ports are under study: Yari, Nechung, Rasuwagadhi,
Kimathanka, Olangchungola, Nepalgunj, and Mahendranagar. In parallel,
SEZs are planned to be developed adjacent to those new dry ports, granting
investors various incentives ranging from 100 per cent income tax
exemption for the first five years (50 per cent for next five years), 40 per cent
tax exemption for infrastructure, zero-value-added tax (VAT) facilities,
customs duty concessions to the prohibition of labour strikes and protests as
per the 2015 Special Economic Zone Act.
Although successful in attracting imports and exports thanks to
multilateral financing support, the dry ports have failed to generate the
desired revenues (Kathmandu Post, 2014). The government is therefore
setting up the Port Authority of Nepal to control and regulate the dry ports
in the country, separate from the direct operations of the dry ports (Rising
Nepal, 2019).
A sovereign wealth fund (SWF) is a state-owned or controlled fund aiming

at stabilizing a country’s economy against volatility in revenues and
emergency events such as natural disasters and economic crises and
supporting economic development of a nation at large (Sovereign Wealth
Fund Institute, 2019b). Among Asia’s LLDCs, Azerbaijan, Bhutan,
Kazakhstan, Mongolia, Turkmenistan and Uzbekistan have at least an SWF
typically funded by the revenues earned from their natural resources
(Sovereign Wealth Fund Institute, 2019a). Some SWFs in Asian LLDCs are
particularly large in terms of the size of capital (see table 5.4).
While most SWFs exist to ensure economic stability and resilience to

economic and financial shocks, such as in the cases of Bhutan, Kazakhstan,
Mongolia and Turkmenistan, the SWFs of Azerbaijan and Uzbekistan have
strategically invested in infrastructure and social assets, (IMF, 2018i;
Peaslee, 2019; World Economic Forum, 2019; Yangdon, 2019; Yurou, 2018;
Zhussupova, 2018). For example, the Azerbaijan’s State Oil Fund (SOFAZ),
97 Among the special economic zones, Dhanusa Janakpur, Nepalgunj and Siraha accounted
for, respectively, 0.11, 3.62 and 0.01 per cent of the total imports of Nepal in 2017-2018.
Among the industrial districts, Kailali accounted for 1.41 per cent of the country’s total
imports in the same year.
Table 5.4
SWFs in Asia’s LLDCs, 2018
(Millions of United States dollars)
Country SWFs Size of capital
Azerbaijan State Oil Fund of Azerbaijan (SOFAZ) 38 987.7
Bhutan Bhutan Economic Stabilization Fund 1.5
Kazakhstan Samruk-Kazyna 71 344.3
National Fund of the Republic of Kazakhstan (NFRK) 57 628.0
National Investment Corporation of National Bank 109.6
of Kazakhstan
Mongolia Mongolia Fiscal Stability Fund ..
Future Heritage Fund(a) 217.3
Turkmenistan Turkmenistan Stabilization Fund ..
Uzbekistan Fund for Reconstruction and Development of Uzbekistan 20 000.0
Source: Sovereign Wealth Fund Institute (2019b).
(a)
Notes: Mongolia’s Future Heritage Fund started with an initial investment of $ 217.3 million in 2019
and expects to receive an additional fund of $ 392.9 million annually (Yurou, 2018).
Box 5.2
The National Fund of Kazakhstan:
a potential funding source for priority infrastructure projects
The National Fund of the Republic of Kazakhstan (NFRK) is an SWF
that favours economic stability over investment. NFRK manages
Kazakhstan’s oil, gas and natural resource revenues to: i) minimize the
impact of volatile oil prices on public finances; ii) support targeted capital
spending; and iii) generate provisions for future generations. In short, the
NFRK is currently used as a stabilization and savings fund.
The current NFRK concept in 2016 sets an annual guaranteed transfer
to the government budget of up to $ 10 billion, principally for budget
support and targeted capital spending. The guaranteed transfer,
denominated in the local currency, is expected to decline to $ 6 billion by
2020, and is intended to reduce oil revenue dependence and hedge against
adverse exchange rate changes in the future.
NFRK could serve as a crucial and sustainable tool in the mobilization
of extra funding resources, given its long-term assets, and is ideally placed
to invest in priority infrastructure projects in Kazakhstan. At present,
however, such an allocation of resources in infrastructure assets is not
permitted, and acquisition of domestic securities – including those of
infrastructure projects – by NFRK is prohibited (IMF, 2017g). The current
reserves of the NFRK are estimated to be nearly $ 58 billion, as of 2018, or
45 per cent of GDP, which suggests a large opportunity for sustainable
infrastructure financing through SWFs in Kazakhstan (IMF, 2017g).
supported by oil and gas revenues, has actively invested in the

infrastructure sector, also covering health care, education and real estate
(Antidze, 2018; Azernews, 2018). A number of SWFs in Asian LLDCs,
however, are still not ready to use their funds for infrastructure
development.
Although infrastructure projects in Asian LLDCs are relatively unattractive

for private investors, FDI still plays a significant role in greenfield
infrastructure in Asian LLDCs (table 5.5). Lao PDR, Nepal and Bhutan are
good examples in hydropower generation (ESCAP, 2017). Kazakhstan has
also attracted greenfield FDI in energy, transport, telecommunications and
other infrastructure, while Tajikistan has received major investment in the
energy sector, including hydroelectric plants (Banco Santander, 2019b; fDi
Intelligence, 2018). Armenia also attracted greenfield FDI in the energy and
telecommunications sectors (Banco Santander, 2019a).
Table 5.5
Greenfield FDI in infrastructure in Asian LLDCs, 2011–2015
Amount received
Host country Share to GDP
(millions of United States dollars)
Kazakhstan 2 475 0.2
Tajikistan 1 137 2.9
Lao PDR 1 012 1.9
Armenia 535 1.0
Nepal 429 0.4
Uzbekistan 428 0.2
Afghanistan 321 0.3
Azerbaijan 321 0.1
Bhutan 272 2.9
Kyrgyzstan 80 0.2
Mongolia 61 0.1
Source: ESCAP based on UNTCAD (2003).
Due to their geographical and demographic conditions, however, many

LLDCs in Asia have typically experienced uncompetitive risk-adjusted
rates of return on infrastructure financing with high costs of construction
and operations. The restrictions imposed on FDI in Asian LLDCs also
provide additional challenges for private infrastructure financing. Foreign
investors are faced with legislative measures as foreign equity limits,
screening and approval procedures, restriction on key foreign personnel,
and other operational measures (OECD, 2015). A lack of transparency and
Box 5.3
Astana International Financial Centre
The Astana International Financial Centre (AIFC) of Kazakhstan, which
was launched in 2018, aims to increase private investors’ confidence, to
attract financial resources for sub-regional development and to promote FDI
flows through creating a competitive, efficient and transparent financial hub
in Central Asia. For this purpose, AIFC, equipped with modern ICT
facilities, provides both local and foreign investors favourable tax treatment,
simplified labour and visa regimes, facilitation to infrastructure
investments, and a separate legal framework based on the United Kingdom
common law—detaching from the judicial system of Kazakhstan. The AIFC
focuses primarily on: i) capital market development in cooperation with the
Shanghai Stock Exchange and Nasdaq; ii) asset management; iii) Islamic
finance; iv) ‘fintech’ start-ups; v) private banking for high net-worth
individuals; and vi) green finance (AIFC, 2019).
predictability of the procurement regime can be additional challenges for

foreign investors in Asian LLDCs.
The business environments in Asian LLDCs vary significantly on a country-

to-country basis. According to the World Bank (2019a), Afghanistan and
Lao PDR share the worst positions among Asian LLDCs, ranked 167th and
154 th out of 190 economies respectively, and their business environments
are very much unfavourable to private investors in infrastructure projects.
Figure 5.3
Doing business rankings for Asian LLDCs, 2019
Source: ESCAP based on World Bank (2019c).

Note: Distance to frontier (DTF).
On the other hand, Azerbaijan, Kazakhstan and Armenia, natural resources

rich countries, are at the top of the list of Asian LLDCs, ranked at 25th, 28th,
and 41th respectively (figure 5.3). Those three LLDCs have increased the
liberalization of their economic policies and enhanced investment appeal in
their infrastructure sector through enforcing favourable laws and
regulations to foreign investors (World Bank, 2019a).
In most Asian LLDCs, public-private partnerships (PPPs) have recently

gained popularity to facilitate private sector financing in the public
sector-led infrastructure investment (ESCAP, 2019). The largest share of
private investments through PPP modalities in Asian LLDCs has been in
the ICT sector, followed by energy, due in part to their lower development
risks and construction costs, as well as offering greater financial return
prospects than other kinds of infrastructure investments, such as water
(PPP Knowledge Lab, 2019). In this case, investment in the transport sector
has been much needed among Asian LLDCs to enhance their connections
with regional markets. The viability of PPPs also tends to vary across
countries as much as sub-sectors. Lao PDR widely uses PPPs in the
hydropower sector and has become a leader among Asian LLDCs, having
implemented more PPP projects than any other Asian LLDCs (see table 5.6).
However, constraints in adopting PPPs still exist: weak public guidelines
on modalities and legalities, lack of appraisal and evaluation criteria,
unclear public objectives, approval process and administrative procedures,
poor business plans, and so on.
Table 5.6
PPP projects in Asian LLDCs, 1990–2019
Total investment
Host countries Completed projects
(millions of United States dollars)
Afghanistan 2 211
Armenia 10 612
Azerbaijan 4 375
Bhutan 2 218
Kazakhstan 8 885
Kyrgyzstan 2 ..
Lao PDR 31 17 896
Mongolia 3 368
Nepal 2 2 500
Tajikistan 3 956
Uzbekistan 2 320
Source: PPP Knowledge Lab (2019).
The Global Infrastructure Facility (GIF), which became operational in 2015,

is a good example of PPP programmes among governments, multilateral
development banks, and private sector investors and financiers. GIF was
designed to provide a new way of PPPs on the preparation, structuring and
implementation of institutionally complex infrastructure projects, and it can
provide extra funding source for infrastructure projects in Asian LLDCs
(Global Infrastructure Facility, 2019).
Box 5.4
Bhutan: pension fund investment in a power plant
Domestic pension funds are another potential source of financing
diversification and can fit well with infrastructure finance, given the
long-term nature of both. There have been some attempts to tap pension
funds for infrastructure, such as in the case of Bhutan, which was able to
harness its pension fund to invest in a hydropower project.
Bhutan’s Hydro Power Corporation Limited was incorporated in May
2008 as the vehicle for development of the run-of-the-river 126 MW
Dagachhu Hydroelectric Project in south-western Bhutan. The project is
a PPP venture, with the Druk Green (the national operator of hydropower
stations) as the majority equity partner with a 59 per cent stake, the Tata
Power Company of India (the holder of the power purchase contract) with
26 per cent and the National Pension and Provident Fund (NPPF) of Bhutan
with the remaining 15 per cent stake. The project is designed for an
estimated mean annual generation of 515 GWh and in a 90 per cent
dependable year to generate 360 GWh.
The project was also funded with a 60:40 debt equity ratio, with ADB
providing a concessional loan of $ 51 million for the civil works; the
Raiffeisen Bank International AG (RBI) of Austria providing a commercial
loan of €41 million for the electro-mechanical works; and NPPF providing
a loan of $ 9 million. ADB also provided a loan of $ 39 million to the
Government of Bhutan to meet the financing gap of the project. The cost of
the project on completion was $ 200 million, and it started producing
electricity in 2015.
Source: Druk Green Power Corporation Limited (2019).
Box 5.5
Kyrgyzstan: multilateral climate finance for low-carbon
infrastructure
Climate finance is a potential source for financing diversification
in LLDCs and can fit well to support a low-carbon and climate-
resilient infrastructure. Kyrgyzstan has attempted to tap climate-related
development finance for infrastructure and adopted comprehensive
national and sectoral strategies and programmes that enhance climate
finance in such sectors as energy, transport, water, agriculture and
emergency relief (Kyrgyzstan, Government, 2017). The country is one of the
most vulnerable states to climate change in Central Asia due to the high
occurrence of climate-related disasters, its dependency on climate-sensitive
economic sectors and its ageing infrastructure. The country’s average
annual temperature is projected to increase from 3.5°C to 8.8°C by 2100

(WHO, 2013).
The Kyrgyz authorities established the Climate Finance Centre (CFC) to
coordinate climate finance issues with various stakeholders. The CFC
designs and implements investment projects for low-carbon, climate-
resilient infrastructure in priority sectors (CFCKR, 2019). It is also
responsible for attracting financial resources from international climate
funds, MDBs, international organizations and bilateral donors (table 5.7).
Table 5.7
Bilateral and multilateral climate funds used by Kyrgyzstan
Typology of funders Funds/donors
Dedicated global climate funds Green Climate Fund (GCF)
Global Environmental Facility (GEF)
Adaptation Fund (AF)
Investment Facility for Central Asia (IFCA)
Climate Investment Funds (CIF)
Pilot Program for Climate Resilience (PPCR)
MDBs Asian Development Bank (ADB)*
European Bank for Reconstruction and
Development (EBRD)*
World Bank*
International Finance Corporation (IFC)*
Bilateral and multilateral donors Department for International Development (DFID),
United Kingdom
Food and Agriculture Organization (FAO)*
Deutsche Gesellschaft für Internationale
Zusammenarbeit (GIZ) *
United Nations Development Programme (UNDP)*
World Food Programme (WFP)*
Sources: Kyrgyzstan, Office of the Prime Minister (2019); Kyrgyzstan, Ministry of
Finance (2019); Kyrgyzstan, Ministry of Economy (2019); Kyrgyzstan, Ministry of
Transport and Roads (2019).
Note: MDBs and donors marked with an asterisk (*) are Green Climate Fund (GCF)
accredited entities.
Box 5.6
Regional cooperation in financing cross-border corridors in
Central Asia
The Central Asia Regional Economic Cooperation (CAREC) programme
is a sub-regional economic cooperation which aims at enhancing
connectivity amongst key economic hubs of LLDCs in Central Asia and
their neighbouring countries through infrastructure development. CAREC
comprises 11 member states and is supported by serval multilateral
institutions, such as ADB and World Bank98. CAREC’s long-term strategic
framework emphasizes developing infrastructure within international
development agenda, such as the Sustainable Development Goals or SDGs
(ADB, 2017b). As figure 5.4 shows, this economic cooperation intends to
develop six major economic and transport corridors amongst the countries
in the sub-region.
Figure 5.4
Six Central Asia Regional Economic Cooperation (CAREC) corridors
Source: CAREC Program (2017).
The CAREC corridors require a large investment of $ 76.8 billion per

year for developing related infrastructure assets, except those of China,
which are equivalent to 7.8 per cent of GDP of the CAREC member
countries (ADB, 2017a). In order to meet this huge funding requirement,
some financing strategies could be proposed as follows:
First, CAREC programme must engage more with the private sector.
CAREC countries can work to improve the regulatory and investment
environment and enhance policy coordination among the member states to
98
CAREC member states include eight LLDCs in Central Asia and North-East Asia, namely
Afghanistan, Azerbaijan, Kazakhstan, Kyrgyzstan, Mongolia, Tajikistan, Turkmenistan
and Uzbekistan, and three of their neighbouring countries, i.e. China, Georgia and
Pakistan.
better attract private investors to its infrastructure projects. Although the

share of PPP remains limited in infrastructure investment compared to
public funding, some countries in Central Asia have provided guidelines for
PPP projects. For instance, Kazakhstan, Kyrgyzstan and Tajikistan have fully
developed PPP laws, entailing the creation of a common legal framework
that better regulates PPP projects in the future.
Second, the BRI could provide additional financial resources for
infrastructure projects alongside the CAREC corridors, while member states
should also be cautious about debt management. As Central Asian countries
are located at the crossroads of the Silk Roads, this strategic location could
help member countries raise necessary financial resources for the
development of the CAREC corridors. In the past decade, for instance,
Kazakhstan has received over $ 14 billion worth of Chinese investment in
the transport sector (Cohen and Grant, 2019).
Finally, international organizations still play an important role. For
example, apart from providing concessional debt instruments directly to
CAREC member states and their infrastructure projects, ADB can offer
expertise, guidance and professional tools to help CAREC countries tailor
policies in every aspect of infrastructure projects. The infrastructure
project’s bankability can be improved with the assistance from international
organizations, easing the wide financial gap in long-term.
2.2. Asia and the Pacific’s SIDS
Public funds alone cannot close the infrastructure financing gap in the least
developed and developing islands of Asia and the Pacific, particularly as
demand for public services is projected to increase. During the period from
2018 to 2030, Asia-Pacific SIDS will need to spend about 6.5 per cent of their
GDP on average to meet their infrastructural needs on transport, energy,
ICT and WSS (Branchoux, Fang and Tateno, 2018). Timor-Leste and
Solomon Islands top the list of Asia-Pacific SIDS, requiring 17.9 per cent
and 14.2 per cent of their GDP respectively, followed by Papua New Guinea
(10.8 per cent) and Kiribati (10.5 per cent). See figure 5.5 for a comparison
among Asia-Pacific’s SIDS. On the whole, Asia-Pacific SIDS need to
mobilize funds from a wide range of resources, and not just public funds.
Attracting private investment in infrastructure project in SIDS poses

numerous challenges, from physical remoteness to the small scale of these
economies to natural disaster threats. Those issues are further complicated
by poor institutional capacity and performance of the public sector
overseeing the provision of infrastructure services (as a public good). These
challenges adversely affect the state of infrastructure development in
a number of ways, including (but not limited to): i) the high cost of building
infrastructure projects, due to the lack of economies of scale, remote
locations, a shortage of adequately skilled planners and workers, and the
need for imported inputs and capital; ii) higher risks of investment as
a result of natural disaster threats, climate change and environmental
Figure 5.5
Infrastructure financing needs in Asia-Pacific SIDS, 2018–2030
(Percentage of GDP)
Source: ESCAP, based on Branchoux, Fang and Tateno (2018, table 4 in Appendix F).
degradation; iii) the limited ability of public sector agencies to attract

private investors, through such measures that can reduce business risks
and offer enticing investment opportunities; and iv) their small markets
and poor connections with larger economies. Table 5.8 suggests that, in
general, Asia and the Pacific’s SIDS run large trade deficits (except for
Papua New Guinea) and attract low FDI inflows (except for Fiji and Palau)
mainly due to distance to foreign markets, the lack of economies of scale,
and relatively poor business environment99. Limited opportunities for
remunerative employment have prompted many citizens to migrate,
further reducing both the market for infrastructure services, and the
provision of skilled labour to build and operate infrastructure projects.
Transparency and accountability are crucial to attract potential private

investors, particularly when it comes to large-scale infrastructure projects
that rely in part on the integrity of the national budget and public funds. In
small economies like Asia-Pacific SIDS, a single large infrastructure project
can have a marked impact on the macro-economic profile of the entire
99 The latest data for total investment is not available for numerous Asia-Pacific SIDS, and
there are differences in how FDI statistics are compiled and released by different
institutions, making comparisons problematic. There is clearly a need for these
governments to improve their database management and publicly disseminate reliable,
regular and timely key data.
Table 5.8
Selected key economic indicators of SIDS, 2017
Trade Total Remittances Gross
FDI Ease of
balance investment received debt doing
Country (percentage
business
of (percentage of GDP)
ranking
imports)
Fiji -60.5 21.5 5.9 5.4 48.9 101
Kiribati -88.3 .. 0.7 9.9 26.3 158
Maldives -86.5 20.0 10.6 0.1 63.9 136
Marshall Islands -67.9 .. 0.1 14.4 25.5 150
Micronesia -38.5 .. 0.3 7.1 24.5 160
(Fed. States of)
Nauru -46.5 .. 0 .. 61.5 ..
Palau -95.5 28.4 12.2 0.8 .. 133
Papua New Guinea 130.3 .. -0.9 0.0 36.9 108
Samoa -87.5 .. 1.1 16.4 49.1 90
Solomon Islands -12.5 17.3 2.8 1.2 9.4 115
Timor Leste -97.9 26.0 0.2 3.0 3.8 178
Tonga -83.9 .. -1.3 37.1 .. 91
Tuvalu -99.8 .. 0.8 10.8 37.0 ..
Vanuatu -90.1 27.1 2.9 2.3 48.4 94
Sources: World Bank (2019b), accessed on 18 April 2019; IMF (2017a; 2017c; 2017h; 2018a; 2018c;
2018d; 2018e; 2018f; 2018g; 2019a; 2019b; 2019c).
country. And as with Asian LLDCs, the business climate rankings for
Asia-Pacific SIDS tend to convey an unfavourable environment for private
investment.
The majority of Asia-Pacific SIDS are at high risk of debt distress (see
table 5.8 again). And yet their infrastructure financing relies principally on
public funds, with considerable support from bilateral and multilateral
international development partners. Various governance indicators,
spanning issues like government effectiveness and transparency, the quality
of the regulatory framework, the rule of law and its enforcement, and
controls on corruption, all reflect relatively weak systems that only add to
the perceived risks of investing funds100. Based on data from relevant
International Monetary Fund (IMF) Article IV Consultations, table 5.9
100
Nonetheless, there is limited data on infrastructure spending in these countries, and the
mechanisms used to determine financing schemes are often not clearly defined, due in
large part to weak planning capacity. Discussions here are made based on World Bank
(2019d), accessed on 17 February 2019.
Table 5.9
Selected public finance indicators in Asia-Pacific SIDS
(Percentage of GDP)
Official aid
Country State budget Special revenues
(ODA+OOF+private)
Fiji (2017 estimate) 32.4 3.1 15.0 (tourism)
Kiribati (2016) 115.0 28.2 66.0 (fishing license)
Marshall Islands (2016 estimate) 58.4 29.5 8.3 (compact fund)
6.3 (fishing license)
Micronesia (Fed. States of) (2016) 61.2 237.4 19.6 (fishing license)
Maldives (2017) 30.1 14.1
Nauru (2016 preliminary) 91.6 97.7 27.4 (remittances)
12.9 (tourism)
Palau (2016/2017) 34.9 11.4 39.9 (tourism)
Papua New Guinea 20.3 2.0
(2017 estimate)
Samoa (2015/2016) 36.5 12.3
Solomon Islands (2018 estimate) 46.9 15.7
Timor-Leste (2016 estimate) 64.5 7.5 19.6 (petroleum)
Tonga (2017 estimate) 44.9 21.5
Tuvalu (2017 estimate) 126.0 69.5 50.0 (fishing license)
Vanuatu (2016) 36.9 16.4 25.5 (tourism)
Sources: IMF (2019a; 2019b; 2019c; 2018a; 2018b; 2018c; 2018d; 2018e; 2018f; 2018g; 2017b; 2017c;
2017h); and OECD (2019), accessed on 17 February 2019.
Note: Other official flows (OOF).
provides some key data on the fiscal situation of SIDS in Asia and the
Pacific. The majority of Asia-Pacific SIDS economies have relatively large
state budgets – in terms of their proportion to total GDP – and high ODA
inflows. Conversely, the scale of their private sectors tends to be relatively
modest.
The economies of many Asia-Pacific SIDS rely on public revenues from

tourism and fishing licenses. However, both sectors face a number of
challenges. Firstly, the islands have limited environmental capacity to
support large flows of people, thereby ruling out the option of scaling up
mass tourism. Travel costs to reach the islands also tend to be expensive,
further limiting this potential market. Secondly, many islands still have
inadequate infrastructure and amenities to support the needs of the tourism
sector, such as clean water, electricity, and navigable roads. Only a few
countries, such as Fiji and Vanuatu, are able to provide upscale hotels and
resorts. There is also limited participation from local small and medium-
sized enterprises (SMEs), mainly due to capacity constraints and
inadequate access to finance. Thirdly, the threat of natural disasters further

hampers tourism development, as most SIDS are located in the Pacific Ring
of Fire, suffering frequent hurricanes and facing rising sea levels because of
climate change.
Box 5.7
Maldives’ financing strategies for tourism infrastructure
As an SIDS, the Maldives shares common aspects with the Pacific
island states, such as small size, seclusion from bigger markets, and
vulnerability to natural disasters and climate change. This archipelago has
the lowest average elevation in the world (1.8 metres), and the rising of sea
water is thus a concrete and immediate threat (Portland State University,
2015). The lack of connectivity between each island forces local dwellers to
use ferries to travel from one island to another, and this greatly reduces
access to basic services (Bramlett, 2017; World Bank, 2019b). Tourism is
a major sector in the Maldives, and its revenues can greatly contribute to
infrastructure development. These islands are victims of their own success
however, and it is a significant challenge to accommodate the massive
arrival of tourists (1.3 million in 2016) given inadequate tourism
infrastructure (Ely and Ercan, 2017). Table 5.10 provides a socio-economic
overview of the Maldives.
Table 5.10
An overview of the Maldives, 2017
GDP PPP Population Surface Average ODA FDI Debt
elevation
(billions of (square (metres) (percentage of GDP)
United States kilometre)
dollars)
6 887 496 402 300 1.8 0.6 7.2 63.9
Sources: IMF (2017a; 2017c); OECD (2017); Portland State University (2015); World
Bank (2017a; 2017b).
Note: Purchasing power parity (PPP).
The development of artificial islands, with the notable example of

Hulhumalé, helps counter the rise of sea level and provides additional land
to a growing population (Mitchell, 2017). Bridges are also built between
islands to increase connectivity and to provide faster travelling methods
than ferries (Mitchell, 2017). The International Finance Corporation (IFC)
has also invested in telecom and hotel operators, and the Valana
International Airport has been under renovation with a budget of $ 800
million to welcome seven million international passengers annually (Ely
and Ercan, 2017; World Bank, 2019c).
There are several ways to facilitate infrastructure financing in the
Maldives. While the Maldives must also rely on tax revenues particularly
from tourism for public financing, concessional loans, ODA and FDI are
additional sources of infrastructure financing. In 2017, the Maldives’ inward
loans and grants, mostly from MDBs such as ADB, the World Bank’s
International Development Association and the Islamic Development Bank
(IsDB), amounted to 0.6 per cent of its GDP PPP (OECD, 2003), and its FDI
represented 7.2 per cent (World Bank, 2017a). In the case of the China-
Maldives Friendship Bridge built in 2018, China provided $ 100 million in
free-aid and $ 170 million in loan as part of the BRI (Bramlett, 2017). In
addition, as a Muslim country, the Maldives could apply ‘sukuks’ (Islamic
bonds) and other instruments to reduce the costs of infrastructure financing
and improve public services. Islamic financing can be another alternative
source of infrastructure financing in Central Asia’s LLDCs and beyond since
its main principles, such as risk sharing and profit sharing, are quite
appropriate for infrastructure financing (Amirat and Sabreena, 2018;
Kulkarni, 2018).
The fisheries sector in Asia-Pacific SIDS also faces significant challenges. In

addition to diminishing fish stocks, the fisheries sector is also adversely
impacted by climate change, pollution and natural disasters that could be
devastating. This situation is further exacerbated by inadequate funding to
invest in infrastructure development. In the Marshall Islands, for example,
there are no telephone networks or proper piped water that reach the outer
islands (ESCAP, 2017). In Samoa, less than 15 per cent of roads are paved
(ESCAP, 2017). High electricity costs and energy vulnerability across
multiple SIDS pose major bottlenecks for the fishing sector (ADB, 2018). In
Kiribati, the commercial sales of small-scale fisheries have hit a roadblock
because of a lack of efficient transport to regional markets (ADB, 2016).
Poor infrastructure clearly hinders the business environment and the
opportunity to develop relevant economies of scale and expand trade
which impact prospects for economic development (IMF, 2016).
In a bid to manage and coordinate development financing flows into

the infrastructure sector in the Pacific’s SIDS, the Pacific Regional
Infrastructure Facility (PRIF) was established in 2008. The institution acts as
a multi-donor partnership to oversee infrastructure development and is
supported by the World Bank, the ADB, the Japan International
Cooperation Agency (JICA), the European Union, and the governments
of Australia and New Zealand. PRIF supports five key economic
infrastructure sectors: i) energy; ii) telecommunications; iii) transport
(including roads and bridges, maritime transport, and aviation); iv) solid
waste management; and v) water supply and sanitation. Of the total
development assistance provided between 2009 and 2016, 82 per cent were
grants and 18 per cent were loans (PRIF, 2016). Papua New Guinea was the
top recipient, getting a significantly larger amount of funding assistance
compared to other countries (see table 5.11).
Table 5.11
Top five development partners to, and recipients of, the PRIF, 2009–2016
Top 5 donors Top 5 recipients
Country Amount Country Amount
Australia 798.7 Papua New Guinea 646.1
New Zealand 192.0 Oceania, regional 239.2
Japan 180.8 Solomon Islands 189.2
World Bank Group 143.5 Fiji 177.3
China 113.9 Vanuatu 153.6
Source: PRIF (2016).
Box 5.8
Fund allocation and international cooperation for infrastructure
development in Fiji
As an upper-middle income country with a population of 918 000
spread over 330 islands, Fiji has a PPP per capita of $ 8 702 and recorded
GDP growth of 3.8 per cent in 2017. Major sources of revenue come from
indirect taxes (62.9 per cent) and direct taxes (26.2 per cent). Fiji has been
running a deficit budget that is common among the Asia-Pacific SIDS. In
fiscal year 2017-2018, it targeted a 4.5 per cent (of GDP) net deficit,
equivalent to 16.0 per cent of the country’s total budget. The total
infrastructure expenditure was about 9.0 per cent of GDP. Fiji allocates
about 21.0 per cent of its budget to infrastructure services, as depicted in
table 5.12.
Table 5.12
Budget allocation for infrastructure in Fiji, 2016-2017
to 2018-2019
Actual expenditure Estimate Estimate
Infrastructure 2016-2017 2017-2018 2018-2019
services
Operating Capital Operating Capital Operating Capital
Ministry of 24 956 14 479 29 013 32 515 33 911 41 996

infrastructure
and transport
Water authority 40 175 91 851 42 101 94 558 48 315 115 839
of Fiji
Ministry of waterways 2 300 4 538 3 774 9 355 6 142 24 580
and environment
Fiji roads authority 7 792 120 672 12 583 211 865 13 925 250 712
Total - infrastructure 75 223 231 541 87 471 348 293 102 293 433 126
Total budget 1 438 329 2 047 710 2 185 757

Actual expenditure Estimate Estimate
Infrastructure 2016-2017 2017-2018 2018-2019
services
Operating Capital Operating Capital Operating Capital
Percentage of total 21.3 21.3 24.5

budget
Source: Fiji, Parliament (2018).

Note: Conversion: F$ 1 = $ 0.47 (Reserve Bank of Fiji, 2019, accessed on
18 January 2019).
Fiji suffered severe damage when tropical cyclone Winston hit in

February 2016, causing losses of $ 1.36 billion, equivalent to 31 per cent of
GDP. The government responded by focusing much of the 2017–2019
budgets on programmes intended to aid recovery and rehabilitation,
resulting in a higher than normal percentage of infrastructure spending. In
2017, Fiji became the first emerging market to issue a sovereign green bond,
valued at F$ 100 million, or approximately $ 47 million, to finance climate
change mitigation and adaptation. Technical aspects of the issuance were
assisted by the World Bank and IFC, and financially supported by the
Australian government. In the first tranche, the country received F$ 87.71
from domestic insurance companies, commercial banks and the Fiji National
Provident Fund. Fiji expects to use the fund to finance several infrastructure
projects, including achieving a target of 100 per cent renewable energy by
2030.
Of the 14 Asia-Pacific SIDS, only Kiribati, Papua New Guinea, Timor-Leste

and Tuvalu have sovereign wealth funds. While those sovereign wealth
funds have played a limited role mainly to provide relatively short-term
financing to supplement their governments’ fiscal budgets, they could be
a very useful endowment to attract external funds for cooperation,
especially in infrastructure financing (IMF, 2019a). However, establishing
new sovereign funds is not an easy undertaking, considering the
economies’ size and activities while lacking capacity to mobilize domestic
revenue with diminishing revenues from natural resources in many
Asia-Pacific SIDS.
Even though private sector participation in infrastructure is not limited to

PPPs, the absence of a PPP regulatory framework shows that the level of
private involvement is typically limited to traditional public procurement
modalities. All Asia-Pacific SIDS are at the early stages of PPP policy; some
countries have PPP units but others do not. Only Papua New Guinea and
Fiji have PPP Acts, while others tend to handle PPPs through a Public
Procurement Law or PPP Guidelines as in the case of Samoa (UNDP,
2017)101. In the specific case of Fiji, it passed a PPP Act in 2006, but there has
101 Publicly available data on private sector participation in infrastructure development in
Asia-Pacific SIDS is insufficient. The mechanisms that allow and support private sector
participation are also unclear and non-transparent.
been little subsequent progress on the issuance of implementing regulations

for the Act. The country’s PPP Act also does not make any reference to the
use of funding support from the government. Instead, it declares that the
control of a PPP company must remain under majority Fijian interests,
through a minimum of 51 per cent of voting rights, or the right to appoint
more than 50 per cent of the board of directors, or a Fiji (“golden”) share,
including a right of veto (Fiji, House of Representatives, 2006). These kinds
of stipulations for foreign investment in PPPs, without being compensated
in some way by adequate guarantees or other financial support, do little to
create a conducive environment for PPP promotion. In Papua New Guinea,
a PPP Act was passed in 2014 but was not followed by the promulgation of
necessary implementing regulations, nor the establishment of PPP
institutions 102. In Asia-Pacific SIDS without specific PPP laws and
regulations, private sector participation is typically governed under public
procurement laws that often fail to capture the benefits of the PPP modality.
Box 5.9
Developing a Pacific capital market for infrastructure financing:
some lessons learned from the Caribbean
Although Pacific SIDS103 largely depend on state revenues, public
borrowing, foreign aid, and FDI to finance their infrastructural development,
those insular economies have struggled to attract both internal and external
capital due to both small-sized markets and projects (Hurley, 2015). Lacking
adequate financial and banking regulations and policies, coupled with weak
governance structure, has further hampered their access to necessary funds.
A potential solution to attract capital for needed infrastructure is to
develop a Pacific-wide capital market that could enhance the economies of
scale through sub-regional cooperation and capacity building of the
financial and banking sector in the Pacific. A joint capital market in the
Pacific could help improve standards and policies as well as develop
a proper surveillance system in the financial and banking sector. This could
also ease the movement of capital from an island to another.
The Pacific Islands Forum (PIF) should be the best framework to lead
the development of such a sub-regional capital market. PIF is an
organization of 16 Pacific SIDS, as well as Australia and New Zealand, to
promote sub-regional socio-economic integration. This Forum has focused
on the free movement of people and goods through trade and investment
liberalization but does not focus on capital and banking as one of its
priorities (PIF, 2019).
Within this context, Caribbean SIDS could provide a useful example for
the Pacific to develop a sub-region-wide capital market. The member states
of the Organisation of Eastern Caribbean States (OECS), a supranational
organization among select Caribbean SIDS, share a common currency and
102 The PPP Act 2014 has been in operation since January 2018, but a PPP centre, as mandated
by the PPP Act, has yet to be established.
103 All the Asia-Pacific SIDS, except the Maldives and Timor-Leste.
a central bank, having removed restrictions to the movement of capital

(OECS Secretariat, 2010). OECS established the Regional Governments
Securities Market (RGSM) in 2002, which is a sub-regional capital market for
trading public debt instruments among OECS member states and operates
fully on an electronic platform administered by the Regional Debt
Coordinating Committee. This committee sets norms, such as the maturities
for treasury bills and sovereign bonds and the calendar for auctions, and
provides a licence to intermediaries or brokers (ECCB, 2019; Venner, 2016).
The purchase of bonds and securities is tax-free for OECS residents. Since
the creation of the RGSM, the number of auctions had increased from a
couple of securities issued in 2002 to nearly 50 securities in 2014 (Venner,
2016).
Pacific SIDS and Caribbean SIDS share some similarities and
differences. Their small and insular geography limits the economies of scale
and provides smaller markets to potential investors and lenders. Both
sub-regions face the serious risks of natural disasters (such as hurricanes,
earthquakes and tsunamis), environmental degradation, and rising sea
level. On the other hand, Pacific SIDS are spread over a large surface of
approximately 38 million km2, while the Caribbean SIDS form a continuous
archipelago. Because of large American and European investments,
Caribbean SIDS have more advanced and efficient financial and banking
systems than Pacific SIDS do. While the PIF member states have mainly
promoted trade and investment liberalization, the OECS member states
already harmonized their monetary regulations and policies through
adopting one single currency and one single central bank. Table 5.13
provides the concise comparison between PIF and OECS.
Table 5.13
Comparison of PIF and OECS, 2018
GDP Average
GDP
(PPP debt-to-GDP
(PPP)
per capita) ratio
Participating countries Population
(Billions of (United
United States States (Percentage)
dollars) dollars)
PIF Australia, Cook Islands, Fiji,
French Polynesia, Kiribati, 40 871 619 1 600 40 321 33.1(b)
Marshall Islands, Micronesia
(FS), Nauru, New Caledonia,
New Zealand, Niue, Palau,
Papua New Guinea, Samoa,
Solomon Islands, Tonga,
Tuvalu, Vanuatu
OECS Full members(a): Antigua 633 934 6.7 10 569 74.7(c)

and Barbuda, Dominica,
Grenada, Montserrat,
Saint Kitts and Nevis,
Saint Lucia, Saint Vincent
and the Grenadines
(Associate members:
Anguilla,
British Virgin Islands,
Guadeloupe, Martinique)
Sources: Country Economics (2018); IMF (2018h); United Nations (2018).


GDP Average
GDP
(PPP debt-to-GDP
(PPP)
per capita) ratio
Participating countries Population
(Billions of (United
United States States (Percentage)
dollars) dollars)
Notes: Purchasing power parity (PPP);

a The data in this table only account full members;
bno data for the Cook Islands, French Polynesia, New Caledonia, Niue,
Palau, and Tonga; and
c
no data for Montserrat.
Less developed financial and banking systems and lack of integration

of the monetary regulations and policies can make it much harder for the
Pacific SIDS to develop a joint capital market. They could however apply
some experiences of Caribbean SIDS. First, Pacific SIDS must accelerate
sub-regional integration through the PIF framework although their initial
actions may still focus on the free movement of goods and people. Second,
Pacific SIDS should enhance the capacity of their financial and banking
sector and improve their productivity and governance. Third, they should
adopt ICT applications to digitize their financial and banking systems to
counter the geographical distance and make it easier to connect to each
other’s capital markets. Fourth, Pacific SIDS should set common
norms regarding bond issuances, selecting capable intermediaries and
implementing tax-free bond purchasing for locals, all of which could greatly
facilitate the transfer of capital among Pacific SIDS. Fifth, implementing
international financial and banking standards such as Basel II and III could
foster a virtuous domino effect as better standards and surveillance can
foster international trust in Pacific SIDS’ financial and banking systems.
Finally, the South Pacific Stock Exchange (SPX) of Fiji, arguably the most
developed capital market in the Pacific, may play a central role to develop
a sub-regional capital market through extending their services and sharing
their knowledge with other Pacific markets to attract financiers and
investors throughout and outside the Pacific. In conclusion, these options
could have the overarching effect of attracting more capital needed for
crucial infrastructural projects in Pacific SIDS through both providing
a larger capital market and better financial and banking systems to potential
investors and lenders.
3. Opportunities and policy recommendations
Through structural reforms and improvements in governance standards,

policy-makers in Asia and the Pacific’s LLDCs and SIDS should mobilize
domestic and external funding resources more effectively and efficiently for
infrastructure. This includes – but is certainly not confined to – improved
tax administration, creating more conducive investment climates through
legal, regulatory and other measures, and building private sector
confidence to invest in infrastructure. It also entails ensuring that domestic
and foreign capital is efficiently channelled into productive infrastructure
investments.
3.1. LLDCs in Asia
Mobilizing domestic public finance is clearly a key factor in infrastructure

financing for Asia’s LLDCs, while private financing is increasingly
important. Given the large financing gap in infrastructure, all financing
sources – whether they are public or private, domestic or international –
need to be harnessed. The respective roles and weightings of the various
potential financing sources will differ across Asia’s LLDCs and
infrastructure sub-sectors. But there are four areas of recommendations
provided here.
Tax reform
Improved tax administration, through the implementation of tax reforms,

will allow Asia’s LLDCs to expand their fiscal capabilities in providing
infrastructure services. The ability to collect taxes is crucial in financing
critical infrastructure projects. Many Asian LLDCs, especially those that are
not rich in natural resources, should strengthen their capacity for tax
collection, as tax mobilization rates still remain low, despite some
significant reforms efforts in the past. A simpler tax system with a limited
number of rates is critical in fostering higher levels of taxpayer compliance.
This also makes tax administration and enforcement less challenging in
countries that typically lack a well-functioning judicial system. Curbing
exemptions can also reduce the tax system’s complexity and distortions,
while boosting revenue by broadening the tax base. In this context, the VAT
has proved to be an efficient and strong revenue booster: countries that
impose this sales tax modality tend to raise more revenues than those that
do not (Keen and Lockwood, 2010).
In addition, Asia’s LLDCs should consider comprehensive tax admi-

nistration reforms that modernize their tax procedures and institutions. A
broad spectrum of legal, technical, and administrative measures might
potentially include: i) establishment of independent taxpayer offices; ii) use
of ICT applications to improve compliance and fight corruption
(e.g. one-stop Internet tax portal, e-filing, e-tax-return application, and
e-customs); iii) establishment and modernization of basic rules and
processes for registration, filing, and management of payment obligations;
iv) enhanced audit and verification programmer; and v) use of infrastructure
related taxes and levies for infrastructure maintenance and operations
(ADBI, 2018; IMF, 2017b, 2018). However, increased tax mobilization does
not automatically translate into adequate volumes of financing for
a country’s infrastructure needs. Nor does it mean that the money
earmarked for infrastructure spending will be used in an efficient or optimal
manner. Thus, reforms aimed at reducing inefficiencies in public spending
on infrastructure can also help better utilize available tax revenues.
Attracting FDI
Asia’s LLDCs may wish to consider implementing carefully tailored

incentive policies aimed at attracting more FDI for infrastructure
investment. Those incentives can be broadly divided into two categories:
fiscal and financial incentives (OECD, 2015). Fiscal FDI incentives include
the following:
• Reduced direct taxes through, for example, reduced corporate

income tax rates, tax holidays and tax-privileges in specific
geographic zones, such as SEZs;
• Incentives for capital formation, such as special investment
allowances, investment tax credits and reinvested profits; and
• Other tax reductions, such as lower sales taxes and VAT
reductions.
Financial FDI incentives are usually negotiated between public authorities

and large foreign investors, and can comprise (but are not limited to):
• Reduction or elimination of tariffs and other cross-border

barriers with trade partners and neighbouring countries;
• Infrastructure subsidies by providing physical infrastructure (e.g.
roads and railways) or communication to meet the needs of
foreign investors;
• Job training subsidies to ease a shortage of qualified labour
resources, including trainings through public education
programmes;
• Credits to investors through providing soft loans, interest
subsidies or loan guarantees to foreign enterprises; and
• Concessional access to real estate through selling or leasing lands
or buildings to foreign investors at below market values.
But there are also risks arising from the use of incentives to try and
stimulate greater foreign investment inflows. Any incentive given comes at
an opportunity cost to the state, in terms of the revenues foregone (for fiscal
incentives) or the expenditures given (for financial incentives); precisely the
opposite of the goal of tax reform. Being confident that an incentive does
genuinely trigger additional FDI activity, and is not a ‘gift’ to a firm that
had plans to invest anyway, is not always easy. And in the case of financial
incentives in particular, least developed and developing countries rarely
have the public funds available to, somewhat controversially, give money
to private sector actors as a form of ‘legal bribe’ to do something that is
deemed desirable for the country, and that they would otherwise hesitate to
do. This can only be justified if the impact resulting from the investment or
business activity triggered by the incentive has a value greater than the
incentive itself.
In the specific case of FDI in the infrastructure sector, and as intimated in

chapter 1 of this volume, it is an imperative to have effective PPP units,
procurement entities and privatization authorities all need to have
adequate institutional capacity (such as well-trained staff), and have well
defined responsibilities and coordination mechanisms in place, including
for managing any cross-border infrastructure projects, such as regional road
or rail networks. Governments may also wish to consider the provision of
appropriate guarantees, so as to lessen the perceived risks for foreign
investors. Such guarantees give comfort to financiers and investors that
legally binding agreements and payment contracts, such as those
pertaining to a power purchase agreement or a PPP deal, will be respected
by the government, and any monies paid. It is important to recognise here
that such a guarantee does entail a government taking on all the risk of an
infrastructure project, but only that part which relates to its own actions,
such as failing to honour a contract or a payment due. All the other,
considerable risks of potential project failure remain with the developers;
the government guarantee just lessens one part of the aggregate risks
surrounding a project, and which the government can control for.
Strengthening public-private partnerships
In Asia’s LLDCs, the PPP modality has been widely touted as a potentially
impactful platform for governments in developing countries to leverage
private sector financing for infrastructure projects that then provide public
services and goods. Private sector financing through PPPs can broadly
include: i) equity financing through the project’s developer(s); or ii) project
finance or debt financing through private lenders, which can be either
commercial banks or non-bank institutional financiers; or a combination of
both. Public financing to PPPs typically comprises: i) governments
underwriting part of a project’s upfront capital costs through grants or
viability gap funding104; ii) governments providing subsidies to share
recurrent operational and maintenance costs; iii) state-owned enterprises
(SOEs) investing some of their equity; and/or iv) state-owned development
banks extending concessional loans. MDBs and bilateral financial
institutions also provide various forms of concessional loans, grants and
guarantees, as well as financial and technical support to PPP based
infrastructure projects. But to be successful, PPPs need an adequate legal
104 As discussed in chapter 3, viability gap funding (VGF) can provide government’s
financial support to inviable infrastructure projects (World Bank, 2006).
and regulatory framework within which to operate, which explains in part

why this particular modality for private-public co-investment in large-scale
infrastructure projects has probably not been as vigorous as many had
previously hoped. And as noted earlier, a key prerequisite for any sustained
progress involves enhancing the capacity of government officials in
planning, executing, supervising and evaluating sustainable, resilient,
inclusive, and well-prioritized infrastructure programmes, and creating
robust infrastructure frameworks. In this context, Asia’s LLDCs can use two
existing tools to assess their readiness to implement PPPs and to determine
which is the optimal path down which to proceed:
• ESCAP’s PPP Readiness Self-Assessment105 is a tool for self-

diagnosis of a country’s readiness to implement PPPs. This
assessment tool helps to diagnose the main challenges in
attracting private investment for infrastructure development and
identify the key issues that governments need to address in order
to involve the private sector more actively in infrastructure
financing. This tool can also help in preparing detailed action
plans; and
• The Public-Private Infrastructure Advisory Facility (PPIAF)
Country PPP Readiness Diagnostic106 can be also used to provide
strategic and specific understanding of whether a country or
a specific sector within a country, is ready to undertake PPPs,
and if not, what is the most effective and efficient operational
way to proceed. This tool aids in the strategic choice of public
investment vis-à-vis PPPs, and the optimal type of PPPs.
International cooperation
It is important for Asian LLDCs to avail themselves of technical assistance

from development finance institutions and MDBs to enhance their
institutional and technical capacity for planning, maintaining and
managing infrastructure, and thereby optimize the limited financing
available. In particular, responsible agencies in Asia’s LLDCs need to be
aware of how to promote and prepare commercially viable (or ‘bankable’)
infrastructure projects. International development agencies and MDBs can
further help to support the sharing of useful experiences and successful
practices in infrastructure financing amongst Asia’s LLDCs, and even in
other comparable parts of the world. In collaborating with international
development partners, Asian LLDCs can also increase the financial viability
of infrastructure projects through various financing and risk management
105 ESCAP (2005).

106 World Bank (2016).
instruments (including viability gap funds), and by reducing operational

inefficiencies and ensuring enhanced transparency and sound practices. By
plugging into the non-inconsiderable expertise, capacity and funding
resources that resides within the international development community,
Asia’s LLDCs can get the kind of support they need to roll out the kind of
infrastructural platform that will then allow them to plug into the regional
networks that are becoming an increasingly important factor in any
country’s macro-economic fortunes.
Further, Asia’s LLDCs are encouraged to work with neighbouring countries

in addressing the following issues:
• Achieving a consensus on policy recommendations at a regional

level, and where possible, harmonizing regulatory frameworks in
infrastructure finance and PPPs;
• Strengthening existing multilateral mechanisms to promote:
greater knowledge transfer for infrastructure financing and
project preparation and implementation; and open dialogues
among public authorities, financial institutions, private investors,
project companies and other stakeholders; and
• Mainstreaming potential climate change impacts in all planning
activity and financial instruments, such as green bonds, so as to
ensure the environmental sustainability of all infrastructure
projects that are pursued.
3.2. SIDS in Asia and the Pacific
Financing infrastructure in Asia-Pacific SIDS is constrained not only by

limited funds from both the public and private sectors, but also from weak
public financial management. In 2014, 81 per cent of total public spending
in the SIDS was allocated to recurrent expenditures, leaving only 19 per
cent dedicated to capital investment for new public goods. A significant
proportion of these recurrent expenditures were used to pay personnel
costs (UNDP, 2017). This leaves a narrow fiscal space, contested by
numerous state programmes, including infrastructure, for funds to
underwrite capital spending projects.
Higher costs to build and maintain infrastructure projects in Asia-Pacific

SIDS, compared to non-island countries, is caused by the need to import
almost all materials and capital goods, while many projects are small scale,
with a faster rate of deterioration due to intrusive climate conditions. As
island economies, however, such countries need to be relatively
self-dependent across a range of infrastructure services while they are
poorly positioned to plug into neighbouring or regional frameworks. The
importance of infrastructure is fundamental, and Asia-Pacific SIDS should

maximize their efforts to mobilize domestic revenues and attract external
funding sources to finance their infrastructure needs. They need to improve
their macro-economic performance, including through enhancing good
governance measures, revisiting tax policies and economic policy. Good
governance practices influence directly private sector confidence, support
public-private partnerships, and cut transaction costs, thereby enhancing
efficiency.
Given the common constraints of small economies and their modest future
potential, relative geographic isolation, and the climate change-related
threats faced by Asia-Pacific SIDS, infrastructure development strategies
need to mitigate such factors, all of which tend to lower the (risk adjusted)
rates of return and increase the risks of investment. With low fiscal capacity
and high costs of building and maintenance, governments will inevitably
face difficulties in attracting private sector financing. The main challenges
here are: i) difficulties in identifying and designing infrastructure projects
with adequate cost-recovery and economies of scale, given that the market
for infrastructure services is thin and users’ purchasing power tends to be
low, while the costs of capital, maintenance, and replacement are high; and
ii) climate change and natural disaster related risks pose threats to the
sustainability of projects, leading to higher costs from internalized risks,
and the need for greater returns to offset the perceived risks.
The infrastructure market in Asia-Pacific SIDS typically consists of

a handful of players, all interacting with one another. They are: i) the
owner(s) of the infrastructure projects (typically the government); ii) the
consumers of infrastructure services, which range from institutions to
individual users; iii) developers and contractors; iv) financial sponsors and
lenders; and v) advisors and consultants. Additionally, there are also
entities who connect the players, such as the capital market, law firms and
negotiators. All players are governed by a set of regulatory frameworks,
but the role of the public sector is vital, since it is the highest authority
which sets the rules and often leads the process. It is also important to
ensure that there is no conflict of interest on the government side as both
regulator and potential owner of infrastructure assets, because this can
deter potential investors from participating in suspicious project bidding.
Figure 5.6 presents an example from Fiji on players and their relationships
in a WSS project.
Given the relatively thin domestic private sector and underdeveloped

capital markets, it is hard to envisage a significant contribution from
locally-sourced financing in most of Asia-Pacific SIDS. Consequently,
foreign participation is often crucial in underwriting the costs of new
infrastructure projects. Nonetheless, an improved regulatory system for
Figure 5.6
Fiji urban WSS and wastewater management investment programme
in the Rewa river
Investor: Government Lenders: ADB and EIB

of Fiji Sponsor: Green Climate
Funds (GCF)
Equity: $ 85 m Loan: $ 68 m (ADB), $ 38 m (EIB)

Grant: $ 31 m (GCF)
Ministry of Economy,
Fiji
Consumers
Project owner: Water (approximately 300 000
Authority of Fiji people) in Suva-Nausuri
Contractor 1: Contractor 2:
Sinohydro-HDEC JV Undisclosed
Sources: Green Climate Fund (2015); Karna (2018).

Note: EIB is the European Investment Bank.
domestic finance can also benefit local players and help foster the market,
while existing funds – such as pension funds and/or insurance funds – can
gradually become more important players in developing the market for
infrastructure financing.
As mentioned in a previous section, establishing a sovereign wealth fund is

one way to leverage the country’s reserve position, support financial
stability, and gain investment returns. It can also serve as endowment to
attract external fund and to show the capability of the government to
manage the fund. Establishing a sovereign wealth fund is a difficult
undertaking, however. The majority of Asia-Pacific SIDS are not in the
position of having excess revenue, therefore finding the sources of fund is
very challenging. Furthermore, given the country’s lack of experience in
managing large funds and the required institutional framework, it will
struggle to engage international partners. Before planning to set up a new
sovereign wealth fund, the government may do better to strengthen
domestic capacity to mobilize domestic revenue and improve spending

policy. Higher revenue means higher opportunity to save, while bigger
impact of a solid spending policy will reduce inefficiency and pave the path
to attract more international support.
Apart from utilizing existing ODA schemes, there are also opportunities for
Asia-Pacific SIDS to both source foreign funds and help counter climate
change-related effects at the same time. Schemes to help finance climate
change adaptation have been supported by various development partners;
both international organizations (such as the United Nations, the World
Bank, ADB and the International Fund for Agricultural Development
(IFAD), among others), and bilateral funds (such as from Australia, Japan,
the United States, several member states of the European Union, etc.).
These funding opportunities span a broad range of areas, covering direct
environmental management, socio-economic development, hard and soft
infrastructure related to climate-change adaptation, and insurance for
natural disasters.
Taking into account the significant impact of natural disasters and climate
change on infrastructure provision, and the extent to which they are now
mainstreamed into most major infrastructure project plans (including their
financing), it is worth looking briefly at this issue. A recent report on
climate and disaster resilience financing in SIDS (OECD and World Bank,
2016) highlighted several issues:
• Building climate change and natural disaster resilience at the

individual, institutional, and private sector levels is essential to
achieve development in the Asia-Pacific SIDS, but available
financing for this purpose tends to be limited and difficult to
access;
• Market-based financing mechanisms are not as equally and
easily accessible to all Asia-Pacific SIDS. Hence, dependency on
concessional finance from the international development
community continues as it remains a key source of financing;
• Geographic and income patterns mask the disproportionate
weight of a few countries, and a few large and isolated
commitments, amongst Asia-Pacific SIDS. The smallest nations
tend to receive the highest per capita annual financing
allocations, largely because of the high fixed administrative costs
involved; and
• Resilience funding tends to follow large-scale disasters, but
predictable, long-term financing is still scarce. Larger disasters
are prone to receive larger funding streams compared with
smaller, more recurrent ones.
Therefore, apart from existing patterns and mechanisms in disaster

resilience assistance, it is critical to focus on strengthening public sector
capacity to help Asia-Pacific SIDS and their infrastructure systems to
become better prepared in the long-term. This in turn demands serious
efforts in establishing an adequately robust support system, notably in:
i) the legal and institutional system; and ii) public sector capacity to
manage disaster risks. Disaster risk management requires long-term
planning and management, spanning pre-event mitigation, event response,
and post-event recovery. Managing disaster risks covers technical capacity
to plan and prepare, as well as management capacity to lead field response,
prepare contingency plans, and evaluate the results. A firm commitment by
a government to having solid disaster risk management will help convince
international development partners to support such efforts. For example, in
November 2017, Fiji became the first emerging economy to issue
a sovereign green bond, with a total amount of F$ 100 million. The World
Bank and IFC provided technical assistance to the government of Fiji in the
process of issuing the bond, which received a positive response from the
financial markets (the first tranche of F$ 40 million was over-subscribed).
The funds raised will be used to support climate adaptation and resilience
projects.
Another possible way to increase the opportunities for SIDS is forming

regional cooperation modalities to raise and manage climate-change funds.
Sustainable trust funds or insurance funds require a certain scale of size.
Individual country in SIDS is too small to raise and manage efficiently
a trust fund or insurance fund, especially when the risks are very high. As
such, regional funds may provide the necessary economies of scale. In
principle, it is similar to regional bonds in some countries, which
municipalities issue bonds not individually but through a regional
development bank. The region already has the Pacific Catastrophe Risk
Insurance Company (PCRIC), established in 2016, as one of the outputs
from the Pacific Catastrophe Risk Assessment and Financing Initiative
(PCRAFI). This initiative is supported by the World Bank and ADB, with
financial support from Japan, the Global Facility for Disaster Reduction and
Recovery (GFDRR) and the ACP-EU Natural Disaster Risk Reduction
Programme. The members of PCRIC currently consist of five countries – the
Cook Islands, Marshall Islands, Samoa, Tonga, and Vanuatu – but could be
scaled up and improved. Establishing a regional trust fund sourced from
climate change funds and other development partners would be another
alternative to explore. Greater pooling of such a fund would be expected to
bring about economies of scale, cutting administrative and transaction
costs, and at the same time reduce the level of risk through greater
geographical diversification. The Pacific region could also look to
strengthen its bonds through regional actions to address the impact of
climate change.
While the Asia-Pacific LLDCs and SIDS face some common challenges and
solutions in infrastructure financing and hence, other issues are specific to
each group. Some of the problems faced by Asian LLDCs, for example, are
intrinsic to being landlocked states, sometimes with mountainous and
unfavourable topography, while SIDS in Asia and the Pacific must contend
with their physical remoteness and being more vulnerable to the impact of
natural disasters and climate change such as rising sea levels. Where the
challenges differ, so do the possible solutions. On the whole, however, both
groups share many common challenges: sub-optimal economic governance,
challenging investment climates, administrative obstacles, a lack of
economies of scale, relatively high transport and logistics costs,
infrastructure deficiencies, and challenging geographical and climate
conditions. Combined, these factors make the enabling environment for
infrastructure financing less than ideal for both the LLDCs and the SIDS in
Asia and the Pacific.
For these countries, the technical capability of public sector agencies to

establish a solid and realistic infrastructure development road map, and to
identify and embed a pipeline of robust projects to offer investors and
sponsors, is crucial. Host country government agencies also need to
schedule project development in a timely fashion, and to be willing to
drive the process forward, from the planning stage through to the
implementation stage. There is also the need for a conducive and
predictable business environment, keeping regulatory burdens and
compliance costs (and risks) within acceptable norms, improving
transparency, and building the capacity of public officials. Tax systems need
to be fair, relatively simple and efficient, so as to provide reliable revenue
sources and support the government’s infrastructure development agenda.
Tax policy formulation, administration and enforcement, transparency and
accountability, as well as the stability of the system as a whole are all
important aspects in evaluating the investment attractiveness of emerging
economies. That, in turn, is important if policy-makers wish to attract
private sector capital to co-fund infrastructure development.
But the private sector alone will not be able to underwrite the cost of
providing adequate infrastructure services in these countries. These are
typically public goods for which the host country’s government is
ultimately expected to provide its citizenry. Governments, therefore, need
to have sufficient fiscal space to invest in capital assets and support
infrastructure development, with the provision of infrastructure services
as a public good. There are several ways to generate additional fiscal
space, including: i) broadening the growth base, by improving debt
management, enhancing growth drivers (e.g. through knowledge,
technology, innovation), and attracting more FDI; ii) improving revenue

performance from both conventional and non-conventional sources;
iii) improving expenditure management (e.g. reducing transaction costs,
reconfiguring SOEs, enhancing treasury management, efficiency gains in
public institutions, creating a development bank or funding institution that
is separate from the state budget); and iv) integrating relevant programmes
into a more comprehensive and holistic framework, from which synergies
and efficiency gains can be derived.
Asian LLDCs are advised to consider all the relevant sources of potential
infrastructure financing, as well as explore new sources of funding, both
domestically and internationally. Having a wider spectrum of financial
instruments can help the LLDCs to make infrastructure investment more
attractive for a broader group of financiers, as well as diversify the risks.
Despite being landlocked, the former USSR LLDCs are relatively more
advanced in overall development – including infrastructure – as well as
often being more attractive for foreign investment. The overall business
environments in Kazakhstan and Azerbaijan, for example, are among the
thirty best in the world, according to the World Bank’s Doing Business 2019
Report. Since problems arising from being landlocked are mediated mostly
through transport, LLDCs would be well advised to pay special attention to
this sector. Secondly, some LLDCs may wish to explore development
strategies emphasizing sectors that are not dependent on physical
transport. The ICT revolution in the 21st century has made this task much
easier.
Some of the SIDS’ common characteristics are their remoteness, the threats
posed by climate change, their modest economic sizes and structures,
widely dispersed and small populations, and limited institutional and
governance capacity. Disaster-prone regions pose severe challenges that can
significantly and adversely impact a country’s economic development path.
It can also deter long-term capital investment in infrastructure projects due
to sustainability concerns. Many island states in the Asia-Pacific region are
low-lying atolls, increasingly threatened by rising sea level. Rising
sea-water level can also contaminate limited fresh water reserves and make
human habitation difficult. Internalizing such disaster risks into what is
already a thin market inevitably raises the costs of investment and
decreases the expected future incomes. This lowering of anticipated risk
adjusted rates of return is one of the main reasons for low private sector
investment in infrastructure projects in the SIDS. Asia-Pacific SIDS can seek
to mitigate these constraints, however, through a number of actions, such as
increasing resilience, reforming the legal system, improving public sector
performance, strengthening regional cooperation, integrating infrastructure
development with disaster management framework, and deepening fiscal
capacity. The key areas for improvement are: public sector capacity
(especially related to fiscal policy), trade and investment, good governance,

and database management. Good public sector performance will improve
budgetary policy, particularly in mobilizing resources and spending
efficiency. Further actions require creative and innovative ideas to attract
more investments. Policy-makers may also need to review their zoning
plans to reduce connectivity costs, public service unit costs, and potential
loss caused by natural disasters.
Overall, both the LLDCs and SIDS of Asia and the Pacific have yet to fully
harness the opportunities derived from global infrastructure financing
options, and therefore have substantial space to mobilize additional
resources to meet their critical infrastructure needs. Greater focus on, and
targeting of, the various kinds of support emanating from the international
development community will likely reap significant rewards.
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Conclusions
In this modern and interconnected world, the bulk of things that are made
require electricity to make them, and then require modes of transport to get
them to their end destination. The transactions and trading involved also
require robust communications. It is the case that infrastructure is the
platform on which any economy depends. It is also the vehicle by which
a society provides public goods and services to its communities, whether it
be health care, education, or safe water. Whatever social, cultural, political,
and economic profile a country may have, the need for quality
infrastructure is the perennial common denominator. Thus, for policy-
makers, there is no way of escaping from the challenge of planning,
funding, developing, and implementing infrastructure projects. But that
challenge is considerable, particularly for many less developed and
developing countries, including those in Asia and the Pacific. Growing and
legitimate concerns around environmental degradation and the adverse
impact of climate change are providing additional headwinds for economic
planners, as an emphasis on sustainability is mainstreamed into the policy-
making processes of all countries. Not only did the job become more
pressing, but it also became more complex. For countries with limited
institutional capacity in those government agencies mandated to oversee
infrastructure planning and operation, the task is a daunting one, and the
resources that the private sector – both foreign and domestic – can bring are
potentially key in determining success or failure. But the worldviews,
priorities and incentives of the public and private sectors are quite
different, and much of the challenge lies in finding ways to align them in
a way that is mutually satisfactory, delivers the desired impact, and can be
made sustainable over time. And this is particularly true around the issue
of financing infrastructure.
This book has sought to identify and discuss crucial and emerging issues in
financing for sustainable infrastructure development, and highlight various
important topics in the infrastructure financing ‘space’. They include: the
roles and constraints of both public and private sectors; the potential of
leveraging capital market for infrastructure financing; capturing externality
effects to attract private sector investors and financiers; key issues
regarding cross-border infrastructure development; and unique challenges
and opportunities of land-locked developing countries (LLDCs) and small
island developing states (SIDS) in financing infrastructure. This book
advocates for a holistic approach to be adopted on infrastructure financing,
where both public and private sectors, as well as key stakeholders such as
the United Nations, have significant roles to play in accelerating the pace of
infrastructure investment towards the sustainable development agenda.
Such a holistic approach to infrastructure financing necessitates the creation

of a robust governance structure and conducive enabling environment that
then delivers a more efficient and effective allocation of public funds, and
creates a more solid basis for mobilizing private sector capital, from both
domestic and international actors. For that purpose, governments need to
consider how best to: i) allocate their own resources to support the
Sustainable Development Goals (SDGs); ii) leverage the development
finance architecture and related regional cooperation platforms to finance
infrastructure; and iii) incentivize and harness private sector financing
sources for sustainable development.
The holistic approach should also help strengthen national and sub-
national capacities to develop and implement ‘bankable’ and potentially
transformational projects, and to then manage, monitor and report on
project implementation. Policy-makers need to focus on making policy, and
having done so, have the institutional frameworks in place that can allow
them to delegate responsibility down to ‘in-house’ experts and consultants
to implement that policy. On large and cross-border infrastructure projects,
in particular, there has often been an understandable, but sub-optimal,
tendency for senior government leaders and elected officials to inject
themselves into project-specific negotiations. This often then leads to
protracted delays in project negotiation, which investors and financiers
often interpret as being an additional political risk factor. It also means that
the whole process has to be repeated again with each project; a hugely
inefficient way of going about things. Far better for policy-makers is to
establish the major terms and conditions by which infrastructure projects
will be negotiated, including issues around pricing and the potential for
guarantees, and then leave it to the assigned agencies to structure the
individual deals. If such a systems approach necessitates first developing
the institutional capacity of those agencies, then so be it. The United
Nations Economic and Social Commission for Asia and the Pacific (ESCAP)
and other regional bodies profiled in this book stand ready to assist in this
regard, through the provision of information sharing and learning
networks, technical assistance, and other supportive interventions.
Each journey begins with a first step, however faltering or hesitant, and
this book underlines the need to think of financing for sustainable
infrastructure development as being a process, and not a destination that is
easily or instantly arrived at. A country’s infrastructure development ‘to do’
list is typically a long one, begging the question of where to start and how
to prioritise. The answer is likely to be different for each country’s, or
region’s, particular circumstances. For example, for a country that has yet
to develop a strong track record in infrastructure financing deals, it might
be important to cherry-pick a handful of relatively small, but eminently
do-able, infrastructure projects and achieve some ‘quick wins’. And by
working with, and arguably investing some degree of trust in, leading
private sector players and service providers in the relevant infrastructure
field, policy-makers can convey a message to the market that their
intentions to develop quality infrastructure interventions are serious. By
leveraging the institutional reputations of some of the major international
players in a respective field, a country can demonstrate that investing in its
infrastructure need not necessarily be a high-risk proposition.
While this book hopefully provides numerous ‘takeaways’ for policy-

makers and other stakeholders, we would concede that it also has some
inevitable limitations. Firstly, the vast geographical scope of this study
arises as an obstacle to the formulation of pertinent and applied policy
recommendations. Asia and the Pacific is not only one of the largest, but
also most heterogeneous regions of the world, with countries displaying
diverse stages of development and socio-economic needs. And this is
particularly true for infrastructure financing issues. Whereas Pacific small
island states, for instance, are legitimately concerned with the provision of
developing relatively basic infrastructure, and developing well-functioning
banking sectors; in other sub-regions, like East and North-East Asia,
countries’ priorities typically lie more with the provision of quality
infrastructure that mainstreams the SDGs, and finding ways to attract and
harness capital via innovative financial instruments. This disparity in needs
makes the process of policy support and advocacy more challenging, as
general frameworks of action may not always prove useful at the country
level.
Secondly, up-to-date and robust data on infrastructure investment is often

in short supply. Public authorities often do not disclose the size of
investment in infrastructure in their national accounts, and the
participation of the private sector is also not easily quantifiable. Moreover,
costing and estimation methodologies vary immensely across databases,
which complicates cross-country comparisons, both statically and over
time. Relevant data for least developed and landlocked developing
countries, as well as small island developing states, is particularly limited,
making any assessment of their needs that much harder to conduct.
Thirdly, there are some important topics that could not be covered
extensively in this book, but that are also deserving of attention and should
be further explored in the future. These include, among others: i) the
optimal governance structure and tax mechanisms to help finance
infrastructure projects; ii) banking and financial sector development,
including debt rating mechanisms, the development of infrastructure
bonds, such as infrastructure Islamic or green bonds, and other
advanced financing instruments and FinTech solutions; and iii) the role
and promotion of foreign direct investment (FDI) in infrastructure
development, which entails a very different approach than that used for
other fields of foreign investment, such as manufacturing or resource
extraction.
Those missing elements, among others, suggest some fertile areas for future
research work, policy advocacy, and capacity building. Some suggestions
for future policy-oriented research in this regard are summarized as
follows:
Firstly, financial schemes for infrastructure development should seek to

focus more on financial inclusion and expanding their coverage. For
example, working with small and medium-sized enterprises (SMEs), and
on commercial and residential activities surrounding infrastructure
networks or corridors. An inclusive approach such as this can help identify
and enhance externality effects, and create more value along with
infrastructure development activities, which could then be captured to
attract greater private sector financing in infrastructure. Governments
should not be shy about embracing commercial structures that can not only
stimulate greater private sector participation, but also achieve their own
socio-economic goals. When a private sector investor completes an
infrastructure project, the relevant government is, in effect, a net beneficiary
of that investment, and should be willing to explore ways in which the risks
and rewards of its enactment are shared equitably.
Second, a robust environmental, social, and governance (ESG) framework

in infrastructure financing work is a necessity. This framework is
particularly useful in providing guidance to institutional investors and
financiers on stock and bond issuance considerations, and investment
portfolio management that can be aligned with the objectives of the SDGs.
The Infrastructure Financing and Public-Private Partnership (PPP) Network
of Asia and the Pacific, which ESCAP established earlier, can also help
integrate ESG into the network’s activities, and encourage the private sector
to get further involved in ESG investing, such as through improved
governance around specific projects, and ensuring that social and
environmental factors are considered in a thorough and meaningful
manner, and not just as a ‘box-ticking exercise’. The size of the impact
investing market is growing exponentially, and it, therefore, makes a great
deal of sense to see how governments can try to capture a greater
proportion of these funds for infrastructure development. As the impact
investing sector grows, it will increasingly be looking for larger projects to
co-fund and help underwrite and willing to invest in countries that are
deemed to be more challenging to operate in. The industry trends are
favourable, if they can be harnessed.
Third, the development of equity and bond markets – including equity and
bond indices – is critical in widening infrastructure financing options for
countries in Asia and the Pacific. The capital markets can be a useful tool to
encourage infrastructure and related business to embrace greener and more
sustainable practices, with portfolio investors serving as a lever. These
financial markets can serve as a conduit, channelling financial resources
from the private sector to sustainable infrastructure projects, since
institutional investors do not typically have the capacity or the desire to
invest directly in individual infrastructure projects. But bonds and other
instruments provide a means to ‘package’ those projects into a form of
derivative investment that institutional investors can then use to gain
exposure to the infrastructure sector, and even to the economies of so-called
‘frontier markets’ where the range of suitable asset classes are often scarce.
New financial instruments, such as green bonds, directly link financing
to sustainable development. It should also be noted that for small
economies with a low level of financial sector development, and a modest
domestic investor base primarily made up of retail investors, participating
in regional financial markets may provide a better alternative for
infrastructure financing, rather than trying to do it alone. Far better to place
infrastructure-related financial products close to the region’s larger pools of
capital, if the aim is to tap this resource for funds.
Fourth, additional research on deepening the banking sector for

infrastructure investment could be conducted. As countries are at different
stages in their financial development, it would not be sensible or
practicable to expect a country with a low level of financial development to
pursue the same reforms as one of its regional peers enjoying a higher level
of financial sophistication. In this case, banking sector development would
be more realistic, and thus a higher priority, than the development of the
capital markets for some countries in Asia and the Pacific. As discussed
earlier, a key challenge is reconciling the maturity mismatch that exists in
bank financing of infrastructure projects, and findings ways to address this
constraint that would then allow banks to perform their primary macro-
economic role, as financial intermediators.
Fifth, there is a need to explore further the potential of using blended

finance and other innovations to incentivize the private sector to invest
more in sustainable infrastructure. It may be possible for some
governments to use more innovative ways to combine various financing
resources (e.g. commercial and concessional loans, public subsidies and
grants, MDBs’ loans, capturing positive externality) through establishing
infrastructure dedicated funds or special purpose vehicles (SPVs) so as to
enhance the effectiveness and efficiency of infrastructure financing.
Sixth, the potential of new financial technologies, commonly referred to as

FinTech, should be recognised and better understood, notwithstanding the
rapid pace of change in the sector. Several countries have already started
adopting blockchain technology in the management processes of their
infrastructure projects, and it can prove especially useful in the
procurement and implementation phases of some projects, facilitating
bidding, procuring or bond issuance. Another good illustration of the ways
in which FinTech is revolutionising the planning of sustainable
infrastructure projects in the transport sector is the emergence of
ride-sharing services. They have the potential to decrease the demand for
personal car ownership, and hence promote a shift in the priorities of
policy-makers away from conventional roads and parking lots, and
towards bicycle lanes and public transport alternatives, such as a shift back
towards using tram lines in urban areas, and thereby harnessing reusable
energy sources.
Finally, other potential areas for capacity building activities might

include: i) effective planning of infrastructure for the SDGs; ii) proper
implementation methods for infrastructure projects and improved
institutional settings; iii) harnessing external benefits from infrastructure
development as a new source of funding for projects; and iv) improving
local taxation to support the mobilization of new sources of funding. In this
context, special attention needs to be paid to institutional capacity building
of government agencies, and to improve the planning and delivery of
infrastructure for the SDGs through strengthened governance. Clearly, the
challenge is conceiving how virtually all least developed and numerous
developing countries in Asia and the Pacific could actually enact such
reforms, as they already wrestle with a range of organizational and
political-economy factors that make ‘joined-up government’ seem like
a distant goal, whether at the national and the sub-national levels. Indeed,
this may well be one of the biggest challenges that the developing countries
of Asia and the Pacific face.

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Infrastructure Financing for

United Nations publication

Cover design: Erawan Printing Ltd., Part.

This publication may be reproduced in whole or in part for educational or non-profit

The 2030 Agenda for Sustainable Development

A critical component that connects all the SDGs is the development of

This book advocates a shift in perspective towards infrastructure

investors; and vi) mainstreams issues of sustainability into all infrastructure

As the leading inter-governmental organization in the region, the United

This publication was prepared under the overall direction of Hongjoo

Foreword ....................................................................................................... iii

Explanatory notes ........................................................................................ xv

Abbreviations and acronyms .................................................................... xvii

7. Concluding remarks ................................................................. 32

3. Capturing tax revenues to increase the rate of return for

1. Introduction ............................................................................... 125

Infrastructure Financing Challenges of Landlocked Developing

1. Introduction ............................................................................... 159

CONCLUSIONS ......................................................................................... 203

Figure 1.1 Example of multi-tier principal-agent relationships in

Figure 2.8 Holders of government bonds in selected Asia-Pacific

Figure 5.5 Infrastructure financing needs in Asia-Pacific SIDS,

Table 1.1 SDG targets and the role of infrastructure ....................... 14

Box 1.1 The government’s multi-faceted role in infrastructure

Box 5.5 Kyrgyzstan: multilateral climate finance for

Groupings of countries and territories/areas referred to are listed

• ESCAP region: Afghanistan; American Samoa; Armenia;

• South and South-West Asia: Afghanistan, Bangladesh, Bhutan,

References to dollars ($) are to United States dollars, unless otherwise

Abbreviations and acronyms

AAAA Addis Ababa Action Agenda

CPPPC China Public Private Partnerships Center

IDB Inter-American Development Bank

PCRAFI Pacific Catastrophe Risk Assessment and Financing

UNDP United Nations Development Programme

Infrastructure Financing Strategies for Sustainable

Infrastructure financing is a prerequisite in the pursuit of sustainable

approach to infrastructure financing. Such an approach has the potential to

Due to the large financial requirements entailed in infrastructure

Selecting optimal infrastructure to contribute to the SDGs requires effective

Consistent with the Group of Twenty (G20) principles for promoting

The first pillar, orienting infrastructure investment around achievement of

The third pillar is to meaningfully engage the private sector as a partner in

The holistic approach to infrastructure financing outlined in this book is

wastage and the misallocation of scarce resources. This chapter therefore

aggressively as a result of government directives – to large-scale

Chapter 3 goes beyond the issue of increasing overall liquidity for

Chapter 4 analyses the particular challenges presented by cross-border

clear benefits arising from cross-border infrastructure, it is perhaps not

Chapter 5 focuses on the more pronounced infrastructure financing

The achievement of multiple Sustainable Development Goals (SDGs),

Infrastructure for the SDGs, whether it is funded and financed by

2014, p. 98). This includes infrastructure provided by private sector firms,

Focusing on the strategic planning, governance and implementation of

2. What kind of infrastructure is needed to achieve the

Infrastructure is defined as “the basic physical and organizational

such as healthcare and education, and to participate in the economy by

There is no full consensus about the precise definition of sustainable

We therefore propose adopting a working definition of infrastructure for