Knowledge Partner

Asian Infrastructure Investment BankAnnual Meeting 2018

Mobilizing Finance for Infrastructure:Innovation and Collaboration

CONCEPT NOTE

Confederation of Indian Industry

In collaboration with

Ministry of FinanceGovernment of India

Ministry of External AffairsGovernment of India

ASIAN INFRASTRUCTUREINVESTMENT BANKAIIB

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BackgroundPoor infrastructure continues to remain a major supply-side bottleneck in the quest for high and inclusive economic growth. Besides institutional and regulatory issues, lack of finance is often viewed as a major reason for slow pace of infrastructure development in most of the developing and Less Developed Countries (LDCs). As per the McKinsey (2016), the world needs to invest $3.3 trillion annually in economic infrastructure through 2030, and under investment in critical and new infrastructure would erode future growth potential and productivity. Given the magnitude of infrastructure financing gaps globally as well as in fast-growing economies in emerging Asia, the existing sources of financing by the multilateral and regional Development Finance Institutions (DFIs) including the World Bank, Asian Development Bank, Inter-American Development and African Development Bank would fall short of; hence there arises a need for new and supplementary sources of funding. Further, the achievement of Sustainable Development Goals (SDGs) would require additional flows of investment to the infrastructure sectors.

While the contribution of the existing DFIs remains crucial, establishment of the Asian Infrastructure Investment Bank (AIIB) and the New Development Bank (NDB) has resulted in expansion of the corpus of infrastructure financing and has widened choice of instruments and co-financing. Moreover, these new DFIs not only provide complementary sources of funding but also reflect the dynamic leadership of the emerging markets like China, India and other economies in Asia and other regions. These new financial institutions are considered different in terms of focus sectors and modalities of financing and are meant to fill humongous gap in infrastructure financing in areas of priority and those boosting economic activities in the South. In fact, these institutions, unlike the financial institutions/multilateral development banks of the earlier vintage have emerged after two major global economic crises affecting Asia.

In 2018, India is hosting the third Annual Meeting of the AIIB in Mumbai on 22-27 June 2018. Given numerous opportunities and challenges in different sectors of infrastructure in India and other member countries of the AIIB, the Ministry of Finance, Government of India has identified the Research and Information System for Developing Countries (RIS), New Delhi as the Knowledge Partner to conceptualize, plan and organise a number of events on pertinent issues of infrastructure financing in the run up to the AIIB Annual Meeting in June 2018. As a part of this series, RIS would

Mobilizing Finance for Infrastructure:Innovation and Collaboration

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organise the lead-up events in collaboration with the industry associations such as the Confederation of Indian Industries (CII), Federation of Indian Chambers of Commerce and Industry (FICCI), the Associated Chambers of Commerce of India (ASSOCHAM) and the Export-Import Bank (EXIM Bank) of India. Besides the Curtain Raiser Ceremony on 27 February 2018 in New Delhi, 8 lead-up events would be organised on different themes of infrastructure in different cities across India from March to June 2018. During the Annual Meeting in June 2018, a number of Host Country Seminars would be held as side events. These events aim to capture the critical dimensions of infrastructure financing such as the sources and instruments of financing; legal, institutional and governance issues; emerging sectors of infrastructure investments including futuristic, resilient and digital infrastructure, gender infrastructure, etc; new technology choices and alternatives; factors constraining flow of investment to different sectors, the ways and means to overcome those constraints, and sensitizing government and other concerned agencies for ensuring enabling environment for promoting investments in infrastructure sectors.

Priority areas of infrastructure develoPmentInfrastructure development constitutes physical infrastructure and soft infrastructure across urban and rural sectors. Along with traditional infrastructure sectors such as transportation, water and sanitation, power, importance of promoting inclusive, resilient and sustainable infrastructure is increasingly felt across developing countries. Further, there is strong acknowledgement of the need for diversification of funding sources in the form of blending, introduction of new and innovative instruments of financing, mode of participation with greater participation of the private sector, regulatory and institutional reforms and other relevant aspects. In light of the above, some themes and sub-themes in infrastructure development are identified for the events to generate meaningful and policy-relevant inputs (see Annexure). As highlighted above, the proposed events would foster debate on infrastructure financing requirements, existing and new sources of financing, legal institutional, and governance issues, scope for co-financing and inter-institutional coordination, innovative financing instruments and modalities, sharing the best practices and issues in emulation. The relevant issues and priorities of the select infrastructure sectors are discussed below.

sustainaBle infrastructureTraditionally, infrastructure development in the developing countries focus on expansion of the physical network of roads, railways, airports, sea ports, telecommunications, and so on. In this perspective, the governments primarily remain obsessed with mobilizing financial resources for meeting targets of physical infrastructure with a very little concern or no concern of the environmental sustainability and climate change. Over

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the years, the concerns over the adverse effects of physical infrastructure in terms of environmental impact, dependence on carbon-intensive energy sources and sustainability and maintenance of infrastructure assets have gained global attention. As a result, the incorporation of environmental sustainability parameters in all different stages of project cycle conception, design, financing and implementation of the infrastructure projects have assumed importance. In particular, the sustainable infrastructure paradigm justifies introduction of carbon pricing, removal of fossil-fuel subsidies, emission taxes, emission trading systems, introduction of green technologies, promotion of renewable energy, development of smart cities, efficient and resilient water systems, etc. To promote sustainable infrastructure in developing countries where huge infrastructure financing gaps exist, they have to make necessary rectifications in conception, financing and implementation of the infrastructure projects. The features of sustainability therefore would help mitigate carbon emission, build resilience, enhance adaptability to climate change, correct pervasive distortions in pricing of natural resources, and regulatory and institutional reforms in the form of competition policies, foreign investment rules, investor and property rights, tax policies and anti-corruption policies. In that sense, a well structured debate on various aspects of the sustainable infrastructure is timely and desirable.

mass raPid transPortation systems Urban transportation is undergoing rapid transformation in most parts of the world. While developing countries are still in the process of building different forms of infrastructure, the advanced countries are facing challenges of ageing infrastructure. Multi-modal Mass Rapid Transportation Systems (MRTS) appears to be a promising solution to the ever-increasing traffic in major cities of the world especially during the peak-time traffic. Besides roads, metro rail system, mono rail, rapid metro are among the others that have emerged as efficient and cost-effective modes of public transportation in many countries of the world. It is gradually becoming the backbone of public transport in rapidly urbanizing developing countries including India. Besides providing faster connectivity in mega cities, metro railway has the potential to support mobility in other large cities and has limited impact in terms of environmental pollution. India has implemented metro railway projects successfully in many cities and is expanding rapidly its network as well as its reach to neighboring hinterland. Technology and associated infrastructure involved in metro railways have undergone significant modernization in recent years. Considering enormous investments and long gestation period, the public sector has been the key promoter of the metro projects in India. In recent years, new financial instruments are being contemplated. Special Purpose Vehicles and Public-Private Partnership models offer lessons for future projects. Apart from metro railways, new age rapid transportation systems and multimodal transport systems are being contemplated for technological

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feasibility, spatial coverage and affordability. Deliberations on mass rapid transportation systems is expected to usher more insights about the new technological options, financing innovations, partnership models and regulatory issues.

Port and coastal infrastructureApart from the landlocked countries, most countries having access to seas and oceans are presuming to leverage the specific features of ‘Blue Economy’ for economic growth. While economic activities like fishing, deep sea mining and oil explorations are old but are of great economic value, in recent years the focus has shifted to improving and expanding the gateways (ports) to reduce transit costs of cargo and to promote tourism and ocean-based livelihoods. Besides, the robust coastal infrastructure would improve the access to coastal areas and would facilitate mainstreaming marine economy with overall development process. India and other countries in Asia are situated in the Indian Ocean which is a major sea route for trade in the world. In that sense, plans for well-structured development of ports would not only promote maritime trade but also boost prospects of the blue economy. Globally, the port and shipping industry grapples with excess capacity, regulatory inertia with respect to new port development and cabotage, transshipment facilities, and so on. On the other hand, unplanned development of urban habitats surrounding sea shores in the form of hotels, restaurants, parks and tourist sites leads to pollution in sea beaches, plastics deposits, contamination of water, destruction of mangroves, and so on. While mobilization of resources would remain critical for development of the port and coastal economy, the non-financial issues such as regulations are equally pertinent issues for triggering private investment and local entrepreneurship in the blue economy sectors.

urBan develoPment The world is witnessing a much faster urbanization in recent years, more particularly in the developing Asia and Africa. Coupled with industrialization, urbanization offers huge potential for investment and job creation. By 2030, almost 60 per cent of the world’s estimated population would be living in urban areas. And almost 95 per cent of urban expansion in the next decades would take place in the developing world, Asian countries would be major contributors. Rapid urbanization exerts pressure on decent housing for all, rehabilitation of slums, fresh water supplies, sewage, living environment, and public health. In that perspective, high quality and sustainable urban infrastructure, covering public transport systems, waste management, housing, renewable energy, smart technologies for efficient management of cities etc are being proposed as tools of urban management. It would require deeper analysis of opportunities and challenges in cities, investment needs in different segments of urban development, solid waste management, waste recycling, use of green technologies, and a host of other issues.

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futuristic, resilient, inclusive and digital infrastructure Infrastructure development viewed in the traditional sense is no more tenable as scientific evidence on fast-changing geo-climatic conditions, development gaps among the vulnerable and disadvantaged sections of people, adverse implications of resource-intensive development processes, severity of environmental pollution and climate change are pointing alarming scenario. The focus therefore is shifting fast towards futuristic, inclusive and resilient infrastructure which can overcome effects of less favourable agro-climatic conditions and transform machines/vehicles for low-carbon environment. In addition, disaster resilient infrastructure need to conform to better safety standard for enhanced disaster preparedness. Sustainability of urban infrastructure should be approached together with better hinterland development. There is significant emphasis on designing infrastructure that is gender sensitive and appropriate for all age groups, for people with disabilities and can be used by poor people. Apart from resource-efficient transportation like electric vehicles it is important for ensuring compatibility among multiple modes of new generation transport.

Digital economy has widened enormously the scope of knowledge dissemination and access to information; real time interpersonal communications; direct benefit transfers; financial inclusion; transparency in governance; and social security. But still, the digital divides are widespread and digital darkness in terms of lack of physical infrastructure and human capacities is a stark reality in many parts of the world. In developing countries governments are implementing large-scale digital infrastructure development for ICT-based governance, disaster resilience and rural connectivity. India is cited as a leader from the developing world in terms of its ICT infrastructure, ICT penetration, ICT services, digital payments and cashless systems and, ICT-enabled governance, procurement and public delivery systems. The Government of India has largely facilitated this process through major interventions in infrastructure development, legislations, biometric registry of a billion plus adults, and in mainstreaming public delivery through the ICT platforms. The scenario is evolving with enormous opportunities in terms of new technologies as well as critical challenges in terms of disruptions and difficulties in regulating the cyberspace and financial transactions. From that sense, a session on the new perspectives of infrastructure development is vital.

regional develoPment Despite high GDP growth and infrastructure development in aggregative terms, many regions in most of the developing countries including India have remained relatively backward as compared to the growth centres. In consequence, these aspirational regions/areas face stagnation while economic activities get concentrated in the growth centres. As production fragmentation and spread of global and regional value chains have revolutionalised the scope for promoting exports, investment and job creation, it is critical

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to link the aspirational regions to mainstream economy. Infrastructure development would enable the local industries especially the small and medium enterprises to access markets in other parts of the country. These specially-targeted area development projects carry high risks and often face bureaucratic delays. It may require sustained flow of institutional finance as commercial finance is less likely to flow to such projects on the grounds of high perceived risks. Adequate coverage of these pertinent issues deserves merit in the events.

clean and renewaBle energyThe ever-increasing demand for energy resulting from rising prosperity of the middle class and rapid urbanization in the developing countries poses a serious challenge. The upward pressure on energy consumption due to rise in per capita income would continue. There would not only be a need for higher supply of energy but also of cleaner and low-carbon energy sources. Fossil fuel, the major traditional source of energy, has adverse health and environmental effects. Globally, the renewable energy systems are increasingly being recognised as the future of energy in the world. Among the major forms, solar, tidal and wave are widely used renewable energy sector. Most of the countries have introduced policy initiatives to promote R&D, technology development, commercialization of technologies and financing models to increase the production of renewable energy. Investment is the key to turnaround current experimental phase of renewable energy production and use to higher levels. From the AIIB perspective, this sector is a focus for financing projects which the member countries can benefit from.

water and sanitationComprehensive watershed management, efficient irrigation systems, providing safe drinking water and proper sanitation are some of the key challenges that many countries across the developing world including India are confronted with. With changing climate patterns, incidence of droughts and over-precipitation, efforts are being made to sustainably use water resources and nurture watersheds. These, understandably require focus in areas like river linking projects, irrigation systems and construction of dams. At the same time local solutions and alternative technological options are equally important. Furthermore, many of these countries lack systems of comprehensive waste management both in cities and rural areas; they require infrastructure investments on modern sewage systems, disposal of wastes and recycling facilities. In implementing projects in this area it is important to consider urban and rural specificities. The role of private sector participation may be explored strongly in this context.

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Private sector ParticiPation and innovation in resource moBilizationWhile public sector and governments have historically played a major role in promoting infrastructure development across countries, considering the issues of market failures and long gestation lags in infrastructural development, future needs are large and different in many ways. It has been emphasised that the private sector is not only the primary user of the economic infrastructure but is the key stakeholder in implementation, designing, operations etc. It is equally pivotal to ensure private sector participation in resource generation through effective mechanisms of costs, risks and benefit sharing. New financial instruments including blended finance have to be leveraged to ensure that local institutions and municipalities are empowered and public borrowing is sensitive towards efficiency, sustainability and societal needs. It has been pointed out that regulatory ecosystem may not always have the best incentives for private sector investments even if design of standards is robust. Many countries including India do have multiple regulatory agencies overseeing private sector investments for infrastructure development. It is important that present regulatory regimes are re-visited from this perspective through effective dialogue among private investors, domain experts and regulatory bodies.

Schedule of AIIB Annual Meeting Events (February-June 2018)

Sl.No

Theme City Partner Organisations

Date

1. Curtain Raising Ceremony Delhi CII, FICCI, ASSOCHAM, EXIM Bank

February 27

2. Mass Rapid Transport Systems Kolkata ASSOCHAM March 133. Port and Coastal Infrastructure Visakhapatnam CII April 3-44. Urban Development Ahmedabad ASSOCHAM April 19-20

5. Futuristic, Resilient, Inclusive and Digital Infrastructure Bangalore CII May 3-4

6. Regional Development Guwahati FICCI May 14-157. Clean and Renewable Energy Bhopal FICCI May 16-178. Water and Sanitation Pune FICCI May 31– June 1

9.Private Sector Participation and Innovation in Resource Mobilization

Mumbai FICCI June 11-12

10. Host Country Seminars at AIIB Annual Meeting and Exhibition

Mumbai CII, FICCI, ASSOCHAM, EXIM Bank

June 22-27

Knowledge Partner

Asian Infrastructure Investment BankAnnual Meeting 2018

Confederation of Indian Industry

In collaboration with

Ministry of External Affairs Ministry of FinanceASIAN INFRASTRUCTUREINVESTMENT BANKAIIB

Annexure