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Linking Cities to Finance:Overcoming Bottlenecks toFinancing Strategic UrbanInfrastructure Investments27 - 28 September 2010 | Shanghai, China

Prepared by:Commissioned by:

Background Paper

Preface The Cities Development Initiative for Asia (CDIA) organizes a Regional Conference annually, aimed at overcoming the challenges medium-sized Asian cities face to bridge the gap between their development plans and the implementation of their infrastructure investments.

CDIA conferences serve as a meeting point for the exchange of views amongst various stakeholders including national and international development finance institutions, private financial institutions, city governments, national/ provincial governments and private sector.

For 2010 the topic of the CDIA Regional Conference conducted in Shanghai on 27 and 28 September, is “Linking Cities to Finance: Overcoming bottlenecks to financing strategic urban infrastructure investments”.

This background paper to the 2010 CDIA Regional Conference has been prepared by KPMG. The paper provides a context to the rising urban infrastructure needs of Asian cities as well as the various challenges to urban infrastructure development and financing. It elaborates on alternate sources for financing and presents options for overcoming bottlenecks in the financing of urban infrastructure.

Collaborating Partners The Cities Development Initiative for Asia (CDIA) is an international partnership program, co-managed by the Asian Development Bank (ADB) and the German Technical Assistance agency GTZ to assist medium-sized cities to bridge the gap between their development plans and implementation of their strategic infrastructure investments. CDIA uses a demand driven approach with cities to support the preparation of their medium-term infrastructure investment plans and pre-feasibility studies for high priority infrastructure investment projects as well as institutional capacity strengthening. www.cdia.asia

InWEnt – Capacity Building International, Germany, is a non-profit organisation with worldwide operations dedicated to human resource development, advanced training and dialogue. InWEnt works together with people in key positions, assisting them in shaping change processes in their own countries. Their capacity building programmes are directed at experts and executives from politics, administration, the business community and civil society. InWEnt qualifies people who pass on their knowledge, thereby working towards long-term structural change. www.inwent.org

KPMG is a leading advisory and professional services firm, serving governments, state-owned enterprises and private-sector organisations across industries. KPMG is an advisor of choice for global cities with in-depth experience in urban infrastructure financing, sustainable development, policy & regulatory advisory and balanced economic development with focus on quality of life. KPMG is a global network of professional services firms whose aim is to transform the understanding of information, industries and business trends into value. www.kpmg.com

前言每年亚洲城市发展机构（CDIA）会召开地区会议，旨在帮助亚洲中型城市更好的填补城市发展规划和基础设施投资项目实施之间的差距。

CDIA会议为各利益相关方提供了交流意见的平台，这些利益相关方包括国内和国际政府性融资机构、私营金融机构、市级、省级和中央级政府，以及私营等。

2010年的亚洲城市发展项目地区会议的主题是“城市与融资：解决城市战略性基础设施的融资瓶颈”。会议将于9月27 - 28在上海举办。会议的协办方是德国国际培训和发展协会（InWEnt）和上海市财政局。

KPMG新加坡为2010CDIA地区会议准备了会议背景资料。资料阐述了亚洲城市日益提高的基础设施需求和与之相关的城市基础设施发展和融资的挑战。报告同时阐述了克服瓶颈的不同融资渠道。

主办方亚洲城市发展促进机构(CDIA)是一个由亚洲开发银行和德国技术合作公司联合管理的国际项目，旨在帮助亚洲地区中型城市弥补在城市发展规划和基础设施投资之间的差距。CDIA根据每个申请城市的不同需求，为基础设施投资项目中期规划做准备，为关键的基础设施投资项目提供预可行性研究技术支持，并为当地机构的能力培训提供支持。www.cdia.asia

InWEnt - 德国国际培训和发展协会是德国的一家致力于人力资源开发、高层培训对话的全球性非盈利机构。InWEnt与当地国家的管理层人员一起，通过改变管理理念来为更好的服务于自己的国家。INWEnt的能力培训项目所服务的群体涵盖广泛的领域，包括来自政治界、行政管理、工商界以及市民社会等各个方面的专家和领导。InWEnt对培训对象进行资格认证，并进行于长期的效果跟踪。www.inwent.org

KPMG是国际著名的一家为政府部门、国有企业以及私营机构等各行业领域提供专业性咨询服务的公司。KPMG以提高社会大众生活质量为基本理念，在城市基础设施融资、可持续发展、政策和法规、平衡的经济发展方面均有资深经验，为全球众多城市提供咨询服务。KPMG作为全球联网的专业咨询公司，致力于将全球信息资讯、各行业的实时动态以及商业的最新趋及时转变为对客户有用的价值。www.kpmg.com

Abbreviations 01

Executive Summary 02

1. Context Setting: Urban Infrastructure 1.1. Role of Urban Infrastructure 1.2. Rising Infrastructure Needs in Asian Cities

1.3. Types of Urban Infrastructure – Social and Economic

1.4. Typical Sources of Funding

12

2. Challenges in Developing Urban Infrastructure Projects 2.1. High Fiscal Deficit and Poverty 2.2. Limited Availability of Financing In Domestic Markets 2.3. Weak Project Structuring 2.4. Financial Weakness of Projects 2.5. Weak Institutional Framework: Overlaps in Role of Government

and Related Agencies 2.6. Lack of Capacity and Inefficiencies at the City Government Level

18

3. Alternative Financing 3.1. Capital Markets 3.2. Pension Funds, Insurance Companies, Foundations and

Endowments 3.3. Multilateral and Bilateral Financial Institutions 3.4. Domestic Financing Institutions 3.5. Asset Leverage (Land) 3.6. Public Private Partnerships or Private Finance Initiatives

30

4. Moving Forward: Overcoming Bottlenecks 4.1. City Government 4.2. Private Sector: Developers and Financial Institutions 4.3. National / Provincial / State Governments 4.4. Multilateral Financial Institutions

42

Conclusion 58

Bibliography 60

Table of Contents

List of Figures

Figure 1.0 Challenges in Financing of Urban Infrastructure Projects

Figure 2.0 Alternative Financing Sources for Urban Infrastructure Projects

Figure 3.0 Overcoming Bottlenecks to Urban Infrastructure Financing

Figure 1.1 Urban Population in Asia

Figure 1.2 Urban Population as a Percentage of Total Population

Figure 1.3 Access to Infrastructure in Asian Countries

Figure 1.4 Typical Sources of Funds for City Governments

Figure 2.1 Fiscal Deficit as a Percentage of GDP vs. the Percentage of

Population Below USD 2 per Day

Figure 2.2 Market Capitalization vs. Domestic Credit by Banking Sector

Figure 2.3 Illustrative Cash Flow Pattern for Infrastructure Development

by Public Sector

Figure 2.4 Roles at Different Tiers of Government

Figure 2.5 Levels of Concern Regarding Government Effectiveness

Inhibiting Infrastructure Development

Figure 2.6 FDI Per Capita vs. Corruption Perception Index in Select

Asian Countries

Figure 3.1 Saving-Investment Gap in Asia

Figure 3.2 Pension Assets as a Percentage of GDP for Selected

Asian Countries

Figure 3.3 Efficient Frontiers with Five Asset Classes (12 Years)

Figure 3.4 Bilateral and Multilateral Loans to Asian Countries

Figure 3.5 Investment Commitments to Infrastructure Projects

with Private Participation in Developing Countries

Figure 3.6 Structure of a Public Private Partnership

Figure 4.1 Suggestions for Improvement in Infrastructure

Figure 4.2 Gathering Consultation and Market Sounding

Figure 4.3 Components of the Template Evaluation Matrix by

Infrastructure Australia

Figure 4.4 Effective ways to de-politicise Infrastructure Project Prioritisation

Figure 4.5 Opinions on Improvement in Infrastructure with

Private-sector Participation

Figure 4.6 Procurement Milestones for Selection of PPP Projects –

Transport, Australia

List of Cases

Case 2.1 Project structuring for the Delhi Noida Toll Bridge, India

Case 2.2 Institutional framework for the TransJakarta Bus Rapid Transit

(BRT), Jakarta, Indonesia

Case 2.3 Award of the North South Expressway Malaysia

Case 3.1 Land Financing by MMRDA, Mumbai, India

Case 4.1 Pre-feasibility Study on Thermao-technical Rehabilitation of

Buildings in Ulaanbaatar, Mongolia

Case 4.2 Capacity Building Program in Kolkata Municipal

Corporation (KMC), Kolkata, India

Case 4.3 Capacity Development by CDIA in Banda Aceh, Indonesia

Case 4.4 Collaboration with the private sector on the Changi NEWater,

Singapore

Case 4.5 Sustainable development in the Sino-Singapore Tianjin Eco-City,

China

Case 4.6 Jawaharlal Nehru National Urban Renewal Mission

(JNNURM) in India

Linking cities to finance 1

Abbreviations

ADB Asian Development Bank

ACRAA Association of Credit Rating Agencies in Asia

AGI Actionable Governance Indicators

BFI Bilateral Financial Institution

BOO Build, Own and Operate

BOT Build-Operate-Transfer

BRT Bus Rapid Transit

CAGR Compound Annual Growth Rate

CDM Clean Development Mechanism

CDIA Cities Development Initiative for Asia

CMWC Chengdu Municipal Water Corporation

CRISIL Credit Rating Information Services of India Limited

DBOM Design, Build, Operate and Maintain

DFID Department of International Development

EIU Economist Intelligence Unit

EOI Expression of Interest

FDI Foreign Direct Investment

GDP Gross Domestic Product

IIFCL Indian Infrastructure Finance Company Limited

IIFF Indonesia Infrastructure Financing Facility

IRR Internal Rate of Return

ITDP Institute for Transportation and Development Policy

IWPP Independent Water and Power Projects

JNNURM Jawaharlal Nehru National Urban Renewal Mission

JBIC Japan Bank for International Cooperation

JV Joint Venture

KMC Kolkata Municipal Corporation

LGFV Local Government Financing Vehicles

LLDF Local Loans and Development Fund

MDFO Municipal Development Fund Office

MFI Multilateral Financial Institution

MMRDA Mumbai Metropolitan Regional Development Authority

MRTS Mass Rapid Transit System

NPV Net Present Value

OECD Organisation for Economic Co-Operation and Development

PFI Private Finance Initiative

PPP Public-Private Partnership

PRI Political Risk Insurance

PUB Public Utilities Board

R&R Rehabilitation and Resettlement

RMB Renminbi, Currency of the People's Republic of China

Rs (Crore) Indian Rupee (10 million), Currency of Republic of India

SPV Special Purpose Vehicle

SWF Sovereign Wealth Fund

UIE Unirule Institute of Economics

UAE United Arab Emirates

UK United Kingdom

UN United Nations

US United States

‘$’ refers to US dollars.


Executive Summary Urban areas are increasingly becoming the cornerstone in determining the strength of Asian economies. In China, for example, cities are expected to contribute about 75 percent of GDP by 2025. Similarly in India, cities are expected to generate 70 percent of net new jobs by 2030 and contribute about 70 percent of GDP. However, many Asian cities continue to lack basic urban infrastructure. The public sector has traditionally funded infrastructure projects from its own revenue sources, such as municipal taxes, transfers from higher levels of government, user charges, lease of land, etc. Asian Development Bank (ADB) has estimated that USD8 trillion will be required for Asia’s infrastructure investment needs between 2010 and 2020, of which 68 percent will be for new

capacity and 32 percent for maintaining and replacing existing infrastructure.

Challenges in Financing Urban Infrastructure Projects The challenges in financing urban infrastructure projects are highlighted in Figure 1. Figure 1: Challenges in Financing Urban Infrastructure Projects

Source: KPMG Analysis Given the above challenges, it is not surprising that many urban infrastructure projects are delayed or ill maintained and most critically running behind demand. To tackle current and future infrastructure needs, it is imperative for city governments to look for alternative financing options to supplement their own sources of financing. However, in order to tap external sources, the financial viability of local governments has to be enhanced to ensure servicing of alternative financing options. Figure 2 shows alternative financing options for urban infrastructure projects. Figure 2: Alternative Financing Sources for Urban Infrastructure Projects

Source: KPMG Analysis

Capital markets

Private institutional

investors

Multilateral, bilateral and export credit

agencies

Domestic financial

institutions

Asset leverage (land)

Private sector participation

(including joint ventures)

Capital markets

Private institutional

investors

Multilateral, bilateral and export credit

agencies

Domestic financial

institutions

Asset leverage (land)

Private sector participation

(including joint ventures)

High fiscal deficit

Bottlenecks in financing urban infrastructure projects

Weak institutional framework -

overlap in rolesWeak project structuring

Shallow domestic financing marketsPoor financial viability of the

projectsLack of capacity and inefficiencies

at the city government level

Unwillingness/ inability of users to payHigh fiscal deficit

Bottlenecks in financing urban infrastructure projects

Weak institutional framework -

overlap in rolesWeak project structuring

Shallow domestic financing marketsPoor financial viability of the

projectsLack of capacity and inefficiencies

at the city government level

Unwillingness/ inability of users to pay


Alternative Financing Sources for Urban Infrastructure Projects Capital markets: Some Asian city governments have accessed capital

markets by issuing bonds. This could be an effective means to raise financing for urban infrastructure projects given the large savings surplus in most Asian countries.

Private institutional investors: Pension funds, insurance companies, foundations and endowments can provide investments for infrastructure based on the long-term investment horizon of such projects, which matches the profile of institutional investors’ liabilities. These institutions typically have to invest a substantial portion of their funds in low-risk asset classes and have a long-term horizon. Infrastructure projects usually provide stable low-risk cash flows over a longer-term investment horizon.

Multilateral, bilateral and export credit agencies: These agencies are able to provide low-cost, long-tenor financing for infrastructure projects. They can also share global best practices and experience in project development and financing. Agencies like Cities Development Initiatiave for Asia (CDIA) help city governments with project preparation and project prioritization.

Domestic financial institutions: Some of the governments have been setting up specialized lending institutions to fund infrastructure projects. These institutions can help overcome the challenges of less developed domestic capital markets and reduce dependence on foreign currency financing.

Asset leverage (land): A number of projects have been successfully implemented with land as the key asset for infrastructure development. This approach of offering land development rights linked to urban infrastructure delivery has strong precedence of improving the project viability.

Private sector participation: Private sector participation has contributed immensely to the development of infrastructure projects and has helped governments access financing to implement much-needed projects. As per World Bank and PPIAF, the investment commitments to infrastructure projects with private participation in developing countries has risen from USD21 billion in 1990 to USD150 billion in 2008.

Way forward Given the challenges facing urban infrastructure financing, it is critical for cities to take proactive steps. An integrated and coordinated approach drawing on the full spectrum of financing sources will go a long way in resolving the bottlenecks facing urban infrastructure financing. Figure 3 summarises the steps various stakeholders can take to facilitate urban infrastructure development in Asia.

An integrated andcoordinated approach

could go a long way inresolving the bottlenecks

facing the urbaninfrastructure financing

thereby enabling cities torealise their full

development potential.


Figure 3: Overcoming Bottlenecks to Urban Infrastructure Financing


City Governments – changing internal processes

To attract funds for urban infrastructure projects, city governments need to clearly demonstrate the viability of projects. This creates confidence among private sector participants.

City governments should focus on capacity development. A starting point would be a detailed assessment of skills required at each level and across departments. Training institutes should be identified and a training calendar should be prepared on an ongoing basis.

Market sounding is one of the key requirements for successful procurement of urban infrastructure projects. This process provides government procurement agencies with valuable insights into stakeholders’ perspectives regarding projects and reduces procurement timelines and transaction costs.

In order to derive even greater value from private sector involvement, the public sector can collaborate with private partners and share the latter’s technical expertise which leverages the private sector’s implementation expertise and finances. Cities that wish to pursue public private partnerships (PPPs) should review their existing policies and laws, and make appropriate changes to accommodate this new structure.

In addition, city governments should look at improving their credit quality and obtain a credit rating. Credit ratings can increase accessibility to capital markets, increase borrowings to bridge financing gaps for critical infrastructure, facilitate the flow of international capital, provide investors with an independent evaluation of credit quality and help investors in pricing the debt offer.

Governments need to have a long-term vision and should make a commitment to the sustainable development of cities. Performance measures and incentive structures should be designed with a view to developing sustainable cities.

City Government

• Undertake and demonstrate project feasibility

• Capacity development

• Stakeholders consultation and market sounding

• Actively pursue private finance

• Obtain credit rating

• Sustainable development

Multilateral/ Bilateral Agencies

• Financial support in the form of grants, loans and guarantees

• Advisory support to the government

• Organise knowledge sharing and best practices conferences

Private Sector – Developers and financial institutions

• Provision for capital

• Innovation

• Cost efficiency

• Adaptability


National Government

• Mobilising funds directly from grants and loans

• Channel funds for urban infrastructure investments

• Standardisation of procedures and contracts

• Monitoring and co-ordination

Overcoming bottlenecks to

urban infrastructure

financing

City Government











Private Sector – Developers and financial institutions


• Innovation

• Cost efficiency

• Adaptability


National Government







financing

To attract funds for urbaninfrastructure projects,

city governments need toclearly demonstrate the

viability of projects.


National Governments – becoming a facilitator

National and provincial/state governments need to support cities by providing greater and more reliable transfers to reflect the increased responsibilities of city governments.

National governments need to increase their focus on channelling domestic savings into urban infrastructure and developing domestic capital markets. Specific infrastructure tax incentives can be introduced to encourage private investment in infrastructure.

It is important for national governments to conduct regular studies and surveys to determine gaps and hurdles in urban infrastructure delivery. This can help in better understanding the problems faced by city governments and determine potential ways to address such identified issues.

National governments can support cities by providing standardised processes, frameworks and contract terms for the implementation of projects. Developers and financial institutions find more comfort in standard contract terms. Standard contract terms help achieve faster implementation of projects and can help reduce transaction costs.

Private Sector Institutions – expanding perceptions

Private sector institutions need to contribute innovation in urban infrastructure development and reduce costs with solutions for sustainable development.

Pro-actively change their approaches and look increasingly for investments in urban and not only national infrastructure.

Private sector institutions should also focus on higher efficiency by optimising use of city resources with innovative technical solutions.

Multilateral Institutions – increasing flexibility

To improve the flow of private capital into infrastructure investments, multilateral financial institutions (MFIs) should continue to advise city governments and assist in the development of innovative project financing structures.

Further, the direct participation of MFIs can bring greater credibility to a project and can enhance the creditworthiness through the use of guarantees, etc.

Sharing of information and best practices through conferences and developing knowledge papers can help various stakeholders. In addition, as knowledge banks, MFIs can also provide countries with policy and technical advice, help governments conduct research on bottlenecks, and suggest possible ways to address them.

To conclude, all stakeholders involved in the management of cities need to provide the requisite support and adopt a more collaborative approach to planning and delivering urban infrastructure projects. Various internal (institutional capacity development, robust project structuring and design, etc.) and external (tapping multiple sources of financing, encouraging private participation, etc.) measures need to be undertaken to make world-class urban infrastructure available in the Asian cities thereby facilitating a sustained economic growth.

To conclude, allstakeholders involved in

the management of citiesneed to provide the

requisite support andadopt a more coherent

approach to planning anddelivering urban

infrastructure projects.


摘要

城市基础设施项目融资的挑战

城市越来越成为定义亚洲国家经济的注脚。例如，在中国，到 2025 年，75%的GDP 将来自城市。同样，到 2030 年，印度 70%的新工作和 70%的 GDP 也会来自城市。但是，很多亚洲城市仍缺乏基本的城市基础设施。

在历史上，政府一般通过市政税、上级政府拨款，使用费，土地租赁等方式对基础设施项目投资。亚行预计显示，在 2010 年和 2020 年间，整个亚洲基础设施投资所需的金额将达到八万亿美金。

图 1 展示了城市基础设施融资所面临的挑战。

图 1: 城市基础设施融资所面临的挑战

来源：KPMG 分析

如图所示，我们就能明白为何很多城市基础设施项目会延期，会管理不善，会远远滞后于需求。为了解决当前和将来基础设施的需求，市政府在自有融资渠道的基础上，寻找不同融资方式就变得十分重要。但是，要接触外面的资源，当地政府必须加强在项目实施和操作上的金融竞争力，以与不同的融资方式接轨。图 2展示了不同的城市基础设施项目融资渠道

图 2: 各类城市基础设施项目融资渠道

资本

市场

私营

机构

投资

多边

、双

边和

出口

信贷

机构

国内

金融

机构

资产

杠杆

（土

地）

私营

机构

的参

加（

包括

合资

机构

）

资本

市场

私营

机构

投资

多边

、双

边和

出口

信贷

机构

国内

金融

机构

资产

杠杆

（土

地）

私营

机构

的参

加（

包括

合资

机构

）


城市基础设施项目融资的瓶颈

各种机构架构的不足功能上的重叠

项目结构不良

国内金融市场的缺陷项目的财务可行性评估不足

市政府层面能力的缺失和低效

高财政赤字使用者不愿意/无能力支付

城市基础设施项目融资的瓶颈

各种机构架构的不足功能上的重叠

项目结构不良

国内金融市场的缺陷项目的财务可行性评估不足

市政府层面能力的缺失和低效

高财政赤字使用者不愿意/无能力支付


不同城市基础设施项目融资的方式

资本市场：有些亚洲城市政府通过资本市场来发行债券。鉴于大多数亚洲国家的高储蓄剩余，这是一种有效的为城市基础设施项目融资的方式。

资本市场：有些亚洲城市政府通过资本市场来发行债券。鉴于大多数亚洲国家的高储蓄剩余，这是一种有效的为城市基础设施项目融资的方式。

私人机构投资人：养老金、保险公司、基金等，按照他们的受托责任，可以为基础设施项目提供长期的投资。原则上，这些机构投资人要把他们管理钱的大部分投到低分险，长期的项目，城市基础设施项目一般能提供长期的低分险收益。

多边、双边和出口信贷机构：这些机构一般可以为城市基础设施项目提供低成本、长期的融资。他们也可被视为全球在项目发展和融资中的最佳做法和经验。CDIA（亚洲城市发展促进机构）帮助城市进行项目准备和项目优先排列。

国内金融机构：有些政府会设立针对城市基础设施项目的借贷机构。这些机构是对欠发达的国内资本市场的补充，也能减少对国外融资的依赖。

财务杆杠（土地）：土地作为基础设施发展的重要资产，已有一些成功的项目。将土地开发权和城市基础设施项目挂钩，能大大提高项目的竞争力。

私营部门的加入：私营部门的加入对基础设施项目的发展有巨大的贡献，也帮助政府接触不同的融资渠道。根据世界银行以及公私合营基础项目咨询机构的统计，私营部门对基础设施项目的投资在发展中国家已从 1990 年的 210 亿美金增加到 2008 年的 1500 亿美金。

展望未来

针对城市基础设施项目融资需面对的挑战和不同融资渠道的事实，政府能否跨出有前瞻性的步子是十分关键的。对各种融资渠道的嫁接和综合考虑，将在长远上有助于基础设施项目融资瓶颈的解决。图３总结了在亚洲不同利益相关方在基础设施项目发展上能采取的步骤。


图 3: 解决城市基础设施融资瓶颈的方式


市政府－改变内部流程

要吸引对城市基础设施项目的资金，市政府要展示项目的竞争力。这会给私

营投资以信心。

市政府应该注重于可持续项目发展所需的技术能力的培养。好的做法可以是

从对各阶层、各部门所需技能的详细评估开始。相关的培训学校和培训计划

应该有序的安排。

市场的可行性研究是城市基础设施项目成功的关键要求之一。这个步骤能帮

助政府采购部门理解利益相关方的想法，能减少采购时间和交易成本。

为了让私营机构有更大的参与，政府可以联合私营方，借鉴后者在项目实施

和融资上的技术专长。若政府有意政府-私营合作模式，政府应研究现有的法

规，并作适当的调整。

其次，市政府应寻求提高他们的信用质量和评级。信用评级可以提高对资本

市场的接触，提高融资额来弥补关键项目的资金缺口，协助国际资本的流入

，提供投资人对信贷质量一个独立的评审，也帮助投资人对债务进行标价。

政府应有远景并对可持续发展有承诺。相关的考核和激励机制应建立起来。

市政府

• 项目可行性的掌握和演示

• 能力的提升

• 利益相关方的协商和市场的反应

• 积极寻找私营投资

• 信用评级

• 可持续发展

多边/双边机构

• 赠款、贷款和担保形式的资金支持

• 对政府的咨询支持

• 组织知识分享和最佳实践会议

私营机构

•提供资金

•创新

•成本优化

•适用性

•可持续发展

中央政府

• 资助和贷款的划拨

• 城市基础设施投资款项的调配

• 流程和合同的标准化

• 协调和监管

突破城市基础设施融资的瓶颈

市政府

• 项目可行性的掌握和演示

• 能力的提升

• 利益相关方的协商和市场的反应

• 积极寻找私营投资

• 信用评级

• 可持续发展

多边/双边机构

• 赠款、贷款和担保形式的资金支持

• 对政府的咨询支持

• 组织知识分享和最佳实践会议

私营机构

•提供资金

•创新

•成本优化

•适用性

•可持续发展

中央政府

• 资助和贷款的划拨

• 城市基础设施投资款项的调配

• 流程和合同的标准化

• 协调和监管

突破城市基础设施融资的瓶颈


中央政府－成为一个协助者

中央和省级政府需要进行更大更可靠的责任转移，使得市级政府承担更大的

责任。

中央政府要更注重将国内储蓄引向城市基础设施项目，并发展国内资本市场

。为了鼓励私人投资，可以引进特别的城市基础设施项目税收激励。

为了明确城市基础设施中的不足和困难，中央政府要进行定期的调研。这样

可以帮助中央政府理解市级政府所面对的难题，并决定潜在的解决问题的方

法。

中央政府可以通过标准化项目实施的流程，架构和合同来支持地方城市。开

发商和金融机构也欢迎标准化的合同条款。标准化的合同条款可以帮助项目

更快的实施，降低交易成本。

私营机构－开阔视角

私营机构可以提供城市基础设施发展的管理创新，降低可持续发展的成本。

私营机构可以用创新的技术方法来最大的利用城市资源。

前瞻性的改变融资方式，焦点更集中在城市基础设施投资，而非国家范围基

础设施项目

多边金融机构－增加灵活性

为了提高私营资本对城市基础设施项目的投资，多边金融机构要持续的给政府建议，并帮助开发创新的项目融资架构。

多边金融机构的直接介入，可以带来对项目的更大信用，通过担保的方式可以提高信用。

通过会议和知识文件的开发可以让利益相关方分享信息和最佳操作。多边金融机构作为知识银行，可以提供政策和技术的建议，帮助政府对瓶颈的研究，并提供相应的解决方案。

最后，在城市基础设施项目的计划和实施上，所有利益相关方应该提供帮助并采取更加合作的态度。为了协调经济的可持续增长，让世界级的城市基础设施在亚洲出现，要实施不同的内部评估（如机构技能的发展，灵活的项目架构和设计，等）和外部评估（如鼓励多边融资、私营资金的加入，等）。


Section 1: Context Setting: Urban Infrastructure

1.1 Role of Urban Infrastructure

Infrastructure is vital for economic and social development. It provides the foundations for virtually all economic activities, delivering economic growth, poverty alleviation and environmental sustainability in cities.

Rapid urbanisation has been the key to impressive growth in Asia. In 2004, 40 percent of the urban population contributed approximately 80 percent of the gross domestic product (GDP) in Asia.1 Urban areas are increasingly becoming the cornerstone in determining the strength of Asian economies. In China, for example, cities are expected to contribute about 75 percent of GDP by 20252. Similarly in India, cities are expected to generate 70 percent of net new jobs by 2030 and contribute about 70 percent of GDP. The urban economy is also expected to provide 85 percent of India’s tax revenue.3 Hence, many developing countries have recently given infrastructure development a high priority in their development agendas.

1 ADB. (2008). Managing Asian Cities. 2 McKinsey Global Institute, Report on Preparing for China’s Urban Billion 3 McKinsey Global Institute, Report on India’s Urban Awakening: Building Inclusive Cities ,Sustaining Economic Growth

Section Summary Background issues relating to urban infrastructure are discussed in this section:

Role of urban infrastructure: Urban areas are becoming increasingly dominant contributors to their country’s gross domestic product (GDP). Meanwhile, economic growth in cities is becoming increasingly dependent upon the availability of both social and economic urban infrastructure. A lack of infrastructure is also an aggravating factor affecting poverty levels in many Asian countries.

Growing demand for urban infrastructure: Rapid urbanisation and economic growth in Asia have fuelled the demand for urban infrastructure. Many Asian countries are lacking in their provision of an improved water supply and sanitation facilities. Asian Development Bank (ADB) has estimated that USD8 trillion will be required for Asia’s overall national infrastructure investment needs between 2010 and 2020, of which 68 percent will be for new capacity and 32 percent for maintaining and replacing existing infrastructure.

Typical sources of financing: The public sector has traditionally funded infrastructure projects using revenue from municipal taxes, transfers from higher levels of government, user charges and lease of land. Private sector participation in the form of public private partnerships (PPPs) and joint ventures (JVs); the raising of funds from capital markets in the form of bond issuances; multilateral grants and loans are some of the alternative sources of financing for the public sector.


Substantial research has been conducted to quantify the links between supply of public infrastructure and productivity, private investment, employment and output. Despite a range of results, there is sufficient evidence to indicate that investment in public infrastructure is positively linked with productivity and economic growth. One of the earliest papers showed that holding private capital constant, a 1 percent increase in public capital stock results in a 0.39 percent increase in output.4 Infrastructure has also been found to have a significant positive effect on economic growth while reducing income inequality. A lack of appropriate infrastructure undermines the competitiveness of cities and their social and environmental sustainability.

1.2 Rising Infrastructure Needs in Asian Cities 1.2.1 Economic Boom and Urbanisation

In 2006 and 2007, average GDP growth in Asia Pacific (ex-Japan) exceeded 8.9 percent.5 According to Economist Intelligence Unit (EIU), Asia’s real GDP is expected to grow at an average annual rate of 4.5 percent in 2011–2020, higher than the global growth rate of 3.3 percent.

Rapid urbanisation has taken place along with this high economic growth. Figure 1.1 and Figure 1.2 show the population boom in Asian cities and towns. Urban population in Asia increased from 229 million in 1950 to 1,719 million in 2009, and it is expected to further increase to 3,382 million by 2050.6

4 Aschauer, D. A. (1989). Is public expenditure productive? Journal of Monetary Economics , 177–200. 5 ADB; ADBI. (2009). Infrastructure for a Seamless Asia 6 United Nations. (2010). World Urbanization Prospects: The 2009 Revision Population Database.

Figure 1.1: Urban Population in Asia

0.0

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CAGR (1950 –2010) – 3.45%

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Source: UN, 2010. World Urbanization Prospects: The 2009 Revision Population Database

Figure 1.2: Urban Population as a Percentage of Total Population

20%

40%

60%

2008200219961990

% o

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East Asia & Pacific South Asia World

Source: World Bank, 2010

“We will invest in our infrastructure to

meet the business needs of tomorrow.”

Mr. S. R. Nathan, President of the

Republic of Singapore, in his opening address to

Parliament


The ongoing urbanisation is considered the second wave of urbanisation, with the first wave having occurred in North America and Europe from 1750 to 1950. However, this current urbanisation is much greater in speed and scale, potentially posing new problems for cities in developing countries. Urban infrastructure is needed more urgently than ever before. Failure to address the issue would likely cause growth bottlenecks and could aggravate poverty levels in Asian countries.

1.2.2 State of Infrastructure in Asia

Infrastructure development in Asia has generally lagged behind global standards in both quantity and quality. Congested roads and poorly maintained transit systems, hospitals and schools are a common sight in many developing countries. According to the Global Competitiveness Report 2009–10, 15 of the 24 Asian economies surveyed are below the world average in terms of infrastructure quality. According to Asian Development Bank (ADB), an estimated USD8 trillion will be required for Asia’s overall national infrastructure investment needs between 2010 and 2020, of which 68 percent will be for new capacity and 32 percent for maintaining and replacing existing infrastructure.7 India invests only 5.7 percent of its GDP in infrastructure, while China invests slightly more at 9.3 percent.8

City governments are facing a growing gap between infrastructure needs and the resources available to meet them. For example, in South Asia, only 57 percent of the urban population has access to improved sanitation facilities.9

Figure 1.3 demonstrates the reach of basic infrastructure such as water and sanitation facilities to urban populations in Asian countries. Countries like Afghanistan, Bangladesh, Cambodia and Timor-Leste need to provide both improved water access and improved sanitation facilities. While countries like Myanmar and Laos may need to focus more on improved water sources, countries like Nepal, Mongolia, Indonesia, Bhutan and China need to focus more on improved sanitation facilities. A closer analysis of the graph also reveals that access to sanitation facilities is a greater concern.

Figure 1.3: Access to Infrastructure in Asian Countries

Source: World Bank, 20101

7 ADB; ADBI. (2009). Infrastructure for a Seamless Asia. 8 McKinsey Global Institute, Report on India’s Urban Awakening: Building Inclusive Cities ,Sustaining Economic Growth 9 The World Bank Group. (2010)

Vietnam

Uzbekistan

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ThailandTajikistan

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Japan, Singapore

Indonesia

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Cambodia

Bhutan

Bangladesh

Azerbaijan, Pakistan

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Kazakhstan

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Bhutan

Bangladesh

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Infrastructuredevelopment in Asia hasgenerally lagged behindglobal standards in both

quantity and quality.


1.3 Types of Urban Infrastructure – Social and Economic

Urban infrastructure can be broadly classified into social and economic infrastructure. Social infrastructure includes facilities such as hospitals and educational institutions. Economic infrastructure consists of public utilities such as water, solid waste management systems, drainage, sanitation, flood protection systems, power and telecommunications, as well as public works such as roads, metro-rails, bus lines and airports. The provision of economic infrastructure expands the productive capacity and the production possibility frontier, enhancing economic growth and social development.

Benefits from economic infrastructure are easily valued and readily apparent over a relatively short timeframe. In contrast, gains from social infrastructure such as healthcare and education are often difficult to quantify in the immediate term. However, empirical evidence has shown that economic and social infrastructure together lead to economic growth. Both play critical roles in laying the foundation for stable and self-sustaining development. Nevertheless, given the capital-intensive nature of economic infrastructure projects, they attract higher funding than social infrastructure projects.

1.4 Typical Sources of Financing

Infrastructure projects have traditionally been established, owned, and managed by the public sector since they involve public goods and services. Currently, the public sector accounts for the majority of investment in infrastructure. In South Asia, public investment typically accounts for about 88 percent of the annual investment in infrastructure.10

Due to decentralisation, city governments have increasingly taken over responsibility from higher levels of government for provision of urban infrastructure services. However, the city governments entrusted with this responsibility generally lack the capacity and mandate to raise sufficient revenues.

Some of the typical sources of funds for city governments are shown in Figure 1.4. These sources are usually insufficient to meet the funding requirements for infrastructure projects.

Figure 1.4: Typical Sources of Funds for City Governments

10 Chatterton, I., & Puerto, O. S. (2006). Estimation of Infrastructure Investment Needs in the South Asia Region. Washington, DC: World Bank.

Typical Sources of Funds for City Governments

Ta

xes

National / provincial / state governments

Water, sewerage and drainage, tolls, fares

etc.

Lease rentals from land, markets, projects etc.

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entertainment tax, sales tax (if any)

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Typical Sources of Funds for City Governments

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etc.

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entertainment tax, sales tax (if any)

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"Frequent watershortages and poor

water quality scaredaway potential investors

and hampered thesmooth development of

the city."

Bai Tiejun, Vice Mayor of MeihekouCity, China


Taxes may be derived from various sources, such as municipal property tax, entertainment tax, trade license fees and sales tax (if applicable). Transfers from national, provincial or state governments are another major source of revenue for city governments, accounting for up to 95 percent of revenue for cities in Pakistan. This results in city governments being heavily dependent on transfers. Government of India established Jawaharlal Nehru National Urban Renewal Mission (JNNURM) in 2005 to support local governments in developing urban infrastructure. According to this scheme, cities are provided with grants from national government for urban development. As of 2009, 515 projects worth over USD12 billion had been approved.11

City governments also recover user charges from infrastructure projects such as toll roads, water supply, etc. However, there are constraints on the levy of high end-user charges, particularly in developing countries with high levels of poverty. Land owned by city governments serves as another source of revenue through leasing to the private sector. In China, land-based revenues made up 23 percent of city governments’ income.12

The increasing gap between the funds available to city governments and the funds required for infrastructure development has prompted city governments to source private financing, typically through initiatives like public private partnerships (PPPs) and joint ventures (JVs) with private entities. Multilateral agencies like ADB and World Bank have actively contributed to governments’ efforts to finance infrastructure projects via grants and loans. Some governments have also successfully raised financing from capital markets in the form of bond issuances. The various alternative sources of financing are discussed in detail in Section 3.

11 Ministry of Urban Development, Government of India. (2010). Monitoring Formats for Quarterly Report December 2009 - March 2010 12 Merrill Lynch. (2010). The visible hand – A reform roadmap & what it means.


Section 2: Challenges in Developing Urban Infrastructure Projects

Introduction

There are significant challenges with respect to governments’ capabilities in the development of infrastructure projects. The challenges relate to a lack of capacity in terms of strategic planning at the city government level; a lack of financing sources due to underdeveloped financial markets; issues related to the nature of projects; a lack of acceptance of varied project structures; and factors such as fiscal deficit and poverty levels.

Some of the major challenges in creating a conducive environment for financing of urban infrastructure projects are discussed in the following sections.

Section Summary Major challenges in developing urban infrastructure projects in the Asian context are summarised below:

High fiscal deficit and poverty: Governments in Asian countries are running high fiscal deficits. For example, countries such as India, Sri Lanka, Vietnam and Pakistan have very high fiscal deficits at 7–9 percent of GDP. The high deficits constrain the ability of governments to fund new infrastructure projects. Furthermore, many Asian countries have a high proportion of population below poverty levels, making it difficult for such populations to afford high user charges for infrastructure facilities.

Limited long-term funds in domestic markets: In some Asian countries, financing is difficult and expensive due to a dearth of long-term, low-cost domestic funds that can match the long payback period of infrastructure projects

Poor project assessment and structuring: Poor risk allocation makes projects unattractive to developers and leads to difficulties in raising funds. In addition, financially weak projects typically require government support in the form of viability gap funding, availability-based payments, shadow tolling, tax exemptions and/or government guarantees on debt. Governments sometimes fail to realise that the private sector is completely dependent upon the government for implementation of unviable projects. A callous approach to the private sector inevitably leads to project failures.

Weak institutional frameworks and lack of capacities: Time-consuming processes due to overlaps among roles of different entities and agencies at different levels of government, lack of capacity at the city government level, and inefficiencies and leakages in the system are key hurdles in building confidence amongst financiers and investors. This limits the flow of funds for development of infrastructure projects.


Vietnam

Thailand

Tajikistan

Sri Lanka

Philippines

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Nepal

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2.1 High Fiscal Deficit and Poverty

Governments in Asian countries are running high fiscal deficits. In countries such as India, Sri Lanka, Vietnam and Pakistan, fiscal deficits are as high as 7–9 percent of GDP.13 The high deficits constrain the ability of governments to fund new infrastructure projects. Furthermore, many Asian countries have a high proportion of population below poverty levels, and it is difficult for such populations to afford high user charges for infrastructure. This presents a catch-22 situation for some Asian governments: the population is unable to pay high user fees for infrastructure, while governments have limited resources to finance these projects on their own.

Figure 2.1 plots the fiscal deficits and poverty levels of countries in Asia. With demand for infrastructure soaring, countries within the upper right quadrant are a cause for concern. Countries in the lower right quadrant have better fiscal health, but face similar poverty problems.

Figure 2.1: Fiscal Deficit as a Percentage of GDP vs. the Percentage of Population Below USD2 per Day

Source: ADB; World Bank; KPMG Analysis Note: Fiscal deficit as a percentage of GDP is calculated as an average over 2007–2009. Poverty is measured using the percentage of population living on less than USD2.00 a day at 2005 international prices; the latest data are taken for individual countries, varying within 2002–2008.

13 The World Bank Group. (2010)

Countries in the lowerright quadrant have better

fiscal health, but facesimilar poverty problems.


2.2 Limited Availability of Financing in Domestic Markets Urban infrastructure requires a large amount of long-term investments, which represents a challenge as most Asian countries have underdeveloped debt and equity markets. Figure 2.2 plots the depth of domestic debt and equity markets. Asian countries that lie in the lower left quadrant face greater financing issues than countries that lie in the upper right quadrant due to undeveloped debt and equity markets.

Figure 2.2: Market Capitalisation vs. Domestic Credit by Banking Sector

Source: World Bank and KPMG Analysis

A less developed domestic credit market also means that projects may need to be dependent upon foreign loans. This can increase a project’s risk level, as foreign currency loans may expose the project to foreign exchange variations. In cases where the government does not absorb the foreign exchange risk, the project may need to enter into a currency hedge transaction, which could result in an increase in the project cost.

Further, financing of infrastructure projects may lead to an asset/liability mismatch for commercial banks since they typically have liabilities of shorter duration compared to assets with a loan life of 15 years or more.

Vietnam

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Sri Lanka

Singapore

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Nepal

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2.3 Weak Project Structuring

Infrastructure projects by nature require huge capital expenditure during the construction phase. However, this requirement is usually much higher than the allocated budget for the city government. Figure 2.3 below illustrates the typical cash flow pattern of an infrastructure project, which clearly depicts the gap between the capital expenditure requirement and the fund availability with the city governments. This situation arises when the public sector has the responsibility to implement a large number of projects on its own. In case the government is not open to private sector participation, then such a situation has the potential to result in delays to or abandonment of the development of key urban infrastructure.

Figure 2.3: Illustrative Cash Flow Pattern for Infrastructure Development by the Public Sector

Construction phase

Operation phase

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development of urban infrastructure

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Source: KPMG Analysis In situations where the government is open to private sector participation, project structuring may be an issue. At times, risks are allocated to parties who are not best placed to manage them. For example, contract terms related to demand risk such as determination of tariffs, fares and off-take quantities are generally outside the control of the private sector, such as in the case of water treatment plants. When the private sector is allocated demand risks but is not in a position to manage these risks, it can lead to limited interest and participation from private developers and financiers.

If private parties are allocated risks that they are not capable of handling, they are likely to either load the excess risk premium while bidding for the project or simply decide not to bid for the project altogether.

Further, project structures designed without stakeholder consultation, market sounding and assessment of risk appetites may lead to unrealistic projects.

Infrastructure projects bynature require huge

capital expenditure duringthe construction phase.

However, thisrequirement is usuallymuch higher than the

allocated budget for thecity government.


2.4 Financial Weakness of Projects

Some projects are by nature financially weak, and thus financing such projects on a commercial basis is difficult. This may be because some projects are inherently a public service (e.g. flood control). Alternatively, high capital expenditure and limitations on end-user charges often also create financially weak projects. Implementing such projects can have a positive social impact. For example, underground mass rapid transit system (MRTS) projects require huge capital expenditure and have limitations on end-user fares. However, on the social side, such projects reduce congestion and improve the urban population’s quality of life.

Case 2.1: Project structuring for the Delhi Noida Toll Bridge, India

The USD100 million Delhi Noida toll bridge project was awarded on a build operate and transfer (BOT) basis for a concession period of 30 years.

The project is a highly successful one, but being one of the first few PPP projects in India, it came at an increased cost to the government.

As per the contract terms between the public body and the private participant, the special purpose vehicle (SPV) was entitled to a guaranteed investment return of 20 percent on the total project cost. Based on the signed concession agreement, if the toll revenues in a given year did not generate such returns, the deficit would be added to the total cost of project and the revised total cost of project would form the basis for calculating the return of 20 percent in subsequent years.

The project cost definition was not clear. The lack of a clear definition led to an open-ended situation where expenses were absorbed as costs, thus inflating the commitment of the government. This led to costs being passed along to consumers and the government, and there was no incentive for cost control amongst the private partners.

The Note by Ms. Sheoli Pargal, Consultant with the Planning Commission, Government of India, explains: “As a result, the initial capital cost of Rs. 408 crore (USD87.5 million), as determined by the concessionaire, had risen to Rs. 953 crore (USD204 million) as on March 31, 2006. Also, since the contract provides for the term of the concession to be extended until the concessionaire recovers the total cost of the project and returns thereon, the concessionaire has noted that it is now entitled to hold the concession for a period of 70 years as against the 30 years initially contemplated in the agreement. In addition, the concessionaire received ‘in-principle’ approval for development rights over 30.5 acres of prime urban land in Noida, as a supplementary source of returns.”

In light of the challenges arising from the Delhi Noida toll bridge project, the government became more conscious of such risks. It has since awarded a large number of BOT and availability-based payments without guaranteeing any fixed return.

Source: Note by Ms. Sheoli Pargal, Consultant with the Planning Commission, Government of India, and

Innovation Report by IL&FS


Financially weak projects typically require government support in the form of viability gap funding, availability-based payments, shadow tolling, tax exemptions and/or government guarantees on debt. At times, governments fail to realise that the private sector is completely dependent upon them for implementation of such projects. Adopting a callous approach towards the private sector can therefore lead to project failures.

At times, different models are adopted for enhancing the financial returns of the project to enable commercial lending. Real estate financing may be included with the development of the project to bring in higher cash flows while subsidising key services for the urban population. However, this may add complexities such as higher borrowing costs for real estate financing and the involvement of additional stakeholders. Land acquisition is also a challenge for developing urban infrastructure projects. Private-sector financiers typically require clear title and unencumbered/un-encroached land.

"One of the key challenges to urban

infrastructure financing is dearth of private

sector interest in such projects, often due to

lack of commercial viability of such projects

and sometimes on account of perceived

political risk."

Mr. Arnab Roy, Municipal Commissioner for Kolkata

Municipal Corporation


2.5 Weak Institutional Frameworks: Overlaps in Role of Government and Related Agencies

Various tiers of government are involved in the development of urban infrastructure projects but their level of involvement varies. In general, policies are formed at various tiers of government while the responsibility for implementation falls to the lowest tier which is typically the city government. Figure 2.4 shows different tiers of government and their roles in the development of urban infrastructure.

Figure 2.4: Roles at Different Tiers of Government


Often, there is no clear demarcation of roles and responsibilities amongst the government bodies which leads to inadequate consultation and communication amongst the various agencies. This leads to delays in implementation of key projects. In addition, the top management within city governments is typically plagued with routine operational matters. Hence, they are often unable to devote sufficient time to the crucial functions of planning, policy formulation, monitoring, management control and human resources development.

National Government

Provincial / State Government

Regional Agencies

Local / City Government

• Local area planning

• Infrastructure development and maintenance

• Social sector activities

• Regional planning

• Regional infrastructure development

• Support to city governments in infrastructure development

• PPP policies & framework

• Creation of PPP cells

• Funds allocation

• Approvals and permits

• Fund allocation for different regions

• Monitoring usage of funds


• Multiple regulators with overlapping functions

• Lack of communication for seeking approvals for the project

• Dearth of financing

• Huge responsibility and lack of authority

• Short-term mandate of political decision makers

• Allocation of funds to different provinces / states

• Non-standardised procedures

• Conflicting policies

National Government

Provincial / State Government

Regional Agencies

Local / City Government

• Local area planning

• Infrastructure development and maintenance

• Social sector activities

• Regional planning

• Regional infrastructure development

• Support to city governments in infrastructure development

• PPP policies & framework

• Creation of PPP cells

• Funds allocation


• Fund allocation for different regions

• Monitoring usage of funds


• Multiple regulators with overlapping functions

• Lack of communication for seeking approvals for the project

• Dearth of financing

• Huge responsibility and lack of authority

• Short-term mandate of political decision makers

• Allocation of funds to different provinces / states

• Non-standardised procedures

• Conflicting policies

Various tiers ofgovernment are involved

in the development ofurban infrastructure

projects, but their level ofinvolvement varies.


Case 2.2: Institutional framework for the TransJakarta Bus Rapid Transit (BRT), Jakarta, Indonesia

The first BRT project in Asia, TransJakarta BRT started operations in December 2004 as an alternative to get through the city’s congestion. It has a dedicated bus-only lane and pre-paid fare system among its many features.

Its design was modelled on that of TransMilienio Bogota. However, a major difference between Jakarta’s structure and that of its successful counterpart in Bogota was that the roles and authority functions were not clearly defined in the case of TransJakarta, which caused the exclusion of stakeholders and led to unilateral decision making.

According to the Institute for Transportation and Development Policy (ITDP), the budget for the planning of TransJakarta, including the prioritisation of future corridors, was the responsibility of the Department of Planning, or DisHub. The planning and physical design decisions were to be made in a consultative process coordinated by Tim Coordinasi. However, in practice, DisHub made most of the physical design and routing decisions unilaterally, without the full agreement of Tim Coordinasi. As a result, several design mistakes were made, which limited the capacity of the TransJakarta busway.

The ITDP report also highlights that TransJakarta did not directly control the revenue from ticket sales. Officially, the Governor’s decree creating BP TransJakarta gave the latter planning authority. However, because TransJakarta did not control the revenue from ticket sales and was not given a sufficient budget by the regional parliament to do the planning, and because the mandate to do the planning was left with DisHub, in practice planning powers remained with DisHub.

TransJakarta was not given the power to regulate bus routes in the TransJakarta corridor, and instead this power also remained with DisHub. This resulted in fewer bus lines in the first TransJakarta corridor being cut than were originally planned. As a result of this and the lack of feeder buses, demand on TransJakarta fell significantly short of its potential.

All of these factors led to a sub-optimal implementation of the system. According to ITDP, the initial target was set at 5 million passengers per day via 14 planned corridors by 2010, but it has only managed to attract 230,000 passengers per day on seven corridors by 2008.


2.6 Lack of Capacity and Inefficiencies at the City Government Level

For urban infrastructure financing, most governments lack the capacity to conduct comprehensive analysis encompassing financial modelling; project structuring; risk allocation; calculation of value for money; estimation of net present value (NPV) and internal rate of return (IRR) for the project and for the investor, economic and social impact of the project; estimation of financing cost; and implications of government support requirements.

Based on World Bank’s Actionable Governance Indicators, regions in Asia have a low rating from 3.12 to 3.23 out of a maximum of 6 for the Public Sector Capacity and Accountability Rating. In a 2010 KPMG study named The Changing Face of Infrastructure: Public Sector Perspectives, it was found that public sector officials acknowledge that government effectiveness is a serious issue.

Figure 2.5: Levels of Concern Regarding Government Effectiveness Inhibiting Infrastructure Development

59%

68%

68%

27%

17%

13%

13%

15%

18%

0%

1%

1%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Public Sector

Infrastructure Providers

Senior Executives

Very Concerned Less Concerned Not Concerned Don’t Know Source: The Changing Face of Infrastructure: Public sector perspectives, KPMG International, 2010

Note: A survey was conducted by KPMG International and Economist Intelligence Unit (EIU) in November and December 2009 comprising 392 senior public sector officials involved in infrastructure policy procurement and development. Respondents came from 50 countries around the world, of which 30 percent were from Asia Pacific.

In addition, there areoften inefficiencies in the

system, such ascorruption, that can block

the flow of foreigninvestments into the

country.


As shown in Figure 2.5, 59 percent of public sector officials have a high level of concern regarding the lack of government effectiveness impeding their ability to provide infrastructure. The major reasons for the lack of effectiveness as determined by the survey are the inability to handle large project budgets, lack of consensus among policymakers and stakeholders over priorities for the problem, and lack of accountability.

In addition, there are often inefficiencies in the system, such as corruption, that can block the flow of foreign investments into the country. Figure 2.6 shows the relationship between foreign direct investment (FDI) inflows per capita and a corruption perception index in an Asian context.

Figure 2.6: FDI Per Capita vs. Corruption Perception Index in Select Asian Countries

AfghanistanBangladesh

Bhutan

Cambodia,

Tajikistan

China

IndiaIndonesia

South KoreaLaos

Malaysia

Maldives

Mongolia

MyanmarNepal,

Azerbaijan

PakistanPhilippines

Sri Lanka

Thailand

Vietnam

Armenia

Kyrgyz Republic

Turkmenistan

Uzbekistan

0

100

200

300

400

500

600

1 2 3 4 5 6 7 8 9Corruption Perception Index

FDI p

er C

apit

a ($

)

Brunei

Macao

Singapore

Hong Kong

900

4500

9000

Georgia

Kazakhstan

Average


Bhutan

Cambodia,

Tajikistan

China

IndiaIndonesia

South KoreaLaos

Malaysia

Maldives

Mongolia

MyanmarNepal,

Azerbaijan

PakistanPhilippines

Sri Lanka

Thailand

Vietnam

Armenia

Kyrgyz Republic

Turkmenistan

Uzbekistan

0

100

200

300

400

500

600


FDI p

er C

apit

a ($

)

Brunei

Macao

Singapore

Hong Kong

900

4500

9000

Georgia

Kazakhstan


Bhutan

Cambodia,

Tajikistan

China

IndiaIndonesia

South KoreaLaos

Malaysia

Maldives

Mongolia

MyanmarNepal,

Azerbaijan

PakistanPhilippines

Sri Lanka

Thailand

Vietnam

Armenia

Kyrgyz Republic

Turkmenistan

Uzbekistan

0

100

200

300

400

500

600


FDI p

er C

apit

a ($

)

Brunei

Macao

Singapore

Hong Kong

900

4500

9000

Georgia

Kazakhstan

Average

Source: World Bank, Transparency International

Note: FDI per capita is calculated using FDI net inflows over total population in 2008. Corruption Perception Index 2009 measures the perceived level of public-sector corruption. Higher score represents lower perceived corruption. Regression analysis shows R2 at 0.55.


The figure above shows that countries with a lower corruption perception index (i.e. those with a higher level of perceived corruption) tend to attract lower FDI inflows. According to a study of 117 countries regarding the relationship between FDI inflows and corruption by Mr. Ali Al-Sadig of the Saudi Arabian Monetary Agency (SAMA), a one-point increase in the corruption level leads to a reduction in per capita FDI inflows of about 11 percent, thereby limiting financing options for the country. At times, projects are undertaken as a result of vested political interests to serve a specific target group. These projects are implemented even if they are not commercially viable. Related to this, a lack of transparency in awarding contracts is another area of concern that can lead to increased risk in the development of projects.

Case 2.3: Award of the North South Expressway Malaysia

The 900km North South Expressway Malaysia linking the northern-most part of Malaysia to the south was awarded to a newly created private firm on a 30-year BOT basis.

The award of the project to a newly created firm led to heavy scrutiny due to increased political interference.

While the project was completed 15 months ahead of schedule, the worthiness of the private partner in clinching this contract was questioned given that it had no track record.

The problem was compounded when it was revealed that the principal shareholders of the private partner included senior members of the Malaysian government, which raised questions as to whether the government had borne excessive commercial risks in the partnership.

Source: International Workshop for Public-Private Partnership in Road Sector, Osaka International Convention Centre, 2009

“Experiences across the region show that FDI

and new technologies are most likely to bypass

countries with inadequate and poor

investment climates.”

Mr. Tadao Chino, Former ADB President


Section 3: Alternative Financing

Introduction

Traditionally, governments have financed infrastructure projects with their own funds. The growing responsibility to provide infrastructure without substantial increases to their available funds has resulted in many city governments falling into budgetary deficits and facing rising debt service burdens. Hence, it is not surprising that many infrastructure projects are delayed or poorly maintained. It is imperative now for city governments to look for alternative financing options,. However, before tapping external sources, the financial viability of local government has to be enhanced to ensure the repayment of borrowed money.

Section Summary: Alternative Financing

In this section, we discuss the various alternative financing sources that governments can tap to alleviate bottlenecks in urban infrastructure financing:

Capital markets: Few Asian city governments have accessed capital markets through the issuance of bonds. However, many Asian countries have a high saving surplus. Hence, there is a huge potential for raising financing from the capital markets.

Private institutional investors: Pension funds, insurance companies, foundations and endowments can provide investments for infrastructure projects based on their long-term investment horizon, which matches the profile of their liabilities. Infrastructure as an asset class can help improve the efficiency of portfolios as it has a lower correlation with other asset classes.

Domestic financial institutions: Some of the governments have been setting up specialized lending institutions to fund infrastructure projects. These institutions can help overcome the challenges of less developed domestic capital markets and reduce dependence on foreign currency financing.

Multilateral, bilateral and export credit agencies: These agencies are able to provide low-cost, long-tenor financing for infrastructure projects. They are also able to share global best practices and experience in project development and financing.

Asset leverage (land): A number of projects have been successfully implemented with land as the key asset for infrastructure development. Leveraging land assets can help to increase the viability of urban infrastructure projects.

Private sector participation: PPPs and JVs have found success in a large number of countries. They have helped city governments to develop key urban infrastructure.


3.1 Capital Markets

An analysis of gross domestic savings and gross capital formation revealed that 13 Asian economies have a savings surplus compared to their investments. In some countries, this gap is as high as 40 percent of GDP. This may be due to inefficient and segmented financial markets which can hinder intermediation between a country’s large savings and its investment needs. As a result, massive savings either flow out of these countries to global financial centres or are invested into non-productive sectors.

Figure 3.1: Saving-Investment Gap in Asia

Saving-Investment Gap (% GDP)

41%

45%

20%

40%

8%

5%

19%

20%

30%

10%

3%

11%

1%

Saving-Investment Gap (% GDP)

41%

45%

20%

40%

8%

5%

19%

20%

30%

10%

3%

11%

1%

Gross Domestic Savings Gross Capital Formation

-50 -25 0 25 50 75

Macao

Azerbaijan

Kazakhstan

Brunei

China

Bhutan

Singapore

Malaysia

Turkmenistan

Uzbekistan

Thailand

Hong Kong

Indonesia

% GDP

Gross Domestic Savings Gross Capital Formation

-50 -25 0 25 50 75

Macao

Azerbaijan

Kazakhstan

Brunei

China

Bhutan

Singapore

Malaysia

Turkmenistan

Uzbekistan

Thailand

Hong Kong

Indonesia

% GDP

Source: World Bank

Governments should actively look at developing their capital markets. Despite initiatives such as Asian Bond Markets Initiative, the local-currency bond market in Asia remains underdeveloped and few municipal bonds are issued. The huge amount of savings in Asia serves as a potential source of financing, but bankable projects and innovative instruments and markets are among the prerequisites required to attract investments.

Further, in order to instil confidence in capital markets, city governments need to be more transparent and have their financial condition rated by credit rating agencies. This would facilitate the issuance of bonds by city governments against the revenue streams and assets of projects. This is a fairly common practice in the US, but in Asia, cities face stumbling blocks in terms of credit risk and credit ratings.

Most city governments in Asia derive significant revenue from central transfers, which are subject to many discretionary elements. In addition to their limited capacity to raise taxes, city governments must cope with unstable revenue from discretionary transfers, which results in higher risk as it is difficult to determine their ability to meet their obligations. On top of higher risk, it is also more challenging to assign credit ratings to city governments since risks are not easily identified and controlled. Financial information regarding city governments is usually not available or unreliable for rating purposes. Nonetheless, some Asian cities have been rated by international agencies. For

An analysis of grossdomestic savings and

gross capital formationrevealed that 13 Asian

economies have asavings surplus compared

to their investments.


example, the Seoul Metropolitan Government was rated “A” in 2009 by Standard & Poor's Ratings Services and Nagpur Municipal Corporation’s bond issuance in India was rated “AA” by Fitch Ratings in 2009. However, these are among the few examples of ratings provided by international credit agencies to city governments in Asia.

Well-developed capital markets can facilitate the financing of urban infrastructure projects. However, the further development of capital markets needs to be coupled with greater transparency in governments’ financial condition and the development of financial products and structures that are acceptable to investors.

3.2 Pension Funds, Insurance Companies, Foundations and Endowments

Pension funds, insurance companies, foundations and endowments can provide investments for infrastructure projects based on their long-term investment horizon which matches the profile of their liabilities. These institutions make investments across various asset classes, from treasury bonds, corporate bonds and equities to alternative investments such as private equity, real estate, hedge funds and infrastructure funds.

Figure 3.2 below shows pension assets in some Asian countries as a percentage of GDP. The Republic of Korea has amongst the highest pension assets in Asia (excluding Japan) with USD 161 billion under management.

Figure 3.2: Pension Assets as a Percentage of GDP for Selected Asian Countries

23

8

5

21

59

10

64

12

0 20 40 60 80

Hong Kong (China)

India

Indonesia

Korea

Malaysia

Philippines

Singapore

Thailand

Pension Assets (% of GDP)

Source: ADB, 2007. Financing Background Paper, Managing Asian Cities Study. Manila

These institutions typically have to invest a substantial portion of their funds in low-risk asset classes and have a long-term investment horizon. Infrastructure projects are therefore a good match, as they usually provide stable, low-risk cash flows but require a long time to recover the investment.

Figure 3.3 shows the risk-return profile for five different asset classes, including infrastructure. It illustrates that the efficient frontier moves to the left when infrastructure is included as the part of the portfolio. This is because infrastructure has low co-variance with other asset classes and thus improves the efficiency of the portfolio by providing diversification benefits.

Pension funds, insurancecompanies, foundations

and endowments canprovide investments for

infrastructure projectsbased on their long-term

investment horizon,which matches the profile

of their liabilities.


Figure 3.3: Efficient Frontiers with Five Asset Classes (12 Years)

Source: Evalueserve Analysis, August 2006 Note: The asset classes studied as a part of this analysis used FTSE-All World Emerging Index, FTSE-All World Developed Index, CGBI WGBI World All Mats (USD), JPM Global Cash, MGII and a composite index created from selected FTSE indexes from 1994 to 2006. In constructing the efficient frontiers a constraint was added that a minimum of 50 percent of the investment was required to be in bonds and cash to reflect the typical composition of a pension fund. Given the risk profile, long-term investment horizon and size of these institutions, it appears that there is considerable money available but it is not being channelled into long-term infrastructure financing. Governments need to understand the requirements of these institutions and provide enabling regulatory structures to encourage greater participation from these funds.

3.3 Multilateral and Bilateral Financial Institutions

Over the years, multilateral financial institutions (MFIs) such as ADB and World Bank and bilateral financial institutions (BFIs) such as Japan Bank for International Cooperation (JBIC) have played an important role in financing and supporting infrastructure development in Asia. Figure 3.4 shows the outstanding multilateral and bilateral loans provided to Asian countries.

Equity

Cash

Bonds

Infrastructure

Emerging Markets

1%

2%

3%

4%

5%

6%

7%

8%

9%

6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26%Risk

Rea

l Ret

urn

s

Efficient frontier without infrastructure

Efficient frontier with Infrastructure included

Equity

Cash

Bonds

Infrastructure

Emerging Markets

1%

2%

3%

4%

5%

6%

7%

8%

9%

6% 8% 10% 12% 14% 16% 18% 20% 22% 24% 26%Risk

Rea

l Ret

urn

s

Efficient frontier without infrastructure

Efficient frontier with Infrastructure included


Figure 3.4: Bilateral and Multilateral Loans to Asian Countries

0

50

100

150

200

250

300

350

2006 2007 2008 2009U

SD

Bill

ion

Multilateral Loans Bilateral Loans

Source: Joint External Debt Hub (JEDH)

MFIs provide both loans and grants to governments for the development of urban infrastructure. Grants are typically provided for feasibility studies, capacity-building programmes including the training of government employees, and advisory mandates for managing bid processes. In addition to grants, soft loans in the form of sovereign and non-sovereign debts help governments and the private sector raise debt for key projects at attractive interest rates.

For projects where there is a high uncertainty due to political risks, MFIs have also contributed in the form of political risk insurance (PRI) cover. In fiscal year 2009, Multilateral Investment Guarantee Agency (MIGA), a member of the World Bank Group, issued more than USD108 million in guarantees for infrastructure projects.14 Multilateral agencies have personnel with global and regional experience who understand new and emerging approaches for infrastructure development. Governments in various Asian cities can therefore greatly benefit from the involvement of MFIs in urban infrastructure projects.

BFIs also provide similar support for infrastructure development in the form of grants, soft loans, PRI cover and sharing of valuable experience. Export credit agencies from Japan, Korea and China have all contributed significantly towards infrastructure development in the form of loans and PRI cover. For example, JBIC disbursed USD24 billion in 2008, while Korea Eximbank provided financing totalling USD22.9 billion in 2008.

3.4 Domestic Financing Institutions Recently, some governments have set up specialised lending institutions to fund infrastructure projects. Such institutions act as commercial entities and charge market-based fees and rates. For example, Indonesia has set up Indonesia Infrastructure Financing Facility (IIFF) to provide long-term debt, equity and credit enhancements for PPP projects. ADB has approved USD140 million for IIFF. Similarly, India has set up Indian Infrastructure Finance Company Limited (IIFCL) and plans to raise USD1 billion to fund infrastructure projects. Such institutions fund infrastructure—including urban infrastructure

14 MIGA. (2009, Oct). Sector - Infrastructure

Recently, somegovernments have set up

specialised lendinginstitutions to fund



projects—by direct lending, refinancing or any other means, subject to approval by the government. These institutions help overcome the challenges presented by less-developed domestic capital markets and reduce the heavy reliance on foreign sources of financing, which typically contain foreign exchange risk.

In addition to national financial institutions, there are also municipal development funds (MDFs), which are set up to support various city governments. MDFs are similar to pooled financing arrangements which have been used primarily in the developed world—in particular, outside the US—to finance city government debt. These MDFs access national bond markets and lend to city governments. For example, Municipal Development Fund Office (MDFO) in the Philippines provides financial assistance to local government units for investments in priority urban infrastructure. Similarly, Sri Lanka has set up a Local Loans and Development Fund (LLDF)15 to finance basic infrastructure.

Currently, over 60 countries have established municipal development funds or specialised financial intermediaries to raise capital that they can subsequently lend to sub-sovereign governments.

3.5. Asset Leverage (Land)

Asset leverage, mainly in the form of land-based financing, was utilised in Paris and New York hundreds of years ago, but it is only in recent times that it has started to become an important source of urban infrastructure financing in developing countries. Over the past decade, Bogotá, Colombia has financed over 200 public works projects through betterment levies from gains in land value. Similarly, cities in China have financed many urban infrastructure projects from land leasing and land sales.

Most land-based financing generates massive revenue upfront compared to other sources of public financing. This boosts the ability of governments to fund urban infrastructure projects, which require massive upfront capital infusions. For example, the auction of desert land in Cairo, Egypt, raised USD3.12 billion for infrastructure development in 2007. This amount was equivalent to 117 times the total urban property collections in Egypt.16 Furthermore, land prices tend to soar during rapid urbanisation, which makes land-based financing an ideal source for funding urban infrastructure projects.

Several methods can be adopted to unlock land value. The most common way is to sell or lease public land and use the proceeds to fund urban infrastructure projects.

While there are a number of successful cases, betterment levies are often difficult to administer. Estimates of land value gains often span a wide range of estimates, hence there is a large margin for error. Cities such as Sydney and Szczecin (Poland) have discontinued the use of betterment levies.

Apart from value capture, developer extractions and impact fees approach land financing from the cost perspective. They are one-time, up-front charges designed for developers to pay for the expansion in infrastructure capacity. For impact fees, developers are required to bear the cost of system-wide infrastructure expansion.

15 Asian Development Bank’s report on Strengthening Local Government Infrastructure Financing Project, Sri Lanka 16 Peterson, G. E. (2009). Unlocking Land Values to Finance Urban Infrastructure. Washington DC: The International Bank for Reconstruction and Development / The World Bank.

Cities like Mumbai, Cairo,Istanbul, Capetown,

Bogota have beensuccessful in raising

funds for urbaninfrastructuredevelopment.


Land-based financing also provides opportunities for PPPs. Governments can provide free use of land to the private sector for investments in urban infrastructure or share the gain in the value of land from infrastructure investments.

However, there are some risks and constraints to land-based financing. Land sales are not sustainable in the long-term since city governments have limited land. Also, the increase in land prices is not guaranteed as prices can be volatile. Overdependence on land-based financing can thus make the development of key projects dependent upon real estate price fluctuations.

Despite the challenges related to land-based financing, cities such as Mumbai, Cairo, Istanbul, Cape Town and Bogota have all been successful in raising funds for urban infrastructure development using this approach.

Case 3.1: Land Financing by MMRDA, Mumbai, India

Mumbai Metropolitan Regional Development Authority (MMRDA) is responsible for the development of Mumbai Metropolitan Region spread over 3,965 sq km including 19 urban centers.

MMRDA is responsible for regional infrastructure development like Mass Rapid Transit Systems, Light Rail Transit Systems, Roads and Bridges connecting various urban centers, etc. which costs billions of dollars.

However, it does not have any powers to collect tax nor does it receive substantial amounts of grant and loans compared to its requirements. Lease of land at the Bandra Kurla Complex (BKC) is the only substantial source of funds for MMRDA.

Bandra Kurla Complex was created out of marshland and industrial slums by channelling the Mithi River and two creeks. The site has now been developed as an International Finance and Business Center in the Mumbai with many of India’s leading corporate houses having offices in BKC.

MMRDA auctioned parcels of land on long term lease to various developers and users with specific land use. MMRDA upfront lease premiums realization has increased from USD650 per sq m in 1993 to USD11,000 per sq m in 2008.

These cashflows have enabled MMRDA to support the development of various infrastructure projects like provision for Viability Gap Funding for various Metro Projects or construction of Monorail and skywalks.

Source: MMRDA, Unlocking Land Value to Finance Urban Infrastructure by World Bank


3.6 Public Private Partnerships or Private Finance Initiatives

Private sector participation has contributed immensely to the development of infrastructure projects. By 2008, the investment commitments to infrastructure projects with private participation in developing countries hit USD150 billion. Figure 3.5 shows the trajectory for investment commitments since the 1990s. The sharp decline in such commitments in 1997–2002 was largely due to fallout from the Asian financial crisis, which led to disputes and re-negotiations of contracts.

Figure 3.5: Investment Commitments to Infrastructure Projects with Private Participation in Developing Countries

Source: World Bank and PPIAF, PPI Project Database

Private sector participation is largely in the form of PPPs, which are typically structured as special purpose vehicles (SPVs). There are various forms that PPPs can take, which vary widely depending on the level of private-sector involvement. The focus here will be on concessions, BOT and other similar arrangements where private funding is involved. Figure 3.6 illustrates the simplified structure of a PPP.

Figure 3.6: Typical Structure of a Public Private Partnership


0

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120

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180

1990 1994 1998 2002 2006

Inve

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(in

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Drop in investments largely due to fallout from the Asian

financial crisis, which led to disputes and re-negotiations on

contracts

0

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1990 1994 1998 2002 2006

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Drop in investments largely due to fallout from the Asian

financial crisis, which led to disputes and re-negotiations on

contracts

Public sector

Construction contractor

Construction contract

Performance guarantee

Maintenance/ Facilities

management

Facilities manager

Returns

ProjectsponsorsLenders

Debt servicing

EquityUnderwriting

Parent company support

Special Purpose Vehicle

Concession deed

Services and asset at the end of concession

Financing

Public sector

Construction contractor

Construction contract

Performance guarantee

Maintenance/ Facilities

management

Facilities manager

Returns

ProjectsponsorsLenders

Debt servicing

EquityUnderwriting

Parent company support

Special Purpose Vehicle

Concession deed

Services and asset at the end of concession

Financing


Both the public sector and private sector have competitive advantages over one another in performing specific tasks and handling risks. Therefore, it is the effective sharing of risks that creates value for money for governments in PPPs.

The roles and responsibilities of each party are defined through enforceable contracts between the partners that specify the intended outputs over the contractual period. In many cases, concession contracts last for about 25 years before ownership is transferred back to the public sector. The private sector provides the initial capital investment and often earns returns through the project’s revenue stream during the concession period.

3.6.1 Key Advantages of PPP

There are several motivations for the public and private sectors to engage in PPPs to develop urban infrastructure and services. However, the principal reason is generally that PPPs are able to deliver better value for money than alternative approaches. From the perspective of city governments, PPPs offer advantages in the following broad categories:

Financing: PPPs help relieve the financial strain on city governments by mobilising untapped resources from the local, regional or international private sector, which continuously seek investment opportunities. The availability of private funds acts as leverage for increased and better social services. City governments are thus able to redirect their limited funds towards other important projects that are not well suited to PPP financing. Hence, instead of developing one project under the traditional method of contracting, with PPPs, governments can develop 2–3 projects with the same amount of financial resources.

Efficiency and Cost Savings: Private investors have strong incentives to complete projects quickly to start earning revenues, and their better operational efficiency also allows them to reduce costs. For areas with both private and public infrastructure operators, competition from the private sector helps to raise the efficiency of public operators. The UK's National Audit Office reported in 2003 that 73 percent of non-private finance initiative (PFI) construction projects were over budget and 70 percent were delivered late. In contrast, only 22 percent of PFI projects were over budget and only 24 percent were late.17 PPPs also transfer long-term operation and maintenance responsibilities to the private sector, thereby creating incentives for the private sector to ensure the long-term sustainability of infrastructure.

Quality: The revenue stream for private sector partners in PPPs often comes from end-user charges. Hence, there is a strong incentive for providing superior customer service. The public sector can concentrate on ensuring that the private partner maintains certain customer service levels as set out in the contractual agreements. Usually, there are financial incentives or penalties for exceeding targets or underperformance, respectively, which enhance accountability and service quality.

Change in Focus: PPPs typically allow city governments to focus on outputs instead of inputs. PPP output specifications are fixed for lengthy periods. However, this means that it is essential that service levels are set accurately and in detail right at the start of the procurement process.

17 Nataraj, G. (2007). Infrastructure Challenges in South Asia: The Role of Public-Private Partnerships.

ADBI Discussion Paper 80. Tokyo: ADBI.


3.6.2 Key Challenges of PPP

Some of the challenges of PPP are discussed below. Cost Recovery: The private sector is motivated to participate in PPPs as it seeks potential returns from investments. However, revenue from user charges depends on the ability and willingness of users to pay. Governments have traditionally subsidised user charges. With the involvement of the private sector, cost savings from operational efficiency may not be sufficient to cover the shortfall due to subsidised user charges. On the other hand, increasing user charges may result in public outrage. This can sometimes be avoided through government-determined price ceilings. However, without appropriate returns commensurate to the risk involved, private sector players will be hesitant to enter into such partnerships.

Foreign Exchange Risk: The majority of infrastructure projects generate revenues in domestic currency. Using foreign currency loans may thus lead to foreign exchange risk. Moreover, domestic capital markets in many Asian countries are underdeveloped and have limited hedging instruments to manage foreign exchange risk.

Political Risk: Developing countries are constantly reviewing and changing their regulatory frameworks. This deters the private sector from committing huge investments in PPPs. Political instability is considered a major risk by the private sector as it presents a risk of contract cancellation or renegotiation. Failures in previous PPPs also reduce the appetite for private sector investment.

Weak Governance: Weak governance and corruption can reduce the interest from internationally reputed developers. In the annual Corruption Perception Index 2009, the majority of Asian countries scored below five on a maximum scale of 10, indicating that corruption is a major concern in Asia. Areas susceptible to corruption include the award of construction contracts, price fixing between public and private sector operators, and the provision of government support in the form of subsidies or guarantees.

Contingent Liabilities: Many city governments fail to take into account contingent liabilities while entering into PPPs. Contingent liabilities usually arise due to government guarantees to the private partners in a bid to attract private sector financing. However, many governments do not set aside sufficient reserves, so when the liabilities crystallise, they are unable to meet the obligations. Contingent liabilities can also arise when governments agree to a take-or-pay contract based on an overestimated demand forecast.

3.6.3 Joint Ventures with Private Partners

Joint ventures present another alternative for private sector participation in which the government wishes to retain a certain level of control and share of profits while mobilising the efficiencies and financing capacities of the private sector. Since all partners have a vested interest in the venture, there is a strong incentive to optimise the efficiency and performance of the company.

Ideally, the technical competencies and business acumen of the private partner can be paired with the local knowledge and social concern of the public sector to deliver quality service to citizens. However, it is important for the company to maintain independence from the government since the latter is both the owner and regulator. This conflict of interest may lead to potential corruption or manoeuvres to achieve political goals.

Joint venture presentsitself as a suitable

modality of private sectorparticipation where thegovernment wishes to

retain certain level ofcontrol while mobilising

the efficiencies of privatesector.


In countries such as China where there are foreign ownership restrictions regarding infrastructure, joint ventures with local partners or state-owned entities are largely the basis for private participation. In fact, joint venture accounts for 61 percent of all the different forms of PPP in China.18

To draw a parallel from the energy sector, independent water and power projects (IWPPs) in the Middle East have seen tremendous success with participation from the world’s leading power and water desalination companies. IWPPs in the United Arab Emirates (UAE) are structured as build, own and operate (BOO) contracts in which the government procurement agency owns a 60 percent stake in the project. Similarly, in the Saudi Arabia IWPP market, a government procurement agency along with the Public Investment Fund owns a 40 percent stake in the project. In this form of partnership, governments share both the profits and losses with the private sector.

While the private sector may have concerns with respect to flexibility in operations as the government enjoys veto rights in many such projects, IWPPs in the Middle East have been very successful in adding the required power capacities. However, this form of financing still requires a large share of the project’s equity to be financed by the government.

18 Hong, Q. (n.d.). PPP Practice and Government Regulation in the People's Republic of China (PRC).

In some countries suchas China where there are

foreign ownershiprestrictions in

infrastructure, jointventures with local

partners or state ownedentities is largely the

basis for privateparticipation.


Section 4: Moving Forward - Overcoming Bottlenecks

Introduction

In Section 2 we looked at the challenges in urban infrastructure development

and in Section 3 we identified alternative financing sources. The stakeholders responsible for the development of urban infrastructure include national, provincial/state and city governments; private sector developers and financial institutions; and multilateral/bilateral agencies. In this section, we examine the steps required by these stakeholders to overcome bottlenecks and access alternate financing.

Section Summary: Moving Forward - Overcoming Bottlenecks All stakeholders need to collaborate to overcome the bottlenecks in financing urban infrastructure investments. The key actions from stakeholders are summarised below:

Actions required from key stakeholders

City Government











Private Sector


• Innovation

• Cost efficiency

• Adaptability


National Government







financing

City Government











Private Sector


• Innovation

• Cost efficiency

• Adaptability


National Government







financing


4.1 City Government

4.1.1 Undertaking Pre-Feasibility Studies

To attract funds for urban infrastructure projects, city governments should clearly demonstrate the viability of projects to the private sector by carrying out detailed pre-feasibility studies with assistance from specialised and reputed advisors. Pre-feasibility studies need to address the technical, financial and regulatory aspects of proposed projects. Good pre-feasibility studies act as an important input in formulating a suitable procurement strategy and in developing an attractive and mutually beneficial project structure.

Governments need to take a more pragmatic view regarding the feasibility of projects and when subsequently deciding on fares or end-user charges. Financially weak projects may need government support in the form of grants, subsidies, tax exemptions or other assistance. In order to increase the viability of projects, various alternative options should be evaluated. For example, waste-to-energy projects such as incineration plants may be eligible for generating carbon credits under a clean development mechanism (CDM), which could provide additional revenue for the project.

At the pre-feasibility stage, governments can also evaluate options such as the lease of land as a source of revenue or project financing to support urban infrastructure initiatives. For example, for the Taj Expressway project in India, the government provided real estate to enhance the viability of the project, which is now in an advanced stage of completion.

A pre-feasibility study carried out in Mongolia provides an example of how governments and multilateral agencies can work together to study a project’s feasibility based on alternative financing/revenue sources for project cost recovery.

Case 4.1: Pre-feasibility Study on Thermo-technical Rehabilitation of Buildings in Ulaanbaatar, Mongolia

Ulaanbaatar is a city with a relatively large population of about million. The majority of this population is poor, with monthly incomes estimated in the range of 100,000–170,000 Tugrik (USD76–130).

The challenge was to reduce energy consumption within multi-storey apartments by redesigning the housing heating system of Ulaanbaatar to make it more energy efficient.

The city government wanted to encourage private participation in the project. ADB and Cities Development Initiative for Asia (CDIA) were involved in conducting a pre-feasibility study and provided capacity-development support to the city government.

The outcome was a well-structured pre-feasibility study. As part of the process, surveys were conducted to understand apartment inhabitants’ capacity and willingness to pay. Possible synergies with other development projects in the city were also explored and organisations that might be interested in funding the project were identified. Several meetings were held to create awareness of the project and encourage cooperation from apartment owners.

As part of the study, alternative financing options such as carbon credits from CO2 emission reductions were also explored.

Source: CDIA


4.1.2 Capacity Development

City governments need to conduct a detailed assessment of the skills required at each level and across departments. Training institutes need to be identified and a training calendar should be prepared on an ongoing basis. Employees should also be taken for site visits to cities that have successfully developed urban infrastructure and can serve as an example for other cities. In Singapore, for example, entities such as Singapore Co-operation Enterprises organise training and site visits for city government officials across developing and underdeveloped countries. CDIA recently signed a memorandum of understanding (MOU) with Singapore Civil Service College to provide capacity-development services in the field of urban infrastructure. Other modalities such as on-the-job learning and city-to-city cooperation and exchange should be evaluated as options to further develop, sustain and retain capacities in city governments.

Case 4.2: Capacity Building Program in Kolkata Municipal Corporation (KMC), Kolkata, India

Kolkata Municipal Corporation (West Bengal, India) embarked on a Capacity Building Program in 2004. The program was funded by the UK’s Department for International Development. Within the program’s first five years, KMC successfully achieved the following:

Capital expenditure increased from USD11.4 million (2003) to USD100 million (2008). Dependence on government grants declined from 42 percent (2003) to 36 percent (2008), while salaries as a proportion of total expenses declined from 68 percent to 48 percent.

Modest but regular growth in property tax (CAGR of 6.6 percent p.a.) and a significant increase in non-tax revenue (CAGR of 16.0 percent p.a.). KMC can now fund 94 percent of its expenditures from its own revenue sources. Excluding land lease, this figure still remains high at 74 percent.

A+ credit rating received in 2008 from Credit Rating Information Services of India Limited (CRISIL), reflecting an above-average surplus, good debt protection and strong liquidity.

There was an increase in services with the addition of 221km of sewerage and drainage. There was also increased investment in the city through additional funding of USD167 million from JNNURM.

KMC raised funds through the long-term lease of surplus land for USD70 million (2006–2008). The funds were used to finance the city government’s contribution to JNNURM projects.

Majority of citizen interfacing departmental processes were computerised;

As part of the program, KMC entered into a number of public private partnerships with private agencies for construction, management and operation of urban infrastructure. PPPs were used in non-core areas such as parks, markets and theatres.

A PPP cell was also formed to explore opportunities for innovative PPP initiatives to generate revenue, reduce costs and improve operational efficiency.

Source: Kolkata Municipal Corporation

City governments need toconduct a detailed

assessment of the skillsrequired at each level and

across departments.


According to a KPMG survey, 37 percent of the respondents believed that providing better training to public sector officials can lead to an improvement in infrastructure. Also, slightly more than one-third of the respondents suggested that de-politicising infrastructure public policy processes and greater use of PPPs can lead to improvements in infrastructure. These findings are shown in Figure 4.1.

Figure 4.1: Suggestions for Improvement in Infrastructure

1 %

1 %

2 %

4 %

15 %

15 %

17 %

18 %

21 %

21 %

28 %

34 %

35 %

37 %

0 % 10 % 20 % 30 % 40 % 50 %

Not applicable — jurisdiction too small for these solutions

Don’t know

Not applicable — no need for improvement

Other, please specify

Increased ownership of infrastructure by infrastructure funds

Secondments between the public and private sectors

Better compensation

Greater centralisation of infrastructure procurement

Establishing centres of excellence

More transparency in spending

More transparency in project selection

Greater use of public-private partnerships

De-politicise the infrastructure public policy process

Better training of public sector officials

Source: KPMG publication: The changing face of Infrastructure: public sector perspective Note: A survey was conducted by KPMG International and Economist Intelligence Unit (EIU) in November and December 2009 comprising 392 senior public sector officials involved in infrastructure policy procurement and development. Of the respondents, 47 percent were at the level of senior manager and above. Respondents came from 50 countries around the world, of which 30 percent were from Asia Pacific.

Case 4.3: Capacity Development by CDIA in Banda Aceh, Indonesia

Indonesia’s Aceh province was ravaged by the tsunami in December 2004. Following the disaster, basic infrastructure in the province was reconstructed with aid from various agencies. With reconstruction efforts nearing completion, a key requirement was to maximise the benefits from any remaining aid for sustainable development.

A six-month study to identify potential projects to develop the Kreung Aceh river area was carried out. Technical assistance was provided by CDIA through German Technical Co-operation (GTZ).

CDIA provided capacity-development assistance to Banda Aceh City Administration (TIMKO). Sixteen sessions were conducted to teach local officials new management tools for carrying out projects and identifying investors.

As a result of the assistance, TIMKO improved its core development and planning skills. By the end of the sessions, TIMKO participants were also able to set goals and objectives for the organisation.

At the end of the study, a pre-feasibility study on urban renewal in the Kreung Aceh area was produced, identifying several potential projects. The study highlighted three projects deemed to be most desirable. These projects are now going forward for bidding through the PPP unit of the Bappenas, the national development planning agency.

Source: CDIA


4.1.3 Stakeholder Consultation and Market Sounding

Market sounding is one of the key requirements for successful procurement of urban infrastructure projects. Various stakeholders such as private developers, financial institutions, end-users and related government agencies should be consulted for procurement option analysis and project structuring. This process can provide the government procurement agency with valuable insights into stakeholders’ perspectives on projects and can reduce procurement timelines. Figure 4.2 provides a snapshot of the key stakeholders in a typical urban infrastructure project and the key inputs required during the market-sounding exercise.

Figure 4.2: Gathering Stakeholders Perspectives through Market Sounding

Source: KPMG Analysis Note: EPC - Engineering, Procurement and Constructions; O&M - Operation and Management;

Discussions with financial institutions can provide clarity on the perceived risks, financing costs and structuring imperatives to access low-cost funds. Developers can provide insights into their return expectations, risks and views on project feasibility. EPC contractors can provide inputs regarding technology options. Discussions with users can reveal user preferences, expectations and indications of users’ ability to pay.

Market-sounding exercises also serve as a marketing tool to attract potential bidders and financiers. Market sounding provides valuable inputs for project structuring and allows issues raised by major stakeholders to be addressed upfront, which will ultimately mean fewer surprises at later stages of the project.

Market sounding is oneof the key requirements

for successfulprocurement of urban


• Project objectives• Structuring imperatives• Long‐term strategy• Strategy for private

participation

• Project finance market• Structuring imperatives• Perceived risks• Financing costs

National & Local Govt.

Private Developers

Financial Institutions

• Return expectations• Risks perceived• Views on project

feasibility and project structure

• Technology options and associated cost and performance implications

• Risks perceived

• Demand estimation • User expectations• Ability of the users to pay

Contractors – EPC & O&MUsers

• Project objectives• Structuring imperatives• Long‐term strategy• Strategy for private

participation

• Project finance market• Structuring imperatives• Perceived risks• Financing costs

National & Local Govt.

Private Developers

Financial Institutions

• Return expectations• Risks perceived• Views on project

feasibility and project structure

• Technology options and associated cost and performance implications

• Risks perceived

• Demand estimation • User expectations• Ability of the users to pay

Contractors – EPC & O&MUsers


4.1.4 Standardising the Decision-making Process for Infrastructure

Procurement

Infrastructure projects can take on various structures, such as government-funded alliances; government-funded design, build, operate and maintain (DBOM) arrangements; and privately funded BOT projects. City governments need to have a structured process to evaluate the procurement options for projects. While each project is unique, city governments can use a standard set of evaluation criteria to analyse procurement option. Some of the criteria used for selecting a suitable procurement option for a project include the extent to which the option lets the government retain its operational flexibility and reduce risks, the extent to which the option helps to achieve project delivery within a given timeframe, and the extent to which an option provides the government with value for money. For reference, Figure 4.3 shows the criteria used to evaluate procurement options by the Australian government

Figure 4.3: Components of the Template Evaluation Matrix by Infrastructure Australia

Stakeholder Management

Flexibility

Budget Certainty

Value for Money

Market Interest

Time to Deliver Project

Risk Management

Operational Flexibility

Australian Infrastructure

Stakeholder Management

Flexibility

Budget Certainty

Value for Money

Market Interest

Time to Deliver Project

Risk Management

Operational Flexibility

Australian Infrastructure

Source: Department of Infrastructure and Planning, State of Queensland, Australia

A similar approach can be adopted by cities. Such an approach enables the transparent selection of procurement options through the use of standard evaluation parameters for every project. Figure 4.4 shows that 41 percent of respondents suggest that increasing transparency in infrastructure project selection can lead to improvement in infrastructure development.


Figure 4.4: Effective ways to de-politicise Infrastructure Project Prioritisation

3 %

3 %

3 %

24 %

32 %

33 %

34 %

36 %

37 %

41 %

0 % 20 % 40 % 60 %

Don’t know

Other, please specify

I disagree — the process does not need to be de-politicised

Improve allocation of financial/social costs and benefits

Improve identification of financial/social costs and benefits

Increase stakeholder involvement

Establish and enforce guidelines for setting infrastructurepriorities

Develop and adopt better cost-benefit methodologies toquantify project outcomes

Improve the public private partnership procurement process

Increase transparency in infrastructure project selection

Source: KPMG publication: The changing face of Infrastructure: public sector perspective Note: This publication is based on a survey conducted by KPMG International and Economist Intelligence Unit (EIU) in November and December 2009.

4.1.5 Actively Pursue Private-sector Financing

With most governments running high budget deficits, city governments need to actively pursue private-sector financing. Collaboration with the private sector can help reduce the gap between the infrastructure required by cities and the scarce resources available within the public sector. As detailed in Section 3.6, PPPs can accelerate project completion and service delivery with lower costs compared to traditional procurement.

Figure 4.5 suggests that private-sector involvement in infrastructure development can bring positive improvements. About 65 percent of the respondents in a KPMG survey on public-sector perspectives believe that private-sector participation can help in improving infrastructure.

PPPs can accelerate project completion and

service delivery with lower costs compared to traditional procurement.


Figure 4.5: Opinions on Improvement in Infrastructure with Private-sector Participation

65 %

26 %

9 %

0 %

10 %

20 %

30 %

40 %

50 %

60 %

70 %

Yes No Don’t know

Source: KPMG publication: The changing face of Infrastructure: public sector perspective

In order to derive even greater value from private-sector involvement, the public sector can collaborate with private partners and share its technical expertise while leveraging the private sector’s implementation expertise and finances. The Changi NEWater Case Study details the benefits of such collaboration.

Case 4.4: Collaboration with the private sector on the Changi NEWater, Singapore

Changi NEWater is the first NEWater plant to be constructed on a design, build,

own and operate (DBOO) model by SembCorp Utilities. The project was awarded

by Public Utilities Board (PUB), Singapore’s national water agency. The success

enjoyed by this PPP collaboration has brought Singapore’s water PPP

collaborations to greater heights.

Sharing of technical capabilities: PUB shared its experience and technical knowledge in water treatment with private-sector organisations to allow them to share the risk of managing water demand issues. This involved the private sector in the development of Singapore’s water management policies.

Constant interaction and checks: PUB conducts stringent tests and audit checks on water quality using both internal and independent auditors. This instils confidence in the quality of water treatment and generates support from the general public.

Cost savings translated from open bidding: The efficiency achieved and knowledge acquired through these strategic partnerships have reaped rewards in terms of lower operating and production costs. These tangible benefits have been transferred to consumers through the reduction of NEWater prices from S$1.30 (USD0.96) per cubic meter to S$1 (USD0.74) per cubic meter.

The success enjoyed by the Changi Newater plant has instilled faith and confidence in PPP projects. The sharing of experience should be encouraged as it can translate to greater cost savings for the public sector.


Cities that wish to pursue PPPs should review their existing policies and laws, and make appropriate changes to accommodate PPP structures. Changes may be required in privatisation, labour and environmental laws, as well as procurement policies.

4.1.6 Sustainable Development

Achieving sustainable urban development requires a balance between economic, environmental and social development. Governments need to have a long-term vision and a commitment towards the sustainable development of cities. Cities need to develop their expansion plans involving integrated land use, infrastructure and transport strategies with consideration for the environment.

Leading banks have adopted Equator Principles, which are a set of voluntary guidelines for assessing and managing social and environmental risk in project financing. These principles apply across all industry sectors to all new projects financing globally with a total project capital cost of USD10 million or more. By applying these principles, negative impacts on project-affected ecosystems and communities can be avoided where possible. In situations where such impacts are unavoidable, they should be reduced, mitigated and/or compensated for appropriately. Designing projects that follow these principles can accelerate the raising of project finance

Urban infrastructure needs to be planned in such a way that minimises pollution and waste. This is especially relevant for wastewater and solid waste treatment infrastructure. For instance, cities may look into ways to retain wastewater for

Case 4.5: Sustainable development in the Sino-Singapore Tianjin Eco-City, China

The Tianjin Eco-City in China is located 40km from the Tianjin city centre and 150km from Beijing.

The 30km2 Eco-City was designed to create a harmonious and sustainable community that meets the needs of an urbanising China where 350,000 residents can live, work and play.

The project integrates nine key features: (1) energy efficiency and use of clean, renewable energy; (2) green buildings; (3) green transportation; (4) ecologically friendly; (5) water management; (6) waste management; economic vibrancy; (7) social harmony; and (8) heritage conservation. The city uses 26 key performance indicators to monitor its development.

The Eco-Industrial Park, located in the northern part of the Eco-City, is designed to create a self-sustaining business community, attracting global clean technology industries and forming green business clusters.

The Eco-City has attracted several investors, including Pan Asian Water Solutions Limited, PV World Pte Ltd, and Sunway City Berhad, since breaking ground in September 2008.

Source: Sino-Singapore Tianjin Eco-City; Sino-Singapore Tianjin Eco-City Investment and Development Co Ltd; Keppel Corporation

Governments need tohave a long-term vision

and a commitmenttowards the sustainable

development of cities.


non-potable use. In Singapore, NEWater is reclaimed from sewage and contributes towards the country’s potable water sources. As levels of solid waste rise, disposal costs increase and can lead to environmental problems if there is no proper waste management system in place. Effective waste management infrastructure must be developed to reduce problems such as illegal dumping. Incineration plants can potentially free up valuable real estate at waste disposal sites while also producing clean energy.

Performance measures and incentive structures should be designed with a view to developing sustainable cities.

4.1.7 Obtaining a Credit Rating

The volume of sub-sovereign bonds issued in Asia is substantially lower than in Europe and North America. In 2000–2007, bond issuances in Asia totalled USD3.2 billion, compared to USD333 billion in Europe during the same period.19 Municipal bond issuances in Europe have benefited from well-developed capital markets. For the issuance of municipal bonds, city governments need to obtain a credit rating. Credit ratings can:

Increase accessibility to capital markets

Increase borrowings to bridge financing gaps for critical infrastructure

Facilitate the flow of international capital

Provide investors with an independent evaluation of credit quality

Help investors in pricing the debt offer

Due to rising budget deficits, uncertainty of cash inflows and poor accounting practices, many city governments tend to have a relatively low standalone credit quality. Hence, credit enhancement is imperative. A bond’s credit rating may be upgraded to a desired rating through credit enhancement mechanisms, such as escrowing dedicated revenue streams; full guarantees from entities or national governments with superior credit profiles; partial guarantees of interest, tenor and principal; pledging of collateral; and pool financing.

Of the 16 city governments rated by CRISIL, a rating agency in India, 10 obtained an investment-grade credit rating as of 2008. By 2009, various city governments in India had raised USD285.5 million through taxable bonds, tax-free bonds and pooled financing arrangements.

19 Municipal Finance: Innovative Resourcing for Municipal Infrastructure and Service Provision, ComHabitat, 2005

Due to rising budgetdeficits, uncertainty ofcash inflows and pooraccounting practices,

many city governmentstend to have a relatively

low standalone creditquality.


4.2 Private Sector: Developers and Financial Institutions

The large untapped urban infrastructure market in most Asian cities holds ample opportunities for the private sector to provide much-needed financing for projects. Research by various organisations has shown that infrastructure investments yield almost the same returns as equity, but at a lower risk. The inclusion of infrastructure investments in a portfolio provides diversification benefits and shifts the efficient frontier to the left, implying lower risk for similar level of returns. With standardisation of procedures and contracts, the Further, the time that elapses from expression of interest (EOI) to award of contract has also been reduced.

Private-sector developers need to contribute innovation to urban infrastructure development and reduce costs with solutions for sustainable development. The private sector should also provide improved management and higher efficiency by optimising resources with innovative technical methods.

Private-sector entities should be proactively involved in supporting urban development. For example, they can conduct constructive and collaborative dialogues with the public sector to encourage greater efficiencies.

Financial institutions need to contribute innovative solutions for channelling funds into urban infrastructure development. They should also seek to reduce the cost of financing by introducing innovative products that match the long-term nature of infrastructure projects.


4.3 National / Provincial / State Governments

4.3.1 Mobilising Funds Directly in the Form of Grants and Loans Decentralisation has shifted the responsibility of developing urban infrastructure from national, and provincial/state governments to city governments. However, many cities face massive challenges in planning and raising funds to construct new infrastructure and replace existing infrastructure. The grant support from national and provincial/state governments is often subject to politics and many other discretionary factors, resulting in unstable funding for city governments on an annual basis. National and provincial/state governments need to support cities by providing greater and more reliable transfers to reflect the increased responsibilities of city governments.

National governments can create dedicated schemes for financing urban infrastructure. The implementation of the JNNURM scheme in India is a good example of national and state government support to city governments.

Further, in August 2010, the Department of Interior and Local Government in the Philippines, signed a memorandum of agreement with the local government units (LGUs) to set up a Performance Challenge Fund as a part of the 2011 budget. LGUs that improve their business registration processes for issuance of permits and licences will receive incentives in the form of grants.

Case 4.6: Jawaharlal Nehru National Urban Renewal Mission (JNNURM) in India

Cities and towns contribute over 50 percent of India’s GDP. Hence, to support economic growth in urban areas, the Government of India launched the JNNURM scheme in December 2005.

JNNURM was launched in 63 major cities and a large number of small and medium-sized cities with an allocation of USD26 billion. In addition to funding infrastructure projects as shown in the table below, JNNURM has also provided a platform for bringing together bits and pieces of reform and innovation under a single urban reform agenda.

Percentage of Funding (%) Category

Number of Cities Central

Grant State Grant Loan

Cities with over 4 million population

7 35 15 50

Cities with 1-4 million population

28 50 20 30

Selected Cities with less than 1 million population

28 80 10 10

In total, 63 cities have prepared city development plans that detail their urban infrastructure requirements, sources of financing, reforms plans and capacity development requirements.

Cities are implementing a number of mandatory reforms in order to access the JNNURM funds from the central and state governments. As of 31 December 2009, 515 projects worth approximately USD13 billion were approved.

The use of PPPs is listed as one of the optional reforms under the JNNURM to leverage private-sector efficiencies.


4.3.2 Channelling Funds for Urban Infrastructure Investments

National governments need to focus on channelling domestic savings into urban infrastructure and developing domestic capital markets. In general, Asian countries have large domestic savings. China’s gross domestic savings in 2008 totalled USD2.27 trillion, while India’s totalled USD398 million.20 These domestic savings should be channelled towards financing urban infrastructure through the development of domestic capital markets. The development of domestic currency capital markets will also help to minimise currency mismatches between domestic revenues and foreign currency loans.

Private-sector financing accounts for only 20–25 percent of total infrastructure investment.21 National governments can facilitate the mobilisation of such funds by providing an enabling environment to encourage infrastructure investments from the private sector. Pension funds, life insurance companies, endowments and foundations all manage massive funds. The infrastructure sector can provide portfolio diversification to such funds. Further, infrastructure as an asset class also fits into the investment profiles of such entities due to their size and long investment horizon. National governments should evaluate the need to revise existing regulations to allow investments in urban infrastructure and provide incentives to such entities.

Specific infrastructure tax incentives can be introduced to encourage private investment in infrastructure. In India, enterprises that develop, maintain and operate new infrastructure facilities are given a 10-year tax holiday, subject to the fulfilment of certain conditions. Elsewhere, Thailand, China and Vietnam also provide tax holidays of 5–10 years to attract private investments. Tax breaks can also be provided to financial institutions to encourage long-term financing for infrastructure projects. Further, categorising infrastructure financing under priority sector lending can help to channel funds towards urban infrastructure.

In India, tax-free infrastructure bonds were proposed this year to raise much-needed long-term funds for the infrastructure sector. In 2009, the Chinese government raised USD29.2 billion from the issuance of bonds for investments in urban infrastructure.22

4.3.3 Standardised Contracts and Decision-making Processes

National governments can support cities by providing standardised processes, frameworks and contract terms for the implementation of projects. Standardisation of contracts can lead to an increased interest from private-sector players. Developers and financial institutions find more comfort in standard contract terms. Standard contract terms also help to achieve faster implementation of projects, which in turn leads to a reduction in transaction costs.

Private-sector participation has found tremendous success in countries such as the UK and Australia. Both countries have standardised contract terms. This eases the procurement process by lowering transaction costs for all parties and minimising surprises.

20 The World Bank Group. (2010). World Development Indicators & Global Development Finance. 21 ADB. (2008). Managing Asian Cities 22 McKinsey Global Institute, Report on Preparing for China’s Urban Billion

National governmentsneed to focus on

channelling domestic savings into urbaninfrastructure and

developing domesticcapital markets.


Figure 4.6 shows that Australian transport projects required an average of 17–18 months from the issue of an EOI to financial closure. Standardised procedures and contracts have contributed to this shortened timeframe.

Figure 4.6: Procurement Milestones for Selection of PPP Projects – Transport, Australia

2

57

4 3

8

3 3 42

5

19

11 12

10

15

7

10

3

2

1

14

8

2

3

0

5

10

15

20

25

30

NSBT East Link RelianceRail

AirportLink

M7 Cross City Lane Cove Pen Link Average

Australian Projects

Mo

nth

s fr

om

EO

I Rel

ease

Dat

e

EOI issue date to RFP issue date RFP issue date to announcement of Preferred Bidder

Preferred Bidder to Financial Close

Source: PPP Procurement: Review of Barriers to Competition and Efficiency in the Procurement of PPP Projects by KPMG Australia Note: NB Cross City Tunnel Financial Close was delayed due to the need for a new Environmental Impact Statement.

The average procurement timeline for social infrastructure projects in Australia is 14–19 months, with school projects at the lower end and health projects at the higher end. The timelines may differ slightly based on the scope of each project.

In Australia, the UK and the Philippines, the national or state governments have established independent PPP units to act as the single point of contact for coordinating projects. PPP units can assist in reducing transaction costs and project timelines with standardised contracts.

4.3.4 Monitoring and Coordination It is important for national governments to conduct regular studies and surveys, as this can help them understand the problems faced by city governments. These studies should be publicly shared to help other city governments learn. Feedback from various stakeholders can reveal the root causes of obstacles faced by cities. Solutions and measures can then be implemented to improve the delivery of urban infrastructure.


4.4 Multilateral Financial Institutions

MFIs play an important role in the development of urban infrastructure. Loan and grant support to urban infrastructure projects help to reduce the gap between funding requirements and the availability of funds.

To improve the flow of private capital into infrastructure investments, MFIs should continue advising city governments and assist in the development of acceptable project structures. MFIs can also share ideas and expertise with various stakeholders by organising conferences and developing knowledge papers. The direct participation of MFIs often brings more credibility to a project. ADB has a policy to limit its financial support for projects to 25 percent of the total cost or USD50 million, whichever is lower. It also offers political risk guarantee coverage of up to 50 percent of the total cost or USD100 million. These policies allow ADB to catalyse private financing while not competing with other sources.

In addition, as knowledge banks, MFIs can also provide countries with policy and technical advice, help governments conduct research on bottlenecks, and suggest possible ways to address those bottlenecks. They can also assist city government with capacity development.


Conclusion Urban infrastructure development is a complex process due to the multitude of stakeholders involved. A more collaborative and open relationship amongst various stakeholders is required. City governments need to focus on building capacity to access alternate financing sources. In addition, the process of identifying and developing projects needs to be streamlined and standardised. This will help the government win the trust of other stakeholders, including financial institutions, multilateral agencies, capital markets and private-sector developers. Successful projects with optimal risk-sharing mechanisms and efficient structuring can help create precedence for the market, which in turn will develop confidence for future projects.

City governments are being called upon to play an increasingly important role in driving the charge for urban infrastructure development. An enabling environment needs to be created to identify and develop infrastructure projects to respond to future demand, thereby facilitating stronger economic growth. In such an environment, alternate sources of financing can be effectively tapped and private-sector participation is encouraged. In addition, national and provincial/state governments need to facilitate private-sector participation by implementing structural reforms, establishing regulatory standards to streamline processes, and helping to reduce or mitigate the risks faced by investors.

Multilateral agencies have been providing both strong advice and financing to cities. Their continued support will become increasingly critical, especially in terms of facilitating partnerships with the private sector in financing urban infrastructure.

The potential for urban infrastructure investments in Asia is immense. To private-sector developers, it offers a very attractive and sustainable business opportunity. The private sector should engage in a proactive dialogue with governments to understand their needs and objectives in order to develop innovative solutions. All major stakeholders should come together via a common platform to discuss and address the key challenges that each of them face. A more responsible attitude and collaborative approach is needed from all the stakeholders to encourage greater development.

Such a participative and collaborative approach will ensure sustainable and timely development of urban infrastructure in Asian cities. Global economic growth will be driven by countries in Asia, and cities have an important role to play in facilitating that growth. Urban infrastructure is the cornerstone for a sustainable growth story. Together, governments, municipal corporations, multilateral funding agencies, financial institutions and private developers can help optimise this growth for all parties.


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Credits Resource People:

Michael Lindfield (CDIA/ADB), Adolfo Guerrero (CDIA/ADB), Emiel Wegelin (CDIA/GTZ), Joris van Etten (CDIA/GTZ), David Villeneuve (CDIA/GTZ), Hannes Cassens (CDIA/GTZ), Michael Funcke-Bartz (InWEnt)

KPMG – Stephen Ip, Satyanarayan Ramamurthy, Sharad Somani, Pradeep Kejriwal, Sonal Agarwal and Jon Liu Guanyi

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