Speech By Mr Peter Ong, Permanent Secretary, Ministry of Finance, At Mexico-Asia Infrastructure FInance Summit04 Oct 2012
Your Excellency Mr Antonio Villegas, Ambassador of Mexico to Singapore,
Ladies and Gentlemen,
1. Good morning. It is my pleasure to join you at this inaugural Mexico-Asia Infrastructure Finance Summit. Joining us today are our friends from the Government of Mexico, the World Bank and many leading industry players and investors keen to plug into new sources of growth.
2. As a proponent of sustainable development, Singapore is proud to play host to this Summit which facilitates the transfer of knowledge and capital between Mexico and Asia. The Summit also features a project market place component that will match prospective Asian investors with infrastructure PPP investment opportunities in Mexico.
Infrastructure as an important global growth engine
3. The World Bank projects tremendous global infrastructure investment needs of about US$35 trillion over the next 20 years. Against the backdrop of the fragile global economy, infrastructure development has become an increasingly important growth engine that can stimulate demand, create jobs, increase productivity and promote inclusive growth.
4. At the Los Cabos Summit, the G20 Leaders acknowledged the importance of this global agenda and has committed to create a more conducive environment to foster infrastructure development and investment, as well as to cooperate closely with multilateral development banks in this area.
Growth Potential of Latin America and Mexico
5. Emerging economies of Latin America and Asia are well poised to capture this growth opportunity. Latin America is expected to grow at a steady 4.1% in 2012. The region’s solid economic performance is underpinned by a combination of strong external and domestic demand, as well as sound macroeconomic management that created sufficient fiscal space to manage the effects of the global financial crisis.
6. As the second largest economy in Latin America, Mexico’s growth potential is clear. Goldman Sachs's Jim O'Neill, who coined the term BRICs in 2001, has coined a new term “N-11” to refer to the next 11 economies that will drive global growth.
7. Mexico is expected to be a key leader of the N-11 in terms of infrastructure spending, amounting to US$70 billion per annum for the next few years. This translates into ample investment opportunities. Infrastructure investment stands at about 4.5% of Mexico’s GDP. This is however, still below the investment rates of some Asian economies for example Vietnam invested around 10% of GDP in infrastructure.
Core Impediments to Infrastructure Investments in Emerging Markets
8. To realize this growth potential, emerging markets need to overcome the core impediments to infrastructure investments.
9. First, there is still a considerable gap in local institutional capabilities of emerging economies to develop bankable project pipelines. Ill-formulated projects and unclear operating and regulatory environment create uncertainties for would be investors. This results in time-consuming and costly efforts in bid preparation by the private sector, which raises the commercial hurdle rates of these projects. This is a lose-lose situation for all parties.
10. Second, higher risks are often associated with infrastructure projects due to their longer tenure. There are many risks associated with infrastructure projects especially in the early stages of development, for example macroeconomic and political risks, technical risks and policy risks.
11. Third, as a result of post crisis deleveraging, stricter banking regulations and capital requirements, banks are shying away from funding long tenure infrastructure projects, in particular cross-border lending. In the first three months of 2012, the global volume of new project finance was one third lower than in the previous year. There is a potential for governments to do more to develop alternative sources of capital like the bond markets to fill this funding gap.
South-South Knowledge Exchange: Mexico and Asia
12. To overcome these impediments and achieve sustainable infrastructure development, we require stakeholders with the relevant capabilities and capital to come together under the right business climate. While there is no one-size-fits-all solution as each region has its own unique circumstances and needs, there are some useful lessons that can be shared across different regions.
13. Asia is home to a critical mass of infrastructure industry players with deep repertoires of expertise ranging from fund management activities to project development and construction. Priority demands in Mexico are in sectors related to urban development, such as water and sanitation services, as well as in transport. These are areas which Asia’s industry players have complementary expertise in.
Improving Local Capabilities
14. Governments can build up their technical expertise and knowledge on project preparation and financing through collaboration with relevant partners. In this regard, Multilateral Development Banks (MDBs) can play a valuable role in improving local capabilities and helping governments to build a conducive business climate with robust regulatory and legal frameworks.
15. A good example is the World Bank’s Infrastructure Finance Centre of Excellence (IFCOE) in Singapore, which provides professional, hands-on technical assistance along each step of the project preparation cycle and other policy advice to improve local capacity. IFCOE has been providing advisory services to regional client governments, such as technical advice given to the Vietnamese Government which has helped to streamline and improve procurement processes.
16. For financing, more could be done in the area of risk guarantees to reduce the perceived risks of investing in developing countries and address structural market gaps in large-ticket, long tenure project financing.
17. Governments can create greater awareness of and access to MDBs’ political and commercial risks guarantees, as well as guarantees by export credit agencies against project financing and re-financing risks.
18. The ASEAN+3 countries have embarked on regional cooperation efforts in this regard. The ASEAN+3 and ADB have established a Credit Guarantee and Investment Facility (CGIF), which helps to develop and strengthen regional local currency bond markets by providing guarantees to corporate bonds. CGIF aims to help these companies secure longer term financing, reduce their dependency on short term foreign currency borrowing and reduce risk of currency and maturity mismatches.
19. Deepening and broadening regional capital markets is an effective means to tap into the substantial domestic savings of the South. In this regard, Asia has embarked on some innovative financing mechanisms.
20. The ASEAN Infrastructure Fund (AIF), which was announced in September 2011, is an innovative way for ASEAN to recycle its own savings into productive regional infrastructure development and also in the process to catalyze private sector investments. Projects will be co-financed by the Asian Development Bank and will be selected based on sound economic and financial rates of return, and the potential impact for poverty reduction. The AIF will eventually issue investment grade bonds that can be purchased using Central Banks’ foreign exchange reserves, hence the recycling.
Bringing Relevant Partners Together
21. Today’s Summit brings together the relevant partners to share these lessons and exchange ex periences on successful investment models in infrastructure projects. We also have the pleasure of having representatives from the Mexican Government to share with us the investment landscape and opportunities in Mexico, and their significance of their newly enacted PPP law.
22. We have also an interesting panel discussion on cross border private investments and financial flows between Mexico and Asia, as well as key drivers of and opportunities for private infrastructure financing.
23. I hope that today’s Summit will be useful for all in learning more about the PPP opportunities in Mexico and Asia.
24. I wish the Summit success and I see great potential to replicate and grow what we have here today. By facilitating Asian business interests to explore new markets in Mexico, we are creating synergy between two regions with high potential to play a significant role in stimulating the world economy.
25. Thank you very much.