Importance of infrastructure financing in South Asia

On behalf of the Government of Sri Lanka, It is my pleasure to be here and address on this seventh informal meeting of the SAARC Finance Ministers. Today we are discussing ‘Infrastructure Financing in South Asia,’ which is a very important topic for all South Asian countries. This discussion comes at a significant time, as we all are working hard to reduce poverty, combat diseases and improve the well being of millions of our people in line with the targets of The Millennium Development Goals (MDGs).

Well-designed infrastructure investments can raise economic growth, productivity, and land values, while also providing significant positive spillovers to areas such as economic development, energy efficiency, public health, and manufacturing. However, inadequate infrastructure has been a serious bottleneck for economic development of all South Asian countries. In the meantime, the amount of resources needed to finance urban infrastructure in our countries is huge.

Demand for infrastructure

In the coming years, SAARC countries will have to tackle a huge demand for infrastructure in their burgeoning cities. According to the projections, Asia’s cities, for example, have to accommodate more than two billion additional people over the next 20 years. All these people will need water, sanitation, healthcare, education, transportation, housing and power. Negative impacts of rapid urbanisation are visible in most of our countries and in some parts of the South Asian region urbanisation has become synonymous with slum growth, posing additional challenges for the cities’ social fabric.

Economic infrastructure in most of South Asian countries is mainly financed from national budgets, which are limited. Obtaining foreign financing from development partners could ease the burden on national budgets to a certain extent. However, each country has its own limit to foreign borrowings. On the other hand, lending practices in relation to development partners involves a lengthy process which is time consuming in terms of project preparation and procurement. Traditional funding methods limit the flexibility and cost-effectiveness of infrastructure financing.

Although decentralisation of public services has generally improved the service delivery levels in some of our countries, increased responsibilities are not always in line with the capacities and financial means of many local governments. In many cases local governments are not well-prepared to meet the challenges they face in providing the services and infrastructure required due to different reasons. The main reasons include (a) overall lack of adequate funding, as a result of insufficient revenues from local taxes and fees and limited access to loans and other forms of debt financing; (b) shortage of qualified staff and lack of technical and administrative capacities to plan, implement, operate and maintain urban infrastructure facilities and (c) lack of coordination between different line agencies.

Therefore, providing urban services and infrastructure will require a blend of finance, technical and planning capacities, and a close cooperation between the public sector, development partners and the private sector.

Private sector participation

Increased private sector participation in financing and operating local urban infrastructure facilities is now been widely recognised. Studies have found evidence of large private sector productivity gains from public infrastructure investments, in many cases with higher returns than private capital investment. However, not every infrastructure project is worth the investment. Investing wisely in infrastructure is critically important, as is facilitating private financing for public infrastructure.

Although there is a growing need for private sector financing, insufficient legal and administrative frameworks for private sector participation such as insufficient investment laws, tariff laws and policies, in-transparent and unreliable planning and procurement processes, and insufficient accounting standards of local governments often hinder the involvement of the private sector in infrastructure financing in most of the countries in our region.

Therefore, we need to find ways to overcome these issues. One way is entering in to partnerships between the government and private sector investors which will enable the government to subsidise by contributing to the concessionaire towards recovery costs. This will ensure the recovery of the projected income over the concession period before transferring the assets (on BOT projects) to the government and this will create a ‘win/win’ situation for all.

Sri Lanka

Sri Lanka has embarked on a big infrastructure development program for which we need funds from different sources like equity, private-public sector partnerships and bond issues. Recognising the need for exploring new funding sources to finance the long-term strategic infrastructure development projects, the Government of Sri Lanka is now trying new investment models.

Registration of an Investment Fund Account (IFA) in all banking and financial institutions was proposed in the Budget Proposals in 2011 for this purpose. Accordingly, all banking and financial institutions were required to transfer a portion of their tax savings to these accounts and the banks are required to adopt low interest rates and longer term maturity for lending the funds accumulated in the IFA with the objective of using the tax savings more productively for economic development.

Investment fund accounts established in the commercial banks are now providing better access to development financing for State Owned Business Enterprises, Public Corporations and the private sector, allowing the government to divert more resources for other priority development projects without burdening the national budget. The Government encourages local banking and financial institutions to contribute more to the national development program of the government in a dynamic way.

While recognising that State Owned Enterprises have a major role in infrastructure development, these enterprises are encouraged to borrow directly from foreign and domestic sources. In the meantime, the Strategic State Owned Business Enterprises (SSOBE) are expected to enhance their revenue generation activities while minimising the dependence on government funds for investment in infrastructure development.

Macro economic situation

Let me take a few minutes to brief you about the macro economic situation in Sri Lanka also. Despite a difficult global and domestic environment, the Sri Lankan economy grew by 6.4% in 2012 following two consecutive years of robust growth of over 8%. The moderation of the growth in 2012 is due the weakening global economy, which has adversely affected the demand for our exports. Sri Lanka has taken steps to reorient its economic development policy framework to suite the requirements of a middle income economy. The main objective of the Government budget for 2013 is to facilitate transformation of Sri Lanka towards a poverty free upper middle income economy.

The Development Policy Framework of the Government envisages a well developed economic infrastructure network covering the entire country. This needs significant private investment with an improved investment climate for the private sector. Considerable private investment has already taken place in the areas of ports, power and energy, roads, telecommunication, tourism, agriculture and marketing. In the meantime, a substantial amount of government investment is also necessary to fill the financing gap. The current investment level of the country is to be increased to about 33% of GDP with sustained commitment of public investment of 6-7% of GDP to support private investment.

The country is now on the path to peace, reconciliation and development based on the Economic Policy Framework of the Government. In 2012, we have concluded Provincial Council Elections in 3 distinctly different provinces that represents one fourth of the population. It is an encouragement to the Government is encouraged that people from all communities have placed their overwhelming confidence in Government development programs.

Upholding our commitment to developing the Northern Province in par with other Provinces, Government has implemented many development initiatives. People have returned to normal family living. Access to electricity, education, water and health facilities is improving rapidly. Banking and financial institutions have expanded and there is a strong enthusiasm in people from the Northern Province to find economic prosperity in the newly found environment.

Let me conclude by emphasising the need for a well-developed infrastructure network for economic growth and improved living standards of our people. Therefore, it is high time that member countries revisit their economic policies to find appropriate strategies to finance the strategic infrastructure development programs which have been left unattended for a long time.