Banking on infrastructure finance

In an increasingly urbanised world facing large-scale rural-urban migration, governments are under pressure to develop or upgrade their infrastructure. This has, in turn, driven up demand for infrastructure financing. The Asian Development Bank (ADB) has said Asia needs at least US$800 billion (S$995 billion) a year to fund its infrastructure needs.

The recent establishment of the New Development Bank (NDB) by the BRICS countries (Brazil, Russia, India, China and South Africa) and the proposed set-up of the China-led Asian Infrastructure Investment Bank (AIIB) present new opportunities for infrastructure financing. As leading Asian financial centres, Singapore and Shanghai stand to gain from this emerging interest in infrastructure finance.

AN EMERGING ASSET CLASS

During a speech given at the World Bank-Singapore Infrastructure Finance Summit last month, Trade and Industry Minister Lim Hng Kiang revealed that Singapore was working on building a strong pipeline of bankable infrastructure projects, mainstreaming these projects for investors and developing a specialised pool of infrastructure-financing specialists. Projects are bankable if lenders are willing to finance them.

Singapore is also working with multilateral banks such as the World Bank and the ADB to develop a market for infrastructure financing. Given that the World Bank has established offices for its International Finance Corporation and Multilateral Investment Guarantee Agency groups in Singapore, there is scope for closer cooperation between policymakers, financial institutions and the World Bank to develop infrastructure financing opportunities.

More recently, Singapore has expressed interest in joining the AIIB. Led by China as its largest shareholder, the AIIB aims to provide funds for infrastructure projects in Asia. In working with the AIIB and other multilateral banks, Singapore is pursuing a development strategy that is in line with its international-oriented approach to economic development. This requires connecting with a “global hinterland” in lieu of its limited geographic size.

More importantly, Singapore’s efforts at developing a market for infrastructure finance are crucial for its continued success as a financial centre. Its strengths lie in foreign exchange, commodities and wealth management markets. Developing a market for infrastructure finance will cement Singapore’s position as financial centre for the developing Asia region and allow it to act as intermediary between international financial markets and other major Asian powers such as China, where infrastructure demands are also rising.

However, Singapore is not the only financial centre that is aiming to become a major player in infrastructure finance. Shanghai, in hosting the NDB, will gain access to China’s immense pool of capital and burgeoning infrastructure demands in developing Asia. China is a major contributor to the NDB’s US$100 billion Contingency Reserve Arrangement, which provides a buffer against short-term liquidity pressures.

Like Singapore, Shanghai’s hosting of the NDB is reminiscent of its traditional approach to developing its financial centre. This involves tapping on its natural economic hinterland in China as well as its close connections to Beijing. Cultivating a market for infrastructure finance will also contribute to Shanghai’s aim to become a full-fledged international financial centre by 2020.

WHAT NEEDS TO BE DONE

However, policymakers in Singapore and Shanghai will need to overcome several stumbling blocks to truly capitalise on the emergence of infrastructure finance as an asset class. In particular, the long-term nature of infrastructure projects means that returns from investment will take longer to materialise and capital invested in these projects will be tied down for a longer period of time.

Banks are typically wary of making too many long-term loans, given that the bulk of their revenue comes from short-term deposits. As the 1997 Asian financial crisis demonstrated, the practice of “lending long” and “borrowing short” raises the risk of capital reversals and bank runs during crises, when investors are more likely to “short” their positions and withdraw cash. This will pose a problem to banks that are overly leveraged in long-term investments and hence unable to meet sudden demands for liquidity.

Furthermore, the financial infrastructure and conditions necessary for infrastructure finance to truly take off remain relatively underdeveloped, particularly in the case of Shanghai. While Singapore has taken steps to develop a pool of infrastructure finance specialists and encourage the development of financial products based on infrastructure projects, Shanghai needs to further liberalise its financial sector to attract foreign investors and enhance its legal-regulatory infrastructure, which is still perceived to be relatively opaque.

Such limitations will continue to hamper Shanghai’s attractiveness to investors as a centre for infrastructure finance. In contrast, Singapore’s strength as a trusted financial centre governed by the rule of law is likely to give it an immediate leg-up over Shanghai in the race to become a hub for infrastructure finance.

Perhaps most importantly, there is a need to consolidate global infrastructure financing by making sure that the NDB, the AIIB and other multilateral banks complement one another. Despite the rhetoric over the potential role of the NDB and the AIIB 
as alternatives to the World Bank, the reality is that developing countries will benefit most from greater access to all three banks.

It is thus imperative that cross-market linkages are established so developing economies can gain access to infrastructure financing options from these multilateral banks. This will require greater cooperation among policymakers in Singapore, Shanghai and other countries, given the emerging position of both financial centres as hubs for infrastructure finance.

ABOUT THE AUTHOR:

Dr Woo Jun Jie is a postdoctoral research fellow at the Lee Kuan Yew Centre for Innovative Cities at the Singapore University of Technology and Design.