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One of the greatest challenges faced by developing Asia is meeting the urgent need for physical infrastructure crucial to achieving overall growth and reducing poverty.

The irony, however, is that while developing countries need physical infrastructure in order to grow, being a developing country, they don’t have the financial resources needed – estimated at US$20tn-30tn in the coming 10 years for major countries – to develop the required infrastructure.
“The sheer magnitude of the region’s financing requirements calls for urgent and diversified mobilisation of financial resources,” says Yun-Hwan Kim, Asian Development Bank (ADB) assistant chief economist, in his paper, “Financing Infrastructure Development: Asian Developing Countries Need to Tap Bond Markets More Rigorously “

Asian developing countries have traditionally relied on fiscal efforts and official external aid to finance their infrastructure needs. However, the last decade has seen important developments that prompted governments to look to other sources of finance.

First among these is the fact that the government budget alone cannot provide the necessary funding for infrastructure, especially in view of the rapidly increasing public demand for basic government services. Also, financing long-term capital investment projects through annual tax revenues is unsound from the viewpoint of financial management principles.
Short-term external borrowings are likewise unsafe as they may cause funding-investment mismatches that were a major factor underlying the Asian financial crisis in 1997.

And with the introduction and adoption of various new financial techniques, such as the build-operate-transfer (BOT) scheme, the private sector’s desire to invest in physical infrastructure has drastically increased.
Given these factors, long-term private sources, specifically bond financing in both domestic and international markets, come out as alternative sources that are both profitable and appropriate.

Kim says that bond financing will ease the uncertainties caused by the limited availability of credit from domestic and foreign banks in the post-crisis period.

Also, he says that since the world’s highest domestic savings are from east and Southeast Asian countries, bond financing will help transform these into long-term development resources. Similarly, the large amount of foreign reserves held by Asian countries could be used to finance development projects through bond markets.

Last, since bond issuers prefer a high credit rating to reduce interest rate and issue costs, bond financing will help enhance corporate governance standards in Asian developing countries.

However, bond markets are generally underdeveloped and shallow as the financial systems of Asian countries remain distinctively bank-centred.
“The markets are small compared to those in Japan or in the US, where outstanding domestic bonds account for over 150% of GDP,” says Kim.
In the US, banks account for less that 25% of financial assets, whereas they account for up to 80% in Asia. This suggests that non-banking financial markets, including bond markets, have a promising future in Asia if proper policies are pursued.

“It is essential that Asian developing countries make stronger endeavours to develop bond markets,” he adds.

A notable development, says Kim, is the emergence of international project bond markets to fund long-term infrastructure projects in developing countries. Among the high-profile projects funded through this are the US$1.2bn issued by the Ras Laffan Liquefied Natural Gas project in Qatar and the US$125mn issued by the Quezon power project in the Philippines.
“Although the volume of funds raised through international project bonds remains relatively small, the market has expanded rapidly. And in view of the massive infrastructure needs in developing countries, the long-term prospects for project bonds appear to be promising,” he adds.
The paper is part of the ADB’s ERD Policy Brief Series, designed to provide concise non-technical accounts of policy issues.