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Speech delivered by Minister of Public Administration and Home Affairs, Dr. Sarath Amunugama at the 62nd session of the UNESCAP in Jakarta, Indonesia on April 6, 2006. Dr. Amunugama was elected President of the sessions.

Ministerial Roundtable on theme Topic Regional Cooperation on Infrastructure Development and Financing: Recycling Asia's Savings for Infrastructure Investment.

"May I at the outset extend my sincere thanks to Mr. Chairman and distinguished delegates for inviting me to make a presentation on "Regional Cooperation on Infrastructure Development and Financing: Recycling Asia's savings for infrastructure investment.

"The UNESCAP study which is before us has highlighted the extent of financing needed for infrastructure development in the region. According to the World Bank study, the Asia-Pacific Region requires an additional US$ 200 billion a year to meet this need. By any test the scale of financing required is large. This need is created by the inadequacy of infrastructure between countries and within countries.

"Sri Lanka's experience in financing infrastructure development has been manifold. Historically, bilateral financing mechanisms have been utilised for investments in infrastructure with Japan, India, US, UK and China being the major bilateral donors.

Multilateral agencies such as Asian Development Bank, World Bank and the International Monetary Fund have also been key lending agencies for the development of the infrastructure in Sri Lanka. Sri Lanka receives approximately US$ 1 billion per annum in donor assistance whilst the required investment in infrastructure amounts to US$ 9 billion per annum to achieve the targets of our development plan. The large gap has retarded Sri Lanka's development efforts especially in the key areas of roads, power, telecommunication and water.

"In the recent past, my country has explored new avenues to finance infrastructure in a bid to reduce the shortfall. Some of the mechanisms Sri Lanka has adopted are:

Entering into Public/Private Partnerships in the fields of telecommunication and energy, implementing Build, Operate and Transfer (BOT) and Build, Operate, Own and Transfer (BOOT) schemes in the power and road sectors, issuance of a Sri Lanka Development Bond (SLDB) to finance a mix of infrastructure facilities, and setting up of a Board of Investment (BOI) to attract Foreign Direct Investment (FDI) for infrastructure development.

"However, even with the implementation of these mechanisms, we are still far short of the investment requirement to meet Sri Lanka's development needs.

We all know that Asia is a big saver. Yet, the lack of financial resources is a major constraint for infrastructure development, which in turn holds back growth and development. Our experiences in accessing international financial markets for financing infrastructure, in particular, have been somewhat disappointing. Financing is not available when countries need them.

When they are available they are generally not given on conditions acceptable to us. On the other hand, domestic financial markets in most developing countries in the region are in their infancy and are not developed enough to finance large scale infrastructure projects.

"The question we have to ask now is why the region's savings are flowing outside the region when a huge demand exists at home? Is it a question of higher returns? Certainly not. Most of the Asia-Pacific region's savings are invested outside the region, at low return, when most developing countries in the region are either unable to access international capital markets or are forced to borrow at much higher rates.

In the context of Sri Lanka, it has had to either postpone or cancel fund raising in international capital markets in the recent past. "The issue is basically a question of the lack of secured investment opportunities within the region. No risk-averse investor would be willing to put their money at risk unless someone guarantees the security of their investments.

We need to address both these issues, if the region is to retain its savings for its own development. Given the magnitude of the infrastructure investment required to address the infrastructure divide in the region, investing in infrastructure must be presented as a credible area of opportunity.

"Recycling even a fraction of the region's financial resources for the development of its infrastructure could have a significant positive effect on the economic development of the region and the quality of life of people.

"One may even ask whether it could destabilise the international financial system. Certainly not. The region's present and future savings alone would be good enough to meet the region's requirement.

"However, at present there is no mechanism within the region that could mobilise the region's resources for financing its infrastructure. The existing mechanisms, both global and regional, have played a significant role in developing infrastructure in the Asia-Pacific region. Yet, the demand appears to be overwhelming, which cannot be met by the existing institutional set-up as their scope is limited.

"There is a need for institutions to facilitate bridging the gap between potential investors and borrowers by providing guarantees and co-finance and putting in place risk mitigation arrangements, so that the investors' concern of securing their investment is met. It is time for us to think about having such mechanisms. We also need to have innovative financial instruments to satisfy complex and varying demands of donors.

"Such mechanisms should also be facilitated at the regional and country level by making efforts to establish investor creditability. Improved transparency and accountability will play a major role in reducing corruption, which is a major factor hindering the private sector.

A sound macro-economic environment is fundamental to inducing private sector investment and a stable and predictable policy regime is an essential pillar of creating an enabling environment for the private sector.

"Several studies have been done regarding foreign investment in the region. Some of the draw backs are: Inadequate technical and administrative planning in respect of projects which are submitted for funding, constant revision of technical and administrative arrangements relating to implementation of projects which lead to delays creating difficulties for the funding agencies, abandonment or long standing delays in major projects, delays in procurement and finding requisite project elements such as land, water, power and environmental approvals for such foreign funded projects, slow moving bureaucracy which hinders implementation, and corruption and lack of transparency.

"Whilst complaints are made regarding inadequate funds for development projects, the reality is that often less than 50 per cent of the projects for which funds have already been allocated are implemented. Nearly all donors have complained regarding the pace of implementation.

It is very necessary therefore that we address the basic question of whether the host countries are ready to receive larger allocations of funds for development purposes.

"Another phenomenon has been the growing intervention of regional donors regarding major projects in developing countries. For an example in Sri Lanka, Japan, India and China now account approximately for 75 per cent of the bilateral donor funds. These donors have experience in working in the region.

However, it is clear that most of this assistance comes by way of tied-aid. Many countries have now shifted away from direct government to government bilateral financing to Export Import Bank (EXIM) led facilities from respective donor nations.

"In many ways, this is a good development because the banks would be in a better position to exercise greater supervision and control before disbursing funds.

However, unlike in the past, banks tend to insist on higher interest rates than in the case of concessionary finance which was basically available on a government to government basis. Also banks do not encourage grant aid.

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