The Hindu Business Line : $300-b SPV mooted for Asian infrastructure

The RIS study says several cross-border projects for improving energy security and cross-border surface transport with high pay-offs are languishing because of lack of resources and complex negotiations.

New Delhi March 20 An official study proposes a regional special purpose vehicle (SPV) with authorised capital of $300 billion to address the infrastructure deficit currently plaguing the Asian region to render the land-locked countries and isolated pockets of Asia land-linked.

The Department of Commerce sponsored the study at the instance of the UN Economic and Social Commission for Asia and the Pacific (ESCAP).

It would be discussed at a two-day High-Level Policy Dialogue Conference beginning tomorrow.

The study examines the relevance of regional co-operation for infrastructure development and financing in Asia.

When contacted, the Minister of State for Commerce, Mr Jairam Ramesh, told Business Line that the ESCAP Executive Secretary, Mr Kim Hak-Su, called on him last year and suggested the idea of pooling regional resources to undertake cross-country infrastructure projects.

Accordingly, he asked the Research and Information System (RIS) for developing countries to execute the pre-feasibility study for such ventures.

Currently, the RIS study said, several cross-border projects for improving energy security and cross-border surface transport with high pay-offs are languishing because of lack of resources and complex negotiations and institutional structures for such regional operations.

Stating that additional resources requirements for meeting infrastructure needs of Asia are at least $200 billion per year, the study said that mobilisation of resources on that magnitude is feasible in the light of conditions where Asia possesses surplus savings estimated at over $300 billion in 2004 but could not be delivered in fully by existing institutions.

Hence the proposal of a regional SPV with authorised capital of $300 billion, 10 per cent of which might be paid-up.

The SVP would use the excess foreign exchange reserves of Asia to help fill the financial viability gap of private sector investments in infrastructure.

A certain small percentage (10 per cent) of the regional reserves (currently hovering about $3 trillion) could be lent at the rate that obtains on 30-year US Treasury Bills to the regional SPV, which would be authorised to invest these resources in global equity indices.

The study contends that there is a high probability that this SVP would be able to earn at least 500 basis points above the cost of its funds and thus have about $15 billion to fill the financial viability gap which, using the India example, could be put at a maximum of 20 per cent of the project cost.

With private and public sector enterprises utilising the capital markets for raising their basic fund requirements, the financial ability of SVP should enable it to be a catalyst for more than $75 billion infrastructure investment per year in the region, thus meeting about half the infrastructure funding gap.

The private sector would raise its basic funding from the regional capital markets in particular bond markets, which need to be developed further by linking up with the growing pension funds industry in the region to intermediate regional savings into regional investments.

In order to minimise the risks to these bonds from fluctuations in regional currencies vis-à-vis the US dollar and in relation to each other, these bonds might be increasingly denominated in an Asian currency unit and this could be a weighted average of major regional currencies with weights proportional to purchasing power parity-adjusted GDP.