Interview: Allard Nooy
How can low-income economies in Asia attract private investment while providing affordable tariffs?
ALLARD NOOY: In the energy sector and in many countries, the user and ability-to-pay principle doesn’t exist; tariffs are co-subsidised. Typically, there exists an agreement between a ring-fenced power plant and either a ministry or a subset of state-owned enterprises and the power plant then sells to distributors. This is the case essentially across the whole region, although a few countries have made considerable improvements in tariff settings. These countries have introduced a different level for retail, industrial and commercial businesses.
Some countries have implemented a so-called rising block tariff, meaning that the rate increases as consumption increases. A potential problem with such measures is that either the tariff for industrial companies or the subsidy must be raised. To resolve this, some countries have introduced a wholesale levy, combined with a wheeling charge for transmission and distribution. This can potentially avoid an increase in subsidy requirements and tariffs can be re-evaluated regularly.
What can be done to channel the relatively high level of domestic savings in Asia towards productive, long-term infrastructure investments in the region?
NOOY: There is still a tendency in a number of countries in Asia to either store savings in cash, at home, or to invest in gold. This is due in part to the collapse of local banks, partly as a result of non-performing loans, or their merging with other banks. This has happened frequently enough to cause mistrust in the banking system. This could be resolved by government guarantees to support the local banking system, which could promote a return to saving money in bank accounts and thus strengthen banks’ balance sheets. This could then provide sufficient credit to lend to infrastructure projects. We recently exited from a hydroelectric power project in Vietnam that was one example of this. In 2012 this project became a distressed asset, primarily because, alongside the banking crisis in Vietnam, the original developer had not secured all the funding. Local lenders did not want to lend to the project. To resolve this issue, and in order to bring the project in line with international standards, we conducted an environmental impact assessment and retendered the engineering procurement and construction contract (EPC) contract. We then achieved 50% of the total funding from the debt market, using relatively long-term limited recourse project finance. We then refinanced once the project was further de-risked and ready to reach commercial operations.
In which ways could green bonds address the financing gap for infrastructure in Asia?
NOOY: There are two main reasons that green finance bonds offer potential to address the financing gap. First, although green financing is not new, it receives considerable attention from commercial lenders and legislatures. This will encourage further sustainable projects to be financed in a green manner – that is to say, involving energy that is clean, renewable and energy efficient. The second reason is that bonds, in general, are becoming a more viable financial instrument, particularly to refinance existing projects.
Where do you see opportunities to address infrastructure gaps in the Belt and Road Initiative (BRI) ?
NOOY: The BRI offers the potential to work with Chinese companies. We have worked with them on EPC contracts and envisage similar opportunities along the belt and road route in the future; not only with Asia, but also in Africa. Working with Chinese partners offers the potential to provide longer debt financing for projects. Hopefully, this will result in a higher number of bankable projects. I suspect that Chinese banks and companies have a different appetite for risk than other countries. We especially foresee opportunities to work with Chinese companies in Pakistan and South-east Asia.
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