Infrastructure Financing Challenges in Small Islands Developing States (SIDS)

Infrastructure Financing for Sustainable Development

Expert Meeting

Bangkok, 7-8 March 2019

Economic Research Institute for ASEAN and East Asia

Fauziah ZenERIA

Outline

• Overview

• State of infrastructure and financing

• Infrastructure financing challenges

– Market-related environment

– Public sector

• Opportunities in infrastructure financing

– Sectors: tourism and global value network

– Climate change financial management

• Conclusion

OVERVIEWInfrastructure Financing Challenges in SIDS

Overview

• The United Nations recognizes 58 SIDS in the world, of which 38 are United Nations Member States and 20 are not.

• The Pacific SIDS in this paper consists of 13 countries: Fiji, Kiribati, Marshall Islands, Micronesia (Federated States of), Nauru, Palau, Papua New Guinea, Samoa, Solomon Islands, Timor Leste, Tonga, Tuvalu, and Vanuatu.

• The islands economies:– serve significant portion of the world biodiversity – are vulnerable to various natural disasters and the effects of climate

change. – are diverse in terms of number of islands, size, population, and GDP– have limited development options

General Economic Indicators

Country Population Area (km2) Population Density

(per km2)

Number of Islands

GDP (million $)

GDP/cap (PPP $)

Fiji 918 757 18 270 50 330 5 061.20 9 555Kiribati 120 428 810 146 33 196.15 2 175Marshall Islands 53 211 180 294 34 199.40 4 193Micronesia (Federated States of)

106 983 700 151 607 336.43 3 622

Nauru 11 260 20 539 1 113.88 14 158Palau 22 206 460 48 340 291.54 14 536Papua New Guinea 8 586 525 452 860 18 600 21 088.76 4 197Samoa 198 909 2 830 70 9 856.63 6 611Solomon Islands 635 254 27 990 22 998 1 303.45 2 422Timor Leste 1 352 360 14 870 89 3 2 954.62 7 213Tonga 110 041 720 146 169 426.06 5 957Tuvalu 11 363 30 434 9 39.73 3 925Vanuatu 288 017 12 190 23 83 862.88 3 208

Source: Population and density data are from United Nations Population Division (2018), others

from the World Bank (2017)

General Economic Indicators

Economy Global Rank

Samoa 90Tonga 91Vanuatu 94Fiji 101Papua New Guinea 108Solomon Islands 115Palau 133Marshall Islands 150Kiribati 158Micronesia, Fed. Sts. 160Timor-Leste 178

4 3.93.6 3.5

3.2 3.2 3 2.82.5 2.5

2

-3.7

-5.3-6

-4

-2

0

2

4

6

GDP Growth Rate 2017, Pacific Islands (in percentage)

Ease of doing business ranking, 2019 (The World Bank)

Source: ADB, 2018

Overview

• International assistance:– The United Nations “SIDS Accelerated Modalities of

Action (SAMOA) Pathway”– The Pacific Regional Infrastructure Facility (PRIF) in

2008: manage and coordinate development aid for Pacific SIDS

• Being SIDS means having increased economic vulnerability by about 10 percent for SIDS and 15 percent for SIDS-LDC, compared to non-SIDS (OECD and World Bank, 2016).

Overview

• State of infrastructure development: – the high cost of building infrastructure due to remote

location, lack of skilled planner and workers, and imported input and capital,

– higher risks of investment caused by disaster threats,

– low ability to attract private investors (high uncertainty, not appealing pipeline),

– small market and poor connection with large economies.

– early stages of PPP policy

– Infrastructure project data is publicly limited

STATE OF INFRASTRUCTURE AND FINANCING

Infrastructure Financing Challenges in SIDS

State of Infrastructure

Key information on transportation state as reported by the PRIF (2016) is as follows:

• Aviation– There are 722 airports in the 14 Pacific Islands countries, with at least one international airport in

each country.

– Only seven per cent of airports are paved, including all international airports.

– There are 16 678 international passenger seats per week of which 65 per cent are on flights from Australia and New Zealand.

– Since 2010, there have been two airplane crashes (both in PNG) with 28 fatalities.

• Maritime– There are 31 international shipping ports.

– International cargo and commercial vessels range from 295 per year in Vanuatu to 20 per year in Tuvalu.

– The composition of port charges caries considerably, making comparisons difficult.

• Roads– There are 21 862 kilometers of road in the Pacific Islands, with only 33 per cent paved.

– 60 per cent of paved road is in PNG but it also has very low road density due to the amount of inaccessible land.

– There is a lack of data on road conditions, maintenance and road safety

Selected Public Finance Indicators in Pacific SIDS, % of GDP

CountryState

Budget

Official Aid (ODA+OOF+ Private)

Debt FDI Special Revenue

Fiji (2017 estimate) 32.4 3.13 48.1 -8.0 ..Kiribati (2016) 115 28.22 42 .. 66 (fishing license)Marshall Islands (2016 estimate)

58.4 29.53 42.5 ..8.3 (compact fund)6.3 (fishing license)

Micronesia (FS) (2016) 61.2 237.35 25.3 .. 19.6 (fishing license)

Nauru (2016 preliminary) 91.6 97.65 64.9 ..27.4 (remittances) 12.9

(tourism)Palau (2016/2017) 34.9 11.41 26.3 .. 39.9 (tourism)Papua New Guinea (2017 estimate)

20.3 2.00 37.5 .. ..

Samoa (2015/2016) 36.5 12.33 52.6 .. ..Solomon Islands (2018 estimate)

46.9 15.74 12.1 31.1 ..

Timor Leste (2016 estimate) 64.5 7.51 2.8 .. 19.6 (petroleum rev)Tonga (2017 estimate) 44.9 21.54 48 2.7 ..Tuvalu (2017 estimate) 126 69.54 37 .. 50 (fishing license)Vanuatu (2016) 36.9 16.38 48.8 .. 25.5 (tourism)

Source:

- IMF (2019a; 2019b; 2019c; 2018a; 2018b; 2018c; 2018d; 2018e; 2018f; 2018g; 2017a; 2017b; 2017c).

- OECD Statistics: https://stats.oecd.org/Index.aspx?DataSetCode=Table2A# accessed 17 February 2019

Top 5 Donors and Top 5 aid recipients (2009-2016)

Top 5 Donors (2009-2016) Top 5 Recipients (2009-2016)

Country Amount ($ mil) Country Amount ($ mil)

Australia 798.70 PNG 646.05

New Zealand 192.01 Oceania, Regional 239.22

Japan 180.76 Solomon Islands 189.23

WB Group 143.49 Fiji 177.32

China 113.92 Vanuatu 153.59

Source: PRIF, 2018

Infrastructure Characteristics

• High cost in investment and maintenance: imported capital goods, difficult access, environmentally vulnerable.

• Low maintenance budget: “build-neglect-rebuild” behavior, short project life-cycle.

• Increasing infrastructure spending on government budget, but the gaps still high.

Sources of finance

• Aid• Loan • Climate-change-related funds• National revenues: fishing license, remittances,

tourism.• Special revenues: oil (Timor Leste), asylum

seekers processing center (Nauru from Australia), compact fund (Palau), sovereign green bond (Fiji, 2017, US$47m)

Private sector participation

• The mechanism to allow private participation is unclear and not easily accessible for the public.

• There are only two nations having PPP Act: Fiji (2006) and PNG (2008).

• Fiji after 2006: slow progress on the issuance of derivative regulations needed to implement the Act. Same thing with PNG.

• No statement about fiscal support.

• Restrictions: control of PPP company remains under Fijian interest (min. of 51 % of voting right or the right to appoint >50 % of board of directors, or Fiji Share, which refers to Prime Minister granted with special rights, incl. veto right.

• Additional risks coming from natural disasters, small and isolated market, and high input costs are not properly compensated, making the PPP market underdeveloped.

INFRASTRUCTURE FINANCING CHALLENGES

Infrastructure Financing Challenges in SIDS

Challenges in infrastructure financing: Market-related domain

• Small market and future potentials, isolation, and climate change threats: lower the return of investment by reducing project’s income stream and increasing monetized risks.

• Structural challenges: – The difficulty to identify and design the project which is cost-recovery

and has sufficient economies of scale: thin market, low purchasing power; high costs of capital, maintenance and replacement.

– Natural disaster risks pose threats to the sustainability of the project, leading to higher internalized risks.

• Operational challenges: – incomplete infrastructure market

– Incomplete legal framework

Challenges in infrastructure financing: public sector

• Public sector capacity in leadership, risk management, fiscal support provision, technical aspects, and preparing good pipeline.

• Low tax revenue and enforcement, low government effectiveness and regulatory quality.

• Needs to review the fragmented policies and stand-alone programs → integrate cross-cutting programs to improve efficiency and effectiveness.

OPPORTUNITIES FOR INFRASTRUCTURE FINANCING

Infrastructure Financing Challenges in SIDS

Opportunities for infrastructure financing

• To enlarge the market: by establishing cooperation with neighboring countries or taking part in regional/global value chain.

• Develop adequate infrastructure to attract businesses and increase contribution from tourism sector.

• Need to increase fiscal capacity• Increasing fiscal capacity can have demonstrating

effects of stronger capacity and credentials.

Opportunities for infrastructure financing

To generate more fiscal space:

• Broadening growth base, by improving debt management, enhancing growth drivers (knowledge, technology, innovation), and attracting more FDI;

• Improving revenue performance for both conventional and non-conventional sources (including: tax reform if needed, increase utilization of brownfield projects and existing assets, and cost recovery approach);

• Improving expenditure management: reduce transaction costs, redesign the role of SOEs, enhance treasury management, efficient public institutions, revisit programs prioritization, and create development bank or funding institutions whose budget management is separated from the state budget.

• Integrating relevant programs into a comprehensive cross-cutting program.

Opportunities for infrastructure financing

• Tourism and GVC:

– Expand cooperation in tourism sector

– Provide adequate tourism infrastructure

– Sustainable framework

– Explore opportunities to participate in GVC through big neighbors/sponsors: Australia, Japan, China, Indonesia (outsourcings, suppliers, etc.)

Opportunities for infrastructure financing

• Climate-change financing

– Beyond the lack of fund problems, the fundamental one is to have solid planning and leading actions from the authority. It requires supportive legal system, capacity, preparation, and discipline.

– Accessing the funds:

• Legal and institutional system

• Public sector capacity: technical capacity in mitigation (science, engineering, sociology, finance, and economics) and management capacity to lead the action in the fields,

prepare contingency plan, and evaluate the results.

CONCLUSIONInfrastructure Financing Challenges in SIDS

Conclusion

• Common features: the combination of factors such as governance issues, unfavourable investment climate, corruption, a lack of economies of scale, higher transportation costs, and poor infrastructure development.

SIDS:• Disaster-prone regions face specific and severe challenges

that can affect their development path.• The disaster threats + small economic size = complicated

business climate, especially for large and long term investments, such as infrastructure.

Conclusion

• To reduce unfavorable conditions:

– Improve islands resilience

– Improve and strengthen legal system to reduce uncertainty

– Implement capacity building for key government officers

– Explore potentials for regional cooperation, especially with neighboring countries,

– Establish a solid, competence, and accountable risk management authority

– Integrate infrastructure development into national or regional disaster management framework

– Improve fiscal policy to generate higher fiscal capacity and create fiscal space to develop infrastructure.

• Improve the roles of the donors and development partners of the SIDS

THANK YOU

fauziah.zen@eria.org