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International relations

Asia to lure private infrastructure loans with insurance scheme

Plan would seek to fill the gap in demand for power plants, rail, roads and waterworks

Workers build a pier in Indonesia. Insurance for private-sector financing could help fill the severe gap in funding for Asian infrastructure projects.   © Reuters

NADI, Fiji -- ASEAN members plus China, Japan and South Korea will draw private investors and banks to invest in Asian infrastructure projects by insuring financing of up to $1.5 billion, according to a draft plan seen by Nikkei on Friday.

There is a tremendous need for infrastructure in Asia but a shortfall of funds. The Asian Development Bank estimates demand at $1.34 trillion a year for 25 developing members but puts their annual investment at just $881 billion. Funds are particularly sparse in the construction phase, delaying power plant, road and rail projects. The Association of Southeast Asian Nations and the trio are together known as ASEAN+3.

Demand is only expected to increase going forward as disasters stemming from climate change take a toll on existing infrastructure.

Finance ministers and central bank governors from the countries agreed here Thursday to create a framework insuring private funding for these projects under a program called the Infrastructure Investors Partnership.

An initial proposal calls for participating countries to furnish $200 million and for the private sector, including pension funds and life insurers, to contribute $400 million. Japanese institutional investors are expected to be top buyers, since capital will likely be raised in yen first.

The $600 million public-private fund will be used to insure a total of $1.5 billion in financing starting in 2020.

Asian countries have supported infrastructure development by insuring bonds. But construction can take more than a decade, and delays are common, making it difficult to issue bonds to finance them in emerging countries. This makes tapping banks for financing the norm.

The new insurance framework for lending is a response to this situation. The program will first insure bank loans made in local currencies. After construction of a project is completed, funds used to insure the project are converted into bonds. Revenue collected from such projects as roads and airports will be used to pay interest to holders of the bonds.

China's participation in the fund is noteworthy as the country has raised its profile in infrastructure finance with the Beijing-led Asian Infrastructure Investment Bank.

Japan has pushed the ADB, which has been led by a Japanese president since its founding, to reexamine the preferential terms on loans for China. But Tokyo also seeks to partner with Beijing on infrastructure development. Cooperation between the AIIB and ADB is essential, according to Bank of Japan Gov. Haruhiko Kuroda.

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