The Sustainable Solution to Asia’s $2.5 Trillion Investment Gap
Asia, that dynamic economic heart of the world, is struggling with a contradiction. Its economic power is not in question, but the continent is faced with an enormous aggregate investment deficit of nearly $2.5 trillion to finance its Sustainable Development Goals (SDGs) within the timeline of 2030. It’s more than a number; it’s a chasm of enormous depth that jeopardizes total progress.
The public purse books, already strained by post-pandemic recoveries and by the ever-ongoing requirements of national imperatives, simply cannot cover this distance on their own. Private capital, though in profusion everywhere else in the world, is too often an abject partner, spooked by perceived hazards and by quite simply not enough “bankable” projects. The essential solution, more and more, is blended finance.
The Elusive “Bankable” Project needs a “Blended” Solution
The perception that capital is insufficient is a false diagnosis. The issue is instead the shortage of appropriate projects to attract such capital. Private capital, ever keen judges of risk and return, regards emerging markets in Asia with circumspection. These are perceived to carry heightened risks from political risk, macroeconomic volatility and frequently, in places such as Indonesia and China, an uncertain environment of regulation. To these, combine the stark lack of standardized and granular data on project profitability, and you have systemic inertia that keeps the pockets of private capital closed.
Projects, despite the noble intentions behind them, too often come “raw” – underdefined, encumbered with local political entanglements, or too immature to suit commercial tastes. Take even such symbols of projects as Bangkok’s Skytrain, which struggled to near-bust in the early days despite its ultimate success, evidence of the profound structural weaknesses to preclude investment. The investment pie, on the other hand, is stubbornly concentrated in selected states like Singapore, Indonesia and Malaysia, perpetuating uneven development throughout the region.
Blended finance – coupling public development funds with private capital – is exactly the sophisticated instrument to unlock precisely this stalemate. It is strategic orchestration, bringing together concessional funding from public or philanthropic sources and commercial funding from private sector participants. The trick is in the layer of concessional capital, which intelligently takes on the early risks or accepts below-market rates in return, turning a high-risk investment into an appealing proposition to market-rate private investment. Not charity, but rather calculated de-risking that incentivises risk-averse lenders into projects that were heretofore too risky.
The instruments involved are powerful and grants and guarantees are key. Consider Cambodia’s US$200 million SMEs’ credit guarantee facility, making it easier and less risky for private lenders. Or the Japan ASEAN Women Empowerment Fund (JAWEF), which used US$120 million in public investor funds in mezzanine tranches to draw in the same amount from private sources to the senior tranche, in effect empowering women entrepreneurs.
The Asian Development Bank’s (ADB) Innovative Finance Facility for Climate in Asia and the Pacific (IF-CAP) is another example of this multiplier impact, with promises to leverage up to US$5 in climate finance in return for US$1 of guarantees. Sweden, as an example, is contributing a US$200 million guarantee to this facility. Indonesia is the Asian trailblazer, with some 40% of blended finance transactions in Southeast Asia by volume and 59% by value. Their support of this method is highly encouraging.
Blueprint to Build-Out
To unleash blended finance in full, platitudes have to be trumped by pragmatism. To start with, everyone’s eyes need to be on developing well-conceived, well-designed projects. Good intentions, although admirable, are not enough to draw in the amount of capital needed. Next, early and deep collaboration with the private sector is not negotiable. Policymakers have to be talking to investors about their specific risk appetites and capabilities before deal design, and risk is assigned to those who can handle it. This is to avoid scaring off investors by requesting them to take all of the project-specific risks. Third, transparency and standardization are essential. This is about harmonized taxonomies, easily available digital platforms for project data, and simple bureaucratic processes to minimize transaction costs and generate confidence.
The Philippines’ PPP Code is an encouraging example of how to raise procurement transparency and mitigate foreign investment risk. Multilateral Development Banks (MDBs) play a key role here, not only in funding, but in technical assistance and government capacity-building. Solving the low rate of SME regionalization is also essential since these small and medium enterprises play the key role in the development of support industries and supply chains in regions.
Lastly, and perhaps above all, leaders need to adopt a more audacious narrative: it’s not only about identifying “bankable” projects, but actually making the “non-bankable” bankable. Projects essential to societal advancement, even marginally commercially fit in the early stages, need to be commercially viable by intelligent structuring and de-risking. Singapore’s FAST-P platform bringing together concessional and private capital to support energy transition and industrial transformation is a powerful prototype of such systemic intervention. Promoting local currency financing can also neutralize currency exchange risk to investors.
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Blended finance is clearly picking up steam in Asia. It is a potent overture in the symphony of sustainable development, yet its full potential, honestly, is currently not fully realized. Realizing this potential requires consistent political leadership, unshakeable policy coherence and unrelenting implementation focus, transcending piecemeal efforts towards genuinely concerted regional coordination.
The potential to remake Asia’s future – constructing resilient infrastructure, green economies, and better lives – is enormous. It is time to write a more harmonious and powerful financial future, not merely for Asia, but globally. Further reading: From the World Economic Forum, available here.
