ABMI TECHNICAL ASSISTANCE WORKSHOP 2006:

INFRASTRUCTURE FINANCING : CATALYST FOR CROSS-BORDER BOND ISSUANCE

OPENING ADDRESS
BY

TAN SRI NOR MOHAMED YAKCOP
MINISTER OF FINANCE II

SECURITIES COMMISSION
KUALA LUMPUR

7 December 2006

Y Bhg. Datuk Zarinah Anwar
Chairman
Securities Commission

Mr Osamu Shimizu
Deputy Director-General
Ministry of Finance, Japan

Distinguished guests
Ladies and gentlemen.

Asalamualaikum Warahmatullahi Wabarahkatu and good morning, and a very warm welcome to Malaysia to our foreign guests.

I would like to thank the Securities Commission and the Ministry of Finance, Japan, for inviting me to deliver the opening address at this workshop on Infrastructure Financing: Catalyst for Cross-Border Bond Issuance.

2. But why infrastructure? It is common knowledge that the construction and provision of infrastructure stimulate economic activities. Wherever a road or a rail track is built, towns spring up. Local producers will not only find a market in the new towns but will be able to market their produce in far away places, including in foreign countries. With infrastructure, all kinds of new business activities will develop and the people will benefit from these activities. The construction of the infrastructure itself will create jobs for the locals, build a market for their produce and earn them better prices. So will the maintenance of these infrastructure.

3. Infrastructure development, therefore, generates a virtuous cycle as infrastructure development facilitates more rapid economic growth, greater trade and capital flows, which in turn provides higher employment and income to finance investments across all sectors of the economy, including more infrastructure. In addition, to support the requirements of business and facilitate strong and sustainable growth, governments need to plan ahead and build today for tomorrow's needs, whether in terms of roads and highways, power generation, telecommunications and water.

4. Since the seventies, the Malaysian Government has invested heavily in building up our infrastructure facilities and public utilities, rising significantly from 3.3 billion ringgit during the Second Malaysia Plan, 1970-1975, to 38.7 billion ringgit during the Eight Malaysia Plan, 2001-2005, while the current Ninth Malaysia Plan, 2006-2010, has provided an additional allocation of 46.8 billion ringgit. We continue planning our investment in infrastructure to ensure that there is capacity beyond current requirements, which enables businesses to come to Malaysia and not worry about capacity constraints.

5. Today, we pride ourselves in having world class infrastructure facilities, ranging from highways, ports and airports, communications as well as power generation and water supply. Our highways and road network have grown by 1.4 times; from 54,000 kilometers in 1990 to almost 78,000 kilometers in 2005. All states in Malaysia have air links, including rural air services in Sabah and Sarawak. The Kuala Lumpur International Airport is one of the largest and modern airport in this region.

6. Where only 80 percent of the population had access to piped water and electricity in 1990, we now have achieved a level of coverage of more than 95 per cent for piped water and 93 per cent for electricity. Our telecommunication industry, once reliant only on fixed line services, now boasts the use of broadband transmission, wireless technologies and third generation mobile telephones. Malaysians are also well connected now with a cellular phone penetration of 74 persons for every 100 Malaysians in 2005, compared to less than one percent in 1990.

7. In Malaysia, traditionally, investment in infrastructure has been publicly funded, largely on account of the high capital intensity nature of infrastructure projects. However, the provision of infrastructure is no longer assumed to be the sole responsibility of the public sector, but increasingly implemented through public-private partnerships. There is a recognition of the need for a more balanced public-private approach to financing and for innovative risk sharing mechanisms. Towards this end, since the 1980s, the Government has encouraged the private sector to invest in infrastructure through its privatization program. As a result, private infrastructure financing has accelerated, including in highway construction, public transportation, ports, communications, water supply and power generation. In the Ninth Malaysia Plan, the Government has emphasized the need to expand our range of public-private partnership and the scope of undertaking projects through the Private Financing Initiatives (PFIs). We have defined PFI quite broadly and are exploring areas where there are private sector projects strategic to the nation but direct returns are not sufficiently high to match market determined cost of capital. Given the strategic nature of these projects and the very large spin offs to the economy, the Government, based on merit, would provide financial support in order to help such projects to take off. An example of this are toll roads where the concession income may not be sufficient to support the entire project.

8. In the eighties and nineties, the financing of private sector initiatives, including long gestation infrastructural projects, has largely depended on the banking sector. The problems that can arise when the banking system carries a disproportionate burden of financing activity are now well documented. In the aftermath of the 1998 financial crisis, therefore, we took steps to put in place the building blocks of a financial system that will ensure proper intermediation and efficient allocation of funding sources. This requires a more diversified financial system in which both the banking sector and capital market have relative depth and breadth, particularly in terms of products and services offered.

9. Our priority in the development of the capital market has been on establishing a deeper and broader as well more efficient bond market that provides greater diversity of products and with a wider range of tenors, especially to meet long term funding needs of investors. Malaysia has, over the last one and a half decades, tenaciously developed its bond market not only to reduce systemic risk in the banking system but also as a viable source of funding for corporates.

10. The Malaysian corporate bond market has grown exponentially to a size of 210 billion ringgit or 58 billion US dollars, the third largest in East Asia (ex-Japan) and the second largest market as measured by its size to GDP. Our corporates have successfully tapped the bond market to finance infrastructure projects, particularly for highways, power generation and water projects. The bond market has the resources to finance big infrastructure projects and for a longer duration than most banks would be willing to finance. For example, a Malaysian corporate turned to the bond market to finance its 14.3 billion ringgit highway project for a period of 20 years, an amount and duration of financing in which most banks would probably shy away from.

11. In the Asian region, each of our domestic bond market may be functioning well in isolation but together, our markets will enjoy the benefits of size and growth. I trust we all recognize our common interests in fostering regional arrangements and cross-border issuance of bonds that will promote the prosperity of our economies. I am confident that our regional bond markets can be tapped on successfully for cross-border issuance of bonds to fund infrastructure projects. After all, we have the largest pool of reserves in the world right here in the region, at some 2 trillion US dollars. We also have economies with sufficiently matured and deep bond markets to mobilize and deploy these reserves.

12. With globalization, our investors have moved away from the parochial tendency to only invest in the comfort of our domestic markets. The search for yields has driven investors to make cross-border investments and manifests in the massive flows of funds globally. The removal of capital account restrictions in many member countries has also facilitated the cross-border flow of funds from one country to another to meet its investment needs.

13. Malaysia, similar to a few other countries in the region, has followed a liberalization policy in respect of her bond market. We have allowed multilateral financial institutions, multilateral development banks, foreign governments and their agencies, as well as multinational companies to raise funds from our bond market in Malaysian Ringgit. Soon, these institutions will be able to raise foreign currency-denominated bonds in the Malaysian market as well.

14. It is recognized that many developing countries in this region have under-invested in infrastructure development. This is premised on ADB’s estimate that lower income countries need to invest more than 6 percent of their GDP to meet infrastructure needs whilst middle income countries need about 3.8 percent of their GDP to sustain their economic growth.

15. The size of the funding gap which runs into more than 100 billion US dollars annually is, indeed, significant. Cross-border infrastructure bonds can be the answer to this financing needs. In this regard, ADB can be a major force in assisting in structural reforms to the regulatory framework of many countries as well as in mobilizing the huge savings in the region to meet the investment needs of capital-importing countries. ADB could, for instance, set up a regional infrastructure bond fund that pools funds from capital-exporting countries in the region for infrastructure development. Taking the cue from the successful experience in Europe, we should study the feasibility of setting up an Infrastructure Investment Bank along the lines of the European Investment Bank to mobilize resources primarily from the capital markets to lend to member countries fro their development needs.

16. The susceptibility of perceived country's risks calls for a layer of credit enhancement, possibly from the government, to absorb the risks associated with infrastructure financing and to raise the credit rating of these bonds to the desired investible grade. We need to have in place the necessary instruments, intermediaries and markets that can perform the function of risk absorption to meet the demands of investors. We have to create an enabling policy environment to convince investors to invest in these bonds.

Distinguished guests,

17. Continued programs of infrastructure development is a key component in ensuring ASEAN sustains its robust growth momentum. Private sector involvement has proven to help enhance implementation of infrastructural development. It is therefore, a challenge to us to find ways to make better use of our resources to advance this agenda towards the continued success and prosperity of ASEAN.

18. Let me conclude by stating that it is my sincere hope that the participants at today's Workshop, held under the auspices of the Asian Bond Market Initiative or ABMI, will go home energised by and equally enamoured with the attractiveness and feasibility of tapping on cross-border bond issuance to fund their various infrastructure projects.

19. On this note, I have the pleasure to declare open the Second ABMI Technical Assistance Workshop, and wish you all a productive session ahead. To our foreign guests, we hope you will have the opportunity to see more of Malaysia.

Thank you.
Wasalamualaikum Warahmatullahi Wabarakatu.

Ministry of Finance
Putrajaya

7 December 2006