How to succeed in Asia’s heartland

Progress is steady rather than spectacular, but the Central Asian and South Caucasus region is starting to open up to infrastructure developers and investors. Stephen Wermert of the Asian Development Bank explains some of the opportunities and pitfalls.

New infrastructure markets seldom develop overnight. It can take over a decade for investors to commit serious capital, even in countries and sectors they know well. The road and power generation markets in India are cases in point. In the 1990s, many long-standing projects failed to reach completion but over time things changed. India now enjoys a mature private power generation and road project market with many projects fully financed and closed.

The Central Asia and South Caucasus region is now in a similar transition phase. The countries in the region – Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan and Uzbekistan in Central Asia; along with Armenia, Azerbaijan and Georgia in the South Caucasus – have widely-scattered populations that need to travel huge distances between cities. The best projects for infrastructure developers lie in providing the long-distance pipelines, railways, roads and logistics hubs that will help people and businesses – particularly those processing the region’s ample natural resources – to more easily navigate those vast landscapes.

Following the breakup of the Soviet Union in the 1990s, private infrastructure investors in Central Asia and the South Caucasus were principally seen as sources of badly-needed funds for governments through the privatisation of state assets. Given the speed of denationalisation, initial investments led to very little fresh capital investment and very few tangible improvements in services.

Over the last five to 10 years, governments have changed their stance. More recently, they have looked to engage private investors more in individual brownfield and greenfield build-operate-transfer projects and have started to embed capital investment requirements into asset transfer regulatory structures.

However, governments have not yet successfully applied these goals. In recent years, there have been notable failures in the transport and power generation sectors. In some cases, developers invested much capital in promising projects only to see the government exit the project after prolonged post-bid award negotiations. In others, project tenders have failed to attract bids from reputable investors.  These sobering experiences have caused governments to step back and ask what can be improved to achieve better results.

We expect that, in time, Central Asia and the South Caucasus will follow the example of other parts of Asia and the developing world where governments upgraded their project preparation, allowing investors to give feedback early in the process, and adopted “one-stop-shop” mechanisms that make it easier for prospective investors to deal with multiple ministries.


Infrastructure investment – with the exception of the telecom sector – is usually based on long returns and relatively conservative risk-return ratios.  It normally represents the second or third wave of foreign direct investment following investment in natural resources, manufacturing and processing industries. So the investment climate in these sectors is a clear yardstick for investor interest and confidence in infrastructure projects.

On this measure, Uzbekistan has made the most progress in the region in attracting investment beyond the extractive industries to downstream projects, with three multi-billion US dollar processing complexes using gas now in development.


Investors also closely watch how much attention governments pay to the details of project preparation. Over the last year, Georgia has sought to ramp up hydropower principally for export to Turkey by inviting investor groups to participate in site transfer or full project-based tenders.

Project preparation has been difficult though, largely because the government has yet to precisely define the risks it is willing to absorb for the electricity off-take. One small project has been completed.  However, this had a guarantee from a Turkish sponsor with the Georgian government taking little risk on electricity purchases and it is not clear that this model could work for larger projects.

Kazakhstan, which has suffered several notable private infrastructure project failures, seems resolved to make another effort to attract investors to both central and local government-led projects.

The country, along with others like Kyrgyzstan (the latter assisted by the Asian Development Bank), is enhancing legislation for concessions to demonstrate commitment to investors. However, the legislation has not yet been tested by lawyers representing prospective pilot project investors.

Going forward, Uzbekistan may well manage to attract private investment in renewable power generation as it has already done elsewhere in its energy sector. With ADB assistance, the government may invite private investment into some planned solar power generation projects. The development of the sector is still at an early stage but is already on the radar screens of several international developers.


With the exception of Georgia, governments and prospective investors in the region pay significant attention to the commercial and legal structures being used in Russia. Power and airports are the focus of major investor activity there. While the governments in Russia’s top cities have adopted interesting investment models, St. Petersburg is the leader in terms of project development and investor interest.

But there are interesting things afoot in the far north-east as well. In Mongolia, the government is preparing an international tender for a 450-megawatt heat and power plant in Ulaanbaatar. The government has already shortlisted four firms – Mitsui, International Power, Samsung and Lance – and the final bidding will take place over the next few months. ADB is providing advice to the government on upstream project preparation.


Central Asia and the South Caucasus remains a destination for early-stage developers which know how to select appropriate projects, manage costs well and intelligently negotiate with governments. Even then the potential for excessive risk capital requirements is a problem particularly when there is no assurance that governments will rigorously follow international standards for private infrastructure investment.

Part of the solution is to hire capable government side advisors. This helps but does not always work since such advisors are not always retained all the way through the project preparation process and, even if they are, governments may not choose to follow all their key advice. With this in mind, multilateral banks and donor agencies are providing small amounts of technical assistance to developers in the most challenging, very low income countries and for certain sectors such as renewable energy. Such assistance is usually reimbursed at financial close.


Given the growing shortage of project finance from commercial banks due to Basel III regulations and the lending contraction by European banks, the role of multilateral financial institutions (MFIs) in providing loans is, more than ever, a key driver in getting infrastructure projects to financial close in the Central Asia and South Caucasus region. Other products such as political risk guarantees and equity investment also help lenders and investors to mitigate political risk.

As of now, MFIs still have significant capacity to lend to such projects and, along with export credit agencies, may very well be the main or only lenders for medium- to large-sized infrastructure projects in the near term.

In addition, MFIs such as ADB will be key providers of advice to governments in areas ranging from how to improve the investment climate to the development of concession laws to assist in project preparation.


There are certainly healthy returns to be made by early-stage developers in Central Asia and the South Caucasus. First movers often have an advantage. Conversely though, even projects with investment from leading developers do not always reach closure even post-project award. Understanding governments and having good on-the-ground intelligence is absolutely essential.

What is certain is that the second or third wave of investment has a better chance of success due to lessons learned from previous projects. So we should expect ongoing efforts by both investors and governments to unlock the value in infrastructure projects in Central Asia and the South Caucasus. And we should expect more projects with healthy returns to get over the finish line.

Stephen Wermert is head of the private sector unit in Central Asia and South Caucasus in the private sector operations department of the Asian Development Bank