Accelerates lending operations-

Southeast Asia is facing an acute shortage of infrastructure investment. While private investments in the region are still to recover from the 1997 Asian financial crisis, the prospects of public spending also remain dismal. Member countries of the Association of Southeast Asian Nations (ASEAN) now invest only about 4 per cent of their gross domestic product (GDP) on infrastructure, substantially lower than the average annual spending of 6 per cent during 1980–2009.

Consequently, the region ranks far below member nations of the Organization for Economic Cooperation and Development (OECD) in terms of per capita basis availability of roads and railways, and coverage of electricity and clean water. This is highlighted by the fact that the region has only 10 km of roads and 0.25 km of rail per 1,000 people. These figures are significantly lower when compared to more than 200 km of roads and 5 km of rail in OECD countries. Electricity coverage in ASEAN is 72 per cent, against 99.8 per cent in OECD countries. The trend remains the same in terms of clean water coverage, which is recorded at 86 per cent in ASEAN, compared to 99.6 per cent in OECD countries.

There is, therefore, a pressing need to revive infrastructure investments to bolster the region’s overall growth. In this context, the ASEAN Infrastructure Fund (AIF) is one major initiative that has been undertaken within the region. Incorporated in Labuan, Malaysia, the AIF was established in 2011 to mobilise financial resources to support regional infrastructure development.

AIF – Addressing infrastructure financing needs

The AIF is funded by equity from nine of the 10 ASEAN member states (excluding Myanmar) and the Asian Development Bank (ADB). It aims to lend up to $4 billion by 2020 to infrastructure projects in the region. To encourage private sector investment, the fund intends to mitigate operational risks in infrastructure projects. It is expected that an average of six infrastructure projects will be financed per annum from the fund. The AIF also provides a platform to leverage the region’s resources for infrastructure projects as the debt issued by the fund is targeted to be purchased by central banks’ foreign exchange reserves.

The AIF was started with an initial equity contribution of $485.2 million. Of this, $35.2 million was contributed by ASEAN members, with Malaysia investing the maximum equity amount of $150 million, followed by Indonesia with $120 million. Another $150 million was provided by ADB. The regional development bank plays a key role in the functioning of the AIF by assuming the roles of administrator, co-financier, and shareholder.

AIF’s recent lending operations

The AIF commenced its lending activities in December 2013 by providing a loan of $25 million to an Indonesian electricity project – Java–Bali 500 kV Power Transmission Crossing Project. The $410 million project includes construction of 220 km of extra high voltage lines with the capacity to transmit 1,500 MW of electricity. It also involves extension, construction, and upgradation of substations along its path. The project has been undertaken by state-owned electricity company Perusahaan Listrik Negara (PLN) and is slated to be completed in 2019. Besides, ADB will lend $224 million and the Indonesian government will fund the remaining $161 million through PLN.

In May 2014, the AIF approved financing for two more infrastructure projects. One is a $100 million loan for a power transmission project in Vietnam. The overall estimated cost of the project is $380 million. ADB will lend another $200 million to the project and the remaining $80 million will be financed by the Vietnamese government. The other is a $40 million sanitation project in Indonesia.

Another significant development has been Myanmar’s willingness to join the shareholders of the fund. The move, which would bring all 10 ASEAN members into the AIF, is expected to open up new opportunities for the fund.

Need to revive private sector financing

ADB officials have projected infrastructure requirements in Southeast Asia to be around $60 billion per annum. However, the region currently spends only about half this amount. One major challenge that the AIF currently faces is in attracting private sector interest. Private investment in infrastructure in the ASEAN region has not recovered since the Asian financial crisis in 1997 and private funding for infrastructure in five of the biggest Southeast Asian members – Indonesia, Malaysia, the Philippines, Thailand and Vietnam – has declined from about $38 billion in 1997 to approximately $25 billion in 2010. Although the region has substantial levels of private savings and foreign exchange reserves, these have largely been invested in low-yield treasury bonds or other securities in Europe and the US.

To boost private sector investments in the region, there is an urgent requirement to develop more bankable projects and new mechanisms to mitigate risk. In this context,  ADB and International Enterprise Singapore signed a letter of commitment in May 2013 to launch a public–private partnership (PPP) initiative to bolster infrastructure development within ASEAN. The proposed investment for this initiative is $9 million, which has jointly been committed to by ADB and the Singapore government. Led by International Enterprise Singapore, the initiative aims to address ASEAN’s infrastructure development needs, helping to establish the ASEAN Economic Community (AEC). The AEC envisages the creation of a single regional common market of ASEAN countries by 2015 to create a competitive market of over 600 million people in the region.

Moreover, the AIF has announced plans to increase its capital base via a bond issue by 2017. The fund is currently conducting credit rating analyses for a successful bond sale, which is expected to attract the central banks of China, Japan, and South Korea, among others.

Conclusion

In order to stimulate growth, ASEAN members need to invest significantly in the infrastructure sector. The AIF board has recently approved a pipeline of projects for 2014. It has also discussed the indicative pipeline for 2015–16, covering the priority sectors of water, transport, and energy in ASEAN countries. As the projects discussed are at advanced stages of preparation, the AIF is expected to increase its funding in the coming years. Nonetheless, the region needs to undertake adequate measures to revive investor interest in order to bring back the savings surplus.