Innovation in financing
The ASEAN Infrastructure Fund (AIF) is an innovative regional cooperation initiative created to support the infrastructure investments of ASEAN member countries. Described as the largest ASEAN-led initiative in the association’s history, the Fund will help ensure that over half a billion people living in the ASEAN countries will have greater access to energy, clean water and sanitation, and improved transportation. The Asian Development Bank (ADB) will be providing financial, technical, and operational support.
The AIF was incorporated in Malaysia on April 24, 2012 as a limited liability company under the Labuan Companies Act, 1990. In June 2012, the AIF Board formally elected Indonesia and Malaysia as the co-chairs for 2012–13. Subsequently, Indonesia will take over from 2013 to 2015, while Malaysia will chair it from 2015 to 2017.
AIF rationale
According to the ADB’s estimates, an annual investment of $60 billion is required to meet ASEAN’s infrastructure financing needs. Southeast Asia still lags significantly behind the Asian average in terms of infrastructure development, though some of the countries in this region, notably Singapore, have excellent infrastructure. On a per capita basis, ASEAN nations have only a fraction of the roads and railways found in the Organization for Economic Cooperation and Development (OECD) nations, with dramatically lower electricity and clean water coverage. In fact, sustained economic growth has generated increased pressure on the infrastructure of ASEAN countries; thus, ASEAN needs to address its infrastructure deficiencies in order to ensure that the region’s economic growth is inclusive. The AIF seeks to tap into the significant private savings and more than $700 billion in foreign exchange reserves of the ASEAN countries for infrastructure investment.
In addition, the AIF also seeks to anchor and complement the continued work by ASEAN and the ADB to strengthen cross-border transport agreements and facilitate intra-regional trade. According to Arjun Goswami, Director of the Regional Cooperation and Operations Coordination Division (Southeast Asia Department, ADB), “The AIF is an innovative regional cooperation initiative grounded in ASEAN’s ideal of South–South cooperation. Through this initiative, along with the ADB’s financial, technical, and operational support, the infrastructure investments of ASEAN member countries will be supported and complemented by other ASEAN programmes.”
Key features of the AIF
The AIF was established in April 2012 with a total equity contribution of $485.2 million. Nine ASEAN members (except Myanmar) have agreed to contribute $335.2 million in equity, while ADB has committed to providing $150 million. Malaysia is expected to be the largest ASEAN contributor with an equity investment of $150 million, followed by Indonesia ($120 million). The equity contributions will be divided into three annual tranches from 2012 to 2014. Significant hybrid capital should be added in 2016, with bonds being launched in 2017; both of these datelines are approximate.
The AIF has reportedly accumulated $450 million with the nine ASEAN member countries contributing to 20 per cent of the fund and the remainder co-financed by the ADB. It is hoped that the AIF will start funding the region’s infrastructure development by year-end, after the contribution from Myanmar is finalised. Myanmar had indicated in 2011 that it wished to participate in the AIF. This was subject to Myanmar’s participation in the international development community, including its re-engagement with the ADB.
The AIF plans to issue a debt of up to 1.5 times its equity, which can be purchased by the central banks using their reserves. The debt is expected to be issued five years after the Fund commences operations. Institutional investors in the region can also purchase the AIF’s debt, including hybrid capital, in the form of pension or sovereign wealth funds. Therefore, the AIF will be able to mobilise both foreign exchange reserves and private savings for the region’s development.
The AIF plans to lend around $300 million annually starting in 2013. With a lending approval growth rate of 10 per cent per annum, the fund is expected to lend close to $440 million annually by around 2017. The AIF’s total lending commitment from 2013 to 2020 is estimated to be approximately $3 billion. With the projected 70 per cent co-financing by the ADB, total commitment is expected to reach about $12 billion by 2020. In carrying out its oÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿÿhe ADB’s business procedures; thus, the AIF will be able to benefit from lower transaction costs for its financing, while extending the ADB’s privileges to its lending operations.
The ADB will serve as an administrator of the fund: it will receive a fee from the AIF at 40 basis points on assets for the same. It will be involved in processing projects; co-financing arrangements for infrastructure projects; treasury operations, financial management, and disbursement of the AIF’s resources; accounting and reporting requirements; obtaining and maintaining the credit rating of the AIF; and managing the placement of hybrid capital and bond issues for the AIF.
The AIF is designed to have three main development outputs: additional financing for improved infrastructure; enhanced private sector participation in infrastructure development through public–private partnerships (PPP); and implementation of strategic policy objectives of connectivity for the region. Promoting private sector participation in the region’s infrastructure is a key priority of the Fund. The Fund seeks to catalyse private sector investments initially via the AIF’s support for the public portions of PPP projects, which will be followed by direct engagement in private sector projects after it has established a strong track record. Moreover, the availability of the ADB’s credit enhancement mechanisms should further mitigate the high degree of perceived risk of long-tenor infrastructure transactions, which will thus boost private sector investment in the development of the region’s infrastructure.
Project pipeline
The AIF will finance approximately six infrastructure projects each year. Projects will be selected based on sound economic and financial rates of return, as well as their potential impact on poverty reduction. In addition, three main criteria will be followed to guide the selection of projects: regional cooperation, private sector development, and project diversification at the country, sector, and project levels. The ADB recommends a maximum exposure limit of 30 per cent per country, 40 per cent limit for each sector, and a single project restriction of $75 million. Projects will be awarded through competitive bidding to achieve lower prices for infrastructure services and greater efficiency. Table 2 presents the preliminary project pipeline of the AIF for 2012–13.
At present, a key strategic priority of the AIF is to finance projects that promote regional connectivity. These include projects featured in the Master Plan on ASEAN Connectivity (MPAC) in three subregions across Southeast Asia: the Greater Mekong Subregion (GMS); the Brunei Darussalam–Indonesia–Malaysia–Philippines East ASEAN Growth Area (BIMP–EAGA); and the Indonesia–Malaysia–Thailand Growth Triangle (IMT-GT). These projects will eventually contribute to the ASEAN highway network and ASEAN power grid.
Furthermore, as Goswami points out, “It will also be important to ascertain the support from key development partners outside ASEAN and to identify additional support for other initiatives.” His comment highlights the need to attract operational and knowledge support from development partners outside the region to complement the efforts of the ADB and the ASEAN countries. The AIF must then decide upon the priority projects, policy implications, and financing mechanisms based on this support. Further, to garner such support, it is imperative that the AIF establishes a strong operational track record.
For now, the launch of the AIF has given ASEAN a head start in regional infrastructure development efforts by successfully gathering the core funds and identifying key strategic areas for investments. Its success, though, will depend on leveraging the promised private savings for large-scale infrastructure creation in the region. Should it succeed, it could well become a model of infrastructure financing for multilateral agencies in other parts of the world.
