Meeting ASEANs Infrastructure Financing Requirements

Infrastructure investment has played an important role in ASEAN growth. However, increasing aggregate demand has highlighted shortfalls in the quantity and quality of infrastructure. This is increasingly seen as a binding constraint on accelerating further growth.

Addressing current shortfalls in infrastructure and meeting additional requirements to support future economic growth will require massive investments over the next decade. As shown in Table 8 [ PDF 71.5KB | 1 page ], ASEAN countries will require infrastructure investments amounting to US$596 billion during 2006–2015, with an average investment of US$60 billion per year.

This is roughly five times the actual amount invested by the private sector during 1990-2006 (Table 9 [ PDF 71.5KB | 1 page ]). Of this projected amount, around US$395.6 billion (66%) will be needed for investment in new projects, while US$200.5 billion (34%) will be required for maintenance. These estimates must only be regarded as a reference point; rather than a substitute for detailed, bottom-up country- and sector-specific estimates which take into account actual conditions in each country. In view of the on-going financial crisis, the demand for infrastructure investment requirement may be different from these estimates.

Meeting this financing requirement will require greater coordination between the public and private sectors. The use of Public Private Partnership (PPP) in infrastructure development will have to be enhanced. Towards this end, the public sector needs to (i) provide the enabling environment for private sector participation and funding; (ii) develop “bankable” projects, with proper consideration of various associated risks; (iii) improve financial intermediation functions by increasing banking sector efficiency; and (iv) strengthen bond markets to mobilize Asia's massive savings.

The ASEAN “Comprehensive Investment Agreement” signed in February 2009 is an important step towards promoting private investment in key areas, including infrastructure. The main objective of this agreement is to promote greater cross-border investment and attract private investment by creating a more liberal, transparent and congenial investment environment, including by extending national treatment to ASEAN investors (ASEAN Secretariat 2009a).

Asia's large foreign exchange reserves and savings represent a huge, untapped resource for financing regional infrastructure (Table 10 [ PDF 42.8KB | 1 page ]). The ASEAN-5 countries alone have savings worth US$457 billion, and foreign exchange reserves amounting to US$409 billion. Innovative and highly liquid instruments and products are required to channel a portion of these resources into productive infrastructure development. Initially, an infrastructure fund such as an ASEAN Infrastructure Bond Fund can be created, utilizing the savings and reserves of ASEAN-5 and Brunei. Other ASEAN members and countries outside ASEAN can join this regional collaborative effort eventually. Integrating financial markets will also be necessary for effective intermediation of ASEAN savings. Such regional-level approaches should be complemented by domestic initiatives to strengthen local currency bond markets.

ASEAN countries should also mobilize resources from Japan, Korea and PRC through ASEAN+3 cooperation as well as from India. Connecting ASEAN countries to countries in South and East Asia, particularly India and PRC, will encourage investment form these regions. With PRC, India, and ASEAN emerging as the three major growth centers in Asia, their connectivity will be important. PRC already has plans to enhance connectivity with ASEAN countries. For example, PRC Foreign Minister Yang Jiechi recently announced a US$10 billion investment cooperation fund, as well as US$15 billion in credit, to help Southeast Asian countries mitigate the negative impact of the global financial crisis. The objective of the fund is to promote infrastructure development connecting PRC with ASEAN nations (Dune 2009). PRC is looking to accelerate the development of regional and subregional transport, power and communication infrastructure achieve interconnectivity and establish network.

Another way to meet long-term financing needs for infrastructure is to develop local currency bond markets. The need to develop bond markets as an alternative source of funding to bank loans was one of the most important lessons of the 1997 Asian Financial Crisis. To ensure the availability of long-term domestic currency funding (and prevent maturity and currency mismatches), policy makers have reached an agreement to promote the development of a regional bond market. The Asian Bond Markets Initiative (ABMI), launched in August 2003 and endorsed by the finance ministers of ASEAN+3, seeks to promote the development of local currency bond markets. The Asian Bond Fund (ABF), on the other hand, was launched by the Asian central banks through the Executives Meeting of the East Asia-Pacific Central Banks (EMEAP) in June 2003.

As of June 2008, local bond markets in ASEAN+3 had grown by a factor of three, with total outstanding bonds issues in emerging East Asian currencies totaling US$ 3.9 trillion. Indonesia, Philippines and Viet Nam instituted new rules aimed at bolstering bond issuance from revenue-generating sectors, such as local government public utilities (ADB 2009). There is a need to develop an ASEAN Infrastructure Bond Fund that focuses on building productive infrastructure while utilizing the region's available savings.

More importantly, regional initiatives are needed to address certain structural issues which have led to chronic underinvestment in infrastructure. These include high risk premiums associated with infrastructure projects in low-income or highly-indebted countries; uncertainties due to long tenures and the requirements for government guarantees; foreign exchange risks, including currency mismatch arising from long tenures; and the weak capacity of domestic financial institutions and markets. Other impediments include high costs and limited insurance facilities; process inefficiencies and lack of capacity to manage projects; limited information and coordination; and market and regulatory restrictions (Goh Ching Yin 2008).

Regional efforts to address these structural issues are already underway. ASEAN finance ministers have proposed the establishment of ASEAN Infrastructure Financing Mechanisms (AIFM), with the following areas of focus (i) promoting best practices in infrastructure financing (this includes the establishment of an enabling legal regulatory framework); (ii) reviewing facilitation measures in relation to insurance and long-term currency hedging; and (iii) promoting the development of private sector capacity to facilitate fund raising and risk mitigation for infrastructure projects (this includes the developing innovative products and deepening capital markets).

The AIFM aims to (i) accelerate infrastructure development to promote regional economic growth and prosperity, (ii) enhance balance sheet recycling and strengthen ASEAN's financial resilience, (iii) accelerate private sector development, increase demand for intermediation services, and deepen capital markets across ASEAN; (iv) support the branding of ASEAN by providing a platform for the creation of regional products; and (v) strengthen intra-regional links and growth dynamics, with a view to accelerating the realization of the ASEAN Economic Community 2015 vision (Goh Ching Yin 2008). An AIFM task force has already been established to support implementation.

The development of an appropriate ASEAN infrastructure financing mechanism for developing and financing bankable projects, particularly cross-border projects, is crucial for enhancing physical connectivity within the region.

Download this Paper [ PDF 216.9KB| 26 pages ].

Comment(s)

There are [0] comment(s) for this entry. Post a comment.