East Asian Infrastructure Investment Fund

East Asian governments have long considered cross-border infrastructure a priority but progress has been slow. The demand for, and the difficulties of implementing cross-border regional infrastructure investments necessitate greater innovation in the way the region carries out and finances its ambitious development plans. Governments usually finance the bulk of their national infrastructure needs but cross-border needs require a pooling of financial resources from the public sector, multilateral development agencies, and the private sector due to the projects' massive financial requirement. Some of the national infrastructure investments made by governments in their response to the current financial crisis may be part of the cross-border infrastructure network. In addition to this possibility, East Asia should earnestly pool its financial resources to invest in the much-needed cross-border infrastructure and lay the foundation of the region's future sustained high growth. For this purpose, the East Asian Infrastructure Investment Fund has been proposed which would create a financial mechanism that can mobilize infrastructure investment and expand the role of existing institutions.

8.1 Existing mechanisms and proposals

A number of broadly similar proposals have been made but they have not been fully implemented. These proposals include the following:

ASEAN Infrastructure Bond Fund

To address under-investment in ASEAN infrastructure projects, the ASEAN Finance Ministers established a regional infrastructure financing mechanism that aims to recycle surplus savings into ASEAN infrastructure development. The concept of the ASEAN Infrastructure Bond Fund is to have ASEAN governments (or central banks) invest in a junior tranche while the private sector invests in a senior tranche of the fund. The combined credit risks and guarantees from ASEAN governments would substantially reduce risk premiums and lower the costs of funding infrastructure projects.

ASEAN Infrastructure Development Fund

In May 2005, the then Malaysian Prime Minister Tun Abdullah Ahmad Badawi proposed that each ASEAN country set aside 0.1% of its foreign exchange reserves for this fund. The fund has tremendous potential as ASEAN's combined foreign exchange reserves amounted to US$471 million in 2007. There has been no further development of this proposal.

ASEAN Infrastructure Financing Mechanism (AIFM)

Very few private investors have participated in cross-border projects in Asia compared to other regions (Kohli 2008). To address this shortfall, the ASEAN countries plan to facilitate more private sector investment in infrastructure projects through the creation of the AIFM, which was agreed in 2006. The AIFM aims to (i) accelerate infrastructure development to promote regional economic growth and prosperity, (ii) recycle ASEAN savings to strengthen ASEAN's financial resilience, (iii) increase the supply of marketable assets from financing infrastructure that can generate more demand for intermediate financial services and help deepen the region's capital, (iv) support the branding of ASEAN as a distinct financial asset class, and (v) strengthen intra-regional trade and investment, with a view to accelerating the realization of the ASEAN Economic Community 2015 vision (Goh 2008). The AIFM Task Force has been set up and comprises senior delegates from the ASEAN Ministries. The focus areas of the Task Force include the promotion of best practices, revision of facilitation measures, and development of private sector capacity.

Northeast Asia Development Bank

The formation of a sub-regional bank was proposed during the Northeast Asia Economic Forum in October 1999. The forum had agreed to create an ad hoc committee for the establishment of the Northeast Asia Development Bank but the proposal has not been pursued further.

Asian Infrastructure Financing Initiative

The objective of the Asian Infrastructure Financing Initiative is to mobilize more resources for regional infrastructure development. There are two parts to the initiative. The first involves coordinated co-financing by governments and institutions such as national development banks to mobilize greater resources for a medium-term time period (for example 3–5 years) for specific regional infrastructure projects. The second part involves the establishment of funds managed by ADB or third parties that are targeted at pension funds and sovereign wealth funds; or by governments to co-finance sovereign and non-sovereign projects.

The initiative has had a good start with the Government of the Republic of Korea, the Korea Export–Import Bank, and the Korea Development Bank pledging US$3.5 billion and the Islamic Development Bank pledging US$1.15 billion in 2008. ADB and the Islamic Development Bank are discussing the establishment of a private equity fund to invest in infrastructure projects in selected developing ADB member countries, namely, Afghanistan, Azerbaijan, Bangladesh, Indonesia, Kazakhstan, Kyrgyz Republic, Maldives, Pakistan, Tajikstan, Turkmenistan, and Uzbekistan. In late 2008, a proposal was made to set up an Islamic Asia Infrastructure Fund, whereby the Islamic Development Bank and ADB invest US$150 million and US$100 million, respectively, which would be managed by a private joint venture for this purpose.

Asia Pacific Economic Cooperation Infrastructure Initiative (APEC)

APEC was directed by its Ministers in 1997 to work with the private sector in developing infrastructure initiatives for promoting integration and diversification of rural economies. In 1999, APEC and its private sector counterpart Pacific Economic Cooperation Council launched RISE—Regional Integration for Sustainable Economies—a public–private initiative designed to improve the economic viability of rural regions of APEC member economies through infrastructure investment. In line with efforts to build knowledge economies, the APEC leaders directed their Ministers to accelerate the progress in implementing the e-APEC strategy, which will create an environment for infrastructure investment and technology development.

Asian Development Bank

ADB is presently a key initiator for regional infrastructure projects such as the Greater Mekong Sub-regional Development, and it has extensive experience and expertise in undertaking such projects. These projects have been aimed at both economic growth and social development. However, ADB's ability to meet the large demand for regional infrastructure is constrained by its limited funds and wide membership, which covers all Asian countries.

Overseas Development Aids

The development of regional infrastructure has also been assisted by aids from donor countries such as Japan through loans at preferential rates. Many of these infrastructure projects are for countries at early stages of development and have been focused mainly on transportation infrastructure, education, and health facilities.

8.2 Establishment of an East Asian Infrastructure Investment Fund

Presently, there is no formal mechanism in which East Asian countries can decide on which cross-border infrastructures are needed or to address the missing links in regional infrastructure networks (Mahani 2008). An East Asian Infrastructure Investment Fund (EAIIF) is proposed to fill this gap. Through the EAIIF, regional countries could agree on new cross-border infrastructure projects that would benefit East Asia. The issue of missing links would also be solved through investment initiated by a regional mechanism, if the relevant countries do not have sufficient funds to finance them. Besides a collective regional investment action, cross-border infrastructure could also be created by coordinating national projects so that they form a compatible network. The EAIIF could be a platform for countries to coordinate their national infrastructure developments that could ultimately be linked to form regional networks. In this way, governments would still have the responsibility and oversight of their national infrastructure projects while meeting the larger regional goals.

East Asian governments should take a more proactive and strategic role in ensuring that more cross-border infrastructure projects are successfully implemented. The many challenges confronting cross-border infrastructure projects can only be overcome by political commitments and a concerted drive to build the foundation for long-term regional growth. East Asia should establish a structure for this process. At the apex would be the political decision-making by East Asian leaders. This would be supported by a high-level committee or secretariat to execute the leaders' decision, a funding institution, an implementation agency, and a monitoring unit.

Political commitment is needed so that the risks and benefits can be shared among nations and between the public and private sectors. Mechanisms to identify the magnitude and distribution of the benefits and costs of cooperation should be established so that a fair system of distribution can be introduced, particularly if the benefits and costs vary dramatically.

The private sector's confidence to participate in these projects will be boosted when governments create credible policy regimes and regulatory environments that assist project implementation. The level of comfort will be increased if appropriate mitigation plans and adequate financial and technical resources are available to deal with trans-border externalities.

The political decision-making process is important to ensure that infrastructure projects meet the objectives set, have wider externalities that benefit not only the participating countries but also the other countries in the region, and a balance is achieved between costs and benefits among the participating countries and funding parties. Another important role of the political process is to provide supportive policy regimes and regulations that are critical in facilitating these projects. Before this can be done, the objectives must be clearly defined and the lending criteria can then be designed to match the intended objectives. The EAIIF would be able to accelerate the implementation of decisions made by East Asian leaders. However, its creation alone will not ensure success because other supporting institutions will also need to be established to execute the decisions made by the leaders, implement the projects, and monitor progress.

Cross-border infrastructure projects would be able to be carried out in three ways: through ADB, ODA, or EAIIF. The EAIIF would be to supplement the financing provided by ADB and ODA. There are many demands for ADB funds for infrastructure development from its members, and since its funding contributors include those from outside East Asia, it may not be able focus fully on infrastructure development in East Asia. ODA is very helpful for the least developed countries. However, middle-income recipient countries no longer qualify for such assistance due to their higher income levels. Since infrastructure projects are needed by countries at various stages of development and require large amounts of funding and involve high risks, the establishment of the EAIIF that could pool together funds from the public and private sectors and national and multilateral development agencies, would allow the building of a cross-border project and could supplement the funds contributed by ADB and ODA.

The proposal to pool East Asian financial resources does not preempt the existing bilateral efforts to fund regional infrastructure projects such as the Japanese ODA or the US$10 billion China–ASEAN Investment Cooperation Fund. Infrastructure projects financed by development aids are still necessary because they provide financing at very reasonable costs to the least developed countries. Although they may wish to continue and expand their development aids and use their national aid institutions for implementation, these countries may wish to inform other regional countries, through the EAIIF, of these initiatives for better coordination and to avoid overlapping or even conflicting projects. Even with their own ODA, donor countries may wish to participate in the EAIIF for burden sharing due to the large funding requirements and for the coordination of policy, regulations, and standards.

There are six elements in the proposal as shown in Figure 2 [ PDF 14.1KB | 1 page ]: the ASEAN+3 Leader's Summit, Executive Directorate Committee, Secretariat, EAIIF, Implementation Agency, and Monitoring Unit.

8.2.1 ASEAN+3 Leaders Summit

The ASEAN+3 regional integration process has a record of 10 years of established cooperation and its annual Leaders Summit is the most suitable platform to get all the governments in the region participating in decision-making on regional infrastructure. Decisions on the projects to be undertaken are made through this mechanism and the decisions receive commitments from the governments in the region. This cooperative platform also deals with inter-country, regulatory, and governance risks.

The Leaders Summit would set a target for annual infrastructure investment and decide on the projects to be undertaken based on proposals submitted by the Executive Directorate Committee.

8.2.2 Steering Committee

This would comprise finance/economic ministers from the ASEAN+3 countries and heads of selected national and multilateral development agencies. It deals with regulatory framework, policy direction, and investment proposals. The steering committee would be briefed regularly by the secretariat on the status of current and proposed projects, and it will agree on proposals and recommendations to be forwarded annually to the Summit. Between Summits, the Steering Committee would also act within specific guidelines given to it from time to time by the Leaders Summit. This committee would also invite countries implementing ODA to share information on existing and planned projects in order to have a better overall view of the development of the region's infrastructure. Countries implementing ODA would be able to suggest joint projects that could be undertaken with the EAIIF.

This body would be particularly useful in quickly implementing the decisions made by the leaders, for making the necessary changes in regulations, and for soliciting top-level backing for budget commitments to ensure the continuity of projects. In evaluating infrastructure project proposals, the participation of ADB and other relevant development agencies would provide invaluable advice and lessons from their experience in other projects.

8.2.3 Secretariat

This body would coordinate the vital functions of the investment mechanism—raising funds (EAIIF), implementing projects, and monitoring outcomes. The funds raised by the EAIIF would be coordinated by the implementation agency to be channeled into the agency for execution. The Secretariat would receive and evaluate the performance of these projects based on the reports submitted by the Monitoring Unit. The Secretariat would also be responsible for civil society participation and information disclosure.

The Secretariat would be staffed by professional administrators and technical experts who are able to deal specific implementation issues. Their role would be to prepare for, and support Steering Committee meetings, and to deploy any decision made by the Steering Committee to the fund raising, implementation, and monitoring groups noted below. The Secretariat would also ensure that the work of those three groups is well understood by the Steering Committee, and if necessary make coordination actions.

8.2.4 East Asian Infrastructure Investment Fund

East Asian governments could establish a special fund, the EAIIF. It would be an independent legal entity that is a non-profit making institution. It would raise and lend funds for cross-border infrastructure projects and would be owned by East Asian countries, multilateral institutions, and the private sector. Besides its capital, it would raise additional funds from the public sector, development agencies, and the private sector.

The purpose of this fund would be to fill the gap between projects that receive cheap funding (through development aids) and those that have to pay the full costs (entirely financed by the private sector at commercial rates). Undertaking cross-border projects on purely commercial funding is difficult because of the high cost as discussed earlier. At the same time, subsidized funding given by ODA and regional and multilateral agencies is limited and insufficient. The EAIIF funds would combine these two elements where a portion of the fund comes from governments and regional and multilateral agencies, while the balance is sourced from the private sector. The funding costs would be lower than commercial rates because of the subsidy element from governments' contributions and backing and lower regulatory and policy risks. Since it would be backed by regional governments, the EAIIF would have a larger funding capacity because of its ability to raise funds from the private sector.

It is proposed that the share structure of the EAIIF be as follows:

The seed funds could come from capital contributions by the ASEAN+3 countries according to the size of their GDP, per capita income, or an alternative mutually agreeable formula. For instance, countries like Brunei Darussalam, PRC, Japan, Republic of Korea, Malaysia, and Singapore could be major contributors to these seed funds if equal weightage is used according to each country's share of the total East Asian GDP or GDP per capita (see Table 13 [ PDF 81.7KB | 1 page ]).

Funds from the public sector/government would take various forms—government-backed bonds that tap public savings from countries with high savings, part of the aid or soft loans from the economically advanced regional countries, investment by sovereign wealth funds, or utilization of instruments related to government foreign exchange reserves. Multilateral development agencies such as ADB could allocate a portion of their fund for infrastructure investment into the EAIIF.

The private sector could either invest directly into the EAIIF or the funding could be raised through the Asian Bond Fund (ABF). The two phases of the Asian Bond Fund, with a total of US$3 billion, is hardly able to meet 1% of the estimated regional infrastructure financing needs. ABF I with a size of US$1 billion, involved the governments of 11 countries in the region voluntarily contributing about 1% of their reserves to a fund dedicated to purchasing regional sovereign and semi-sovereign bonds denominated in US dollars. ABF II, with US$2 billion, was launched in May 2005 and invested in local currency and the sovereign and quasi-sovereign bonds of various Asian countries. The main drawback of the ABF is the size of the fund and the high transaction fees incurred because of the lack of secondary market liquidity (United Nations Economic and Social Commission for Asia and the Pacific 2006). However, the ABF could be a viable option if its size is increased.

Another possible source of funding is the Asian Bond Markets Initiative (ABMI), which was endorsed by the finance ministers of ASEAN+3. The objective of the ABMI is to develop an efficient and liquid local currency bond market. A wider variety of issuers need to be involved and market infrastructure enhanced to foster this market before the ABMI can become a dependable source.

Funds raised by the EAIIF should then be handled by the ADB for implementation because of the latter's experience and capability. Setting up a new project implementation mechanism will require large additional resources, both financial and human, and may duplicate existing ones. This fund will increase ADB's financial capacity to meet its objective to promote East Asia's socio-economic growth and development. This differs from ADB's normal operations because it has an East Asian focus since the largest share of funding comes from East Asia and the projects to be undertaken are determined collectively by regional governments. ADB can contribute to the types and locations of the projects to be undertaken based on their knowledge, experience, and expertise, and it will ensure effective implementation.

8.2.5 Implementation Agency

Work carried out by this agency would be driven by ADB and supported by civil servants and project implementation experts. Technical evaluation, project management, selection of contractors, and project coordination in the countries involved would be the focus of this agency's work. It would also harmonize regulations, procedures, technical standards, and the legal reforms needed to attract private financing to supplement public resources, reduce risks, and lower transaction costs.

8.2.6 Monitoring Unit

Some form of accountability has to be established so that the lender and project coordinator can be answerable to the ASEAN+3 leaders and stakeholders involved. Performance indicators and measurements of success should be agreed by the stakeholders and attached to the projects. For instance, in the case of self-funding projects, the measurements of success could include the following:

• Speed of implementation
• Quality of final project
• Increase in trade and economic activity in the nations involved
• Increase in employment/reduced unemployment
• Improvement in income or reduction in poverty
• The ability of the project to self-fund its own maintenance
• Minimal leakages
• Cost saved

It is proposed that ADB undertakes this task because it already has the capability based on its past experience.

8.3 Project criteria

The success of cross-border infrastructure investment depends a great deal on the criteria set for the projects. In the case of the EU, for instance, a Cohesion Fund was set up with specific objectives to assist in the integration of the European countries and the narrowing of the income differences between the different regions (Bhattacharyay 2008). This fund has been successful because the objectives are clear and the cooperative funding mechanism is clearly set out and agreed to by all participating nations. The Cohesion Fund finances projects in environment and transport infrastructure such as roads, ports, airports, water supply, and waste water treatment. EU members eligible for these funds are those with a gross national product per capita less than 90% of the EU average. According to the European Commission, a €16 billion Cohesion Fund was made available between 2004 and 2006 and more than half of the funding was reserved for new member states.

In the case of East Asia, the objectives are likely to be similar to those of the ASEAN Infrastructure Financing Mechanism (Section 8.2). The criteria could be split into two groups. The first would be to support nearly self-funding projects, where after an initial grant or soft loan, the project is able to internally fund its servicing and maintenance costs. In this case, projects would be chosen based on the highest return on investment to attract private sector participation and to ensure the success of the debt instrument issued. Projects popular with the private sector, such as telecoms or energy, would be given priority. Initial successes are important to kick-start the marketability of the assets.

The second criteria would be to select projects with the highest social benefit in order to meet the objective of East Asian integration. A certain amount of funds could be earmarked for this purpose. This would help to increase regional investments in infrastructure projects such as water and sewerage that will bring high social benefits but have generally been shunned by the private sector.

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