Task Force for the Promotion of Infrastructure Investment in East Asia

1. Task Force for the Promotion of Infrastructure Investment in East Asia Dr. Mahani Zainal Abidin Institute of Strategic and International Studies (ISIS Malaysia) Prof. Fan Ying Chinese University of Foreign affairs 10 May 2008

2. Content • Objective of Task Force • Objective and structure of proposal • Submission of proposal • Timelines

3. Objective of the Task Force • NEAT Conference on East Asia Financial Cooperation in Shanghai, China, 13 April 2008 agreed to established a Task Force for the Promotion of Infrastructure Investment in East Asia • The Task Force concentrates on policy solution and implementation of specific problem and submits proposal to the Working Group on Financial Cooperation • Members of the Task Force – NEAT members • Co-opted members – experts from public and private sectors and multilateral organisations (ADB) • Scope – ASEAN + 3 countries • The objective of this Task Force is to submit a proposal on the Promotion of Infrastructure Investment in East Asia

4. Objective of the proposal • To propose a mechanism for infrastructure development cooperation including investment, implementation and assessment that involve initiatives between governments and between public and private sectors

5. Structure of proposal • Review of present initiatives • Justification of ASEAN + 3 regional co-operation in promoting infrastructure investment • Principles and criteria for the types of infrastructure investments that should be undertaken • Investment cooperation mechanism to carry out the initiatives - cooperation between relevant governments and between the public and private sectors • Funding mechanism • Projects implementation framework including post implementation assessment

6. Review of existing initiatives • ASEAN Infrastructure Bond Fund • Regional infrastructure financing mechanism • ASEAN governments (or central banks) invest in a smaller share while private sector invest in a major share of the fund • The blended credit risks and guaranteed of ASEAN governments would substantially reduce premiums and lower costs of funding infrastructure projects • Asian Bond Fund Initiative • First phase of the US$1bn was launched in 2003. The US$2bn Asian Bond Fund II began operation in 2005 investing in local currency bonds. • The main drawback is the relatively small fund and it incurs high transaction fees because of lack of secondary market liquidity

7. Review of existing initiatives • Proposal to establish sub-regional banks/funds • ASEAN Infrastructure Development Fund • Proposed by Malaysian Prime Minster in may 2005– each ASEAN country set aside 0.1% of its foreign exchange reserves for this fund • Asian Investment Bank • ala European Investment Bank model • Northeast Asian Development bank • Proposed at Northeast Asia Economic Forum in 1999 • APEC Infrastructure Initiative • Launched in 1997, the framework is to enhance public-private partnership in infrastructure development • e-APEC strategy – to facilitate an environment for infrastructure investment and development in ICT

8. Review of ADB Initiatives for Infrastructure Investment ADB is handling a number of infrastructure financing in the region. Four case studies of cross-border infrastructure: • GMS Northern Economic Corridor and Trade and Transit Harmonization • Nam Theun 2 Hydropower Project • Regional Cooperation for Pacific Aviation and Information Communications Technology • Indonesia-Singapore Gas Transmission program

9. Why we need new proposal to promote infrastructure investment? • Situation now is conducive for boosting infrastructure investment: • East Asia has more funds from high national savings and foreign exchange reserves • Demand for infrastructure is huge • Infrastructure investment initiatives will only be successful if supported by governments • Economically advanced countries in East Asia are to take the lead • Governments to provide guarantees for projects • Infrastructure development is essential to have a meaningful and successful regional integration • East Asia needs to generate its own growth, cannot dependent on other regions • Narrowing the development gaps

10. Infrastructure Investment and Maintenance Needs in East Asia, 2006-2010 (USD million) Source: Yepes, 2004

11. Types of infrastructure projects needed • Energy infrastructure enables economic and social activities to take place. • Technology for improving environment and meeting targets of managing climate change • Networks of roads, railways, airports and road allow inputs to be shipped to production centers and for minerals, agriculture and manufacturing products to be transported to consumers. • Water infrastructure is essential to both domestic and industrial consumption in view of the growing population and rising economic activities in East Asia. • Investment in ICT (Information Communications Technology) to ensure that the East Asian region can be at the forefront of the growth curve.

12. Infrastructure challenges facing East Asia • The poorest regions in East Asia have underdeveloped infrastructure • Limited financial resources to build infrastructure • Vicious cycle of poverty and infrastructure • Growth of urban population strains infrastructure • 80% of future growth will be in urban areas due to rural-urban migration (World Bank). Create massive needs for infrastructure to maintain economic growth and create jobs

13. East Asia demand for infrastructure • To sustain high economic growth currently enjoyed by the region • Investments in ICT infrastructure is necessary to be at the forefront of growth curve • Inter-country infrastructure projects particularly in transportation and energy can develop large, poor regions of East Asia • Generating growth in emerging countries will further increase intra-regional trade – developed East Asian countries will also benefit • Infrastructure development, which can create economic activities is the most effective methods to reduce poverty • Can link agricultural and poorer areas to services and growth centres • Create economic activities, provide socio-economic needs and increase income • Investment in technology to manage climate change and improve environment • Pace of urbanisation will create massive needs for infrastructure

14. East Asia is a Trade Powerhouse Source: World Bank 2005

15. East Asia is ready to investment in infrastructure • Ample financial resources for investment • Foreign exchange reserves to be recycled • savings • Better use (and returns) of financial resources • East Asia has a large pool of experience and expertise in infrastructure construction. • Construction companies and professionals

16. Opportunity for cohesive regional integration • Meaningful regional integration can only take place if development gaps between member countries is narrowed • e.g. EU adjustment fund • To maintain competitiveness in the global economy - attract investment • The development of joint growth areas, involving a number of countries calls for coordination of investment and development of infrastructure between affected governments. • Infrastructure projects needs government/public sector involvement because private sector initiative alone is not feasible

17. Difficulties faced in undertaking inter-country infrastructure projects • Different countries are at different levels of development - differing infrastructure needs. • Some infrastructure projects span many countries, thus need full cooperation from various governments involved • Requires clear government commitments due to concentration of risks in the early phase of the project which are only be resolved over time • Absence of a single pervasive sovereign jurisdiction when conflict arises between nations • Costs and benefits of nations may differ dramatically in a cross-border infrastructure project

18. Risks of financing infrastructure projects • Risks differ from other investment due to the nature of large infrastructure projects • High capital layout costs & low operating costs • Long construction period & slow build-up revenue (projects have long payback time) • In absence of public guarantees, projects cash flow is crucial element for return to equity to investors & for security to lenders • Exposure to currency risks (exchange rate fluctuations) – project revenues generated in local currencies but servicing of foreign capital (debt or equity) involves payment in foreign currency

19. Two main categories of risks • Commercial risks affecting the project’s commercial operation • Construction delays & costs overruns often occur in large projects • Difficulties in finding financial guarantors for large projects • Commercial risks – regulatory risk with host government • Unforeseen events changing the project’s prospects for profitability • Changes in laws adversely affecting the project’s viability (e.g. non-approval of expected tariff increase or approval delays) • Projects are normally natural monopoly – highly politicized, vulnerable to public sensitivity (e.g. tariff increases)

20. Lessons from earlier infrastructure initiatives • Governments involved must play a larger multifaceted role: • Sharing risks • Create credible policy regimes to • Provide direct or indirect financial support, even if projects are private sector driven. • To reduce any risk of conflict between nations and to lower transaction costs, there should be either formal or informal institutional arrangements. • Mechanisms to identify the magnitude and distribution of the benefits and costs of cooperation so that a fair system of distribution can be introduced particularly if the benefits and costs vary dramatically

21. Political leadership is needed • Regional political vision, leadership and commitment is most important • Developed East Asia countries must take leadership to turn opportunity offered by global trends to make the region into a world economic centre • Infrastructure investment is critical of East Asia’s future growth • Mutual trust and goodwill between governments • Transparent and predictable governance structures and institutional arrangements for infrastructure projects to reduce overall risks and enhance project feasibility

22. Principles for infrastructure investment • Geographic scope – ASEAN +3 countries • Projects benefits (involved) more than one country and have the features of public goods • Projects are key or strategic to the countries’ development • Narrows development gaps between countries in the region • Infrastructure linkages with the highest return on investments (ROI) to be given priority

23. Projects must have at least one of the following criteria: • Generate economic growth and/or expand trade • Reduces poverty and improve people’s income • Take advantage of complementarity among countries involved – abundant labour, growth potential, land, mineral or commodity resources • Facilitate freer flow of factors of production and expand regional production network • Improving environment and contribute positively to management of climate change • Should be feasible in implementation and business operation - able to attract private sector investment

24. Infrastructure investment co-operation mechanism The apex of the mechanism is the ASEAN + 3 cooperation ASEAN +3 has a record of ten years of established cooperation The ASEAN +3 Leaders Summit is the most suitable platform to get governments in the region involved Decisions on the projects to be undertaken are made by this mechanism and therefore receive the commitments of governments This cooperation platform can also deal with inter-country, regulatory and governance risks Set a target for annual infrastructure investment – e.g. % of regional foreign exchange reserves

25. Mechanism • The ASEAN + 3 Leaders Summit agrees on the proposal to promote infrastructure investment submitted by NEAT • ASEAN +3 Leaders may establish the relevant supporting mechanism to evaluate and propose the desired infrastructure projects by incorporate the participation of ADB, the private sector and relevant experts • Proposals for infrastructure investment will be submitted for consideration of ASEAN + 3 Leaders at their annual Summit • Summit decides on the infrastructure investment to be undertaken • Choice of funding modality will also be decided after considering and balancing between the various criteria such as strategic nature, financial viability, affordability, socio-economic impact and outcome • ADB to assist in implementation and monitoring of infrastructure investment projects

26. Funding mechanism Funding can take one of the following modalities: • Public sector mechanism such as a form of foreign aid or soft loans by the economically advanced regional countries • Economically advanced regional countries can mobilize their national saving through the issuance of government-backed bonds and the funds raised can be invested in these infrastructure projects • Utilization of instruments related to government foreign exchange reserves. • For example the interest accrued from existing foreign exchange reserves investment can be recycled into lending for infrastructure investment

27. Funding mechanism • Private sector funding through the Asian Bond Fund • Existing mechanism can be strengthened by expanding the size of the fund • Governments giving comfort/guarantee but projects must meet more stringent criteria • Covering construction risks for greenfield projects/extending project funding tenures/addressing refinancing risks • Bridging financing gaps • Accelerate the progress of ASEAN Infrastructure Bond Fund • Multilateral funding sources such as the ADB

28. Projects implementation framework including post implementation assessment – to be developed • Incorporate ADB as co-partner in the implementation mechanism • Since its establishment, ADB has invested over US$113bn in development Asia and the Pacific, over half of it in transportation and communications infrastructure, energy provision, water and sanitation services. • ADB is in the process of refocusing its strategic direction. • East Asia infrastructure development, mobilizing multilateral funding, capitalizing private sector funding and post-construction project assessment should be among its new focus

29. Timelines for proposal

30. Thank you