Infrastructure fund to spur Asian integration

IFR Asia - Asian Development Bank 2012
5 min read
Steve Garton

The ADB and Asean finance ministers are poised to announce the first commitments to the Asean Infrastructure Fund at this year’s annual meeting. Here’s the lowdown on the fund.

What’s the big idea?

Dreamed up in 2006, the Asean Infrastructure Fund is designed to boost public lending to fund the region’s infrastructure deficit and improve connectivity. At the same time, it also promises to provide member countries with a regional alternative to invest their reserves closer to home. The AIF will begin lending to sovereign-backed projects, but will, eventually, expand its remit to private-sector funding.

The headline target calls for the AIF to “leverage more than US$13bn in infrastructure financing” come 2020. That assumes, however, that it will directly finance around 30% of each project, with the ADB and other co-financing partners accounting for the remainder. The actual lending target is US$300m for the first year, rising 10% a year. This means that, by 2020, the AIF could lend up to US$4bn.

“With Asean countries holding over US$700bn in reserves, the Asean Infrastructure Fund offers an avenue for mobilising the region’s resources for its growing infrastructure requirements,” said Asean secretary-general Surin Pitsuwan. “It’s a financial package that leverages on our collective credibility and mutual confidence.”

Who’s paying for all this?

The capital structure calls for three rounds of financing for the AIF. First, the ADB (US$150m) and the Asean governments (US$335.2m) contribute the core equity, spread across three tranches in 2012, 2013 and 2014.

Second, the shareholders will invite institutional investors, such as pension funds, to participate in hybrid securities (currently pegged at US$162m). The precise format has yet to be decided, but private sector investors will most likely be offered perpetual bonds or non-voting preference shares.

The third phase calls for the sale of senior bonds, but this will come further down the line once the AIF has a track record – and, crucially, an investment-grade credit rating that appeals to Asian central banks, thereby working as a vehicle for the region’s foreign exchange reserves.

When will it start lending?

The AIF was on track to be incorporated in Malaysia before the end of April, with the first board meeting scheduled for May to coincide with the ADB’s annual meeting and the first tranche of money to be received by June. Whether or not lending can start this year, however, was unclear at the time of writing: the board needs to approve the first pipeline of projects before the AIF can start dishing out the money.

“We’re straining at the bit to get there, in part because we need to respond to the countries because the countries themselves are eager,” said Arjun Goswami, director of the regional co-operation and operations co-ordination group and the ADB’s point man for the AIF. “If we reach that target, it is a phenomenal rate of progress for any regional initiative.”

Doesn’t the ADB already do this?

In short, yes, but the AIF will be a corporate instrument, designed to leverage the region’s savings pool. The ADB’s involvement gives the AIF a ready-made administrator and access to a pre-vetted pipeline of projects, cutting down on execution costs. It also gives it the support of a Triple A rated multilateral, which may be key to obtaining a Single A or even a Double A credit rating later on. For the ADB, meanwhile, the AIF will allow it to “double leverage” its own resources and finance more of its priority projects. The ADB will mandatorily co-finance each project the AIF supports. The ADB’s board voted 12:0 in favour of the equity commitment.

Are the biggest shareholders in charge?

With the exception of Myanmar, all Asean nations are contributing equity. Malaysia (US$150m) and Indonesia (US$120m) are contributing far more than their peers: the Philippines and Singapore, for instance, are chipping in US$15m apiece.

Politicians in both Malaysia and Indonesia have said they plan to table projects for the AIF’s support, including an expansion of 14 Indonesian ports into international harbours, and a cross-border power grid project connecting Indonesia’s West Kalimantan and Malaysia’s Sarawak territory.

Each shareholder’s voting power will be linked to its financial contribution, giving Malaysia and Indonesia the best chance of getting their projects through. Approvals, however, will also require the support of 50% of shareholders – regardless of their capital commitments.

Will it work?

Initial reaction from the public and private sectors has been encouraging. The AIF has generated a huge amount of attention and even governments outside the Asean grouping, such as India and the Plus 3 countries, have expressed interest in joining – potentially hinting at a similar pan-regional initiative or an expanded second fund further down the line.

“We expect that, over the coming years, with the strong political backing of the Asean nations, the Asean Infrastructure Fund will be a lead player in the funding and development of a wide variety of infrastructure projects in South-East Asia,” said lawyers at Norton Rose in a note.