Alternative financing for ASEAN infrastructure
This article has been translated by PwC Indonesia as part of our Indonesia Infrastructure News Service. PwC Indonesia has not checked the accuracy of, and accepts no responsibility for the content.
Investor Daily - Pembiayaan alternatif infrastruktur ASEAN
24 July 2023
By: Abdul Aziz
Infrastructure is the main booster for economic growth in a country, or even globally. Excellent infrastructure availability in an economy is always related to other economic variables, such as people’s income and welfare, poverty alleviation, interregional construction disparity reduction, and other variables.
Quality infrastructure construction also positively impacts interstate/interregional cooperation. Interstate infrastructure connectivity in an area will boost regional collaboration and economic integration among its members.
However, the positive impact of infrastructure construction is not always in line with the available funding. Many countries are lacking infrastructure funding. If this condition persists, it will hamper infrastructure quality, which will worsen the services of governments/states for their citizens.
Infrastructure financing
Slow economic growth in many countries is caused by poor infrastructure quality and quantity, which is caused by the lack of domestic and foreign financing/investment to construct infrastructure in the countries.
Sustainable infrastructure financing is the main key to realise sustainable construction and growth. The research conducted by Bhattacarya et al. (2015) predicts that, between 2015-2030, the global infrastructure investment value will reach US$90 trillion or US$5-6 trillion per year. For ASEAN, the Global Infrastructure Outlook reports that, in 2022, the infrastructure investment forecast in ASEAN (excluding Brune and Laos) reached US$108.8 billion. Meanwhile, the investment required is predicted to reach around US$123.8 billion. If this condition continues until 2040, ASEAN is predicted to experience an infrastructure funding gap of at least US$19.9 billion per year.
Infrastructure construction in ASEAN has been traditionally funded by the state budget (APBN). It is a similar pattern with the rest of Asia as the government’s financing generally reaches around 90% of infrastructure expenditure. Meanwhile, the global average is around 40%. Limited fiscal capability, especially in developing countries, is the main challenge in reducing the sustainable infrastructure requirement gap.
The role of the private sector and global investors is also important in reducing the sustainable infrastructure financing gap. The government’s task is to reduce the risks and challenges in investing.
Solution proposal
Regarding the problem above, as a solid area, countries that are members of ASEAN have established ASEAN Infrastructure Fund (AIF) in 2011 as one of the efforts to reduce the funding disparity in infrastructure construction. AIF is committed to achieving its goal to continuously support ASEAN members in infrastructure construction by offering loans to be a project funding source.
At the 2023 ASEAN forum, AIF submitted two proposals to reposition AIF’s role in project financing in ASEAN and to recapitalise AIF.
Regarding the reposition proposal, AIF intends to increase the amount of investment and support for projects that are in line with climate change transition (mitigation and adaptation) and/or environmental sustainability (green projects). In practice, it means that AIF will provide a higher percentage from its portfolio for green projects with an annual target that will increase incrementally from 2024.
Meanwhile, for the recapitalisation proposal, AIF has submitted a request to countries in ASEAN (as shareholders of AIF) to increase their capital by US$100 million. They hope that ASEAN members can contribute to increase their capital. The increase in AIF’s capital is meant to support financing for ASEAN projects that will operate between 2024-2025.
Indonesia, as the Chair of the 2023 ASEAN forum, and other ASEAN countries have approved AIF’s reposition proposal. The proposal is reckoned to be in line with the climate change transmission and the emission reduction targets in ASEAN , so it is expected to attract more co-financiers with a more affordable cost of fund.
Regarding AIF’s recapitalisation proposal, Indonesia and several other ASEAN countries have given their approval. However, Indonesia is asking AIF to conduct further study to more precisely determine the increased capital amount, the capital contribution formula for each country, and other basic factors.
On the other hand, ASEAN members also need to increase their efforts and collaborations to take advantage of the capital from other sources, which are already available in ASEAN in large amounts.
From the option, bank deposits are actually the most plausible funding source that can be used for infrastructure construction with an estimated capital amount of around US$4.6 trillion. Meanwhile, the ASEAN capital market is predicted to have an available capital of US$3.1 trillion.
In order to optimally utilise other funding and financing sources (especially from the private sector and international financial institutions), there are several points that must be implemented.
First, the costs of infrastructure construction projects (sectoral and regional) in ASEAN need to be recalculated. Then, the investment requirement to finance infrastructure construction also needs to be recalculated. Next, the latest financing/investment sources in ASEAN that can be utilised for the next 5-10 years have to be mapped out.
Moreover, a dialogue forum among governments and financing sources, such as private companies, investors, multilateral development banks (MDBs), and other related parties, in ASEAN needs to be conducted. The dialogue is meant to explore potential infrastructure financing sources, increase the participation of the private sector in sustainable infrastructure investment, as well as share the best practices and the experiences of many countries regarding innovative infrastructure financing models. With this dialogue, each ASEAN member and private company/investor/MDB is expected to share their experience in the development of infrastructure investment practices in their area and to hold discussions on how the practices can be replicated in other countries, especially in ASEAN countries.
