ASEAN Infrastructure Financing Mechanism (AIFM) Conference
Distinguished guests, Ladies and Gentlemen,
Assalamualaikum Warahmatullahi Wabarakatuh and a very good morning,
1. I am pleased to deliver the keynote opening address for the inaugural ASEAN Infrastructure Financing Mechanism (AIFM) Conference today. I would like to extend a warm welcome to H.E. Dr Surin Pitsuwan, the Secretary-General of ASEAN, to Malaysia. His presence as well as those of the eminent speakers, Task Force members and distinguished guests at this conference only goes to underscore their commitment to promoting infrastructure development in the region.
Critical role of infrastructure in meeting aspirations of ASEAN
2. Let me start by outlining why it is such a critical priority on ASEAN’s agenda to launch this initiative aimed at increasing collaboration between member countries and the private sector to mobilize capital to finance infrastructure development in the region. As you are aware, it is ASEAN’s vision to evolve into an integrated economic community by 2015. The ASEAN Economic Community Blueprint 2015 envisages ASEAN to have a single market and production base, to be a highly competitive economic region, to be a region of equitable economic development and to operate as a region fully integrated into the global economy.
3. ASEAN have already taken considerable strides towards this direction in lowering tariff barriers. As at the end of last year, intra-regional trade already accounted for a quarter of ASEAN’s total trade, roughly double what the region trades with the US. Achieving ASEAN’s vision requires that we extend our cooperation beyond trade towards greater cross-border collaboration in activities that provide substantial economic benefits such as infrastructure development.
4. ASEAN, with a population of 600 million, is a significant region and among the fastest-growing regions in the world; with per capita income more than doubling from USD949 to USD2,091 over the past decade. However, there is still disparity in income levels among ASEAN countries. There are still large numbers of population who do not have access to basic amenities and do not benefit from the necessary economic infrastructure to enable them to earn a meaningful livelihood. In this regard, the equitable and social dimensions of building a prosperous and harmonious region pose a considerable challenge that should be given the utmost priority.
5. Therefore even as we focus on building greater connectivity between ASEAN countries through improvement of transportation and communication networks between thriving areas in the region, we must also pursue with equal passion the challenge of bridging the gaps between the haves and the have-nots in the region. The long-term prosperity and stability of the region can only be realized if social harmony is sustained through more equitable sharing of the benefits of economic growth.
6. The provision of basic infrastructure throughout the region is therefore necessary to overcome the geographical, resource and knowledge constraints that impede our communities from achieving progressive economic development. Access to basic necessities such as water, sanitation and electricity are core requirements to lift communities out of poverty. Reducing the time and costs of travel and transportation will facilitate small economic units to expand market reach and increase the commercial viability of their business activities. And as we facilitate higher levels of domestic business activities through improved infrastructure networks and facilities, this will attract external investors to invest, leading to the opening of more areas – thus ensuring more balanced distribution of economic wealth throughout the region.
7. Infrastructure development is thus a powerful catalyst that promotes economic growth. The returns from infrastructure development are likely to generate a value to society over the long term that far exceeds the cost of an individual project. Better living conditions, increases in property usage and values and increasing the proportion of population engaged in commerce represents tangible benefits that accrue over the long term to society.
Challenges in mobilizing capital to finance infrastructure projects
Ladies and Gentlemen,
8. Overall, ASEAN needs to attract a considerable amount of investments to finance its infrastructure development. The Asian Development Bank projects infrastructure investment requirements for ASEAN could reach USD583.1 billion for the period 2006 to 2015 or an average annual requirement of USD58.3 billion a year. This is roughly five times the average annual private sector investment of USD10.9 billion recorded during 1990 to 2006.
9. Though the benefits from investing in infrastructure are well known, it is a considerable challenge to mobilize the required capital to invest in infrastructure projects. While governments can directly finance the infrastructure projects through fiscal means or provide the necessary guarantees, they only have sufficient capacity to finance a limited number of priority projects in their own country.
10. In this context, the fiscal resources of the government falls far short of the financing required to support infrastructure development that is necessary for the region to sustain a rapid pace of growth. The region therefore needs to attract considerable amounts of private capital if we are to be able to develop our infrastructure at a fast enough pace to match our aspirations for growth.
11. At the moment, we recognize that there are many impediments that limit private sector participation in infrastructure projects in the region; resulting in under-investment in infrastructure projects. First, the returns from investments in infrastructure usually materialize over a long time horizon, typically stretching to over 20 years. Hence, there are high levels of uncertainties related to infrastructure financing – arising from potential delays, escalation in project costs and the reliability of future revenue streams. These uncertainties inflate the risk premium required by investors; translating into additional financing costs for infrastructure projects.
12. The high risk premiums associated with infrastructure projects in the region considerably reduces the number of commercially viable infrastructure projects that can be undertaken by the private sector without the requirement for government funding or guarantees. This represents a more acute challenge for the low income member countries where the low levels of affordability means that the tariff charged to infrastructure users may not generate sufficient revenues to cover the investment costs.
13. From a viewpoint of the region as an economic community, the under-investment in infrastructure projects is certainly an anomaly. There are ample savings in ASEAN with the region generating Gross National Savings in excess of USD340 billion annually. However, these savings are not evenly distributed and the absence of efficient intermediation mechanisms to recycle these savings means that regional savings are not automatically available to be deployed into infrastructure projects.
14. The dependency of infrastructure financing on government financing also has the drawback of concentrating infrastructure risks in the government’s fiscal budget. When there is an economic downturn, the government will find its fiscal position aggravated by the sudden need to meet liabilities from guarantees or to provide subsidies to reduce toll rates for users. This then constrains the ability of governments to spend when these expenditures are needed most as a counter-cyclical measure to offset an economic slowdown.
15. As I had mentioned earlier, the benefits to society from infrastructure projects as a public good are enormous – extending well beyond the benefits of each project on a private basis. A private sector infrastructure developer only receives direct benefits from an infrastructure project and when one assesses these benefits, net of financing costs and uncertainties, few projects remain commercially viable. As an outcome, the take-off rate for infrastructure projects remains far below what is required to achieve even higher economic growth rates for the region.
16. It is this conundrum that the Finance Ministers is seeking to address through practical and innovative interventions that effectively combines the strengths of ASEAN governments with the capabilities of the private sector in a mutually-beneficial partnership to overcome the challenges to financing infrastructure development in the region.
The role of the AIFM Task Force
Ladies and Gentlemen,
17. The ASEAN Finance Ministers recognize the critical role of infrastructure in accelerating economic growth and we have therefore established a Task Force, chaired by Malaysia, to facilitate the establishment of the best frameworks and mechanisms to attract greater private sector participation and investment in infrastructure projects. The Task Force will therefore focus its efforts on the identification and implementation of a broad range of facilitation initiatives required to address the various impediments that result in private sector under-investment in infrastructure projects in the region.
18. We have to recognize that the challenge of addressing impediments is a significant task. Infrastructure projects are complex, often involving multiple agencies and private sector players. The challenges to facilitating greater private sector participation and capital in infrastructure projects are therefore manifold and span a wide range of areas.
19. In this regard, the creation of a conducive environment for infrastructure financing actually goes go hand in hand with the current nation-building efforts in the respective ASEAN countries. Building a strong and prosperous nation requires the strengthening of institutions and markets through enhancing the regulatory, institutional and tax frameworks to facilitate private sector participation. This can be complemented with the adoption of best practices to provide greater efficiencies in managing infrastructure projects and that enhance their creditworthiness so that the private sector will be attracted to invest in these projects.
20. For the ASEAN governments, the challenges are also for us to strengthen our capacity and expertise in assessing infrastructure proposals, using methodologies that would ensure fairer sharing of risks and returns for partnerships with the private sector. As past experience has highlighted, the building of capacity to manage financial risks is very critical to contain the potential spill-over effects infrastructure projects may have on fiscal expenditures and financial stability.
21. We must also work together to strengthen the role of our financial institutions and markets in financing infrastructure projects. Through ensuring that our financial intermediaries and markets are well regulated and through diversifying and deepening the sources of financing, this would enhance the capacity of regional capital markets to efficiently undertake its task of dispersing risks – strengthening financial stability and resilience in the process.
22. The transparency of risks and reliability of information for infrastructure projects will allow markets to price these risks efficiently and to reduce the risk premiums or financial returns required by private sector investors to finance infrastructure projects in ASEAN. Efficient and deep markets will substantially increase the supply of capital at lower costs. This will expand the number of commercially viable projects in the region. These are critical stepping stones to achieve our objective of recycling regional savings into infrastructure projects in ASEAN.
23. While the task of addressing the challenges to infrastructure financing is substantial, they are not insurmountable. Fortunately, there is already a wealth of experience around the world in dealing with the many complex issues on infrastructure projects. We can tap global experience and expertise through expanding the possibilities for public-private partnership in regional infrastructure development. The ASEAN Finance Ministers therefore wish to invite the private sector and multilateral organizations to engage with the Task Force and to assist us in shaping more effective approaches to implementing infrastructure projects, to strengthen our capacity in managing these projects and in broadening the range of facilities and instruments to manage financial risks.
24. The Task Force, comprising representatives from the ten member countries, will therefore operate as a conduit to the region’s Ministries of Finance to harness the expertise of the private sector to assist in organizing the necessary interventions to overcome the impediments to infrastructure financing. We will certainly be seeking the support of the multilateral organizations such as the World Bank and the Asian Development Bank as well as other specialized agencies to participate in our efforts to build an ASEAN infrastructure financing mechanism. The region’s Ministry of Finances will certainly appreciate the effective and innovative ideas put forward by private sector and multilateral organizations and will look forward to working in partnership with them to implement these initiatives either on a multilateral or bilateral basis.
Ladies and Gentlemen,
25. In conclusion, the AIFM represents a major initiative in terms of establishing a network of partnerships with global and domestic players in the infrastructure sector. We believe that the partnership approach to achieving the region’s aspirations for infrastructure development will create opportunities for both global and regional players so that all may jointly benefit from a substantial expansion in infrastructure development in the region.
26. Indeed, the critical challenge for ASEAN in moving forward is the strengthening of our effectiveness for cooperation to achieve the vision of shared prosperity in a harmonious community. Towards this end, ASEAN member countries must seek to commit more resources in each other’s countries. The more member countries have a stake in each other’s prosperity, the stronger will be the bond between the member countries.
27. Regional cooperation and coordinated intervention to promote mutual prosperity in the region is also sorely needed at this point in time. The recent dislocation of financial markets around the world is already starting to impact on regional economic activities. While there is already coordinated intervention to address the effects of financial contagion, I wish to propose that the governments of ASEAN consider expanding our efforts to include creating and supporting growth opportunities throughout the region to offset the slack in global consumption and investment.
28. It is hence timely that we are having this conference where the ASEAN Finance Ministers are seeking to expand our co-operation and partnership with the private sector and multilateral organizations to boost regional infrastructure development. We believe that the building of infrastructure will help us build society and to build our economies at the same time. The ASEAN Finance Ministers are certainly keen to strengthen our identity as one region and to take active measures to achieve the ASEAN vision of an integrated and high-growth economic community. Malaysia is honoured to be the chair of the ASEAN Infrastructure Financing Mechanism (AIFM) Task Force and we stand committed to expanding the opportunities for collaboration among all of us for mutual benefit and for the prosperity of ASEAN.
Deputy Prime Minister’s Office
10th November 2008.