What’s Behind the New ASEAN Infrastructure Hub?

While Cambodian Prime Minister Hun Sen stole the headlines at the World Economic Forum (WEF) on ASEAN held in Phnom Penh from May 10 to 12 with yet another rant against his opponents, a much more important development was the announcement at the forum of a new regional hub to promote sustainable infrastructure financing in Southeast Asia. The new ASEAN hub, founded by governments, banks, and other philanthropic organizations, represents an innovative, albeit modest, effort to help fill a large gap in the region’s infrastructure needs.

Asia’s growing demand for infrastructure has long vastly outstripped supply. The Asian Development Bank (ADB) forecasts that a staggering $26 trillion is needed by 2030 to resolve a serious infrastructure shortage that inhibits countries from achieving their full economic potential. Within Southeast Asia, estimates by ASEAN project that the subregion would need at least $110 billion in infrastructure investment each year to support future growth. Though the regional grouping included sustainable infrastructure as one of the five prongs of its new Master Plan for ASEAN Connectivity released last year, which looks out to 2025, officials say the future ambition still exceeds the current financial reality.

Despite this massive funding shortfall, it is not all gloom and doom for Southeast Asia. Actors are coming together to broach and then test potential solutions that could help at least begin to bridge some of the gaps. One promising effort in this regard was announced at the WEF on ASEAN on May 12, when the Sustainable Development Investment Partnership (SDIP), a collaborative initiative managed by the Organization for Economic Cooperation and Development (OECD) and the World Economic Forum (WEF), said that it would establish a new ASEAN hub to advance financing for sustainable infrastructure in Southeast Asia.

The new ASEAN hub is an example of what has been termed “blended finance.” The idea is basically to combine public, private, and charitable money to get funding for projects that commercial or institutional investors might be otherwise reluctant to touch due to the prohibitively high risks involved. In this case, according to the WEF, efforts were made to bring together a community of 35 governments, banks, pension funds, and other philanthropic organizations to mobilize $100 billion worth of projects to support sustainable and climate-resilient infrastructure. Though these various institutions would be involved, the objective of the “hub” idea is to empower local actors to come up with work programs that address financing challenges from a regional perspective.

The idea of an ASEAN hub is not entirely new. The SDIP has been moving toward the creation of the ASEAN hub since the successful launch of its Africa hub last summer, where projects valued at over $20 billion have already been assessed and it is targeting $100 billion in blended finance by 2020. And the proposal had already been floating around in various forums throughout Southeast Asia, including the World Economic Forum on the Mekong Region last year, where blended financing was explicitly discussed to overcome the lack of interest by the private sector in funding some critical infrastructure projects. The Mekong is one of the world’s longest and largest rivers, and the Greater Mekong Subregion (GMS) area – which comprises Laos, Myanmar, Thailand, Vietnam, and part of China – has long been recognized as a key economic growth area within Southeast Asia.

To be sure, it is early days, and how exactly the new SDIP ASEAN Hub will fare remains to be seen. Relative to the Africa hub, there seems to be a bit more work that will be required to get things off the ground, with even the WEF admitting that its initial focus will be on assessing project preparation facilities and infrastructure initiatives in ASEAN. This, the body says, will include country-level engagements to assess project pipelines and providing supporting tools to bridge gaps and address constraints.

The SDIP ASEAN Hub will also need to ramp up participation if it is to gain steam. Though the list of 35 participants is a good start (the Africa hub began with just 30 last year), the needs in Asia are much greater and bringing together more supporters will help the Hub move toward a more ambitious target than the current $100 billion. And while it is commendable that Cambodia has been the first member of SDIP from ASEAN and has been willing to play a critical role in the Hub so far, the reality is that it will not take off in a significant way if it does not enjoy broad support among the main players in the subregion, particularly Indonesia, which alone represents nearly 40 percent of Southeast Asia’s economic output.

There are also some questions about how the SDIP ASEAN Hub will fit in with some of the newer organizations that are occupying the infrastructure space, especially ones like the China-led Asian Infrastructure Investment Bank (AIIB), which may not be as committed to goals like sustainability (though AIIB’s most fervent supporters are quick to point out that the outlook on this score is far sunnier than it was even a year ago). When asked this question during the press conference during the launch of the Hub, the panel’s participants resorted to boilerplate responses, stressing that the AIIB was a complementary organization and that the infrastructure needs were too great for zero-sum thinking. This skirts the tougher questions that would need to be answered should the Hub choose to cooperate with the AIIB, including on its standards.

All this should not take away from the idea itself, which remains sound. ASEAN is a key engine of Asia’s economic growth, and establishing a dedicated SDIP ASEAN hub is a strong signal by international institutions that they are committed to addressing the infrastructure question in a sustainable and cost-effective manner in the subregion. Now they must follow through on this noble effort and begin turning rhetoric into reality.