Funding the Future for ASEAN: Blended Financing the 4IR

ASEAN celebrated its 50th anniversary not long ago, and along with the celebration comes the needs for more preparations for the future as indicated by the leaders, especially during the era of the Fourth Industrial Revolution (4IR). In fact, if ASEAN members could mitigate potential risks stemming from the 4IR, they could accrue up to $625 billion per year in 2030. Nonetheless, insufficient infrastructure investment remains one of the stumbling blocks for progress.

ASEAN have established financing mechanisms such as the ASEAN Development Fund, ASEAN Infrastructure Fund, and bilateral agreements with dialogue partners, yet the advent of the 4IR calls for more. It is estimated that $2 trillion in infrastructure investments is required to stabilise economic growth for the member states from 2016 to 2030. One possible way to meet the demands for investments is using blended finance. It combines funds from the public, private, and philanthropic institutions and uses various financial instruments to mitigate risks for financially troubled projects and increase their bankability for private investments in the long run.

Blended finance is at the forefront of the current project financing efforts with endorsements from academics and practitioners in health, public finance, and sustainable development fields. OECD and WEF have pledged to gather $100 billion per year to finance sustainable and climate-resilient infrastructure projects via their Sustainable Development Investment Partnership (SDIP). Development banks such as ADB, AfDB, EBRD, EIB, and IFC are already members of the SDIP alongside various commercial banks and national governments.

OECD and WEF has already established the SDIP ASEAN Hub to bring blended finance to the region. Cambodia being the first ASEAN member to join the new Hub is a positive sign that the members are in fact interested in the funding model.

However, directly injecting a hub coordinated by a third party into the region might not be in line with ASEAN’s efforts in fostering collective decision-making and identity. The ASEAN Community commitments are manifestations of the member states’ collective wills to be in the decision-making position for any developments in the region. An arguably more likely scenario for blended finance adoption entails either reforms to the SDIP ASEAN Hub steering committee to include ASEAN members or the creation of a new ASEAN platform similar to the SDIP. Both options would establish a platform with the same aspirations, governance structure, and funding model.

Aspiration

The aspiration of the platform could be to facilitate the establishment of an ASEAN digital single market, building on the ASEAN Connectivity 2025 vision of achieving a seamlessly and comprehensively connected and integrated ASEAN. To realise this vision, the platform’s main goal should be set on reducing the financial gaps for development projects under the vision.

Governance structure

Members would comprise the current ASEAN Connectivity Coordinating Committee (ACCC)—the body responsible for ASEAN Connectivity 2025 initiatives—representatives, delegates from national governments, private firms, philanthropic bodies, and development banks. The ACCC would assume similar roles to those of OECD and WEF in terms of providing policy guidance and reviewing the projects submitted by implementing organisations.

The reviewing process by the ACCC could be conducted on a monthly or quarterly basis and be based on a set of agreed upon criteria. The criteria could be similar to those of the SDIP with additional ASEAN-specific principles such as mutual respect for territorial integrity specifically for inter-state projects.

Other members mainly involves in deliberating on which projects to finance after the ACCC reviews and project presentations. They will engage with the implementing organisations after the reviews to discuss the form of blended finance to be used and to review reports submitted by the organisations.

Funding model

Decision-making procedures

The main decision-making process revolves around financing projects. First, the implementing organisations submit their project proposals to the ACCC for reviews. At the monthly or quarterly meetings, the ACCC would review the proposals and select projects to be presented to the platform members. Interested members would enter into bilateral negotiations with the implementing bodies to determine the form of blended finance to be utilised.

Sources of funding

Funds for administrative spending would be under the ASEAN Secretariat budget allocated to the ACCC, whereas those for operational spending are derived from all members. No resource pooling is required as funding for projects varies based on the outcome of bilateral talks between implementing organisations and members.

Management and implementation

The ACCC would be in charge of managing funds for administrative spending. Tasks involving case studies on best practices, drafting policy guidance, and hosting meetings are part of the spending. Management of funds for projects would depend on the implementing organisations.

Implementation of project funds falls under two types of blended finance schemes. The first type, supporting mechanisms, involves using technical assistance, market incentives, and risk underwriting to mitigate risks and increase bankability of projects. The other type is direct funding by platform members based on the market segment the project is categorised in. The financial instruments used in both types range from grants, guarantees to equities.

The actual structures and functions of the platform could vary but the core focus should remain on the usage of blended finance. The widely adopted co-financing model could be the key to an ASEAN approach to funding the future in light of the 4IR.