Supporting Regional Project Development for Association of Southeast Asian Nations Connectivity

Major Change in Technical Assistance Project Number: 46309-001 TA Number: 8240 November 2013 Supporting Regional Project Development for Association of Southeast Asian Nations Connectivity

ABBREVIATIONS ADB Asian Development Bank ASEAN Association of Southeast Asian Nations IES International Enterprise Singapore PPP public private partnership SERC Regional Cooperation and Operations Coordination Division SERD Southeast Asia Department TA technical assistance NOTES In this report, "$" refers to US dollars, unless otherwise stated. Vice-President S. Groff, Operations Group 2 Director General J. Nugent, Southeast Asia Department (SERD) Director J. Lynch, Director, Regional Cooperation and Operations Coordination Division, SERD Team leader Team members J. Cyhn, Principal Economist, SERD M. Bugayong, Associate Operations Officer, SERD B. Finlayson, Principal Public Private Partnership Specialist, SERD T. Lewis, Senior Infrastructure Specialist (Public Private Partnership), Regional and Sustainable Development Department H. Nguyen, Regional Cooperation Specialist, SERD In preparing any country program or strategy, financing any project, or by making any designation of or reference to a particular territory or geographic area in this document, the Asian Development Bank does not intend to make any judgments as to the legal or other status of any territory or area.

CONTENTS Page I. PROPOSED MAJOR CHANGES 1 II. BACKGROUND 1 III. IMPLEMENTATION PROGRESS 3 IV. RATIONALE FOR THE PROPOSED CHANGES 4 V. DUE DILIGENCE 4 VI. THE PRESIDENT'S RECOMMENDATION 5 APPENDIXES 1. Revised Design and Monitoring Framework 6 2. List of Linked Documents 8

I. PROPOSED MAJOR CHANGES 1. An increase in technical assistance (TA) amount and a major change in scope for Supporting Regional Project Development for Association of Southeast Asian Nations Connectivity are proposed for Board consideration. 2. The major changes to the TA scope and implementation arrangements are to include (i) an expanded scale of TA activities commensurate with the increased TA amount, and (ii) appropriate implementation arrangements for cofinancing administration. The TA activities are consistent with the existing components but are on a larger scale. The activities are screening more candidate projects and structuring additional potential public private partnership (PPP) infrastructure projects in Association of Southeast Asian Nations (ASEAN) countries, as well as increasing knowledge sharing activities as appropriate. 1 The TA will be implemented in close coordination and consultation with the cofinanciers. 3. The proposed changes will be funded by a proposed increase of $4.5 million to be financed on a grant basis by the International Enterprise Singapore (IES) and a proposed increase not exceeding the equivalent of Can$4.5 million to be financed on a grant basis by the Government of Canada, in each case to be administered by the Asian Development Bank (ADB). The President approved the original TA amount of $1.2 million financed by the Technical Assistance Special Fund (TASF-IV) on 4 December 2012, and the vice-president of Operations Group 2 approved additional financing of $300,000 financed by the Regional Cooperation and Integration Fund on 22 February 2013. Considering the expanded scope and the additional resources, it is proposed that the completion date of the TA be extended for an additional 18 months, from January 2016 to June 2017. The revised design and monitoring framework is in Appendix 1. II. BACKGROUND 4. The overall impact of the TA is greater economic connectivity in the ASEAN region. The outcome of the TA is increased investments from both the public and private sectors into ASEAN infrastructure development and connectivity. Private sector participation is emphasized since, as indicated in Infrastructure for a Seamless Asia, the investment requirement for Asia and the Pacific is around $8 trillion for 2010 2020, and this cannot be financed by the public sector alone. 2 Thus, the demand for infrastructure development requires additional investments from the private sector, as well as support to identify and structure viable projects. 5. The original TA was designed to deliver two outputs: (i) develop and apply a set of screening mechanisms to determine the most viable projects based on project readiness and expected development impact, and (ii) catalyze private sector investments by providing structuring support for the selected projects. 3 While synergies will continue to be sought with ADB and the ASEAN Infrastructure Fund for possible project financing support, it will be made 1 For this TA, PPP refers to catalyzing private participation in infrastructure development for the region. The private participation can be contributions to equity, lending, or other forms of participation in greenfield or brownfield projects. Private participation could also include operations and maintenance concessions for existing projects to enhance efficiency and overall project management. 2 Asian Development Bank Institute. 2009. Infrastructure for a Seamless Asia. Manila and Tokyo. 3 The screening process would also identify the specific aspects of possible PPP structuring efforts to be undertaken. The TA may not need to undertake all aspects of PPP development, but concentrate on specific aspects in consultation with the stakeholders of given projects.

2 clear to the potential project sponsors that the support for PPP development under this TA does not ensure or guarantee financing with the private sector. At the same time, this TA aims to seek synergies with ADB and the ASEAN Infrastructure Fund pipeline projects. 4 The TA is designed with two main components: (i) (ii) Component 1: Project pipeline screening. This component would continue to build on the ADB Technical Assistance for the Master Plan on ASEAN Connectivity Implementation in deepening a pipeline of regional connectivity projects. 5 Accordingly, this TA will continue the efforts in further project screening in coordination with sector divisions within the Southeast Asia Department (SERD). This component aims to contribute to addressing the need to develop a sound infrastructure project pipeline based on project readiness, expected development impact, and support for regional economic connectivity. The screening process can also determine scope and appropriateness of the detailed work to be undertaken in conjunction with stakeholders through the TA to structure financially viable projects. Component 2: Public private partnership structuring support. Based on the findings and recommendations from ADB s Technical Assistance for the Promotion of Capital Market Instruments for Infrastructure Financing in the ASEAN, undertaken in response to the request by the ASEAN Working Committee on Capital Market Development, project structuring support is to prepare PPP transactions and to use capital market instruments for project financing. 6 Based on the results from the screening process as noted above, the support is to focus on structuring infrastructure projects to strengthen infrastructure development and support economic connectivity in the ASEAN region. 6. The original TA is classified as regional capacity development technical assistance with an estimated combined cost of $1.5 million, of which $1.2 million is financed on a grant basis by ADB s Technical Assistance Special Fund (TASF-IV) and $0.3 million by the Regional Cooperation and Integration Fund. Considering the resource-intensive nature of transaction advisory work for PPPs, it was envisioned that additional resources would be utilized in parallel, both from other cofinancing sources and ADB s related technical assistance. 7 The TA was approved on 4 December 2012, to be implemented over 36 months from January 2013 to January 2016. 7. ADB s Regional Cooperation and Operations Coordination Division (SERC) in SERD as a focal point, with the Regional and Sustainable Development Department, is implementing the TA. Implementation requires that SERC coordinate with other SERD sector divisions and 4 This TA is also expected to have synergies with ADB-supported initiatives and national project development facilities in various Southeast Asian countries. 5 ADB. 2011. Technical Assistance for the Master Plan on ASEAN Connectivity Implementation. Manila. Regional projects refer to those projects that promote cross-border development and national projects that clearly show regional economic impact and demonstration effects. 6 ADB. 2011. Technical Assistance for the Promotion of Capital Market Instruments for Infrastructure Financing in the ASEAN. Manila. 7 Accordingly, additional cofinancing and collaboration arrangements were envisioned during the preparation of the TA, with cofinancing agreements to be finalized before the inception of the TA. ADB resources would come not only from this TA but also from other related TA, including ADB. 2011. Technical Assistance for the Master Plan on ASEAN Connectivity Implementation. Manila.

3 resident missions on project administration responsibilities. 8 In addition, SERC will coordinate with the Private Sector Operations Department and the ADB community of practice on PPP to identify, screen, and structure PPP transactions. Furthermore, SERC will continue its coordination with ASEAN and its related initiatives in supporting infrastructure development and private sector participation. For specific in-country TA activities, ADB will seek concurrence from the respective government in advance. 8. With the additional resources through the cofinancing, the TA will engage a group of individual consultants and/or consulting firms, as appropriate, to provide the necessary advisory, technical and administrative support services. Because of the diverse skills requirements, it is envisaged that consultants will likely be engaged on an individual basis for the component on project pipeline screening, and through a firm for the component on PPP structuring. 9 To respond to project needs in a timely manner, prequalification of consultants and/or consulting firms may be undertaken. The consultants will be engaged in accordance with ADB s Guidelines on the Use of Consultants (2013, as amended from time to time). As required, ADB staff members will participate as resource persons. The purchase of necessary equipment (computer hardware and software) will be carried out in accordance with ADB's Procurement Guidelines (2013, as amended from time to time) and in coordination with the ADB Office of Information Systems and Technology and Office of Administrative Services, where applicable. Upon TA completion, any procured equipment will be turned over to the developing member countries participating government agencies in accordance with ADB guidelines. Disbursements under the TA will be made in accordance with ADB's Technical Assistance Disbursement Handbook (2010, as amended from time to time). III. IMPLEMENTATION PROGRESS 9. Following approval of the original TA, implementation of component 1 was initiated through active discussions with external stakeholders, including government contracting agencies, as well as within ADB s various departments, to explore opportunities and to identify prospective PPP projects to build a pipeline. 10 At the national level, consultations have been held with the PPP-related centers in Indonesia, Malaysia, the Philippines, and Thailand. A number of (greenfield) projects were discussed with institutions in Malaysia, the Philippines, and Thailand, although additional screening and scoping analysis is required. In addition, some refinancing possibilities were also discussed in Indonesia, with possible involvement of Indonesia s infrastructure guarantee facility. At the regional level, assessments of a number of projects are ongoing, including potential energy, transport, and urban (including special economic zone) projects in the Greater Mekong Subregion and Indonesia Malaysia Thailand Growth Triangle. Prospects for possible private participation in projects currently listed in the ADB pipeline have also been explored. Such consultations and preparations have confirmed a strong demand for additional PPP support in infrastructure sectors in Southeast Asia, as well as the need for sound project selection and structuring. Formal partnerships on the aforementioned 8 A working group of staff members can be established to further support the TA activities, since it is envisioned that the activities can involve different sectors across different countries in ASEAN. 9 The quality-based selection process will be used. This process has been recommended because of the complex nature of structuring PPP projects. Other methods of recruitment are to be tailored for this TA in consultation with the relevant departments in ADB. 10 Government agencies of the countries will be further consulted and their endorsement will be sought to engage in the TA activities. Further, as appropriate based on ADB guidelines, under the TA, reimbursement may be sought for costs of structuring support upon its financial closure.

4 prospects will be further explored after approval of this proposed major change to the TA in order to screen and possibly structure PPP transactions. 10. Intensive consultations were also conducted with stakeholders and partners to confirm possible cofinancing for this TA. Based on a strong interest to support PPP infrastructure projects that will contribute towards ASEAN s regional economic development as well as the ASEAN Economic Community 2015, Singapore (both as a shareholder of the ASEAN Infrastructure Fund, and as the chair of the ASEAN Working Committee on Capital Market Development) and the Government of Canada have committed additional resources to support this TA. At the ADB Annual Meeting in May 2013 in Delhi, the IES and SERD signed a letter of intent confirming the contribution of $4.5 million from the IES to support the TA. In parallel, following active communications with ADB, the Government of Canada also approved its cofinancing contribution of Can$4.5 million in July 2013. 11. Separate cofinancing agreements will be executed between ADB and the IES and between ADB and the Government of Canada. Drafts of these agreements have been finalized and will be signed following the Board s approval of this proposed major change to the TA. Given the need to finalize the cofinancing agreements and the desire to consolidate all funding sources under the TA, the recruitment of consultants was postponed. However, significant progress has been made in identifying prospective projects for further analysis under the TA. Upon signing of the cofinancing agreements, consultants will be engaged to undertake screening and PPP structuring activities for the projects described in paragraph 9. IV. RATIONALE FOR THE PROPOSED CHANGES 12. These changes will enable the outputs originally envisaged to be scaled up and the impact and outcome to be broadened to encompass economic connectivity. With additional resources, at least six potential projects are expected to be screened, of which up to three are expected to receive structuring support under the TA. 11 The 18-month extension of the implementation schedule of the TA will allow for the delivery of outputs following the finalization of the cofinancing arrangements and launching of the project structuring support. Apart from increased outputs (revised performance indicators, and revised qualitative descriptions of outcomes and outputs), the assumptions and risks remain unchanged. The revised design and monitoring framework is in Appendix 1. The TA classification will remain unchanged. 13. The proposed changes are to accommodate the expected contribution of additional resources for the TA from the IES and the Government of Canada. They also reflect the necessary changes in implementation arrangements (including reporting requirements to the cofinanciers) to administer these additional resources. V. DUE DILIGENCE 14. To respond to additional due diligence needs for project screening and structuring, the estimated use of consultants has been revised upward to provide for around 190 person-months of international and 150 person-months of national consulting services (or the equivalents if 11 It should be noted that project structuring is capital intensive; therefore, most of the additional resources will be used to increase support for component 2 (project structuring support), which means that the output indicators do not increase proportionately with additional funding. Although it would vary from project to project, it has been estimated that around $2 million $3 million could be required for structuring support for each project, while the remainder would be utilized for pipeline development and other related activities.

5 firms are engaged). It is expected that the TA will also benefit from synergies with other infrastructure and/or PPP initiatives by providing knowledge-sharing platforms and knowledge products from its transaction advisory services. ADB policies and guidelines, including on procurement, consulting services, safeguards, and addressing gender issues, will be adhered to during TA administration and in project screening, prioritization, preparation, and structuring. Meanwhile, under the TA it will be ensured that the requirements of cofinanciers, including their possible participation in review missions and related activities, are met effectively. 12 Due attention will be given to disseminating the TA outputs, outcomes, and impacts, as well as to acknowledging the contributions of various cofinanciers and development partners. 13 A revised cost estimate and financing plan is included as a linked document, as specified in Appendix 2. VI. THE PRESIDENT'S RECOMMENDATION 15. The President recommends that the Board approve (i) (ii) (iii) the major changes in scope and implementation arrangements for Supporting Regional Project Development for Association of Southeast Asian Nations Connectivity, as described in para. 2; an increase in technical assistance (TA) amount for Supporting Regional Project Development for Association of Southeast Asian Nations Connectivity by $4,500,000, to be financed on a grant basis by the International Enterprise Singapore and administered by ADB, as described in para. 3; and an increase in TA amount for Supporting Regional Project Development for Association of Southeast Asian Nations Connectivity not exceeding the equivalent of Can$4,500,000, to be financed on a grant basis by the Government of Canada and administered by ADB, as described in para. 3. 12 It is envisaged that, during the TA inception, further details for coordinating mechanisms between stakeholders will be developed to support the TA implementation more effectively, including timely consultation on major activities, project pipeline development, selection criteria of consultants, and possible secondment. All expenses of cofinanciers participation will be borne by themselves and not from the TA. 13 Detailed arrangements are included in respective cofinancing agreements complying with ADB. 2009. Administering Grant-Financed Technical Assistance. Project Administration Instructions. PAI 5.09. Manila.

6 Appendix 1 REVISED DESIGN AND MONITORING FRAMEWORK Design Summary Impact Greater economic connectivity in the ASEAN region Performance Targets and Indicators with Baselines Growth in trade and investment opportunities within the ASEAN region supported by sound infrastructure Data Sources and Reporting Mechanisms Reports from ASEAN, relevant governments and other development partners. Assumptions and Risks Assumptions Continued commitment to narrowing the development gap is a shared goal of all ASEAN countries. Outcome Increased investments from both public and private sectors into ASEAN infrastructure development and connectivity Outputs 1. Robust project screening and pipeline is established 2. Regional project structuring support for infrastructure Baseline: Intraregional trade share at 25.9% (2011) and intraregional cumulative foreign direct investment inflows at $49.6 billion (2009) Synergies between various key initiatives (and ASEAN member countries) as well as the private sector are fostered: (i) AIF to contain PPP projects in its pipeline by end of first half of 2017 (2012 baseline: 0) (ii) At least 2 3 PPP project structures to be initiated by the end of first half of 2017 (2012 baseline: 0) At least six priority projects that are potentially eligible for funding by the AIF (cofinanced by ADB) are proposed and screened by end of first half of 2017 (both sovereign and nonsovereign, and in ASEAN developing member countries or in subregional programs). Structuring work for up to three priority projects is initiated based on PPP financing and/or capital market instruments by end Reports from ASEAN, relevant governments, ADB and other development partners Semi-annual ADB reports and documentation of individual in-country and regional consultations Semi-annual ADB reports Sustained private sector interest in infrastructure development in ASEAN Risk Prolonged economic downturn could lead to a policy shift toward domestic economic concerns. Assumption ASEAN-wide objectives continue to be reflected in and consistent with national plans of ASEAN countries. Risk Policy shifts result in reluctance of relevant agencies to be involved in specific undertakings for a sustained period of time. Assumption Active participation of line agencies in program and project formulation Risks Intra-country bureaucratic barriers across government agencies Varying levels of cooperation among various stakeholders Assumption Regional cooperation and integration and accelerated regional growth remain a key national interest in

Appendix 1 7 Design Summary financing through PPP and capital market instruments is put into operation Performance Targets and Indicators with Baselines of first half of 2017 Up to three knowledge events or products (experience sharing workshops, policy briefs, etc.) delivered by end of first half of 2017 Data Sources and Reporting Mechanisms Assumptions and Risks ASEAN countries. Risk Adverse economic conditions dampen private sector participation and financing Activities with Milestones Output 1. Project Pipeline Screening 1.1 Propose potential projects in consultation with ASEAN governments by the fourth quarter of 2013 1.2 Launch project screening by the first half of 2014, led by the sector specialists 1.3 Identify additional potential projects in consultation with countries and subregional programs (GMS, IMT-GT, BIMP-EAGA). 1.4. Include additional project screening for project structuring support by 2015 1.5 Conduct regular consultations with developing member countries to update and refine potential project proposals for project pipeline screening, 2014 2017 Output 2. Regional PPP Structuring Support 2.1 Establish regional PPP structuring support in consultation with ASEAN stakeholders by the first quarter of 2014 2.2 Propose a set of potential projects for PPP financing (including through capital market instruments) by the second half of 2014 2.3 Initiate the necessary structuring work for at least one project by the first half of 2015 2.4 Continue to structure additional key infrastructure projects for the region, 2014 2017 Inputs ADB (TASF-IV and RCIF): $1,500,000.00 1. Consultants: $1,375,000.00 2. Equipment: $5,000.00 3. Workshops, Training, Seminars, and Conferences: $25,000.00 4. Miscellaneous Administration and Support Cost: $15,000.00 5. Contingencies: $80,000.00 IES: $4,500,000.00 1. Consultants: $4,121,000.00 2. Equipment: $13,000.00 3. Workshops, Training, Seminars and Conferences: $77,000.00 4. Miscellaneous Administration and Support Costs: $45,000.00 5. Contingency: $244,000.00 Canada: $4,300,000.00 (Can$4,500,000 equivalent) 1. Consultants: $3,664,000.00 2. Equipment: $12,000.00 3. Workshops, Training, Seminars and Conferences: $68,000.00 4. Miscellaneous Administration and Support Costs: $40,000.00 5. Contingency: $516,000.00 ADB = Asian Development Bank, AIF = ASEAN Infrastructure Fund, ASEAN = Association of Southeast Asian Nations, BIMP-EAGA = Brunei Darussalam Indonesia Malaysia Philippines East ASEAN Growth Area, GMS = Greater Mekong Subregion, IES = International Enterprise Singapore, IMT-GT = Indonesia Malaysia Thailand Growth Triangle, PPP = public private partnership, RCIF = Regional Cooperation and Integration Fund. Source: Asian Development Bank.

8 Appendix 2 1. Revised Financing Plan LIST OF LINKED DOCUMENTS http://www.adb.org/documents/mc/?id=46309-001-4 2. Revised Outline Terms of Reference for Consultants