In the recent years, ASEAN’s increasing thrust on infrastructure spending has proved imperative for the region’s continued economic growth. Further, the increasing urban population, which is expected to almost double by 2020, has compelled most governments to augment infrastructure, specifically that relating to the transport and power sectors. As per the Asian Development Bank (ADB), an investment of at least $950 billion will be required by 2020 to ensure the region’s continued growth and development. Therefore, ASEAN’s infrastructure sector is expected to garner a lot of attention over the next few years, offering vast opportunities for long-term investments.
Growth drivers
In the medium term, growth in ASEAN countries is expected to pick up pace owing to a strong rebound in trade, robust domestic demand and infrastructure development initiatives undertaken by various governments. ASEAN’s growth is also expected to remain strong at 5.2 per cent between 2018 and 2022. Among the region’s 10 member countries, Cambodia, Lao PDR and Myanmar are projected to grow the fastest between 2018 and 2022, while the Philippines and Vietnam are expected to lead in terms of actual growth numbers among the ASEAN-5 (Indonesia, Malaysia, the Philippines, Thailand and Vietnam). Meanwhile, during the same period, Singapore is estimated to grow by 2.3 per cent per annum, reflecting the country’s advanced stage of economic development.
With regard to the CLM countries (Cambodia, Lao PDR and Myanmar), growth is expected follow a strong pace over the medium term (2018-22), led by Myanmar at 7.4 per cent per annum. Meanwhile, the real GDP growth of Cambodia and Lao PDR is projected to increase to about 7 per cent during the said period, reflecting significant improvements in the countries’ investment appeal.
Initiatives are also being taken to promote regional integration in trade of goods and services. Cambodia, Lao PDR, Myanmar and Vietnam (CLMV countries) reduced tariffs in 2017 under the ASEAN Trade in Goods Agreement (ATIGA) schedule. Further reductions are expected, especially for sensitive products in 2018.
Additionally, the digital economy is expected to enhance the free flow of goods and services within ASEAN through the ASEAN Single Window initiative. Also, the ASEAN Framework Agreement on Services (AFAS) and mutual recognition arrangements (MRAs) in several sectors have helped liberalise services. In addition to the eight MRAs signed in the past, the ASEAN MRA for generic medicinal products recently got finalised.
Southeast Asia’s infrastructure sector, therefore, is expected to offer huge business opportunities in the years to come, with investors perceiving the region to be an attractive destination due to its sustained growth rates, growing consumer markets, strong labour force, and steady economic and regional integration among its 10 nations.
ASEAN’s massive project pipeline
Southeast Asia Infrastructure Research has tracked a total of 518 upcoming projects across sectors offering an investment opportunity of over $298.81 billion. Country-wise, Thailand offers the maximum opportunity of over $74.96 billion, followed by the Philippines ($68.53 billion) and Vietnam ($54.71 billion). Sector-wise, the railway sector offers the maximum opportunity, accounting for almost 40 per cent of the total expected investment in the region, followed by the urban transport and airport sectors at 26 per cent and 14 per cent respectively.
Upcoming mega projects
Various mega projects and plans have been announced for the coming years.
In the railway sector, Thailand has lined up one of its most ambitious projects for implementation in 2018, the Sino-Thai railway line, covering a distance of 873 km between Bangkok and Nong Khai on the Thai-Lao PDR border. The country has further laid significant emphasis on the development of high speed rail (HSR) corridors, some of them being the $12.28 billion Nong Khai-Map Ta Phut HSR project, the $10.91-billion Chiang Khong-Ban Phachi HSR project, the $8.13 billion Phitsanulok-Chiang Mai HSR project, the $6.87 Bangkok-Phitsanulok HSR project; and the $6.49 billion Bangkok-Rayong HSR project.
Malaysia plans to develop the “wheel and spoke” railway system around Kuala Lumpur to include several new interconnecting stations, and implement the long-awaited $18.35 billion Kuala Lumpur-Singapore HSR link with Singapore. Indonesia plans to implement the $11.1 billion Jakarta-Surabaya railway project and the $2.97 billion Tanjung Enim-Tanjung Api-Api railway line, while the Philippines and Vietnam have already launched the $4.3 billion Malolos-Clark railway project and the $5 billion Bien Hoa-Vung Tau railway project respectively.
The urban transport sector has also been abuzz with a lot of activity, with plans to implement several new projects. Key projects in the pipeline include the $18.42 billion Saigon metro rail lines 2-6 in Vietnam, the $3 billion light rail transit in Cebu, Philippines, the $2.39 billion Brunei bus rapid transit (BRT) system in Brunei; and the $0.8 billion Phnom Penh “skytrain”/light rail system in Cambodia.
In Malaysia, projects worth over $568.2 million are currently in the planning stages of development. These include the urban railway city of Medan in North Sumatera, the Khing BRT system and the MRT 3 Circle Line.
Airports in ASEAN are also expected to receive significant investments over the next few years. Several countries in the region have planned a total of 46 projects involving the construction of new airports, terminals, runways, and ancillary infrastructure, entailing a total investment of $41 billion. The Philippines alone accounts for close to 40 per cent of the investment in the sector. Some of the key projects are the $16.03 billion Long Thanh International Airport expansion project in Vietnam, $13.91 billion New Manila airport in the Philippines, the $16.6 billion expansion project of Suvarnabhumi airport (Phase III) in Thailand, the $15.7 billion Kedah International airport project in Malaysia, the $15.3 billion expansion project of Suvarnabhumi airport (Phase II) in Thailand and the $15 billion Hanthawaddy International Airport (Phase I) project in Myanmar. Besides, Thailand launched a $5.5 billion plan in 2016 to expand and augment the country’s airports over the next 15 years.
Another sector to garner sizeable investments is the oil and gas sector. A key project in the pipeline is the construction of an oil refinery by Petron Corporation in the Philippines that is estimated to cost $15 billion-$20 billion. Another involves the construction of an oil depot and pipeline connecting Vietnam’s Hon La port to Khammuan province in Laos. The cost estimate for the project is $300 million-$500 million. Other key projects include the $286 million LNG import terminal at Thi Vai and the $279.62 million Son My LNG terminal in Vietnam.
In the road sector, ASEAN has outlined an ambitious pipeline of projects involving the construction of expressways, toll roads, and operation and maintenance of roads. Southeast Asia Infrastructure Research has tracked a total of 81 road projects spanning a length of at least 1,213 km, with the maximum road length planned being in Laos (490 km). Some of the key big-ticket projects in the region are the $2.3 billion Nakhonpathom-Cha Um motorway and the $1.08 billion Bang Pain-Nakhonsawan motorway in Thailand, the $1.5 billion Yangon Inner Ring Road in Myanmar, and the $1 billion Panay (Metro Iloilo)-Guimaras-Negros (Metro Bacolod) Island Bridges and the $8.8 billion NLEX East Expressway in the Philippines.
The seaport sector is also expected to receive a significant push in the region, with around 107 projects planned for implementation at an estimated cost of $7.5 billion. However, a major portion of these investments is accounted for by three big-ticket projects – the $2.5 billion seaport project in Ca Mau province, the $1.47 billion new port facility at the Da Nang port complex in Vietnam, and the $1.48 billion seaport project in the northern part of Java island (Patimban port project).
Besides, the electricity and renewable sectors have a modest line-up of projects. Indonesia has announced its plans to add additional capacity of 35,000 MW of electricity to meet around 96.6 per cent of its total demand by 2020. This would entail the construction of 30 new dams and hydropower plants. Other key electricity generating and transmission projects include the Gulf SRC Power Plants I and II ($1.8 billion each) in Thailand, the $1 billion Tadmax Resources Bhd and the $1.8 billion 500 kV Sumatera Transmission projects in Malaysia, and the $410 million 500 kV Java-Bali crossing project in Indonesia.
Financing projects
Multilateral organisations have played a pivotal role in funding mega infrastructure projects in the ASEAN region. As of November 2017, the World Bank financed 291 infrastructure projects entailing a total investment of around $32 billion, while ADB financed about 473 infrastructure projects entailing a total investment of over $35 billion. Most of these projects were sanctioned in Indonesia, Vietnam and the Philippines. The Japan International Cooperation Agency funded 871 infrastructure projects totalling an investment of JPY 8,456 billion. The main recipients of these investments were Indonesia, Thailand, Vietnam and the Philippines. Besides, another multilateral organisation, the OPEC Fund for International Development, approved loans worth $469 million in the region over the same period.
Besides, bank credit has also been a critical source of finance for infrastructure projects in the region. ASEAN has mostly relied on this source for private sector financing, with public sector banks traditionally playing a greater role. However, private equity (PE) investments in the infrastructure sector continue to remain subdued. After a subdued PE deal environment in 2015, deal value in Southeast Asia bounced back to $6.8 billion in 2016 from $4.8 billion in 2015, which is 14 per cent higher than the 2011-15 historical average. A rebound in Malaysia from a record low in 2015 helped spur the rally. However, challenging conditions have affected ASEAN-focused PE fundraising since 2014, with the amount of capital raised annually significantly below the record $12.3 billion secured in 2014.
Additionally, bond financing for infrastructure in the Southeast Asian region remains a largely untapped route on account of persistent issues such as lack of liquidity and lower project ratings which have made investors vary of investing in the bond market. As per Asia Bond Monitor, local currency corporate bond issuances in Southeast Asia expanded from $338.7 billion as of March 2016 to $352.5 billion as of March 2017.
The road ahead
Going forward, international assistance on preferential long-term loans is likely to be the most dependable source of funding for countries like Cambodia, Lao PDR and Myanmar. However, in the case of the Philippines and Vietnam, both government financing and multilateral agencies are expected to lead in investments made in the countries, while Indonesia is likely to explore public-private partnerships (PPPs) as a new financing alternative. Besides, the ASEAN Infrastructure Fund, launched in 2012, is expected to raise additional funds through high investment grade debt that central banks could purchase using foreign exchange reserves. This would make more funds available. Besides, the recently established Asian Infrastructure Investment Bank, focused on funding infrastructure projects in Asia, is likely to emerge as an important financier for projects in the region.
Overall, the role of PPPs is expected to increase across all member states in times to come. While the Philippines has taken major steps ranging from improved procurement procedures to a new public finance management law, Vietnam has brought in a new legal framework on PPP investment in an effort to attract greater foreign direct investment in infrastructure. However, the PPP experience so far has not been very encouraging in the region, given the sheer complexity in launching such projects. Concerted efforts will have to be made towards building a strong PPP framework to bolster the role of PPPs in speeding up infrastructure development in ASEAN.
