Given that Southeast Asian (SEA) countries have embarked on massive infrastructure investment programmes and seek a significant share of the funding from private investors, it is critical that they ensure that the environment for doing business is right. The SEA region is also becoming attractive for sourcing and investments. There has been more rapid growth in countries like Malaysia and Singapore, which have utilised investments from a range of funding options such as foreign direct investment, sovereign wealth funds and participation of multinational enterprises to the fullest in sectors such as telecommunications, oil and gas, and power generation and transmission.

Although most countries in the region have laws and regulations that encompass the principles of competition and transparency, challenges remain in terms of the ease of doing business. Cumbersome regulations and licensing requirements and the lack of regulatory predictability have ensured that the cost of doing business in the region as a whole remains high.

Of the countries in ASEAN, Singapore is ranked among the world’s safest and most stable countries with first rank in terms of the World Bank’s Ease of Doing Business 2016. On the other hand, Myanmar remains the lowest-ranked ASEAN member, with the exception of Afghanistan and Bangladesh, the lowest-ranked country in Asia.

This article looks at the various issues and challenges that make the environment for doing business difficult.

Transparent policy and regulatory framework

Though most of the countries have laws to ensure fair competition and transparency, which are vital for the success of large-scale infrastructure projects, the problem of corruption continues to undermine investor interest in most Southeast Asian nations. According to a study by the International Monetary Fund, countries with high levels of corruption have 5 per cent less investment than other countries. Apart from Singapore and Malaysia, corruption acts as a “hindrance to business” across the region. In fact, three Southeast Asian countries – Cambodia, Laos and Myanmar – rank among the 30 most corrupt countries in the world, while Singapore is among the 10 least corrupt.

Moreover, the institutional capacity within countries to design sophisticated and commercially sound public-private partnership (PPP) projects is weak. A case in point is the Kalibaru container terminal, Jakarta, Indonesia. In 2012, the Indonesian government cancelled tenders for the $1.3 billion Kalibaru container terminal project in north Jakarta when it realised that it did not have the capacity to jointly finance the project. Under the blueprint, the government was supposed to provide Rp 3.5 trillion ($389 million) for roads and bridges to the port area. Reportedly, at least five local and foreign companies had submitted pre-qualification bids for the project. Naturally, the government’s action did not go down well with international bidders for the project.

Another example relates to the construction of the new terminal at the Mactan-Cebu International Airport. Originally scheduled to begin operations in August 2013, bidding for the $765 million project was postponed due to the authorities’ need to fine-tune the tender documents following concerns raised by interested private parties. The project was finally awarded to the GMR-Megawide consortium in April 2014 but was again subjected to a further delay of 10 months.

Cross-border challenges

Another issue faced is that most projects involve multiple countries, in terms of physical location, or as investors/promoters. Given the lack of unified legal and operational frameworks for infrastructure services, such projects are often stuck between multiple agencies across borders. The absence of a comprehensive legislative and regulatory framework in areas like the actual operation of cross-border infrastructure and tariff determination is a hindrance in attracting private investors.

Take the case of the Laos-China railway project. In December 2015, the Laos and Chinese governments held the ground-breaking ceremony to begin the construction of a mega high speed rail project to connect Vientiane, the capital of Laos, with Boten, a Laos-Chinese border checkpoint. Laos and China have reportedly reached an agreement on the interest rate for a $480 million loan to build the high speed Lao-China railway.

The project was approved by Vientiane in 2012 but the launch was delayed on account of lengthy negotiations between the two countries on the loan conditions offered by China. The loan amount had been set at $500 million to finance the project, but was recently lowered to $480 million after the parties involved agreed to reduce the overall cost to $6.04 billion. Laos will not have to pay any principal on the 20- year loan during the first five years. The Chinese government had initially offered the loan at an interest rate of 3 per cent; however, the Lao government negotiated the terms of the loan and both the parties finally reached an agreement. The rate of interest was being regarded as too high as compared to the terms of other loans sanctioned by China. Earlier, China has offered other loans to developing countries in the region at an interest rate 2 per cent for railway, civil engineering and infrastructure projects. The Lao government plans to pay back the loan using the income derived from the excavation of potash mines.

Local social and environmental opposition

In quite a few cases developers face significant opposition from social and environmental groups within the vicinity of the project site. A number of environmental groups have highlighted that the coal-fired power plant project in Batang will adversely affect the region’s land and air quality. According to Greenpeace Indonesia, the plant is likely to release around 226 kg of mercury per year.

Dawei port is also expected to pose social and environmental risks for the people near the Thailand-Myanmar border and the ethnic fishing and farming communities in Myanmar. Since Myanmar does not have strong environmental laws to protect its resources, environmental groups fear that most investments will be in heavily polluting industries.

Financing constraints

Projects are not structured properly in most cases, so financial closure is not achieved. The key element of structuring is mapping the risk profile. Due to capacity issues, risk maps are not adequately prepared. Moreover, due to weak understanding of risks and their impact, risk allocation to public and private sector entities in a PPP is poor.

The $60 billion Dawei port and industrial complex project is a case in point. The Dawei Development Company (DDC) has failed to secure the funds needed to finance the project. The decision of Max Myanmar, a 25 per cent stakeholder in DDC, to opt out of the project is also another setback for the firm.

Although the Myanmar and Thailand governments have committed to finding the required financial resources for the project, it remains to be seen whether the two governments will succeed in their endeavour to raise the $60 billion needed for the project. Investors have not been convinced of its financial viability so far.

“In order to realise their grand development plans, Cambodia, Laos, Myanmar and Vietnam (CLMV) need abundant sources of long-term, fixed rate funding. Unfortunately, capital markets (both debt and equity) are underdeveloped, and their overly conservative commercial banks do not view infrastructure loans as a priority. As a result, many CLMV infrastructure companies are struggling to find adequate funding and are underleveraged, and overly reliant on capital from their shareholders,” says Kenneth Stevens, managing partner, Leopard Capital LP.

The way forward

Several of the biggest economies in the region have rolled out ambitious infrastructure development programmes, a significant share of which is expected to be implemented through PPP. However, the current investment climate remains characterised by a lack of transparency and predictability for investors. The key to bringing these plans to fruition will involve eliminating all the bottlenecks that are undermining infrastructure development.

If significant progress is to be made in implementing the region’s ambitious infrastructure development plans, getting effective institutional and governance mechanisms in place is a priority area. There is also the need to eliminate bottlenecks, at both the pre-award and post-award stages. The selection of bankable projects that can generate stable revenue for investors in the long run and the institution of open and fair competition to bidders are the other major areas that need attention.