Investment requirement for the development of infrastructure in Southeast Asia is enormous. According to the Asian Development Bank, investments of at least $60 billion are needed annually in national and regional infrastructure projects to realise the vision of Association of Southeast Nations (ASEAN) economic integration. Although most of the investments will come from public funding, there is an increasing emphasis on private investment in infrastructure development. Private investment is more a necessity than a choice, more so in the case of mega projects which require billions of investment (for definition of mega projects, refer box). However, the region requires new policy, institutional and regulatory frameworks to sustain private investor interest.
The article discusses the experience of undertaking mega projects in the Southeast Asian region, along with their associated challenges. It also identifies the factors that are important for the successful execution of mega projects.
Mixed progress so far
This experience of the preparation and implementation of mega projects in the region has been mixed, with significant disparities across countries as well as sectors in the region. There have been instances where projects have been completed on or before schedule. The completion of the Nam Theun 2 hydropower plant in Lao PDR has been a major success story. The project provides a perfect case for adopting innovative financing mechanisms to hedge the project against several risks. The project made slow but steady progress due to its innovative financial structure. The $1.2 billion project was funded through a mix of private, multilateral, and bilateral funds. The financing process was completed within a record time of 15 months.
Another successful mega project is the 2,400 MW Son La hydroelectric plant in Vietnam, which commenced operations in December 2012. The project, completed three years ahead of schedule, is the largest in Southeast Asia. Located in Muong La district of Son La province, the project that has six turbines is expected to generate 10.24 billion kWh of electricity and $500 million in revenue annually.
On the flip side, a number of mega projects are running behind schedule. Land acquisition, financing-related issues, changing technology, and political instability are some of the key obstacles. Heterogeneity among ASEAN members is the key challenge to implementing regional or cross-border infrastructure projects; the countries differ in terms of their state of development and capacity. The financial requirements for cross-border infrastructure projects are huge. Besides, the risks involved in the implementation of such projects make it even more difficult to tie up funds.
Lack of adequate institutional capacity
Most countries in Southeast Asia have laws and regulations in place that cover the principles of competition and transparency. Nevertheless, challenges remain in terms of the ease of doing business due to corruption, etc.
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 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.
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.
Only recently, in August 2016, Pelindo II commenced commercial operations on the first of three container terminals set to be built at the new harbour by 2023. The new container terminal is developed and operated by the project company, PT New Priok Container Terminal One (NPCT1). The state-owned Pelindo II had entered into an agreement with private companies – Japan-based Mitsui and Company Limited and Nippon Yusen Kabushiki Kaisha (NYK) Line, and Singapore-based PSA International – for the construction and operation of NPCT1 at Tanjung Priok port in December 2014. Pelindo II owns a controlling stake of 51 per cent in NPCT1, while the share of Mitsui, PSA and NYK Line stands at 20 per cent, 19 per cent and 10 per cent respectively. The total cost of the terminal is estimated at around $320 million.
In another instance, the Department of Public Works and Highways, the Philippines, was forced to terminate the auction for the PhP 123 billion ($2.65 billion) Laguna Lakeshore Expressway Dike, after all three qualified bidders failed to submit bids. According to reports, the private players felt that the risks were not adequately addressed and divided in the contract between the implementing agency and the private player.
The India-Myanmar-Thailand (IMT) trilateral highway is also facing significant delays, and has already missed a couple of deadlines. The IMT is now expected to become operational by 2018-19. The project, which was conceptualised in April 2002, is of particular significance due to the geographical locations of all the three countries and their trading relationships with one another. Although there was some progress in its initial years, the project has been facing delays since 2006 due to a lack of political commitment and funding.
Financing
Approved in 2012, some progress was finally made on the 40 billion yuan ($6.04 billion) Laos-China high speed rail project in 2015. The launch was delayed on account of lengthy negotiations between the two countries on loan conditions offered by China.
In December 2015, the Laos and Chinese governments held the groundbreaking 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 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 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 had offered other loans to developing countries in the region at an interest rate of 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.
The project’s viability has been widely questioned by various stakeholders. However, industry experts are of the view that the project can be effectively implemented if there is greater transparency among all the stakeholders involved and promotion of information sharing about best practices. Once operational, the railway link will transform Laos from being landlocked to land-linked.
Finally, after a decade of delay, Suvarnabhumi airport’s Phase II expansion plans are moving forward, with contracts being awarded in August 2016. According to Suvarnabhumi airport’s expansion plan, the airport capacity was to be increased to 60 million passengers per annum (mppa) by 2019. After a prolonged delay, AoT finally invited bids for construction works for Suvarnabhumi airport in June 2016. The work will be bid out in seven packages, of which three were awarded in late August 2016. The first contract, worth 12.05 billion baht, has been awarded to Italian-Thai Development Corporation Limited. The second contract, worth 1.98 million baht, has been awarded to Chinese Grand International Advertising Link for developing and outsourcing infrastructure utilities systems. The third contract, worth 879 million baht, has been awarded to SCS Consortium for supervising the construction work. Earlier, the project faced delays after the country’s military government decided to scrutinise state enterprises and large projects worth at least 1 billion baht ($31 million) to ensure transparency and exercise more control over state companies.
Land acquisition
Land acquisition is one of the key challenges being faced by infrastructure projects worldwide, and Southeast Asia is no exception.
One of the major projects to face land acquisition delays is the trans-Java toll road project. Due to slow progress in the toll road’s development, the prices of land that had to be bought reportedly increased 10- to 20-fold, which ultimately affected construction expenditure. In June 2016, construction of the Pemalang-Batang toll road and the Batang-Semarang road was inaugurated. However, reportedly, the procurement of land was less than 30 per cent overall. For the Pemalang-Batang toll road, the land acquisition was around 12 per cent, and for the Batang-Semarang toll road, it was only 20 per cent.
In another example, when construction officially began on the mass rapid transit (MRT) system in Jakarta back in October 2013, it was hoped that construction on the transportation system’s main line could be finished and the line could begin operating in 2018. The line, however, has witnessed delays due to land acquisition issues for parts of the line’s elevated sections.
Another mega project which witnessed significant delays due to land acquisition issues is the 2,000 MW power plant in Batang, Central Java. In March 2016, a Supreme Court decision to reject a cassation request from Batang locals brought an end to a lengthy land acquisition dispute, which had hampered the development of a power plant in Batang, Central Java. A consortium, consisting of Jakarta-listed PT Adaro Energy, J-Power Electric Power Development Company Limited and Itochu Corporation, had secured the contract for the Batang project in 2011.
Local social and environmental opposition
Often driven by central governments, many mega projects do not have the support of the local population, and social and environmental groups in the vicinity of the project site. A number of environmental groups have highlighted that the coal-fired power plant project in Batang overlaps with a marine protected area; moreover, it will adversely affect the region’s land and air quality. According to Greenpeace, the plant is likely to release 10.8 million tonnes of carbon emissions per year, which will adversely impact the climate and human health, and cause environmental damage. The project has also faced resistance from farmers, who refused to give up their land.
In another instance, in 2015, the Myanmar government cancelled a 279 MW coal-fired power plant in Yangon’s Htantabin township due to local social and environmental opposition.
The way forward
Although a number of mega projects are on the anvil in the region currently, only a handful of them are proceeding without challenges. For the success of such mega projects, robust coordination between different stakeholders is required from the start.
Since the majority of the big projects are being taken through private investment, it is necessary that issues hampering private sector investments are taken care of. It is critical to address the bottlenecks of regulation, governance, land acquisition, financing, and others in moving these projects towards success.
