ASEAN investment alternatives-

Some Southeast Asian economies such as Singapore, Malaysia and Thailand have been extremely successful in building and maintaining high quality infrastructure in the past decades. On the other hand, Indonesia, Myanmar and the Philippines have remained laggards. As different countries are at different stages of development and face diverse macroeconomic conditions and endowments, suitable financing options for infrastructure development will vary. Some of the funding institutions that can be tapped to meet infrastructure funding requirements are described below.

ASEAN Infrastructure Fund

The Association of South East Asian Nations (ASEAN) member countries and the Asian Development Bank (ADB) provided an initial equity of $485 million for the ASEAN Infrastructure Fund (AIF). The AIF’s total lending commitment through 2020 is anticipated to be approximately $4 billion which, with co-financing by ADB and other financiers, could be leveraged to over $13 billion. For additional capital for its operations, the AIF will issue bonds, which can be bought from the central banks of member countries, starting 2017. The AIF aims to provide funds to sovereign or sovereign-guaranteed projects in the ASEAN region, amounting to approximately $300 million per year, to bankroll infrastructure investment projects in the transportation, energy, water and sanitation, environment and rural development, and social infrastructure sectors.

The following projects are ADB sovereign and sovereign-guaranteed loans for infrastructure development, which are funded through participation in the loan by the AIF.

Asian Infrastructure Investment Bank

The Asian Infrastructure Investment Bank (AIIB), formally established in Beijing in December 2015 and which started operations in January 2016, is a multilateral financial institution that aims to promote investment in infrastructure projects in the Asia-Pacific region. China provided an initial capitalisation of $40 billion, which is 80 per cent of the authorised capital of $50 billion. The AIIB is expected to lend $10 billion-$15 billion a year for the first five or six years. Recently, the bank evinced interest in investing in infrastructure and transport projects in Southeast Asian countries in order to further tap the economic potential of the region.

Indonesia is the eighth largest AIIB shareholder, pledging to contribute $672.1 million of capital over the next five years. It is expected to be one of the main beneficiaries of the AIIB as Jakarta seeks significant funding to build new roads, ports and bridges to boost growth. Besides, the AIIB has plans to co-finance a national slum upgrading project in Indonesia, in what could be the bank’s first foray into the country.

China’s Silk Road Infrastructure Fund

China launched the $40 billion Silk Road Infrastructure Fund in February 2015 to provide investment and financing services for China-proposed “Belt and Road” initiative. “Belt and Road” refers to the Silk Road Economic Belt and the 21st Century Maritime Silk Road (MSR) initiatives proposed by China in 2013 for improved cooperation with countries in vast parts of Asia, Europe and Africa. The fund is also seen as an addition to the AIIB for financing infrastructure projects such as high speed railways, airports and roads in Southeast Asia.

The MSR initiative will benefit ASEAN as developing countries in the region will get funds to improve their infrastructure, deepen investment cooperation, and increase cultural and personnel exchanges, which are necessary for economic development. China has developed an impressive reputation in infrastructure projects such as ports, terminals and high speed trains, and can offer technology and expertise to support the ASEAN Master Plan for Connectivity (AMPC).

Nomura’s focus on Asia in general and ASEAN in particular

Japanese bank Nomura is redoubling its efforts to strengthen the firm’s position as Asia’s global bank. These efforts include a recently announced move to open its new Singapore-based Asia Infrastructure Project Office in August 2016 to expand and develop its Asia platform, with a focus on Southeast Asia. The bank is targeting small- to medium-sized infrastructure projects including airports, ports, toll roads, as well as urban development projects. Discussions with clients and governments in countries such as Singapore, Malaysia, Indonesia, Thailand, the Philippines, Vietnam and Cambodia started in end-2015.

The business is a new growth area for Nomura that will focus on demand for funds to finance infrastructure projects in Asia as global investors increasingly seek alternative investments. The team aims to enhance Nomura’s role as an intermediary and network hub between Southeast Asia and Japan by leveraging Nomura’s existing platform and collaborating with other divisions to strengthen the group’s presence in Asia as a whole.

JBIC lending amendment

The Japan Bank for International Cooperation (JBIC) has recently changed its lending rules to allow higher-risk investment through a special account. Japanese firms investing in the ASEAN region with the support of the government – a cohort referred to as Japan Inc – will be able to make greater investment in the infrastructure segment of the region. Under the revised charter, JBIC may finance infrastructure projects that benefit a country’s economy and will generate revenue but do not independently meet the bank’s strict credit requirements for commercial viability and cash flow. The new investments will be made through a special JBIC fund. The bank is expected to make its first investments through this fund in fiscal year 2016 (to March 2017), and to increase its investment significantly thereafter.

Power and transport infrastructure projects are likely to be the main targets for Japanese firms. JBIC currently has JPY 1.6 trillion in outstanding commitments to ASEAN, with much of the investment in power plants and other power-related infrastructure. Recent projects include thermal, geothermal and hydroelectric power plants in Indonesia, coal and gas power plants in Vietnam, and a combined cycle power plant in Thailand.

JBIC’s relatively strict credit requirements had limited its ability to invest in certain infrastructure projects. As a result, Japan Inc, though active in infrastructure investments in ASEAN, has struggled to compete with the terms offered by China. This was best illustrated by the failure of Japanese bidders to win the tender for the planned Jakarta-Bandung high speed railway, which instead went to a Chinese consortium. The rule change will allow Japanese companies to better compete for contracts with Chinese competitors, as the two rivals vie for influence across ASEAN. The amendment will help keep Japanese bids competitive for large infrastructure investments such as the Kuala Lumpur-Singapore high speed rail project.

Maybank’s financial aid

Malayan Banking Berhad (Maybank), the fourth largest bank by assets in Southeast Asia, aims to tap opportunities in the ASEAN infrastructure market worth $110 billion per year. ADB estimates indicate that the region needs $110 billion annually until 2025 in infrastructure spending. Maybank will be focusing on water, power, renewable energy, wastewater, transport, airport and highway infrastructure projects within the region during the period.

Maybank is currently working as arranger and adviser on infrastructure projects worth $15 billion in ASEAN. The financing of these projects is helped by ASEAN’s underleveraged position, which provides room for the bank’s balance sheets to expand. The bank has projected that the governments in ASEAN-6 alone, which comprises the Philippines, Malaysia, Singapore, Vietnam, Indonesia and Thailand, has already set a combined spending of $84 billion for infrastructure sector in 2016.

Others

Capital Advisors Partners Asia (CapAsia) is a private equity firm that invests in infrastructure sectors in Southeast Asia. Founded in 2006, the firm currently manages three infrastructure funds with over $250 million in assets under management. Of the three funds, the South East Asia Strategic Assets Fund (launched in 2006) and the CapAsia ASEAN Infrastructure Fund III (launched in 2012) have opened up more financing sources for the ASEAN region.

To foster economic ties with ASEAN, the China-ASEAN Investment Co-operation Fund was set up in 2010. The dollar-denominated offshore quasi-sovereign equity fund targets investment opportunities in infrastructure, energy and natural resources in the ASEAN member countries. With a targeted size of $10 billion, the fund has used the first tranche of $1 billion for investments in 10 projects within the ASEAN region, barring Vietnam and Brunei.

Conclusion

 ADB forecasts that Asia needs $8 trillion by 2020 to plug its infrastructure deficit. As countries move up the value chain and urban populations increase, the demand for transport, logistics and utilities will continue to grow, increasing the burden on public funds. The efforts of Southeast Asian countries to build sound and quality infrastructure will benefit from the establishment of New Development Bank, silo initiatives of Japan and China, and the launch of infrastructure equity funds.