The financial landscape in Southeast Asia is characterised by a shortage of infrastructure investment and polarised investment needs. These countries have tapped various sources of investment across various infrastructure sectors. 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 (FDI), sovereign wealth funds (SWFs) and participation of multinational enterprises (MNEs) to the fullest in sectors such as telecommunications, oil and gas, and power generation and transmission. In other countries like Thailand, Indonesia, Vietnam, the Philippines, Cambodia, and Lao PDR, the private sector has increasingly contributed to economic growth; however, these countries have relied more on government funding and multilateral/bilateral funding. Overall, all categories of infrastructure financiers play an important role in infrastructure development in Southeast Asian countries.

Involvement of foreign private players

Private sector participation in the region’s growth has been rising over the past decade or so. Such investment has primarily been mobilised into the transport (including highways, ports, and urban transport), telecom, and power sectors.

Over the years, Southeast Asian countries have invested more in gross fixed capital formation (GFCF), which is a prerequisite for faster gross domestic product (GDP) growth. According to the International Monetary Fund (IMF), the GFCF of countries like Lao PDR and Indonesia accounted for about 32 per cent and 30 per cent of GDP respectively between 2005 and 2013, while that of Cambodia and the Philippines accounted for only 18 per cent and 19 per cent, respectively. Further, the share of private investment in the GFCF in the relatively developed countries in the region like Indonesia, Thailand, Singapore, and Malaysia increased between 2000-04 and 2010-14, while the share remained stable for the Philippines at about 87 per cent.

Further, private sector or MNE involvement varies across infrastructure sectors as well as across Southeast Asian countries. This is largely based on the policies of host countries – openness of the sectors, investment opportunities, and the risk-return relationship perceived by investors. Private sector investment flows into these economies through various modes –  FDI, mergers and acquisitions (M&As), and partnership/joint venture/ consortium arrangements. Notably, some forms of investment are dominant while others are relatively less significant.

Besides, MNEs from developed as well as developing countries, including those from the Association of Southeast Asian Nations (ASEAN), are involved in infrastructure development through contractual arrangements, whether as engineering, procurement and construction (EPC) contractors, subcontractors or build-operate-transfer (BOT) projects.

Investments through non-equity modalities

One of the key features in MNEs’ involvement in Southeast Asian countries is their participation through the non-equity mode. These are primarily concession agreements or contracts to undertake projects, especially those related to infrastructure. Further, the use of a consortium model is widely adopted among MNEs, especially for large and complex contracts. Some of the consortium-based projects are the partnership of US-based AES, Korea’s Posco Power and China Investment Corporation for the Mong Duong II independent power producer project in Vietnam; and Électricité de France International, Thailand-based Electricity Generating Public Company, Italian-Thai Development and the Government of Lao PDR for the Nam Theun 2 hydropower project in Lao PDR. These consortium-based investments are also adopted for mass transit and  information and communications technology (ICT) projects in the Southeast Asian countries.

Cross-border M&As

Southeast Asia has a huge need for funds to finance infrastructure development and provide respite to overstretched governments. About 18 per cent of the M&A deals in the region during 2010-14 were related to infrastructure sectors, especially transportation, power, water and utilities, telecommunications, and construction. Further, cross-border infrastructure M&As more than doubled from $2.8 billion in 2013 to $6.2 billion in 2014, and involved more Southeast Asian countries, including Cambodia and Vietnam. This indicates the increasing focus of foreign investors towards the M&A strategy of growth in the region.

A large number of M&A deals have been reported in the region’s infrastructure sector in the last two years. These include Singapore’s Pan-United Corporation Limited’s 90 per cent stake acquisition in Changshu Changjiang International Port Company Limited for RMB 436.5 million; Indonesian mobile operator Indosat’s offloading of the remaining 5 per cent of its shareholding in Tower Bersama Infrastructure for $122 million; and Indonesia’s XL Axiata’s 100 per cent acquisition of PT Axis Telekom Indonesia for $865 million.

According to UNCTAD, companies based in Indonesia, Malaysia, Singapore, and Thailand made significant infrastructure-related acquisitions. Further, companies from Japan, China, Hong Kong, Korea, and a few other Southeast Asian countries actively acquired companies in the last few years. Some of these companies are E-Power, Ortus Holdings, and TEE International from Singapore; Enco Holdings, Gadang Holdings, Salcon, and Axiata from Malaysia; Electricity Generating PCL and B. Grimm Power from Thailand; and Solusi Tunas Pratama from Indonesia.

FDI

The contribution of FDI in the region’s infrastructure development is a vital link in the chain. FDI in infrastructure has grown rapidly in the last few years and is dominated by investments in the transportation and ICT sectors. According to the ASEAN Secretariat, FDI in infrastructure accounted for 12-15 per cent of the total FDI inflows into the region during 2012-14, with differences among ASEAN members. There was an increase in FDI inflows into the infrastructure sector in countries like Indonesia, Thailand, and Vietnam during 2014. Singapore continues to dominate as an FDI destination, followed by Indonesia, Thailand, and Malaysia.

In the last two years, FDI inflow into countries like Malaysia, Myanmar, Thailand, and Brunei Darussalam has been uneven. Most of the countries in the region attract FDI in the extractive sector as well as in infrastructure. Higher FDI inflow in Vietnam, Thailand, and the Philippines could be attributed to rising levels of greenfield investments.

Rising share of sovereign wealth funds

SWFs have emerged as a potential solution for the management of foreign reserves. SWFs in Southeast Asia are largely non-commodity based and have gradually gained prominence. These funds hold portfolio investments in several projects and companies. For instance, Malaysia-based Khazanah Nasional has stakes in companies operating in the transport and logistics (Malaysia Airport, Malaysia Airline System, Penerbanhgan Malaysia, etc.), construction (UEM Group, PLUS Expressways, UEM Builders, Opus Group), communications (Telekom, Axiata, Astro Malaysia Holdings), and power (Tenaga Nasional, Northern Utility, Shuaibah Water and Electricity) sectors.

Further, Singapore-based Temasek Holdings had a net portfolio value of $195 billion as of March 2015. It is involved in investment in sectors like telecom, ports, power, and engineering in Singapore as well as abroad through some Singapore government-linked companies. In the telecom sector, it has invested in Intouch (Thailand) through MediaCorp, made an indirect investment in Sky Cable (Philippines) through Singapore Technologies Telemedia, U Mobile (Malaysia), and Asia Mobile Holdings, which owns a stake in Lao Telecommunications. Temasek is also involved in the construction, operation, and management of ports through the Port Authority of Singapore (PSA). In engineering and construction, Keppel Corporation and ST Engineering provide Temasek a platform for contributing to infrastructure development.

Further, Sembcorp, with total assets of over S$19 billion, has invested in the power, water, and marine sectors. In the power sector, Sembcorp has invested in ASEAN as well as non-ASEAN countries. For example, Sembcorp has a stake in the 746 MW Phu My 3 combined cycle gas turbine power plant in Vietnam. In July 2014, Sembcorp completed its second combined cycle gas turbine cogeneration plant in Singapore. In Myanmar, Sembcorp will be developing a 225 MW gas-fired power plant in the Mingyan district of the Mandalay division. Meanwhile, Sembcorp Marine operates shipyards strategically located in Singapore and Indonesia, besides other countries.

Conclusion

Southeast Asian countries have attracted a significant amount of foreign investment in their infrastructure sectors over the years. This is primarily due to cheaper resources (land, manpower, etc.) for manufacturing as well as the growing demand for quality infrastructure. Further, rapid economic growth in the region has attracted foreign investment. Notably, the Southeast Asian countries have attracted investment from a diverse group of countries like Japan, China, the US, Korea, Hong Kong, and European countries. Moreover, in the past few years, funds have started flowing into diverse sectors like oil and gas, power, transport (metro rail, road, railways, and ports), and water supply and sanitation. Going forward, the policies of the ASEAN countries will play a determining role in attracting or facilitating foreign investment in the infrastructure sector.

(Based on ASEAN Investment Report 2015)