The funding landscape in Southeast Asia (SEA) is evolving rapidly. With the increasing focus on private sector involvement in infrastructure development, governments in the region are making significant moves, such as promoting innovative financial tools like green bonds and blended finance. With priorities shifting towards climate change, multilateral development banks and the rising adoption of sustainable financial instruments are playing a crucial role in funding green and sustainable infrastructure projects.
Moving beyond government financing
Budgetary support has historically been a key source of funding for infrastructure development in the SEA region. According to the Asian Development Bank’s (ADB) 2023 report, the public sector accounted for up to 92 per cent of all public and social infrastructure development in the region.
However, in the backdrop of post-pandemic recovery and growing pressure on public financing, there has been a greater emphasis on tapping private capital to address the funding gaps. This change is evident through a shift in the policy stance of a few countries in the region. Countries such as Indonesia and the Philippines have adjusted their national budgets to reduce reliance on government funds. Additionally, even countries like Thailand that are prioritising budget allocations, are eyeing greater private sector participation. However, budget allocations still remain one of the main sources for infrastructure financing in SEA.
Indonesia’s 2024-25 budget, amounting to IDR 3,613.1 trillion (approximately $230 billion), signals a strategic shift in priorities. The allocation for infrastructure development in 2024-25 stands at IDR 400.3 trillion (around $25.5 billion), a decline of around 5 per cent from 2023-24. The Indonesian government has emphasised that it would promote private sector participation in infrastructure development to offset the reduction in budget allocation.
Similarly, the Philippine government has reduced its infrastructure budget for 2024-25 by 0.3 per cent, from PhP 1.510 trillion in 2023-24 to PhP 1.507 trillion in 2024-25. The Department of Budget and Management (DBM) announced that it anticipates public-private partnerships to offset the decline in spending. The DBM has already announced planned PPPs worth PhP 3.183 trillion, focused mainly on infrastructure projects.
This trend reflects a broader strategy among SEA nations to diversify funding sources and gradually encourage private capital to take the front seat in funding infrastructure development.
Continued support from multilateral development banks
Multilateral development banks (MDBs) have played a crucial role in funding infrastructure projects across SEA. These institutions have provided financial assistance for key infrastructure projects for decades, including sectors such as transport, energy, water sanitation, and more. Lately, the renewable energy sector has emerged as a key interest area.
Over the years, the role of ADB in the region’s development has been unparalleled. In 2019, the ASEAN governments and ADB established the ASEAN Catalytic Green Finance Facility to finance green infrastructure projects. Since then, several projects have been funded under the ACGF initiative.
In November 2024, ADB and Gulf Renewable Energy Company Limited approved a $820 million loan facility for financing the construction of 12 ground-mounted solar photovoltaic (PV) plants across Thailand. The financing package comprised a $260 million loan from ADB’s ordinary capital resources and $529 million in parallel loans from the Asian Infrastructure Investment Bank (AIIB), DEG, the Export-Import Bank of China and KEXIM Global, among others. Further, ADB also committed to a blended concessional finance of $31.35 million from the Clean Technology Fund to allow for the higher execution and operating risks of solar battery energy storage system projects. Earlier, in May 2024, ADB approved a $500 million loan to support Indonesia’s national action plan for handling marine debris, which aims to reduce plastic waste flow into the ocean by 70 per cent by 2025.
Prior to this, in March 2024, ADB launched a new country partnership strategy for Laos, a five-year plan from 2024 to 2028. The strategy aims to lay the foundation for a more inclusive, sustainable and resilient economy. Under this five-year strategy, ADB will closely collaborate with the government to promote sustainable public finance, enhance equitable access to services and advance climate actions. A similar five-year plan has been launched for Cambodia.
Other MDBs have also been active in financing critical infrastructure projects across SEA. The French Development Agency (AFD) had approved a concessional loan of $210 million for the Bakheng Water Treatment Plant Phase 3 in Cambodia. Construction for the project commenced in April 2024, with an estimated total cost of approximately $252 million. The European Union has also pledged a €12 million (around $13.4 million) grant for this initiative.
Emerging innovative financial instruments
Innovative financing tools, such as sustainable bonds and blended finance, are transforming the financial landscape. These instruments make private investments more appealing while aligning them with global Sustainable Development Goals. Over the years, financial institutions have recognised the importance of these funding sources, and significant steps have been taken on this front in 2024.
The Singapore government launched its flagship blended finance initiative, Financing Asia’s Transition Partnership (FAST-P), in December 2023. The programme aims to mobilise up to $5 billion to finance energy transition and marginally bankable green projects in SEA. Since its launch, several major financial institutions, including Allied Climate Partners, ADB, the Global Energy Alliance for People and Planet, and the International Finance Corporation (IFC), have partnered with FAST-P, while many others are in discussions to join.
In December 2024, it secured an additional $50 million investment from the Australian government. Further, at COP29 in November 2024, the Singapore government committed $500 million to support the programme. Concessional funds under FAST-P are expected to begin to be deployed in 2025, marking a significant step towards financing critical green projects and turning them attractive for private investors.
In September 2024, the Ministry of Finance of Singapore reported that SGD 2.1 billion from the proceeds of green bonds issued in 2022 and 2023 were allocated for the the Jurong Region Line and Cross Island Line project, which is expected to reduce 100,000 to 120,000 tonnes of CO2 emission, highlighting significant environmental benefits.
Back in May 2024, the Development Bank of Singapore announced it would provide an undisclosed sum under a blended-finance-funded project in Indonesia, along with Karian Water Services, ADB, IFC and the Export-Import Bank of Korea. The Karian-Serpong Regional Water Supply Project involves developing a regional water supply network to provide fresh water to 2 million residents in Jakarta, Tangerang and South Tangerang, entailing a total cost of SGD 285.8 million. This marks the first public-private blend of funds used in the country’s water sector.
During the same month, France-based Air Liquide issued green bonds worth €500 million to finance/refinance flagship energy transition and sustainable projects in Singapore. In June 2024, the Royal Group Phnom Penh from Cambodia, a relatively nascent market, raised $10 million through green bonds. Sustainable bonds are emerging as a key financial instrument for financing sustainable and green projects in the region. The ASEAN, China, Japan and South Korea – collectively called ASEAN+3 – is the world’s second-largest regional sustainable bond market, accounting for an 18.9 per cent global market share. The growth in the sustainable bond market in ASEAN+3 outpaced the EU-20 and global markets during Q3 2024, reaching $893.1 billion as of September 2024. Within the ASEAN+3 association, ASEAN alone recorded a quarter-on-quarter growth of 9.2 per cent.
Beyond green bonds, other sustainable bonds also gained traction. The Thai government has raised approximately $865 million through sustainability-linked bonds. Earlier in June 2024, the AIIB entered into a $75 million contract to finance green and blue bonds to be issued by the Southeast Asia Commercial Joint Stock Bank. It marked Vietnam’s first blue bond issue and AIIB’s first investment in such financial instruments.
Looking forward
SEA, home to some of the world’s fastest growing economies, such as the Philippines and Vietnam, will continue to see rising demand for funds driven by rapid urbanisation and transition towards sustainable infrastructure. According to ADB, the ASEAN region will require an estimated annual investment of $210 billion (adjusted for climate change) till 2030. Private capital is expected to play a critical role in bridging this funding gap, with public finances focusing on de-risking investments for private players through new innovative financing mechanisms.
