Public sector funding continues to be the major source of funding for infrastructure projects in the Southeast Asian region. However, given the fiscal constraints, governments have been exploring alternative sources of funding for developing critical infrastructure. Of late, greater focus is being laid on mobilising new sources of finance such as the China-led Asian Infrastructure Investment Bank (AIIB), infrastructure bonds and sukuk financing. In addition, China has also been increasing its presence in the region by providing infrastructure finance to various countries.
Increased budgetary allocation
Funding through government budgets continues to be the mainstay for infrastructure financing in Southeast Asia. Pertinently, 75-80 per cent of the region’s overall infrastructure investment has been traditionally funded with fiscal resources. In the recent years, the governments of Southeast Asian countries have scaled up budgetary allocations to infrastructure sectors. These allocations are primarily used as development expenditure on the road, energy, communications and utility sectors.
In 2018, for instance, the Indonesian government apportioned Rp 410.7 trillion to infrastructure as compared to Rp 387 trillion allocated in 2017. Similarly, the Philippines government set aside PhP 704.2 billion for the infrastructure space, the amount being 28 per cent higher than that in 2017.
Multilateral organisations have played a pivotal role in financing infrastructure projects in Southeast Asia. Their well-defined guidelines and stringent criteria for infrastructure projects instil confidence among various stakeholders and act as a catalyst for investment in such projects. Southeast Asia Infrastructure looks at some of the key financings by multilateral agencies in the region during 2018…
- In December 2018, the Japan International Cooperation Agency (JICA) released the first instalment of a loan amounting to $36 million for the construction of Number 3 Thanlyin bridge in Myanmar.
- In December 2018, the Asian Development Bank (ADB) decided to invest THB 5 billion ($155 million) in Thailand’s B.Grimm Power Public Company Limited’s green bonds.
- In December 2018, ADB approved a loan worth $188 million to improve and upgrade 198 km of road network in the mountainous northwest region of Vietnam.
- In November 2018, ADB signed a loan agreement worth $227.7 million with the Gulf SRC Company Limited for the implementation of a 2,500 MW combined cycle power plant project in Chonburi province.
- In July 2018, ADB approved a $90 million loan to help Cambodia strengthen climate resilience and modernise its agricultural sector, including the promotion of renewable energy.
- In May 2018, the China Development Bank (CDB) disbursed a $170 million loan for the Jakarta-Bandung high speed rail (HSR) project in Indonesia. It is the first tranche of the $500 million loan being provided by CDB for the project.
- In April 2018, the Cambodian government and the Export-Import Bank of the Republic of Korea (RoK) signed an Economic Development Cooperation Fund loan agreement for development of a sewerage system in Takhmao, Cambodia. As per the agreement, RoK will provide a concessional loan of $63.88 million for the project.
- In March 2018, the Philippines signed a PhP 4.6 billion loan agreement with Japan for construction of the third and final phase of the 24.61 km Arterial Road Bypass connecting the North Luzon Expressway in Balagtas, Bulacan, with the Maharlika Highway in San Rafael, Bulacan.
- In March 2018, JICA signed a loan agreement to provide official development assistance of JPY 104.53 billion for the development of Phase I of the Metro Manila subway project in the Philippines.
Corporate bonds: In recent years, the market for infrastructure bonds in Southeast Asia has been slowly developing, buoyed by the increasing sophistication of Asian investors and growing demand from global investors. As per Asia Bond Monitor, corporate bond issuances in Southeast Asia expanded from $352.5 billion as of March 2017 to $430.72 billion as of November 2018.
Malaysia continues to dominate the corporate bond market in Southeast Asia with $157.9 billion corporate bond issuances as of November 2018. It is followed by Singapore and Thailand, with $115 billion and $104.1 billion corporate bond issuances respectively.
Green bonds: Despite having been around for over a decade, green bonds have recently become prevalent in less mature, emerging markets. In February 2018, Indonesia hit the international bond market with a $1.25 billion (SGD 1.65 billion) green sukuk, the first sovereign sukuk issue in the world. Further, in April 2018, Indonesia’s Star Energy Geothermal issued and listed a $580 million amortising green project bond. In July 2018, Indonesia-based Sarana Multi Infrastruktur, a state-owned infrastructure financing firm, issued green bonds and sukuk worth a combined Rp 1.5 trillion as part of the first tranche of a planned issue of Rp 3 trillion each. It became the first corporate entity to issue green bonds in the country.
Further, in June 2018, Thailand’s TMB Bank issued its first green bond amounting to $60 million. In July 2018, the International Finance Corporation (IFC) also issued its first peso-denominated green bond, the Mabuhay Bond, worth $90 million, to support renewable energy development in the Philippines. More recently, in October 2018, IFC issued the Indonesian rupiah Komodo green bond, attracting strong investor demand and raising Rp 2 trillion ($134 million) to combat climate change.
Sukuk financing: Malaysia has long dominated both global and domestic sukuk (the Islamic equivalent of bonds) issuance worldwide. According to estimates of the Malaysia International Islamic Financial Centre, Malaysia accounted for 51.6 per cent of the world’s outstanding sukuk as of June 2018.
In December 2018, GFM Services Berhad issued its maiden sukuk of RM 165 million through its wholly owned subsidiary, Dynasty Harmony Sendirian Berhad. The sukuks, having tenors between 10 years and 14.5 years, will be utilised to finance GFM’s investment activities, capital expenditure, working capital and for general corporate purposes, including repayment of financing facilities. Earlier, in October 2018, HSBC Amanah Malaysia Berhad launched the world’s first United Nations (UN) sustainable development goals (SDG) sukuk worth RM 500 million. It is the world’s first-ever benchmark sustainable sukuk issuance by a financial institution referencing the UN SDGs as use of proceeds.
The Indonesian government also launched an Islamic bond linked to endowments/waqf in October 2018. Around $1.64 million cash waqf has been collected for the new sukuk. Further, Indonesian firm Blossom Finance has announced plans to launch blockchain-based sukuk to fund microfinance projects in the country.
Meanwhile, the Philippines government is also exploring plans to issue sukuks to fund large infrastructure projects for the Mindanao island and raise funds for the rebuilding of Marawi City under the Build,Build, Build programme.
Foreign direct investment
Foreign direct investment (FDI) inflows to ASEAN increased by 10.66 per cent to $135.62 billion in 2017. Singapore and Indonesia attracted the maximum FDI inflow of $62.01 billion and $23.06 billion respectively. Intra-ASEAN FDI flow also remained strong at $16.98 billion in 2017, an increase of 4.18 per cent year on year. At 19.9 per cent, intra-ASEAN was the largest source of total FDI inflows to the ASEAN region, closely followed by the European Union at 18.3 per cent. Japan was the third largest source of FDI inflows to ASEAN at 9.9 per cent followed by China at 8.4 per cent.
Amongst the infrastructure sectors, the energy (electricity, gas and steam) sector witnessed the highest FDI inflow of $6.63 billion, followed by the mining and quarrying sector with $2.78 billion.
China’s increasing presence
China has increased its dominance in providing infrastructure finance to Southeast Asia, given the region’s economic and strategic importance to the country. The China-led AIIB, which seeks to help plug Asia’s infrastructure funding gap, has begun shifting the economic balance of power and influence in Southeast Asia, a region in which Japan and the US have traditionally been the key external economic players. Some of the projects recently approved by the AIIB in the region include the Manadlika urban and tourism infrastructure project and the strategic irrigation modernisation and urgent rehabilitation project for which $248.4 million and $250 million loan will be provided respectively. Both these projects are in Indonesia.
Private participation on the rise
The region has had a positive experience with private participation in infrastructure development, largely in energy and transport. As per the latest World Bank PPI database (June 2018), the region received over $231.38 billion in investments through private participation in infrastructure. Sector-wise experience reflects that on an average, the energy sector received the maximum investments, followed by the transport sector.
The way forward
Given the region’s large infrastructure needs and the public sector dominance in providing infrastructure, the development of innovative financing mechanisms has become imperative to complement the traditional funding sources. In addition, the public sector needs to establish a regulatory and institutional framework that encourages greater private participation in infrastructure. At the same time, there is a need to develop a sound financial system, enhance transparency and show stronger political commitment to provide an impetus to infrastructure development in the region.