With a number of infrastructure projects being undertaken in Southeast Asia, countries such as Japan and China have turned out to be a dependable source of financing. The upcoming infrastructure boom in Southeast Asia has attracted a lot of capital investment from these nations lately. However, there is still a huge spending gap in the Southeast Asian countries. The 10 members of the Association of Southeast Asian Nations (ASEAN) collectively require $2.76 trillion in infrastructure spending between 2016 and 2030, according to the Asian Development Bank (ADB). This investment requirement of about 5.7 per cent of gross domestic product depicts the stark reality of the huge spending gap in these countries, as their current spending is 2.3 per cent.
Southeast Asia is currently witnessing an infrastructure boom, with a number of projects being approved in Vietnam, Thailand, the Philippines, Malaysia and Indonesia. The majority of these projects have been facilitated through loans and other assistance provided by Japan and China. Until recently, Japan had been the sole major player to provide financial assistance to the projects. However, China is now giving competition to Japan through financing large-scale projects in the Asia-Pacific region. At present, Japan has the highest investment in infrastructure in Southeast Asia, followed by China. In 2018, Japan had a total investment of $367 billion in the ASEAN region, compared to $255 billion by China. Vietnam is the largest recipient of Japan’s funding in the region, with pending projects worth $209 billion. This includes a high speed rail line connecting Hanoi and Ho Chi Minh City worth $58.7 billion. On the other hand, China’s largest investment in the region is in Indonesia, amounting to $93 billion, or 36 per cent of its total investment. The biggest Chinese project in the country is the $17.8 billion Kayan River hydropower plant on the island of Borneo. In terms of number of infrastructure projects, Japan has an involvement in 240 projects in Southeast Asia whereas China’s involvement is in 210 projects. Even though Japan remains ahead of China in the funding scenario of infrastructure projects in Southeast Asia, China is catching up with Japan’s investment portfolio in the region rapidly. The value of China’s construction contracts in ASEAN had doubled to $19 billion from 2012 to 2017. In the recent preliminary bidding for the North-South Expressway in Vietnam, the majority of the 60 potential investors were from China. Financial assistance from China is very crucial for ASEAN as these investments are affordable and unconditional and include the necessary funding and resources to process the megaprojects.
ASEAN Catalytic Green Finance
Besides taking financial assistance from Japan and China, the ASEAN members and ADB have also established a dedicated fund called the ASEAN Infrastructure Fund (AIF) to provide funding for infrastructure projects in the region. The fund aims to address the ASEAN region’s infrastructure development needs by mobilising regional savings, including foreign exchange reserves. All AIF-financed infrastructure projects are also co-financed by ADB funds. The fund is an integral part of ASEAN’s efforts to strengthen regional connectivity. It also provides loans to finance infrastructure investment projects in the transport, energy, water and sanitation, environment and rural development, and social infrastructure sectors. In 2018, two new facilities were created within the ASEAN Infrastructure Fund (AIF) on a three-year pilot basis, an Inclusive Finance (IF) facility and the ASEAN Catalytic Green Finance (ACGF). The IF facility offers limited concessional loans to members that fall within ADB’s Group A classification, such as Afghanistan, Bhutan, Cambodia, Maldives, Myanmar, etc. The ACGF aims to help the nations achieve environmental and climate targets by leveraging the fund’s existing resources to bridge the viability gap for green infrastructure projects and attract private capital into these projects. It aims to mobilise around $1.3 billion from a number of sources, including the AIF, ADB, the German development cooperation through KfW, the European Investment Bank, the Republic of Korea, and Agence Française de Développement. The facility is also supported by other entities, including the Organization for Economic Co-operation and Development (OECD), the Global Green Growth Institute, and the Overseas Private Investment Corporation. The OECD and the Global Green Growth Institute have extended their support to knowledge sharing and capacity building on green finance. The OPIC has further expressed interest in potential financing for emerging projects. The facility is part of a new Green and Inclusive Infrastructure Window under the AIF. Since its establishment, the AIF has committed $520 million for energy, transport, water and urban infrastructure projects across the region.
In October 2019, ADB and Singapore-based Infrastructure Asia signed an agreement to develop sustainable infrastructure projects in the region in order to address the infrastructure deficit in Southeast Asia. Through the agreement, ADB aims to use innovative and green finance approaches to plug the $210 billion annual infrastructure investment needs of Southeast Asia until 2030. It also aims to launch the Innovative Finance Lab for Sustainable Infrastructure to help governments and state-owned institutions develop good infrastructure projects. The adoption of innovative financing approach will help the governments to catalyse funds from private and institutional sources to support greener, cleaner and timely infrastructure development. The Innovative Finance Lab for Sustainable Infrastructure, a virtual space supported by a biannual event in Singapore, aims to gather stakeholders from across Southeast Asia to exchange knowledge and help improve the policymaking capabilities to adopt innovative and green finance models in local infrastructure projects. The lab will also serve as a capacity-building platform for the ACGF to develop green infrastructure projects across ASEAN.
The issue of financing has been a major hindrance in the development path of Southeast Asian countries. In fact, they are currently only able to cover about 50 per cent of the total investment requirement. Due to lack of internal funds, they have become greatly dependent upon external or multilateral funding for their projects. However, there is always a price attached to such finances in terms of geopolitical and economic risks. China’s infrastructure-based development strategy has been called upon as debt-trap diplomacy because if the indebted economies fail to pay back their loan, they remain at a risk of being pressured to support China’s geostrategic interests. One such example is Hambantota port in Sri Lanka, which was leased to China Merchant Port Holdings Limited for 99 years for $1.12 billion in 2017. The inability to service the loan forced the Sri Lankan government to hand over its asset of national and strategic importance to China. Further, the ambitious Belt and Road Initiative (BRI), also known as One Belt, One Road, adopted by China for infrastructure development has also raised concerns among the ASEAN countries due to its assertiveness. These countries are now becoming cautious of China’s potential impact on their economies and political stability. However, despite the risks from China’s investments and its political calculations, China possesses the key resources needed by the ASEAN region for infrastructure development. These cross-border initiatives can indeed act as catalysts to help Southeast Asian countries fill their infrastructure gaps.