Traditional funding sources being supplemented by new mechanisms-
Southeast Asia is undergoing an infrastructure boom to meet the needs of the burgeoning urban population. While public funds have been the dominant mode of meeting funding requirements, governments are putting efforts to step up private investment and looking at new funding mechanisms to meet the huge infrastructure investment needs. Besides, multilateral funding continues to play a crucial role in infrastructure financing. With Southeast Asia holding strategic importance for China and Japan, the two countries are shoring up investments in the region.
Green financing
Southeast Asia green bonds totalled $6 billion in 2019, a 55.6 per cent growth from a year ago. Country-wise, Indonesia represents the largest source of green bonds, followed by Singapore and Malaysia. In February 2016, AP Renewables became the first green bond issuer of the region with a PhP 10.7 billion ($226 million) green bond. Two Vietnamese local government entities – Ho Chi Minh City and People’s Committee of Ba Ria Vung Tau Province – followed in their footsteps by issuing the first VND-denominated green bonds. The year 2017 was a busy one, with Singapore and Malaysia joining the green bond market. Indonesia and Thailand debuted in 2018.
In a notable move, Southeast Asian governments, The Asian Development Bank (ADB) and major development financiers recently launched the ASEAN Catalytic Green Finance Facility, a new initiative to spur over $1 billion in green infrastructure investments across Southeast Asia. The new facility provides loans and necessary technical assistance for sovereign green infrastructure projects such as sustainable transport, clean energy, and resilient water systems. Regionally, sukuk remains the focus of green issues and represents over 42 per cent of the ASEAN green bond market by amount. Six entities have used the Islamic financial instrument to finance climate projects in a range of sectors. With the Securities Commission Malaysia revising its Islamic Securities Guidelines in 2014 to provide standards for socially responsible investment, the basis was laid for the issue of the first green sukuk in June 2017; it has since promoted the uptake of green investment. Multilateral banks such as the IFC and IBRD also carry out vanilla (non-green) Islamic finance transactions to support the growth of the industry beyond its traditional borders.
Funding from Japan and China
There has been an infrastructure boom in Southeast Asia with major projects approved in Vietnam, Thailand, the Philippines, Malaysia and Indonesia. In several cases, these have been facilitated through loans and other assistance provided by Japan and China.
Currently, Japan remains far ahead of China in terms of infrastructure investment in Southeast Asia. In 2018, Japan’s investments totalled $367 billion, compared to $255 billion from China. Japan is also ahead in terms of the number of infrastructure projects with engagement in 240 projects vis-à-vis the 210 projects funded by China. Vietnam is by far the largest recipient of Japan’s infrastructure investment in the region, with pending projects worth $209 billion, including a $58.7 billion high speed rail (HSR) line connecting Hanoi and Ho Chi Minh City. China, meanwhile, has poured $93 billion of its infrastructure investments in Southeast Asia, or 36 per cent of the total, into Indonesia. The biggest Chinese project in the country is the $17.8 billion Kayan river hydropower plant on the island of Borneo.
However, a point to note is that China’s infrastructure investments in ASEAN have grown rapidly over the past few years. From 2012 to 2017, the value of China’s ASEAN construction contracts doubled to $19 billion. In accordance with China’s ambitious Belt and Road Initiative, the country has come to the aid of Laos by funding 70 per cent of a $7-billion high-speed rail project, while its investments in Cambodia have helped sustain the country’s economic growth.
REITs
Southeast Asian markets like Malaysia and Singapore already have listed real estate investment trusts (REITs). The mature Singapore REIT market is seeing some merger and acquisition (M&A) activities due to consolidation amongst smaller REITs. The Malaysian government intends to set up the world’s first Airport REIT, through which it hopes to raise RM 4 billion. The investors of the Airport REIT will receive returns arising from user fees collected from Malaysia Airports Holdings Berhad, which has the concession to operate these airports. An REIT listing by Philippines’ largest property developer Ayala Land is on the cards. In Indonesia, preparations are still underway for the establishment of listed REITs.
Credit enhancement facility
Although ASEAN has seen rapid growth in savings, local institutions have little ability to take on risk and hence, struggle to put the savings to use. Thus, the CGIF is developing a mechanism – a new guarantee platform for infrastructure financing, the Infrastructure Investors Partnership (IIP). The platform’s guarantees will fund developing markets’ projects using domestic savings, through the local bond markets. By providing credit enhancement for Greenfield project loans, the IIP aims to encourage more infrastructure developers to raise local currency loans that can be refinanced through bonds after the construction period is complete. The new facility will also seek to mobilise capital in developed markets. In addition to the capital contributed by governments, IIP will issue mezzanine bonds in developed bond markets. The IIP will be a new programme under the Asian Bond Markets Initiative.
