“The main challenge is ensuring not only sustainable growth but inclusive and shared growth”
With a relatively young population and rich natural resources, growth prospects in Southeast Asia remain strong. It is important to develop and strengthen institutional and legal frameworks and policies to attract investment. Governments also need to promote the development of disaster-resilient infrastructure and strategies to deal with risks due to climate change. Stephen P. Groff, vice-president for East Asia, Southeast Asia and the Pacific, the Asian Development Bank (ADB), offers his views on the overall investment scenario in the region, the role of ADB in promoting infrastructure development, key issues and concerns and the strategies needed to accelerate the pace of development…
What is your perspective on the current investment climate for infrastructure projects in Southeast Asia?
Improving the investment climate is a long-term process and involves successive government administrations. Private investment in the infrastructure sector of the Association of Southeast Asian Nations (ASEAN) plunged after the 1997 financial crisis, and has yet to recover. The five largest ASEAN countries attracted $38 billion of private infrastructure investment in 1997 but only about $25 billion in 2010.
Although progress has been made in improving business climates, the region as a whole can do more to attract investment. This will help ASEAN countries move beyond the middle-income trap – where rapid growth stalls as labour costs rise and comparative advantage shifts. Component manufacturing within value chains will evolve; so ASEAN needs to prepare itself through appropriate competition policies, by fostering investment climates that spur innovation, and by taking the necessary steps to obtain financing for infrastructure such as expressways, ports, clean water, power grids and gas pipelines.
What has been ADB’s role in infrastructure development in Southeast Asia? What problems do you face in balancing your investment goals in terms of both financial returns and economic development?
ADB is working in many different ways to promote infrastructure development in Southeast Asia. We provide direct financing of $3 billion annually to our ASEAN developing member counties, a quarter of which was used in 2013 for transport and energy infrastructure. In addition, we have made co-financing a priority and actively seek this for each dollar of funding that we provide. We are also increasingly providing B-Loans on behalf of commercial banks. ADB has played a pivotal role in launching local currency bonds in large markets such as the People’s Republic of China (PRC) with the Panda bonds in 2005 and, more recently, through a project bond guarantee facility in India.
ASEAN has also taken some encouraging steps in this direction through the Asean+3 Bond Markets Initiative, the Asian Bond Fund, the Credit Guarantee and Investment Facility and the ASEAN Infrastructure Fund (AIF). The AIF can provide partial financing for public-private partnerships (PPPs) in infrastructure, including regional projects to promote connectivity. Additionally, under the Greater Mekong Subregion (GMS) programme, ADB has mobilised more than $20 billion for physical infrastructure projects, primarily in the transport and energy sectors. Most of these projects have contributed to domestic and subregional connectivity. But large challenges remain as cross-border projects are inherently more complex and risky than single country investments. The region also needs a pipeline of bankable projects and should be realistic about which projects will work – for example, as PPPs – and which will not.
As a development bank, ADB’s primary purpose is to invest in projects that stimulate economic and social development as agreed under country partnership strategies. Given this mandate, we approach risk and return differently from commercial banks. Our shareholder value is gauged through the social and economic development we help create, while seeking financial returns to at least cover financing costs in keeping with sound banking principles.
As ASEAN prepares for economic integration, what role will ADB play to promote inclusive growth and improve connectivity in the ASEAN region?
ADB continues to bridge deficits in ASEAN’s physical connectivity. ADB continues to work with Southeast Asian countries in this regard and recently supported the GMS countries in their unveiling of a pipeline of over 90 priority infrastructure investment projects with a total cost of around $30 billion. ADB will finance some of the projects, and will help to arrange financing for others through private sector channels as well as from other multilateral organisations.
Physical infrastructure needs to go hand in hand with the “software” aspects of connectivity. “By that I mean government policies, procedures and systems essential to facilitate the mobility of goods and people and promote jobs – critical attributes of inclusive growth. Despite efforts by ADB and other development partners to support transport and trade facilitation in the GMS, there are still several subregional road corridors that do not have a single cross-border trans-shipment agreement signed, and some corridors that do have signed agreements but lack effective enforcement.”
Specifically, this is: boosting transport and trade facilitation measures and related capacity building; controlling the cross-border spread of communicable diseases; and increasing research and database development. To make this happen, institutions are needed that foster closer cooperation and coordination in specialised areas, such as railways and power development. ADB’s recent support to help establish the Greater Mekong Railway Association and the GMS Regional Power Coordination Centre are two examples of efforts to build institutional connectivity in the ASEAN region.
What are the common challenges associated with the planning, designing and financing of infrastructure on a large scale? What could countries do to address these challenges?
While ASEAN countries are advanced in planning and designing projects, they still require substantial assistance in the financing, execution and maintenance of large public infrastructure projects. Further, a key agenda for ADB going forward is to work with countries in simulating the potential impact of climate change and “climate-proofing” infrastructure – for example, making extra financial investment in infrastructure that is designed to withstand the risks of increased flooding or more frequent tropical storms. Bespoke financial products such as insurance also need to be developed for our markets to cover climate-related risks to infrastructure and agriculture. Environmental and social risks associated with large infrastructure projects need to be managed diligently. Countries also need support in developing technical and financial mechanisms for the regular maintenance of infrastructure to extend its operating life. Transparent procurement systems are essential to building market confidence, promoting competition and institutionalising the concept of value for money within bureaucracies.
What has been the experience with regard to private participation? What role can ADB play in creating an enabling environment for greater private sector participation?
PPPs are a good modality for financing and implementing infrastructure projects, and are gradually taking root in the region. At the national level, ADB is supporting project development facilities for PPPs in Indonesia, the Philippines and Vietnam.
There is clear progress in countries like the Philippines, which has converted the build-operate-transfer law into a Public-Private Partnership Act, established a well-functioning PPP Centre, which is working on more than 50 transactions, and recently awarded the Mactan Cebu airport contract on a PPP basis. Vietnam is progressing very well on investment in infrastructure, in part due to its increased attention on PPPs. In Myanmar, authorities are looking at securing private sector resources for all sectors, particularly the power sector.
In terms of technical support, ADB has helped establish the ASEAN Infrastructure Center of Excellence (AICOE), co-financed by the Singapore government and the Canadian government. This facility helps prepare regional infrastructure projects with private sector participation, and provides transaction advisory support in the areas of risk sharing and viability gap financing.
What are your views on the economic outlook for Southeast Asia over the next two to three years?
Growth in some of the larger Southeast Asian economies was slower than expected in 2014. Growth projections were slightly reduced for Indonesia, the Philippines, Singapore and Thailand. The gross domestic product (GDP) in the subregion is likely to grow by 4.4 per cent in 2014, down slightly from the 5 per cent predicted earlier. In 2015, we expect subregional growth to average 5.1 per cent.
Over the long term, I think the economic prospects are quite positive for Southeast Asia. If ASEAN were one economy, it would be the seventh largest in the world with a $2.4 trillion combined GDP in 2013. It could be the fourth largest by 2050 if growth trends continue. With over 600 million people, ASEAN’s potential market is larger than that of the European Union or North America.
Granted there are challenges, such as limited infrastructure, evolving regulations, and a weak skill base in most countries. However, the macroeconomic fundamentals are much stronger than in 1997, and will get stronger with the inception from 2015 of the ASEAN Economic Community.
Which sectors and countries in Southeast Asia are priorities for ADB?
While we do not prioritise our operations in one of our developing member countries over another, continued progress in countries like Indonesia and Vietnam is clearly critical to the future prosperity of the region as a whole. Indonesia is the largest country by population and is also the region’s largest economy. Vietnam is emerging as a key regional economy and is making impressive efforts to reform and become more efficient, and can help other developing countries move along a similar development path.
But ADB is engaging with the entire region. We recently opened an office in Myanmar, and have close partnerships with Thailand, the Lao People’s Democratic Republic (Lao PDR) and Cambodia. Some of our support is delivered through the GMS programme, for which we act as the secretariat. For example, the Fourth International Mekong Bridge between Thailand and Lao PDR was opened to traffic in 2014, as was the Noi Bai-Lao Cai Expressway in Vietnam linking Ha Noi with the PRC.
Our sector priorities in the region are infrastructure (particularly transport, energy), health care, education and skill development. Another important priority is financial reform and improving the efficiency of state-owned enterprises. For example, in Vietnam, we have supported the government’s efforts to reform state-owned enterprises (SOEs) since the 1990s, and recently provided technical assistance to restructure the core business lines and debt of SOEs, while building capacity at the Ministry of Finance to drive the SOE reform agenda forward.
What should be done to improve the investment scenario and investor sentiment in Southeast Asia?
Among the most critical things that governments can do to build market confidence are to follow through on commitments, develop human skills and capabilities, and facilitate initiative and risk taking that is critical for innovation and growth. Lastly, the benefits of growth need to be shared to ensure peace and stability, which are the cornerstones of an attractive investment climate.
