Despite efforts to diversify sources of funding, including private capital markets, the public sector remains a key provider of funds for infrastructure investments in Southeast Asia over the years. As many developing countries face tremendous fiscal constraints, it becomes a challenge for them to secure a stable source of funding, resulting in under-investment of critical infrastructure. Therefore, alternative sources, such as project bonds, along with greater private participation are need of the hour. Further, China has increased its dominance in providing infrastructure finance to Southeast Asia, given the region’s economic and strategic importance to the country.

Debt

Infrastructure projects in Southeast Asia have been traditionally funded with fiscal resources. The public sector provides about 75-80 per cent of the region’s overall infrastructure investment. Over the past 3-4 years, governments of Southeast Asian countries have increased budgetary allocation to infrastructure. In 2017, for instance, the Indonesian government apportioned Rp 387 billion to infrastructure as compared to Rp 317 billion allocated in 2016. Similarly, the Thai government set aside THB 194 billion for the infrastructure space, the amount being 11.5 per cent higher than that in 2016.

Bond financing for infrastructure in the Southeast Asian region remains a largely untapped route on account of a number of persistent issues such as lack of liquidity and lower project ratings which have made investors vary of investing in the bond market. As per Asia Bond Monitor, local currency corporate bond issuances in Southeast Asia expanded from $352.5 billion as of March 2017 to $380.1 billion as of September 2017. Malaysia continues to dominate the corporate bond market in Southeast Asia due to successful project financing via bonds. The bond market has matured over the years owing to a number of factors, including sanctity of contracts enforced and comprehensive regulations.

Multilateral organisations have played a pivotal role in financing infrastructure projects in Southeast Asia. Their well-defined guidelines and stringent criteria for infrastructure projects instill confidence among various stakeholders and acts as a catalyst for investment in such projects. Apart from government funding, official development assistance (ODA) loans have provided bulk of infrastructure financing in the ASEAN region.

World Bank: As of November 2017, the World Bank has financed 291 infrastructure projects in Southeast Asia. These projects together entail a commitment of close to $32 billion. The maximum number of these projects have been sanctioned in Indonesia (102 projects), followed by Vietnam (45 projects) and Philippines (44 projects). With regard to the sector, the energy and transport sectors have topped the list.

Asian Development Bank (ADB): As of November 2017, ADB has financed about 473 infrastructure projects in Southeast Asia. These projects entail a loan commitment of over $35 billion. Country-wise, Indonesia, Vietnam Philippines have attracted funding for the maximum number of projects and highest loan commitments. Sector?wise, the energy and transport sectors have received majority (over 70 per cent) of the funds in terms of value and volume.

Japan International Cooperation Agency (JICA): As of November 2017, the agency has provided JPY 8,456 billion worth of financial assistance to 871 infrastructure projects. The major beneficiaries of JICA funding include Indonesia, Thailand, Vietnam and Philippines. JICA’s loan exposure is skewed towards the transportation sector with a share of about 56 per cent in terms of number of projects and 62 per cent in terms of loan commitments.

OPEC Fund for International Development (OFID): As of November 16, 2017, OFID’s cumulative loan approval to Southeast Asia stood at about $469 million. Of this, the maximum amount of loans has been sanctioned for the transportation sector with a share of close to 65 per cent, followed by energy segment whose share is around 26 per cent. Country-wise, Vietnam, Philippines and Laos have received majority of the financial assistance from OFID.

Equity

After a subdued private equity (PE) deal environment in 2015, deal value in Southeast Asia bounced back to $6.8 billion in 2016 from $4.8 billion in 2015, which is 14 per cent higher than the 2011-15 historical average. A rebound in Malaysia from a record low in 2015 helped spur the rally. The Southeast Asian region’s deal market was driven by Singapore, Malaysia and Indonesia. Internet and consumer products have been among the favourable areas of investment for PE players given the Southeast Asian region’s rising middle class. However, PE investment in the infrastructure sector has remained subdued for a very long time. In 2016, exit value increased 26 per cent over the previous year as a result of a strong corporate M&A environment.

There were a total of 409 IPOs (including in the infrastructure sector) across Southeast Asia from 2014 to 2016. Despite the global political and macroeconomic situation over the past years, which includes Brexit and the US presidential elections, funds raised in the region increased 23 per cent from 2015 to 2016.

Foreign direct investment (FDI) inflows to ASEAN fell by 18.6 per cent to $98.04 billion in 2016. The slowdown in FDI flow was in line with the trends in global FDI, which fell by around 2 per cent year-on-year in 2016. However, intra-ASEAN FDI flow remained strong at $24.66 billion in 2016, an increase of 14.4 per cent year-on-year. Sector-wise, transport and storage segment witnessed the highest FDI inflow of $4.58 billion, followed by energy (electricity, gas and steam) sector receiving $2.94 billion.

Emerging sources

The market for infrastructure bonds in Southeast Asia is slowly developing, buoyed by the increasing sophistication of Asian investors and growing demand from global investors. Recently, in August 2017, global investors gave a strong reception to a project finance bond sold by an independent power producer, PT Paiton Energy, in Indonesia. The bonds comprised $1.2 billion 13-year notes and $800 million 20-year notes. The issuance marks the return of Asian project bonds raised in the offshore debt capital markets after many years of absence.

The China-led Asian Infrastructure Investment Bank (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. The AIIB is already cooperating with the ADB and the World Bank which will ensure the complementary role that each of these institutions play in development finance.

Conclusion

According to ADB, ASEAN requires an infrastructure investment of around $3 trillion between 2016 and 2030. Given the scale of investment needed, the development of innovative financing mechanisms has become imperative to complement the traditional funding sources. Issues of credit, foreign exchange and sovereign risk must be tackled to attract investments from conservative institutional investors. No single solution will solve all of these issues in a region as diverse as ASEAN. But stronger governance, increased transparency and host-country commitment will help push the needle forward.