Financing ASEAN's infrastructure gap

Workers labour at the 2018 Asian Games swimming venue at the Senayan sports complex in Jakarta on March 24, 2017. (AFP Photo/Bay Isnoyo)

Lately, news on Southeast Asia has been dominated by ambitious infrastructure plans. For example, the Philippines’ “Build, Build, Build” infrastructure plan involves 75 projects and is estimated to cost US$180 billion. In Indonesia, construction of a high-speed rail covering a distance of 140 kilometres connecting Jakarta and Bandung is currently underway. Malaysia and Singapore are also working on a high-speed rail system that would connect the two countries together.

These are just some examples of the massive infrastructure projects Southeast Asian countries are embarking on. There are plenty more projects lined-up throughout the region. Even with such projects planned, infrastructure demand is expected to rise.

According to PwC’s report on ASEAN infrastructure opportunities, driving this demand for infrastructure is the growing economy in the region. The region has been growing rapidly in the past five years. The combined GDP of ASEAN is worth US$2.4 trillion and is expected to increase further in the future. As it stands, Southeast Asia is the seventh-largest economy in the world and is forecasted to jump to fourth largest economy by 2050.

The EU-ASEAN Business Council paper on infrastructure finance in ASEAN released last week, points out that the demand for infrastructure is cyclic in nature. The economic growth leads to increased infrastructure demand, and improved infrastructure leads to even more economic growth.

The paper also highlighted that infrastructure needs in the region is forecasted to grow further as ASEAN is expected to gain 60 million people to its working population and 90 million people moving into its cities between 2015 to 2030.

As infrastructure demand is expected to increase exponentially, governments and institutions in these countries need to prepare a financial roadmap on how to finance such demand. In a report by the Asian Development Bank (ADB) titled “Meeting Asia’s Infrastructure Needs”, ASEAN requires around US$3 trillion in infrastructure investment between 2016 and 2030 to meet their infrastructure demands.

Source: EU-ASEAN Business Council

The problem therein lies in financing such projects. ADB has highlighted the fact that even if reforms were made by governments with regards to public finances, the public sector can only provide 50% of the investment. Most recently, the Philippines reformed their taxes to fund President Duterte’s infrastructure projects. However, it was found that the tax reforms only add 0.7% to the Philippines’ GDP.

This difference in the required infrastructure spending and actual investment spending has been termed as an “infrastructure gap” by PwC. According to recent ADB data, the total infrastructure spending in Southeast Asia was US$55 billion, while the estimated required annual spending on infrastructure for the region is US$157 billion. Therefore, the region is currently facing an infrastructure gap of US$102 billion.

The EU-ASEAN Business Council has recommended that ASEAN member states engage more with private firms to finance such projects. In the aforementioned paper by the EU-ASEAN Business Summit, the council has laid out several suggestions for improving investment conditions in the region.

One of them includes deregulation in the investment sector to create suitable conditions for investment. In the paper, the importance of insurance companies and pension funds in providing long-term investments was also highlighted. However, various regulations have made it difficult for such investment vehicles to be effective.

Another recommendation made is to strengthen public-private partnerships (PPPs). PPP’s can be complex as investors and public institutions need to work out guarantees and assurances over various factors such as costs, public policy and rules and regulations. To prevent any mishaps and complications, the EU-ASEAN Business Council recommends that governments put in place PPP laws and implement transparent bidding and contracting models.

As pointed out by the ADB, ASEAN needs the infrastructure if they want economic growth. However, ASEAN also needs to be careful when they seek collaboration with private companies. While these companies might have the capital to finance such projects, it is important that ASEAN governments find a balance between generating profit for these private companies and taking care of public interest.