The need for infrastructure in Asia has significantly grown. The Asian Development Bank (ABD) has estimated this need to be USD2.8 trillion between 2016 and 2030.  This is more than USD180 billion a year, or USD3.17 trillion (USD210 billion a year), if adjusted to cope with climate change. ASEAN states have agreed a plan – the ‘Masterplan on ASEAN Connectivity’ – to highlight main priorities. Traditional sources of funding, including the National State Budget and Official Development Aid (ODA), cannot cover these amounts, even with the support of the local banks and capital markets. So, there is a need for new sources. The ‘funding gap’ calculated by PwC is USD92 billion a year, more than half of the total amount. The private sector is the first port of call, given the size of global markets and their currently favourable disposition to invest in Southeast Asia and in infrastructure, especially if sustainable.
Another alternative has emerged: China’s Belt and Road Initiative (BRI). On top of its previous international support, this is a financial program to build roads, ports, airports, railways, and industrial zones to enhance commerce and value-chain creation between China and forty countries among Europe, Africa and Southeast Asia.
Common Issue, Different Needs
Each country and region has different needs, as cities and rural areas would have. From completing basic infrastructure in Myanmar, Laos, rural Cambodia, and in some provinces of the Philippines and Indonesia, to upgrading them for all the other counties in order to keep up with economic growth. Meanwhile, all countries in ASEAN (except for Singapore, which has fully developed infrastructure) need to build the infrastructure they cannot afford by themselves. In part, new demand for infrastructure is driven by fast urbanisation and economic activity growth (in industry and agriculture), in part by the rise of the middle class with higher standards of living, and finally by the need to enhance physical and information connectivity.
The absolute size of the GDP is comparable to the total cost of the infrastructure being planned, and the average investment need is almost 6% of GDP a year. However, the government debt-to-GDP ratio in some ASEAN countries is already high, so they cannot borrow more than they used to spend . Generally, ASEAN countries are inefficient in collecting taxes. Their tax rates are difficult to raise (Corporate Income Tax ranges from between 17% in Singapore to 30% in the Philippines, VAT from 5% to 10%), while corruption prevents improving tax collection and increasing social security cost. This, coupled with the fear of investor flight, works to keep rates relatively low. PwC’s study further indicates the states that can finance by themselves is, at most, 50% for the cost of new infrastructure.
Local banks, who are usually also the main investor in government banks, have a capacity of investment limited by the capital size and the serious maturity mismatch. Whereas Vietnamese, Malaysian and Thai banks’ assets are around 130% of GDP, Indonesian ones do not reach 40%. In most ASEAN countries, the amount of institutional investors like pension and investment funds is very small and continue to invest mostly in government bonds, so their additional contribution to infrastructure investment is capped by growth rates.
ODA outstanding total commitments from multilateral institutions to ASEAN countries is over USD10 billion for ADB and a comparable amount for the World Bank. Other governments’ commitments are led by China, Japan, the US, Germany, France, and the European Union for a total commitment of USD9 billion. While Europeans tend to offer untied aid, the other countries in the list ask it to be spent to buy products and services generated in their country.
In some countries, their graduation to a ‘middle-income country’ has augmented the situation, with the money now coming only in the form of debt instead of a grant. This is the case of Viet Nam. For the World Bank, last year it was upgraded to the new status and it is set to do be upgraded soon by the ADB. Many European donors, especially the UK and Scandinavian countries, closed their activity in Viet Nam. The ‘Paris COP 21 agreements’ on climate change gave new life to ODA, which now is funneled to the region specifically for this purpose.
The Public-Private Partnership (PPP)
There is a wall of money in world financial markets ready to be deployed in PPP form to fulfill these tasks, but a set of conditions need to be put in place before this money materialises. The barriers are in regulation, government reliability, and supporting institutions:
Regulation: Laws on PPP do exist in many countries, but usually they do not offer bankable contracts to the developer/operator because risks are all thrown onto the private side. The regulation of markets for services/utilities often do not allow for private operators to enter a market where there is a public monopoly controlled by the same government authority that regulates the market. Meanwhile, rules of local ownership may crowd out foreign operators or State control may be protected by law, even if ASEAN rules aim to open up for majority stakes for member State companies, and the lack of an efficient system to deal with bankruptcy increases the risk of loss. Lastly, the level of tariffs may not allow for the recovery of the capital invested, as in the case of electricity in Viet Nam and Indonesia where the tariff barely covers the cost of operation.
Government: This is the highest source of risk, specifically sudden changes of policy. While a reliable and stable policy reduces risk substantially, there are recent examples of nationalisation in the Philippines.There, the power purchase agreement for electricity from private producers is conceived to allow the electricity monopolist to renegotiate the whole structure of fees in case of a crisis. Another serious deterrent is the many permits necessary to start a project. In addition to using a lot of precious time before construction starts, thus increasing risk, it sets the ground for corruption which can add up to 30% of the cost.
Institutions: Local capital markets, banks and other local consultants involved lack the technical expertise and experience (since it was hardly done before) to evaluate the risk of PPP projects. Therefore, they either stay out or make investment decisions based on perceived or patent political support, which does not have the legal status of guarantees.
Most ASEAN countries are working at improving at least some of these conditions, with the help of multilateral banks and the private sector advocating for pro-market measures to rebalance risks, reduce arbitrary decisions, and strengthen local institutions. Moreover, they make it possible to benefit from the services of international institutions. Each Southeast Asian government should find a balance between the desire to promote local companies and the larger, faster and often more resilient performance of international companies.
The BRI is a great project worth close to USD1 trillion. A large proportion of ODA, blended with Chinese private capitals, was disbursed to build interconnectivity between China and the regions around it. Through the BRI, China aims to conquer the heart of the countries touched by the project, thanks to the many infrastructure projects built in each nation, and thereby opening the economies to Chinese FDI and Chinese products.
It is clear that this is additional to the many initiatives countries have already taken and it comes in a context of much-increased flow of trade, investment and tourism out of China into the region.
Several ASEAN countries have political issues with their gigantic neighbour. Viet Nam, Indonesia, the Philippines, and Malaysia contested control of tiny islands in the South China Sea, since this would grant control of the immense submarine reserves of oil and gas, of fishing rights and of the commercial shipping routes. In addition, the Vietnamese population has not forgotten the 1979 war with China, in which Chinese Communist troupes arrived at 50 km of the capital Hanoi. Each ASEAN country is touched by several infrastructure projects:
– Cambodia: The 190 km, USD1.8 billion highway from Sihanoukville to Phnom Penh is supported by China Road and Bridge. Cambodia is the most open country in the region to Chinese investment, including in the energy sector.
– Laos: China Exim Bank is expected to spend up to 70% of the China-Laos High-Speed Rail Link cost.
– Philippines: the new Manila Bay will be a smart city jointly developed by Chinese and Filipino partners.
– Malaysia: Central government launched the Digital Free-Trade Zone, a logistics hub supported by Alibaba, KLIA and Cainao Holdings.
– Indonesia: The Kalibaru expansion of the Tanjung Priok Port should cost USD3.97 billion, with the participation of Ningbo Zaoshan Port Company.
– Brunei Darussalam: The Muara Petrochemical Refinery is valued at USD15 billion and it is now controlled by Zhejian Hengyi Company, supporting Brunei at a time when Western companies are deterred by the Islamic turn of the government and the expected end of its oil reserves.
– Myanmar: The Kyaukpyu Deepwater Port will be part of a special economic zone, controlled by China’s State-run Citic Group for up to 75 years. Due to local government’s concerns about excessive debt, the project has scaled down to USD1.3 from 7.2 billion.
– Thailand: The Eastern Economic Corridor is a USD5 billion smart digital hub and economic zone, supported by HNA Innovation Finance.
– Viet Nam: Hanoi’s Cat Linh-Ha Dong Metro Line would value USD868 million.
Some countries like the Philippines, Indonesia, and Cambodia have chosen to join the BRI with great publicity and explicit documents. In particular, the Philippine government has given high visibility to its good relationship with China.
Yet these apparently win-win projects have incurred local resistance and other political hurdles, most commonly the concern that too much money coming in the form of bilateral debt and not from a multilateral institution may bankrupt the country or provide an excuse to take over land assets, as it happened in Sri Lanka with the Hanbantota Port. This port was built with Chinese money, but Sri Lanka could not pay the installment debt so they were forced to give it to China for 99 years.
In most countries, Chinese workers moving in to realise the infrastructure were perceived as displacing the local workforce. In Viet Nam, which has not officially signed any BRI declaration, three special economic zones with unusual lease length – 90 vs the usual 50 years – were met with street rallies assuming they were meant for Chinese companies, an extremely rare event in that country. Yet it seems to be clear that Viet Nam has to be on good terms with China, not only for the flow of direct investment (for example, in textile and furniture industries), but also for the number of tourists, and the support that Chinese buyers give to the real estate market bubble. On top of this, China is already the largest supplier of goods, machinery and raw materials, and after being a minor buyer of Vietnamese goods for a long time, since 2018 it has become the largest importer.
Myanmar blocked a large power station already in 2011 and asked to scale down the Deepwater Port project due to the fear of over-indebting itself.
There are also risks for the Chinese partners, who are exposed to project delays in construction or failure to become economically viable (as was the case of the Sri Lankan port) with bad debt piling in the balance sheet of the Chinese banks.
However, there seems to be always a winner: Singapore, thanks to its well-developed institutions and expertise in private projects, strong institutions such as capital markets and international arbitration court, is well positioned to benefit in both cases, regardless of the source of funds, by supporting the PPP projects and also Chinese-led international projects.
It is clear that ASEAN countries cannot let pass the opportunities given by co-operating with the local and international private sector, or miss out on taking advantage of China’s ‘Marshall Plan’ for its all neighbours.
Most ASEAN countries, except Singapore, are more at home with government-to-government relationships, but several are afraid of an excessive dependence on a single country. That is why they have developed ASEAN and, especially Viet Nam, created an impressive network of free trade agreements.
Working with the private sector requires a daunting change in mentality and in legal rules. Viet Nam did some Build Operate Transfer (BOT) structures for roads and power stations under an old law in the early 2000s, but the new one on PPP has only been successful in drawing the money of some local companies with political ties supported by state-owned banks. By the way, the well-being of the citizen and their increasing spending capacity that enables them to pay for the services they receive, and economic growth that in ASEAN has surpassed 5% for many years (and is a great social stabilizer) are tilting the balance towards change.
 ‘Meeting Asia’s Infrastructure Needs’, ADB Report, February 2017, available online at <https://www.adb.org/publications/asia-infrastructure-needs>.
 See ‘Master Plan on ASEAN Connectivity to 2025’, November 2018, available online at <https://asean.org/wp-content/uploads/2016/09/Master-Plan-on-ASEAN-Connectivity-20251.pdf>.
 PwC, ‘Understanding Infrastructure Opportunities in ASEAN 2018’. Infrastructure Series Report 1, 2017, available online at <https://www.pwc.com/sg/en/publications/assets/cpi-mas-1-infrastructure-opporuntities-in-asean-201709.pdf>.
 ‘Meeting Asia’s Infrastructure Needs’, quoted.
 Viet Nam lowered its CIT from 24 to 20% at the beginning of this decade and currently plans to cut further to 15-17%.
 Latest data provided by The Global Economy.com, available online at <https://www.theglobaleconomy.com/>.
 ‘Geographical Distribution of Financial Flows to Developing Countries’, OECD Report, 28 February 2018, available online at <http://www.oecd.org/fr/cad/financementpourledeveloppementdurable/geographical-distribution-of-financial-flows-to-developing-countries-20743149.htm>
 In some cases, the ASEAN Economic Community (AEC) helps in bringing money from one country to the next: FDI of regional leading utilities into other countries: Manila Water and Metro-Pacific Investments from the Philippines, Viettel of Viet Nam, Axiata Group from Malaysia, Singapore Telecom, EGAT of Thailand all bought stakes in similar business neighbouring countries’ utilities see, ‘Southeast Asia Burgeoning Infrastructure Market Defies Borders’, Nikkei Asian Review, 29 January 2019.
 Summary Report, ‘Making the Belt and Road Initiative Work for ASEAN’, Singapore Institute of International Affairs, August 2018, available online at http://www.siiaonline.org/wp-content/uploads/2018/08/Summary-Report_Making-the-Belt-and-Road-Initiative-work-for-Asean.pdf; Sarah Chan cites 25 projects for a total value of USD12.4 billion in the Philippines, nine projects in Indonesia worth USD26.2 billion and twelve projects in Malaysia worth USD26.2 billion. in Chan, S. (2018) ‘The Belt and Road Initiative: Implications for China and East Asian Economies’, Copenhagen Journal of Asian Studies, Vol. 35(2), pp. 52-78, available online at: <https://rauli.cbs.dk/index.php/cjas/article/view/5446>.
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