After a spell of economic success, the 10 member-states of the Association of South-east Asian Nations face a more challenging future due to both infrastructure deficiencies and a rapidly changing demographic. Don Kanak, chairman of Eastspring Investments, explains why businesses and governments must come together to confront the issues. 

The 10 member states of the Association of South-east Asian Nations (Asean) have enjoyed a remarkable decade of economic success. But during the past few years, Asean’s share of global trade has levelled off, having peaked both in terms of total merchandise export value and inflow of foreign direct investment in 2014.

To remain a growth powerhouse, Asean must continue to boost its competitiveness, particularly as China, India and other developing countries raise their games. Asean’s own research identifies infrastructure as key to raising competitiveness. Telecommunications, power, roads, rail and ports provide the backbone of modern competitive supply chains, and more efficient supply chains will increase Asean’s appeal to global manufacturers.

Demanding demographics

But there is a second reason for a major rise in infrastructure spending – to cope with Asean’s daunting demographic changes. Between 2015 and 2030, Asean will have added 60 million to the region's working population and 80 million new middle-class households will have come into being. Financing infrastructure to support such growth presents Asean members with an unprecedented challenge.

The Asian Development Bank (ADB) estimates that south-east Asia will require $3000bn in infrastructure investment between 2016 and 2030. Current bank and capital-market finance will be insufficient – $3000bn is equivalent to 130% of the region’s stock-market capitalisation. Even with public finance reforms, according to the ADB, the public sector can provide only 50% of the required investment.

Closing this gap is a shared challenge for business and governments. Public funds for infrastructure are constrained in most countries because of imperatives for social spending. Concessionary finance from donor nations or multilateral institutions is likewise limited.

Asean has high domestic savings, but most are in cash, short-term bank deposits, or property, thus unavailable for long-term investment. Growing the insurance sector, pension funds and capital markets will create pools of long-term savings, but this could take decades. Therefore, urgent attention is needed on two fronts to close the infrastructure gap.

Private capital incentives

The first involves public and multilateral action on 'crowding-in' private capital. Globally, more than $60,000bn of institutional funds are managed by insurance companies and pension funds. Those funds increasingly see infrastructure as an attractive asset class, but whether they choose to invest in emerging Asia is a matter of risk and return.

Recent efforts, such as the International Finance Corporation's (IFC's) Managed Co-Lending Portfolio Programme and the Credit Guarantee and Investment Facility established by the Asean+3 countries (the three being China, Japan and South Korea), use multilateral capital to provide credit enhancement, partially to insulate private sector capital. Credit enhancement helps private institutional investors to invest in countries and/or projects they otherwise might have deemed too risky.

Eastspring Investments recently concluded a precedent-setting agreement to co-invest, with the IFC, in a portfolio of emerging-market infrastructure investments with a layer of loss protection for insurance investors. As with the IFC, other multilateral bodies should increase their efforts to expand private sector blended finance and provide advice and encouragement to national governments to develop local capital markets facilities to do the same.

A matter of priorities

The second front can be described as prioritising and accelerating the most investible projects. National, multilateral and private sector leadership must bring more urgency to building a robust pipeline of bankable deals, removing unintended investment restrictions.

The Sustainable Development Investment Partnership (SDIP), a joint initiative of the Organisation for Economic Co-operation and Development and the World Economic Forum, aims to tackle this challenge by identifying projects that can proceed without public sector financial support. SDIP is establishing an Asean infrastructure investment hub in Cambodia to review the governments’ lists of priority infrastructure projects. Projects that can be designed to be investible with only private funding should be accelerated, leaving public resources to support projects where revenues alone are insufficient to justify private investment.

Many projects are public-private in nature, or involve risks such that public sector support will be required to attract capital. Several Asean countries have passed public-private partnership (PPP) laws and established PPP offices to attract private investors to infrastructure. This is constructive, but continuous effort is needed to improve and professionalise project planning. One possible solution is further investment in project preparation facilities (PPFs), public or public-private organisations that help developers use expertise to move a project from concept to investment-readiness.

By focusing on the two urgent priorities above, public and private sector leaders in Asia can improve the attractiveness of emerging market infrastructure. With co-operation and a greater sense of urgency to scale up and replicate the pilots and successful experiences mentioned above, big strides are possible in closing the infrastructure gap. 

Don Kanak is chairman of Eastspring Investments, Prudential’s Asian asset management arm.

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