www.pwc.com/sg Understanding infrastructure opportunities in ASEAN Infrastructure Series Report 1 Contents Foreword 3 Methodology 4 Chapter 1: State of play in ASEAN 5 Current infrastructure spending in ASEAN 5 Future infrastructure spending outlook 7 What is an infrastructure gap? 16 Chapter 2: Challenges in addressing the infrastructure gap 18 Understanding the infrastructure project lifecycle 18 Key challenges across the infrastructure project lifecycle 20 Strategy 20 Design and execution 21 Recycling capital 24 Chapter 3: Measures to address the infrastructure gap 25 Presence of an entire ecosystem 25 Governments 26 Financial institutions and investors 36 Advisors 37 Infrastructure companies 40 Multilateral development banks 41 Chapter 4: An infrastructure hub: a one-stop shop 43 Conclusion 46 Sources 47 Foreword We all know there is a huge need for infrastructure spending in To understand these better, this report explores the lifecycle ASEAN and other emerging markets, while spending remains of infrastructure projects and the challenges at each stage constrained and lags behind the demand for new infrastructure of any project. In order to address these challenges, projects stock. Emerging markets tend to focus on core infrastructure require the presence of an entire support system comprising like transport networks and utility infrastructure, but other key stakeholders – the government, financial institutions, aspects like healthcare, education and housing, which tend infrastructure companies, financial, legal, tax and technical to be significantly under provided, are becoming increasingly advisors, as well as multilateral institutions. We call this important. This failure results in a widening infrastructure gap support system an infrastructure ecosystem. This report notes which has a negative effect on the growth of economies in the that not every country in ASEAN houses a complete ecosystem region. It limits the access of citizens to work and prosperity and countries rely on each other for support, be it in terms of and increases the vulnerability of cities to climate change, funding, expertise or others. This cross harmony gives rise to natural disasters and changing demographics. the concept of an infrastructure hub – a geographic location within a region that comprises all ingredients necessary This report is the first in a three-part Infrastructure Series. For for project success, including but not limited to the entire starters, we focus on the current state of play of infrastructure ecosystem, a talented pool of experts, strategic location, spending in ASEAN and what is needed in the future. The language advantage, and a robust financial system. shortfall between the actual and required infrastructure spending points towards an infrastructure gap that needs to be The subsequent reports within this Infrastructure Series, filled if growth in ASEAN is to be maintained or accelerated. will cover the future project pipeline, investment outlook for This report also delves into the key factors that are responsible infrastructure in the region and how and why infrastructure for the infrastructure investment gap, including external needs to be considered as a separate asset class to attract factors such as the role of government in formulating plans, private sector investment and alternative financing sources availability of finance and facilitating a conducive business such as pension funds and institutional investors. environment, as well as project-related factors such as design and implementation. We hope that you find this Infrastructure Series a useful resource that addresses some of the key issues that we as infrastructure Governments in ASEAN have been undertaking reform and practitioners grapple with. If you would like to discuss any of the measures to address the external factors in order to attract issues raised here, please get in touch with us. domestic private and foreign investment into their economies but project-related factors still need more attention. Mark Rathbone Asia Pacific Capital Projects & Infrastructure Leader, Partner PwC Singapore [email protected] Devin Chan Director Capital Projects & Infrastructure PwC Singapore [email protected] Oliver Redrup Director Capital Projects & Infrastructure PwC Singapore [email protected] Methodology Our comments and analyses are based on data obtained from to 2025 (2014), Capital Project and Infrastructure Spending: industry recognised sources. We also built on PwC’s significant Outlook to 2025 (2014). We supplemented these findings research and findings drawn from previous publications, with independent research to provide a holistic view of the which include Repaving the ancient Silk Routes (2017), A topic. Furthermore, we have also included case studies and Summary of South East Asian Infrastructure Spending: Outlook examples, where relevant, to illustrate the trends observed. 4 | Infrastructure Series Report 1 | PwC Chapter 1: State of play in ASEAN In this first chapter, we provide an overview of the current status and future needs of infrastructure spending in ASEAN, and the infrastructure gap that exists based on the mismatch between the required and actual expenditure. Current infrastructure spending in ASEAN The Association of Southeast Asian Nations (ASEAN) The ASEAN region is developing at a rapid rate. Its combined was founded in 1967 by Indonesia, Malaysia, Philippines, Gross Domestic Product (GDP) of US$2.4 trillion grew by Singapore and Thailand. Today, ASEAN consists of 10 4.7% in 20151, and annual average projected growth from member states: the five founding member states and Brunei 2016 to 2020 is 5.2%2. The bloc is currently the seventh-largest Darussalam, Cambodia, Lao People’s Democratic Republic economy in the world, and is projected to become the fourth- (PDR), Myanmar, and Vietnam. largest by 20503. Figure 1: Infrastructure spending and GDP growth Average growth rates from 2012-2016 14% 12.6% 12% 11.5% 10.3% 10% 8.7% 8.6% 8% 6.6% 5.9% 6% 5.1% 5.3% 4.3% 4% 3.4% 3.3% 2% 0% Philippines Vietnam Thailand Malaysia Indonesia Singapore Infrastructure spending growth (%) GDP growth (%) Source: Oxford Economics; World Bank data 1 ASEAN Economic Community Chartbook 2016, ASEAN Statistics, 2016 2 Outlook 2017: ASEAN still beckons, IE Singapore, 2017 3 7 surprising things you probably don’t know about ASEAN, World Economic Forum, 2016 PwC | Infrastructure Series Report 1 | 5 A large part of the economic growth in ASEAN is attributable Singapore increased the least. These trends highlight the to the rise of the manufacturing industry, among other following: factors. Manufacturers are shifting operations from China to Southeast Asia due to lower overall costs, increases in • Developed economies such as Singapore that are domestic consumption and improving physical infrastructure. reaching or have reached a steady state observe lower This has called for a further rise in demand for infrastructure rates of growth of GDP and infrastructure spending. development. Recently, foreign investors have capitalised In contrast, developing economies such as Philippines on this growing demand. Foreign Direct Investment (FDI) in and Vietnam need to grow faster to catch up with infrastructure accounted for about 12-15% of total FDI inflows their developed counterparts and hence need higher into the ASEAN region between 2012 and 20144. According to infrastructure spending. the World Bank, the majority of private sector participation • Infrastructure spending growth has a direct positive in infrastructure projects in ASEAN has been in the transport, correlation with GDP growth. A higher investment in energy, information and communications technology (ICT) infrastructure enables a country to increase its output, and real estate sectors. Infrastructure spending is broadly which then leads to a higher GDP growth rate. acknowledged as a key driver of economic growth. • For all of these six selected countries, infrastructure spending is growing faster than the overall economy. In our analysis, we have used data sets from our previous report, Capital Project and Infrastructure Spending: Outlook However, an exception to the observed trend is Thailand. to 2025, which was supported by research from Oxford The country has an infrastructure spending growth of 10.3%, Economics. We have also used publicly available data sources whereas its GDP growth only stands at 3.4%. The large growth from the Asian Development Bank (ADB) and the World Bank. in infrastructure spending has been primarily a result of its In the data sets, Oxford Economics defines infrastructure as government’s increased focus on infrastructure spending to social, transport, communications, manufacturing, utility, enable and drive growth in other sectors of the economy. power and extraction industries. ADB defines infrastructure Thailand has implemented a number of government initiatives as transport, telecommunication, power, water supply and to realise this objective, including the development of the sanitation. Eastern Economic Corridor, Thailand 4.0 (its Digital Economy Strategy) and a new fast-track scheme for high priority In the last five years, there has been a large disparity between Public Private Partnerships. These are all huge initiatives. For the growth rates of infrastructure spending in the six largest example, within the next five years, an expected US$43 billion economies of ASEAN, which has ranged from 4% to 13%. will be invested in the Eastern Economic Corridor