It has long been understood that countries in the Association of Southeast Asian Nations (ASEAN) bloc provide some of the best infrastructure investment opportunities in the world. The past few decades have seen an appalling lack of domestic infrastructure investment, while the population booms into a strong middle class. With demand growing, ASEAN countries have become open to foreign investment in this realm, with a number of ways to contribute.
Foreign direct investment (FDI) in the ASEAN region rose to $136.2 billion in 2014, making it the largest inflow of investment into developing countries in the world. The investment needs of the power, transport, water and sanitation, and telecom sectors alone will be over $100 billion per year. However, this is only a fraction of the growth. McKinsey estimates that over the next decade, private investors will be able to contribute $1 trillion to infrastructure via public-private partnerships.
How can you ensure that your investment will be profitable, guarded against the myriad of risks and challenges inherent in the Southeast Asian landscape?
There are upward-trending conditions on the ground. Public infrastructure is privatizing, and the mergers and acquisitions environment is becoming friendlier to companies. Savings rates are going up, and various factor markets are set to liberalize as more pressure accumulates on governments in Southeast Asia to serve the needs of their people. Furthermore, free trade agreements like the Trans-Pacific Partnership (TPP) will establish and enforce norms of behavior that will accelerate the liberalization process. There are a number of regional projects that have been pledged and are seeking funding, including the Singapore-Kunming Rail Line, the ASEAN Power Grid, and the ASEAN Highway Network. Governments have taken notice and there are now many ways investors can join the boom through public-private partnerships.
The story is, of course, quite diverse across the region, but the trends underpinning the demand are locked in. The challenge now is simply to find secure funding mechanisms, reliable partners, and appropriate investment opportunities. Equity investors should look to countries that have more well-defined PPP policies, or specific measures that prohibit sudden capital controls. Investors may remember the sudden stoppage of capital flows in Malaysia following the 1997 financial crisis. The ASEAN is not light on political risk, but this can be mitigated through the relentless pursuit of clarity in policy and agreements.
Be prepared to have high risk tolerance in the short term and establish long term goals for returns on capital invested. Partnership agreements should be constantly revisited and revised, and this will require cultural understanding and finesse. Investors should expect a harsh learning curve, so the initial capital outlays should not be taken as a measure of their overall strategy.
If you are looking to find your niche in the various infrastructure value chains, look at where pressure might be from the consumer side. For example, telecommunications infrastructure will support the already-booming e-commerce story in Southeast Asia - mobile commerce is the number one channel in the region and it continues to grow. The needs are broad, and you should select an area where you will be able to be a dependable player in your niche.
There are a number of ancillary benefits that will accrue from infrastructure investment, and these have the potential to pay off greatly in the long term as the markets in the ASEAN region continue to mature. You can invest in ports or telecommunications towers to support the operations of your business, or you could dabble broadly, in power, mining, telecom, and more, to diversify and reduce risk while increasing your corporate valuation. It will be easy to maximize returns if you have a niche knowledge advantage, such as developing a port, but financing and partnership options exist for more broad-minded investors.
Think of investing in this region as investing in connectivity, which is a reinforcing process. Even with an $8 trillion infrastructure financing gap, discernible regional projects and value chains have become well-articulated. If you build a manufacturing facility in lower-cost Cambodia or Vietnam, the products will likely serve Indonesia or Thailand.
Political uncertainty in Thailand and Malaysia, and worries about relatively new governments in Indonesia and Vietnam, have spooked some investors. However, the general trend is inexorably toward connectivity. There are too many processes at too many different levels for this trend to be disrupted. Therefore, if an investor situates themselves securely in a value chain they understand, they will do well.
Major investors from around the globe are already taking advantage of the budding opportunities, hoping that an early foot in the door will lead to a decisive knowledge advantage over the next decade. Chinese companies are able to build and run infrastructure projects with ease, but they are not alone. The likes of Mitsubishi, Toshiba, GE, Hyundai, Conergy, and TUV Rheinland are already major players in the power and transport sectors.
Every government in the region is interested in building connectivity to support their economy, so the regulatory environment will only get better. However, the potential to be crowded out of any segment in any value chain is great, with the diversity of players. Therefore, it is essential to enter now, but have your wits about you.