Infrastructure Investment Appetite Grows in Southeast Asia

Population growth and breakneck industrialisation are placing heavy strains on infrastructure across the Asia-Pacific region, but nowhere is the need for critical infrastructure more acutely felt than in Southeast Asia.

 

Mergers and acquisitions (M&A) intelligence service provider Kroll says investment opportunities are abundant across the patchwork of countries that makes up Southeast Asia; however, this vast potential for development is stalled by the lack of modern links necessary to sustain economic growth.

 

Looking to bridge the gap between what is needed for infrastructure projects and their available funding resources, governments across the sub-region are turning to Public-Private Partnerships (PPP), according to Kroll.

Aside from realising the immediate financial benefits, private investors also act as project gatekeepers, providing an additional level of screening to prioritise investment into the most needed projects. This can help raise the efficiency of project execution and prevent waste of already scarce public funds.

 

“PPPs are perceived to reduce the risks of private sector participants because projects are ultimately underwritten by the government. In effect, the risks of cancellation or expropriation are theoretically lower. PPPs also make social infrastructure projects like schools and hospitals more likely to be completed,” says Kroll’s Senior Managing Director Omer Erginsoy. “However, every partnership comes with risks, and they are not very different from the risks that foreign direct investment faces in any emerging market. These include political interference – very likely given the reputational stakes of political backers; the possibility of civil opposition; bribery and corruption; and commercial competitors undermining projects using administrative means.”

 

Regulations across the region are changing to accommodate such investment. However, despite governments’ trying to provide a more welcoming investment environment, risks are abundant.

 

“Longstanding issues like corruption, lack of transparency, lack of judicial independence, and political uncertainty are still big concerns for investors, with corruption probably topping the list when it comes to Indonesia and the Philippines,” says Erginsoy. “For infrastructure investment specifically, land use rights continue to pose challenges. Whilst both countries have recently introduced new legislative and regulatory measures around land rights, it has not necessarily resolved the problems that investors are facing.”

 

In Singapore, the major challenge is a shortage of skilled labor. Malaysia on the other hand continues to be plagued by fraud, especially procurement fraud, despite its more advanced position in the region. Thailand likewise has its shortcomings as an investment destination.

 

While Thailand is perceived to have achieved a high level of development, investors can expect more challenges here than in Malaysia mainly due to funding constraints, bureaucracy and the volatile political climate. Fraud and corruption risks also need to be considered. Misstated financial statements and thefts of high-value inventory are also common.

 

Southeast Asia’s frontier markets – Cambodia, Vietnam and Myanmar – offer a host of investment opportunities, but investors need to tread softly before committing resources.

 

“Investing in these frontier markets usually requires having local partners. This brings a whole set of risks to consider. You want your partner to be well-connected, but in a good way, not a corrupt way. Also, we sometimes see investors pushed by the host government into partnering with a specific local company,” says Erginsoy.

 

In Myanmar, investors have the added burden of considering the reputational risks of being associated with parties affiliated with the country’s former regime. “The country is in transition, but nobody really knows how things will turn out. A number of high-profile businessmen and military-linked holding companies remain sanctioned by the United States, and the list of sanctioned parties may yet change. It is therefore essential for investors to conduct due diligence on potential local partners to see how exposed they might be should a future government decide to prosecute members of the former junta and their commercial backers,” Erginsoy says.
 

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