Leaders Pore Over Southeast Asia’s Investment Hurdles

May 5, 2013, 10:14 p.m. ET

Leaders Pore Over Southeast Asia’s Investment Hurdles

By NATASHA BRERETON-FUKUI

GREATER NOIDA, India—Asian policy makers have been working hard to improve access to funding for regional infrastructure projects, but other hurdles could be a bigger constraint to investment in the sector.At meetings outside Delhi last week, the board of the Asean Infrastructure Fund approved projects value at around $1 billion that it will support over the next three years.

Officials from the Association of Southeast Asian Nations also considered expanding their clout by adding new members.

The World Bank estimates that the emerging East-Asian-Pacific region requires $407 billion of annual investment to keep up with growing consumer and producer demand.

But analysts say more fundamental changes are needed, such as improving the region’s investment climate and aligning the development-and-approval process.

“Mobilizing more and cheaper financing may help in some cases, but eliminating nonfinancial hurdles is the more important task,” says Jordan Schwartz, who heads the World Bank’s infrastructure-policy unit. Such issues are the “800-pound gorilla” in tackling Asian infrastructure development.

Investors need to be comfortable that the laws guarding business and investments are transparent and reliable, that the scope of projects will remain constant and that their conditions won’t be altered, he says. They also need confidence that they will be able to withdraw investments—without unexpected penalties—when a plan reaches fruition, he says.

“It’s important for the government at the national level, at the local level and all stakeholders to understand the complexity and the challenges that we have to face in dealing with infrastructure investment,” says Mahendra Siregar, Indonesia’s vice finance minister.

“Everybody also understands that if we fail in responding to this big issue, then we are not going to sustain high economic growth in Asia.”

Shifting boundaries discourage investors. For example, the third terminal at Manila’s Ninoy Aquino International Airport had been scheduled to open in 2002 but was delayed until 2008 because of a legal dispute—which continues—between the Philippine government and the consortium that won the contract to build and operate it.

“Consistent national policy and clear regulation is critical to reduce investment risk, since infrastructure investment requires long-term pay back. In particular, retroactive policy and regulation damages investment potential,” says Kim Gil-Hong, director of the sustainable infrastructure division at the Asian Development Bank.

While authorities in the region have become much more aware of the benefits of public-private partnerships, which should help improve project development and the financing structure of deals, more work is required in clarifying the investment environment, Mr. Kim says. That is particularly the case in the frontier economies of Cambodia, Laos and Myanmar, he says.

More developed countries in the region also might need public-private partnerships.

In Malaysia, under its $444 billion decadelong Economic Transformation Program, the government has been speeding up the approval of infrastructure projects that promise fast economic gains. But critics say such projects are mired in graft and cronyism.

“It is widely believed that infrastructure projects have an element of overpricing, and the most conservative estimate put it at 10% to 30% for major projects,” says James Chin, head of humanities at the Malaysian campus of Australia’s Monash University. “We’re getting less for every ringgit spent.”

In Indonesia, the government’s pledge to crack down on corruption has made officials reluctant to take charge of infrastructure projects for fear that they could be accused of wrongdoing later, analysts say.