Addressing Legal and Regulatory Barriers to Quality Infrastructure Investment in India, Indonesia and the Philippines

2. Landscape of infrastructure investment in South and Southeast Asia

Abstract

South and Southeast Asia present strong potential for quality infrastructure investment, driven by rapid economic growth and rising demand for sustainable development outcomes. Despite this, financing gaps persist, with public resources covering only part of the need. Private investors are expanding their presence through funds, partnerships, and blended finance, but concerns remain over lengthy procedures, weak secondary markets, and reliance on state-owned enterprises. Multilateral development banks continue to play a central role in de-risking and preparing infrastructure projects, though their instruments have limitations.

Investors increasingly expect integration of environmental, social, and governance standards, but domestic regulatory frameworks remain uneven and often fall short of international practice. In line with the G20 Principles for Quality Infrastructure Investment, the chapter stresses that greater efficiency, resilience, transparency, and ESG-aligned business conduct are essential to mobilise private capital and realise sustainable infrastructure outcomes.

The post-Covid macroeconomic landscape in South and Southeast Asia offers attractive opportunities for private investors seeking diverse and high return assets in emerging markets. Prior to the pandemic, these regions experienced robust growth, with East Asia and the Pacific growing at 6.7% from 2015-19, and 4% from 2020-22 with a recent uptick of 4.5% projected for 2024 (International Bank for Reconstruction and Development / The World Bank, 2024[1]). As quality infrastructure is crucial for sustainable economic growth, these regions are poised to become key areas for infrastructure development and investment in the post-pandemic era (Rao et al., 2023[2]).

The Asian Development Bank (ADB) projects USD 7.1 trillion annual infrastructure investment in Asia over 20 years to address various challenges. However, South and Southeast Asian governments face financial constraints, limiting their spending to 37% of required capital for resilient infrastructure projects (ADB, 2017[3]). Foreign Direct Investment (FDI) into Southeast Asia has been robust as a general trend with a weakening in 2023 in Asian emerging economies, with ASEAN members recording USD 224 billion in 2022. These inflows are expected to pick up in 2024 and beyond. (OECD, 2024[4])

The Russian invasion of Ukraine in October 2022 disrupted global energy and supply chains, with ripple effects in Asian markets. Energy prices peaked in August 2022, compromising energy security. This increased risks in capital flows and commodity markets. Higher commodity prices raised CAPEX, complicating infrastructure investment prospects (S&P Global, 2023[5]).

2.1. Private investment appetite in the region

Global private equity funds are increasingly targeting large infrastructure projects in South and Southeast Asia, driven by the region's rapid economic and demographic growth. Firms like Macquarie Asset Management, Global Infrastructure Partners (GIP), and KKR have been boosting their infrastructure allocations (Daga, 2022[6]) and establishing regional offices in Singapore, Mumbai, Hong Kong, and Sydney. Many investors are creating dedicated portfolios for these markets.

Investors are forming partnerships with local entities and MDBs to diversify into blended finance instruments for infrastructure, as tickets can be too small for debt instruments such as syndicated loans through special purpose vehicles (SPVs). As equity investment grows into infrastructure assets, funds are creating blended finance platforms to address debt market challenges, particularly for projects important for sustainable development but struggling with bankability.

Private equity firms and asset managers often hesitate to invest in Public-Private Partnerships (PPPs) due to bureaucratic concerns. The extended construction phases and 15 to 20 year-structures of infrastructure assets also introduce uncertainty and risk. Many infrastructure assets are owned and operated by state-owned enterprises (SOEs) which prioritise control, and some investors may seek shorter-term exit strategies.

There has been a strong interest on developing new infrastructure funds to capitalise on high returns. These funds attract capital from North American, European, and Australian institutional investors seeking indirect exposure through alterative funds. Their diversified portfolios span infrastructure debt, real estate assets, core equity and Indian InvITs.

Investors first evaluate a countries’ market to understand the financial landscape and local operations. They then conduct project assessments aligned with their investment mandate, examining credit risk, bankability, and ESG compliance to identify risks, opportunities, and suitable investment vehicles.

Investors identify barriers in infrastructure financing and seek to bridge gaps for marginally bankable projects. This approach looks at financing options to projects that may otherwise have some limitations, potentially using risk mitigation tools or guarantees.

Private and pension funds point out constraints with financial instruments in Southeast Asia due to underdeveloped secondary markets (Table ‎2.1 shows a taxonomy of different infrastructure finance instruments). By contrast, local investors and insurance providers continue to buy governments bonds and stack them in local currency, which increases currency risk.

Other challenges in the region include country and credit risk, compliance with home country financial regulation, bottlenecks faced in adapting and rolling out of investment strategies, and relative profitability of infrastructure projects, often too large and sporadic for the dynamic investment cycles in the private equity sector.

Table ‎2.1. Taxonomy of instruments and vehicles for infrastructure financing

Modes	Infrastructure Finance Instruments			Market Vehicles
Asset Category	Instrument	Infrastructure Project	Corporate/Balance Sheet/ Other Entities	Capital Pool
Fixed Income	Bonds	Project Bonds	Corporate Bonds, Green Bonds	Bond Indices, Bond Funds, ETFs
		Municipal, Sub-sovereign bonds
		Green Bonds, Sukuk	Subordinated Bonds
	Loans	Direct/Co-Investment lending to Infrastructure project, Syndicated Project Loans	Direct/Co-investment lending to infrastructure corporate	Debt Funds (GPs)
			Syndicated Loans, Securitized Loans (ABS), CLOs	Loan Indices, Loan Funds
Mixed	Hybrid	Subordinated Loans/Bonds, Mezzanine Finance	Subordinated Bonds, Convertible Bonds, Preferred Stock	Mezzanine Debt Funds (GPs), Hybrid Debt Funds
Equity	Listed	YieldCos	Listed infrastructure & utilities stocks, Closed-end Funds, REITs, IITS, MLPs	Listed Infrastructure Equity Funds, Indices, trusts, ETFs
	Unlisted	Direct/Co-Investment in infrastructure project equity, PPP	Direct/Co-Investment in infrastructure corporate equity	Unlisted Infrastructure Funds

Source: (OECD, 2015[7])

2.2 Role of Multilateral Development Banks (MDBs) in the region

Private investors recognise MDBs' crucial role in infrastructure financing in developing Southeast Asian markets. MDBs offer mezzanine financing, political risk coverage, and risk mitigation mechanisms, enhancing project bankability where commercial banks hesitate. There is also technical assistance programme and project preparation facilities that provide practical guidance.

The World Bank leads and collaborates with other regional development banks in infrastructure projects working to improve quality and access to national road transport networks and improve energy sector capacity in several countries in the region (International Bank for Reconstruction and Development / The World Bank, 2024[1]). Further, the International Finance Corporation (IFC) makes significant investments to support infrastructure development and economic growth in Southeast Asia. During fiscal year 2022, IFC allocated USD 5 billion to the region, including USD 1.2 billion for climate-smart and urban infrastructure, and USD 300 million for Asia's first social bond financing basic infrastructure (IFC, 2022[8]). In December 2023, IFC partnered with A.P. Moller Capital (Denmark-based fund), investing approximately USD 500 million in their USD 1 billion Emerging Markets Infrastructure Fund II to address infrastructure gaps, improve trade, and boost renewable energy in Southeast Asia (IFC, 2023[9]).

The European Investment Bank (EIB) invested USD 6.5 billion in the region (excluding China), with 35% in energy and 31% in transport (EIB, 2023[10]). Financing for India, the Philippines, and Indonesia totalled USD 3.2 billion, USD 338 million, and USD 289 million, respectively by EIB (EIB, 2023[10]).

The Asian Infrastructure Investment Bank (AIIB) supports sustainable infrastructure development in its member economies. In March 2023, AIIB committed USD 130 million to the Seraya Southeast Asia Energy Transition and Digital Fund in Indonesia (He, 2023[11]). This fund aims to facilitate green energy transition and digital infrastructure integration in Southeast Asia, financing projects like the Nusantara Satellite PPP to reduce emissions and promote digitalisation.

The appetite for infrastructure investment in South and Southeast Asia is growing, but obstacles remain. Despite the need for large projects, the region faces a pipeline shortage, especially in green projects (ADB, 2023[12]). Additionally, consistent MDB participation has saturated the market, limiting commercial banks' access to new opportunities in the region's prosperous investment landscape (Bizimana et al., 2022[13]).

MDBs, while crucial to infrastructure investment, face operational constraints such as longer timeframes for deals to be concluded compared to the private sector. This can limit the possibility of additional investments due to the administration involved. Local governments often struggle to meet the strict project preparation and implementation standards required by relevant MDBs due to capacity constraints.

Further complicating matters, investors cite several issues with MDB guarantees in infrastructure projects, including high costs, difficult claim processes, and susceptibility to local regulations. Legal restrictions and unfavourable business environments in certain countries hinder both foreign and domestic private investors from participating in infrastructure development. These factors collectively impede broader private sector involvement in such projects, creating a complex landscape for infrastructure investment in the region.

2.2. ESG Considerations from private investors

Investors in South and Southeast Asia are increasingly committed to sustainability and ESG considerations in infrastructure projects. However, sustainability, and ESG in particular, remains an emerging concept in most countries of the region. Regulatory reforms are necessary to strengthen institutions and frameworks, enabling greater private sector investment through bankable, sustainable, and ESG-compliant projects, particularly PPPs (Asian Development Bank, 2021[14]). This reflects the spirit of the QII Principle 1 on maximising the positive impact of infrastructure for sustainable growth, which underlines that robust institutional frameworks are a foundation for scaling ESG-compatible investment (G20, 2022[15]). Adopting these reforms could show quantifiable results from specific QII Indicators associated with Principle 1 on maximising the positive impact of infrastructure to achieve sustainable growth and development, such as direct jobs supported and created by projects, private capital mobilisation, and the development of employee skills (G20, 2022[16]).

• ESG considerations for infrastructure development can be extensive and complex depending on the country’s level of development and capacity, but both public and private entities can integrate ESG considerations into the decision-making process and collaborate in achieving their goals by considering factors as shown in Table ‎2.2. Embedding such practices is consistent with the QII Principle 2 on raising efficiency across the life-cycle of infrastructure, as early ESG integration helps avoid costly risks, delays and cost overruns. This principle could also be quantified as QII Indicators through improvements to projects’ internal rates of return (IRR), risk mitigation measurements, and value-for-money benefits. The third principle on integrating environmental considerations into infrastructure investment would also be bolstered, and could be captured through the QII Indicators of tonnes of GHG emissions reduced annually, local air pollution reduced, and sustainability certifications. These practices would also advance Principle 4 on building resilience against natural disasters and other man-made and environmental risks, measurable through the disaster risk financing indicator in currency. Lastly, Principle 5, on integrating social considerations around widespread economic participation and inclusion into infrastructure investment, is also particularly relevant, as seen in the table below, and could be captured through km/GWh/m³ of rural infrastructure assets built, and the binary indicators of stakeholder engagement and infrastructure improvements in local communities (G20, 2022[15]).On the Environmental front, developers and contractors are expected to prepare a health, safety, security, and environment (HSSE) work plan to anticipate, prevent and control any risks and environmental impacts that may arise.

• On the Social aspect, employee safety and health codes should be implemented in the construction and operational phases.

• Regarding Governance, transparent implementation, and management procedures, including progress reporting and accounting, are essential to meet basic good governance international standards. This plan trickles down to the operational phase, addressing common indicators such as integration of environmental sustainability in the project life cycle, climate change measurements, biodiversity conservation, safety in the workplace and fair labour.

Table ‎2.2. ESG Indicators brought up by investors in South and Southeast Asian Countries

Environment	Social	Governance
Climate change measurement and resilience	Community engagement	Transparency and anticorruption
Biodiversity conservation	Resettlement and land rights	Regulatory compliance
Renewable energy and efficiency	Labour rights and safety	Long-term sustainability
	Stakeholder Engagement

Source: Adapted from notes and interviews conducted with stakeholders.

Private foreign investors can encourage local partners to adopt ESG standards and due-diligence frameworks to measure impact and climate risk which are established in the private sector. Indeed, due diligence processes often consider ESG risk at every level of screening before project approval, but they can vary considerably across sectors, for example:

• A project to build a greenfield road asset may require large land acquisition, which may incur social issues such as negative impact on highly populated areas or intensive construction work at low-quality labour standards. Such a project will therefore require implementation of social welfare monitoring and project management tools.

• Remote economic infrastructure projects in ecologically sensitive areas present challenges linked to ensuring the protection of biodiversity. ESG diligence before project selection is essential to mitigate climate and biodiversity impact risks too.

For projects implemented through PPPs or in partnership with SOEs, investors provide a list of requirements and common indicators to assess the asset’s compliance with local regulation, but also with the investor’s own financial and non-financial reporting requirements in its country of origin. The information required can include ESG plans, policies and standards, as well as other applicable frameworks depending on the sector. This aligns closely with Principle 6 on strengthening infrastructure governance, which underscores the importance of transparency, compliance, and accountability in ensuring quality outcomes, measurable through the specific QII Indicators of transparency and accountability measures in procurement and financial management supported in implementation anti-corruption protocols and procedures, and information disclosures (G20, 2022[15]).

References

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[3] ADB (2017), Meeting Asia’s Infrastructure Needs, https://doi.org/10.22617/FLS168388-2.

[14] Asian Development Bank (2021), Public–Private Partnership Monitor: Indonesia, Asian Development Bank, Manila, Philippines, https://doi.org/10.22617/SGP210069-2.

[6] Daga, A. (2022), Exclusive: KKR raises $6 billion for Biggest Asia Infrastructure Fund, Reuters Business, https://www.reuters.com/business/exclusive-kkr-raises-6-bln-biggest-asia-infrastructure-fund-sources-2022-10-28/ (accessed on 13 December 2023).

[10] EIB (2023), The EIB in Asia and the Pacific, EIB.

[15] G20 (2022), Compendium of Quality Infrastructure Investment Indicators, https://cdn.gihub.org/umbraco/media/4761/compendium-of-qii-indicators.pdf.

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[11] He, L. (2023), “AIIB Enhances Support for Southeast Asia’s Green Transition and Sustainable Infrastructure Development, Board of Directors Meets at Bank’s Heardquarters”, https://www.aiib.org/en/news-events/news/2023/AIIB-Enhances-Support-for-Southeast-Asia-s-Green-Transition-and-Sustainable-Infrastructure-Development-Board-of-Directors-Meets-at-Bank-s-Headquarters.html (accessed on 13 December 2023).

[9] IFC (2023), IFC Supports New Fund to Address Infrastructure Gaps, Cut Carbon Emissions Across Asia and Africa, https://pressroom.ifc.org/All/Pages/PressDetail.aspx?ID=27942 (accessed on 19 February 2024).

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