This Chapter examines sustainable urban development financing in ASEAN-5 countries through deep dives into Indonesia, Malaysia, the Philippines, Thailand, and Viet Nam. It highlights positive developments (e.g., the increasing use of Green, Social, and Sustainability (GSS) bonds, and other innovative financing instruments), identifies ongoing challenges (e.g., complex regulatory frameworks, limited market size for sustainable finance instruments, and difficulties in project prioritisation), and presents emerging opportunities (e.g., the development of green building standards, public-private partnerships, and the potential of Real Estate Investment Trusts). The chapter emphasises the importance of aligning national net-zero commitments with sector-level initiatives and explores the role of international financial institutions in facilitating private investment in sustainable urban development.
Financing Sustainable Cities in Southeast Asia
Abstract
Indonesia
Recent developments: Indonesia's urban transport projects are primarily financed by the national government, which in turn relies greatly on international donors. The country has been actively utilising Green Sukuks—Islamic bonds dedicated to environmental purposes—as a green financing instrument.
Challenges: A major challenge in sustainable urban development finance in Indonesia is the lack of systematic mechanisms for prioritising urban projects, leading to poor co-ordination of financial plans for subnational projects. Furthermore, the complexity and enforcement of local land use planning and zoning regulations pose significant hurdles.
Opportunities: There are emerging opportunities to direct private investment towards sustainability-focused projects in Indonesia. This includes making sustainability considerations mandatory, improving regulations for PPP infrastructure projects, and leveraging incentives and pilot projects, such as grants from the People’s Survival Fund, to drive sustainability in urban development.
Malaysia
Recent developments: Malaysia has pioneered the use of green Sukuks, exemplified by the Merdeka PNB 118 Tower project. Additionally, Malaysia has established the Green Sustainable and Responsible Investment (SRI) Sukuk Grant Scheme, offering tax exemption benefits to green Sukuk issuers, and encouraging the issuance of GSS bonds under ASEAN Standards.
Challenges: Issuing GSS bonds in Malaysia is complex and costly, requiring comprehensive frameworks based on International Capital Market Association (ICMA) principles and ongoing reporting. Furthermore, the market for these bonds remains relatively small, limiting their impact on sustainable urban development.
Opportunities: Malaysia's commitment to net-zero emissions by 2050 presents significant opportunities for driving sustainability in urban development. The National Low Carbon Cities Masterplan (NLCCM) provides guidance for subnational governments and businesses to transition to low-carbon cities, focusing on the measurement, management, and mitigation of GHG emissions, covering 33 local governments.
Philippines
Recent developments: The Philippines supports sustainable urban development through the Municipal Development Fund (MDF), which provides Local Government Units (LGUs) with access to capital for social and economic projects. Managed by the Municipal Development Fund Office (MDFO), the MDF offers grants and loans from international donors and financial institutions, improving the financial capacity and creditworthiness of LGUs.
Challenges: The Philippines faces challenges in sustainable urban development financing due to fragmented institutional co-ordination and the complexity of integrating climate action with land use regulations. The decentralisation issues make it difficult to mainstream comprehensive land use and development plans.
Opportunities: There are significant opportunities for sustainable urban development financing in the Philippines through the implementation of regulations for green buildings. Policies like the Building Energy Code (2009) and the Green Building Code (2015), along with the Energy Efficiency Conservation Act (2019), aim to enhance energy efficiency in buildings and reduce emissions. Public-Private Partnerships (PPPs) also present opportunities, with the PPP Centre co-ordinating and facilitating infrastructure and development projects.
Thailand
Recent developments: Thailand has successfully leveraged various funding mechanisms for sustainable urban development, notably through the development of its REIT market and the issuance of sustainability bonds, which contribute to the growth of capital markets in the ASEAN-5 region.
Challenges: A significant challenge in Thailand's sustainable urban development finance is the lack of co-ordinated institutional frameworks and enforcement of local land use planning and zoning regulations, leading to fragmented land use and ownership regulations across provinces.
Opportunities: There are significant opportunities for enhancing sustainability in urban development through co-ordinated public-private investments and mechanisms like the Community Infrastructure Levy (CIL), which could help fund necessary urban infrastructure and align with private investment. Additionally, cascading the national net-zero commitment to sector-level initiatives could further drive sustainability in targeted projects.
Viet Nam
Recent developments: Viet Nam relies heavily on international donor loans for urban development, with 98% of projects financed by international donors. However, there is a shift towards developing the domestic financial market, with local banks beginning to offer long-term financing for infrastructure projects as part of the government's strategy to reduce dependency on foreign currency reserves and government guarantees.
Challenges: The major challenge for urban development in Viet Nam is the lack of systematic mechanisms and criteria for prioritising projects, compounded by a complex and ambiguous legal and regulatory framework for land management, involving multiple laws and regulations from different sectors.
Opportunities: Significant opportunities exist in simplifying the permit and approval system, including centralising development and building permits under one institution, and strengthening inspections and enforcement. Additionally, developing the Real Estate Investment Trust (REIT) markets could follow successful international models through regulatory amendments to address market and taxation complexities.
4.1.1. Recent developments in funding sources and financing instruments
Indonesia has been actively implementing urban transport projects, with 12 out of the 37 sampled transport projects occurring within this country (Figure 4.1). All but one of these projects are funded and managed by the national government. Notably, international donors have partially financed 24 (77%) out of the 31 Indonesia projects sampled, highlighting the country’s dependence on external financial support.
Among the green financing instruments emerging in Indonesia are Green Sukuks, Islamic bonds dedicated to environmental purposes, which have gained attention in both Indonesia and Malaysia (CBI, 2019[1]). The Indonesian government is a major issuer of Green Sukuks, although these are not confined to specific urban development projects. Furthermore, the national development bank PT Sarana Multi Infrastruktur (PT SMI) plays a role in infrastructure financing, as seen in the Makassar-Parepare Railway Line project, which spans 144 kilometres and includes 16 stations. PT SMI allocates equity, debt, and loans from various institutions to support subnational governments and specific infrastructure projects (OECD, 2021[2]).
Cities are major investors in infrastructure. It is estimated that subnational governments – state, regional, and local – are responsible for nearly 60% of general budget resources in G20 countries. In ASEAN countries, approximately 75% of infrastructure investments are publicly funded, with the remaining 25% financed by the private sector, primarily through commercial loans (direct lending) (Climate Bonds Initiative, 2019[3]). In Indonesia, the government’s share of infrastructure investment is estimated to be 65% (Goldman Sachs, 2013[4]).
Number of projects by sector in each country (n=129)
Note: Results based on a sample of 129 sustainable urban development projects collected by the
Source: Author’s elaboration based on the project list Annex C.
4.1.2. Challenges in diversifying instruments and leveraging private investment.
Despite the progress in renewing national spatial plans and frameworks, systematic mechanisms for prioritising urban projects are lacking, leading to poor co-ordination of financial plans for subnational urban projects (Tobing, 2017[5]).
In addition to establishing a clear national urban strategy, co-ordination and collaboration between national and subnational governments are crucial to securing financing for urban projects. Indonesia does not have systematic mechanisms or criteria for prioritising urban projects, which leads to a lack of co-ordination of financial plans for subnational urban projects.
Furthermore, the Ministry of Public Work in Indonesia fast-tracked strategic infrastructure investments in various cities as part of the National Spatial Plan (Tobing, 2017[5]). Land use regulations can be a powerful tool to facilitate climate resilience. The enforcement of local land use planning and zoning regulations have large impacts on mitigation, for instance, through its impact on urban sprawl, renewable energy on rooftops or at the urban periphery, transport planning and service delivery in cities, between rural and urban areas, and in low-density areas. It also affects the degree to which climate-related extreme weather events affect local communities and economies. Climate-friendly and risk-sensitive land use (e.g., denser urban areas, mixed-use development, home-job proximity, land use restriction in hazard-prone areas) can further enhance the resilience of urban infrastructure (OECD, 2020[6]). Therefore, regulating land use is an important prerequisite to attract investment in sustainable urban development.
The complexity of deploying sustainable finance instruments like GSS bonds also poses a challenge. Following the Sustainable Finance Roadmap Phase I (2015–2019), the Financial Service Authority of Indonesia (OJK) launched Phase II for the period of 2021 to 2025. This second phase incorporates plans for the development of a complete market ecosystem for sustainable finance and the co-ordination of appropriate taxonomies with other institutions. Combined with a few other initiatives on sustainable finance, the Indonesian government is paving the way to advance sustainability through finance (Climate Bonds Initiative, 2021[7]).
Deploying sustainable finance, including GSS bonds, presents several challenges for issuers. To classify projects as ‘green’, ‘social’ or ‘sustainable’, issuers must develop their own frameworks aligned with the International Capital Market Association (ICMA) GSS bond principles and ASEAN Standards (Table 4.1). Even after issuing bonds successfully, GSS bond issuers are required to consistently report on the actual use of proceeds to market participants.
One of the challenges in Southeast Asia is to diversify funding and financing methods for sustainable urban development projects. In Indonesia, for example, PT Sarana Multi Infrastruktur (PT SMI) is a state-owned enterprise that specialises in infrastructure financing (SMi, 2022[8]). PT SMI allocates equity and debts from the central government, loans from multi-lateral institutions and private financial institutions and bond issuances to provide financial support, advisory services and project development to subnational governments and specific infrastructure projects (OECD, 2021[2]). Indonesia’s Regulation on the Application of Sustainable Finance (No. 51/POJK.03/2017) includes a classification of 12 sustainable business activities to encourage financial institutions to improve their sustainable portfolio (PwC, 2021[9]). The government of Indonesia intends to foster sustainable development by enforcing this regulation to build and strengthen the foundation for green financing (Smoke, 2019[10]).
4.1.3. Emerging opportunities and instruments for green financing
Indonesia is exploring various opportunities to direct private investment towards sustainability-focused projects. One approach is making sustainability considerations mandatory, which is one way to direct private investment in sustainability-focused projects rather than focusing solely on profitability. Such initiatives are reinforced by Indonesia through sustainable investment criteria, regulations on sustainable finance, and regional initiatives such as those introduced by the European Banking Authority. Entities such as the People’s Survival Fund could help provide grants to projects that demonstrate a high contribution to disaster risk reduction. The use of such incentives and pilot projects could further drive sustainability in urban projects.
In Indonesia, the government has implemented a series of initiatives including improved regulations for PPP infrastructure projects, subsidies for PPP projects, and credit enhancements for PPPs and State-Owned Enterprises (SOEs) through sovereign guarantees, gap viability funding, and availability payments (Climate Bonds, 2018[12]). The selection process across proposed PPP projects needs to be aligned with the country’s national development strategy. National and subnational governments could collect project data and assess emerging trends and needs of sustainable urban development projects. National hubs, such as the PPP Centre in the Philippines, could serve as a platform of expertise that could provide appropriate technical assistance and guide project stakeholders to an adequate source of funding. To assess contingent risks, as well as to implement and monitor projects, implementation agencies and LGUs need to advance their technical capacity through provided capacity-building and advisory support. Long-term PPP projects often involve renegotiation possibilities. Clear and transparent rules and processes are therefore crucial for successful renegotiation, with institutionalised frameworks playing a significant role.
The Indonesian government has demonstrated a strong commitment to GSS bonds and sustainability-linked bonds, particularly through the Sustainable Finance Roadmap Phase II (2021-2025). This initiative aims to develop a complete market ecosystem for sustainable finance and align taxonomies with other institutions (Climate Bonds, 2018[12]).
Deploying sustainable finance instruments like GSS bonds involves several challenges. Issuers need to establish frameworks based on International Capital Market Association (ICMA) GSS bond principles and ASEAN Standards and maintain ongoing reporting on the use of proceeds. Following this trend, ASEAN-5 governments have developed policy frameworks to accelerate sustainable investment. Indonesia, for example, introduced the “Application of Sustainable Finance (No. 51/POJK. 03/2017)” in 2017, obliging financial services agencies, issuers, and public companies to provide the funding needed to achieve sustainable development goals and ensure adequate financing for the efforts to address climate change. The regulation also requires targeted entities to prepare sustainable finance action plans and ensure that they have adequate environmental and social management policies and processes in place (OJK, 2017[13]).
4.2.1. Recent developments in funding sources and financing instruments
Green financing instruments, such as GSS bonds, are emerging in the ASEAN-5 countries. Malaysia’s first green Sukuk, an Islamic bond dedicated to environmental purposes, was used for the Merdeka PNB 118 Tower (CBI, 2019[14]). Furthermore, Malaysia has established a Green Sustainable and Responsible Investment (SRI) Sukuk Grant Scheme. This scheme is one of the first global examples of incentive structures to support green bond issuance, providing tax exemption benefits for green Sukuk issuers. It expanded its scope in 2021 to cover all Sukuks or bonds issued under ASEAN GSS bond standards (ASEAN Standards). The Malaysian government aims to encourage more companies to finance green, social, and sustainability projects through GSS bond issuances.
Malaysia has made significant strides in sustainable urban development through the use of green bonds. An exemplary project is the Green Building initiative at Gateway@klia2 (Chandra and Ng, 2017[15]) (Box 4.1).
Green Building in Malaysia (corporate green bond) – Gateway@klia2
Segi Astana Sdn Bhd (“Segi Astana” or the “Issuer”), a joint venture company between WCT Holdings Berhad (“WCT” or the “Group”), a Malaysia-based construction engineering company, and Malaysia Airport Holdings Berhad (“MAHB”), issued a Green Bond of MYR 415 million (USD equivalent 103.7 million) in January 2018. The issuer established a Green Bond Framework in accordance with the transparency and disclosure requirements of the ASEAN Green Bond Standards and globally recognised Green Bond Principles.
The issuer was founded to develop gateway@klia2 (“the complex”), an integrated complex in Sepang Selangor of Malaysia. Gateway@klia2 was certified by LEED Silver, characterised by energy-efficiency measures, rainwater harvesting, and centralised waste disposal systems. Segi Astana also has a tenant engagement programme to make sure that the tenants play an active role in the building’s sustainability management. The complex is a key infrastructure component of the Kuala Lumpur International Airport 2. The building was opened to the public in May 2014.
The green bond was issued to refinance the outstanding MYR 400 million Medium-Term Notes (MTN), issued in January 2012, including any accrued interest and to repay the related company’s advances that were entirely used to finance the construction and development of the complex. The MYR 400 million MTN was guaranteed by Danajamin Nasional Berhad, jointly owned by the Ministry of Finance (50%) and Credit Guarantee Corporation Malaysia Berhad (50%), which functions as a financial guarantor for enterprises to access the debt security market. The use of the green bond framework allowed the issuer to address the needs of sustainability-conscious investors, and to access the debt security market without a guarantee.
UoP Reporting | All proceeds will be immediately used to repay the outstanding Medium-Term Notes Programme and related company advances. |
Impact Reporting | Energy Use Intensity (kWh per square meter) Carbon Emissions (metric tons of CO2 per square meter) Water Intensity (cubic meter per square meter) Sale of Recyclable Items (Kg) |
Source: (Chandra and Ng, 2017[15]). SEGI ASTANA SDN BHD ASEAN GREEN BOND PROPOSED MEDIUM-TERM NOTE FACILITY OF RM415.0 MILLION.
4.2.2. Challenges in diversifying instruments and leveraging private investment
Despite the progress in utilising green financing instruments, Malaysia faces several challenges in sustainable urban development. One major issue is the complexity and cost associated with issuing GSS bonds. Issuers need to establish comprehensive frameworks based on International Capital Market Association (ICMA) principles and maintain ongoing reporting on the use of proceeds. Additionally, the market for green and sustainability bonds is still relatively small, with only a few projects funded through these instruments (CBI, 2020[16]).
Additional challenges hindering the development of REIT markets include the high level of taxation imposed on the exchange of a real estate properties for REITs, double taxation on dividends, and potential ownership restrictions regulated by free float weight1 (MLIT, 2022[17]). Simplifying taxation and policies could, therefore, help promote further use of REITs in Southeast Asia.
The development of Malaysia’s REIT market was steered by the introduction of guidelines. Following the success of REIT markets in Japan and Singapore, the Securities Commission Malaysia introduced guidelines on REITs to improve market liquidity and monitoring. Furthermore, the country implemented “Guidelines for Islamic REITs”, paving the way for REITs to be aligned with Islamic finance principles (MLIT, 2022[17]).
In Malaysia, where REITs are more prevalent, their full potential for financing green or sustainable projects, including buildings, does not seem to be fully leveraged. However, capitalising on real estate investment in green and sustainable urban projects is an emerging trend evident in developed financial markets.
4.2.3. Emerging opportunities and instruments for green financing
Malaysia has several opportunities to enhance sustainable urban development through innovative financing and policy measures. The introduction of tools like the Carbon Reduction and Environment Sustainability Tool (MyCREST) (Box 4.2) in 2016 has helped quantify carbon emissions and sustainable impacts on the built environment. This tool has been successfully applied in projects such as the Kementerian Kerja Raya Tower (KKR Tower) in Kuala Lumpur, which aims to reduce environmental impacts (Climate Bons Initiative, 2021[18]).
The Carbon Reduction and Environment Sustainability Tool (MyCREST) was introduced in 2016 as a comprehensive tool to quantify carbon emissions and sustainable impacts on the built environment. Focused on building design, construction, and operation, the tool has been successfully applied in practice. The construction of the Kementerian Kerja Raya Tower (KKR Tower) in Kuala Lumpur has been reported as one of the first projects to implement this tool set. This tool builds upon the experiences of Malaysia’s Green Building Index (GBI), providing guidance for certifying green buildings. By the end of 2020, over 500 projects had been awarded GBI, covering a total gross floor area of 24.7 million square metres. In addition to GBI, Malaysia also adopted Green Real Estate (GreenRE) in 2013, under the leadership of the Real Estate and Housing Developers’ Association. With the full support and recognition of the governmental bodies, GreenRE aims to drive the sustainability of the real estate industry in Malaysia. Certified projects by GreenRE are qualified for income tax allowances and incentives under the Green Tax Incentive Scheme. Green certifications such as GBI and GreenRE raise awareness about environmental issues as a way of promoting green design and construction in the built environment and encouraging private buildings to comply with certain standards.
Source: Author’s elaboration based (Climate Bonds Initiative, 2021[7]). Green Infrastructure Investment Opportunities, Malaysia, GIIO Report. The viability of green bonds as a financing mechanism for green buildings in ASEAN; (Climate Bonds Initiative, 2020[19]). Green Infrastructure Investment Opportunities Philippines. 2020 Report.
The Malaysian government’s commitment to net-zero emissions by 2050 provides a significant opportunity to drive sustainability in urban development. Cascading the national net-zero commitment to sector-level actionable initiatives and guidance could drive sustainability in targeted sectors and guide investments in more sustainability-focused projects. Green Technology Financing Scheme in Malaysia helps energy-efficient and/or energy-performance contracting projects to secure financing. It focuses on the sectors beyond energy, including buildings, transport, waste and water and manufacturing, to drive the national net-zero strategy.
The National Low Carbon Cities Masterplan (NLCCM) was published in 2021 (KASA, 2021[20]). Built on the legacy of the Low Carbon Cities Framework (LCCF) introduced by the National Government, NLCCM provides guidance for subnational governments and businesses on how to drive the transition to low-carbon cities. The Masterplan is structured around three areas: measurement, management, and mitigation of GHG emissions to reduce environmental impacts, with 33 local governments falling within its scope.
Additionally, foreign investors play a vital role in solidifying ASEAN’s investor base. The Malaysian government introduced the Bond + Sukuk Information Exchange platform to share bond prices and credit information with potential investors, promoting market transparency and attracting foreign investment (Kitano, 2018[21]). Streamlining policies and improving market accessibility could further enhance foreign investor participation, thereby driving more investments into sustainable urban projects.
4.3.1. Recent developments in funding sources and financing instruments
The Philippines has implemented various financing mechanisms to support sustainable urban development. One significant initiative is the Municipal Development Fund (MDF), established in 1984 as a way of providing Local consisting of grants and loans from international donors and financial institutions. Since 1998, MDF has been managed by the Municipal Development Fund Office (MDFO) in the Department of Finance. The objective is to harmonise disbursements for LGU funding, but also to allow the central government to monitor the use of international financing. MDF acts as an alternative infrastructure financing for LGUs that are unable to access private capital. In addition to project evaluations, MDFO provides technical assistance for LGUs to carry out projects in a financially sustainable way. In this way, MDFO improves the financial capacity and creditworthiness of LGUs, enabling them to directly access the private capital market. The Local Government Unit Guarantee Corporation (LGUGC) is another mechanism used for subnational lending. It was incorporated in 1998 as a private financial guarantee institution that provides financial guarantees to LGUs and other public and private entities in case of borrower defaults. On the basis of the provided guarantee, partner financial institutions provide loans or underwrite bond issuances. MDF and LGUGC are successful examples where the intermediary institutions enable LGUs and other entities to access financing for urban projects.
Furthermore, the utilisation of a USD 7.48 million loan from the World Bank’s International Bank for Reconstruction and Development (IBRD) was channelled through the Development Bank of the Philippines for the Urban Water and Sanitation Project. This project involved financing sustainable water and sanitation services and strengthening the institutional and technical capacities of LGUs (Box 4.3).
Local Government Unit (LGU) Urban Water and Sanitation Project APL2 (2002-2008) in the Philippines
The project aimed to assist selected 40 LGUs to (i) provide sustainable water and sanitation services and (ii) strengthen their institutional and technical capacity for planning, budgeting, and financial management of local services. It contributed to improving water supply systems in LGUs, water utilities where the partnering private operators were selected, and to the physical infrastructure in household toilets, as well as on-site sanitation facilities including soakaway pits or the disposal of wastewater flows.
A USD 7.48 million loan from the World Bank’s International Bank for Reconstruction and Development (IBRD) was channelled through the Development Bank of the Philippines. Following the selection of sub-projects (construction, rehabilitation and expansion of the water supply system, on-site sanitation facilities, and micro-drainage infrastructure) and participating entities (an LGU, a private operator or a financial institution), the aforementioned IBRD loan was sub-loaned to the participating entities. The loan from IBRD extended to DBP was guaranteed by the Government of the Philippines. In addition, DBP also contributed US$ 0.97 million to the project by itself.
The project showcased the important role of the national development bank, which (i) channelled the international development fund and (ii) redistributed financing to the participating subnational governments.
Source: (World Bank, 2022[22]). LGU Urban Water and Sanitation Project APL2.
Another example is grants to integrate local disaster risk reduction and planning for climate adaptation, including the development of infrastructure. Priority is given to the areas that have a strong presence of multiple climate-related hazards and high poverty incidence and that present key biodiversity challenges. Proponents of the fund are not only asked to provide suitable proposals but also an updated annual investment plan, as well as a local development plan considering climate risks. Despite the fund’s difficulties in attracting enough proposals, by 2020, the fund had approved around USD 5.5 million worth of projects, benefiting six municipalities in the Philippines (Department of Finance, 2020[23]).
4.3.2. Challenges in diversifying instruments and leveraging private investment
The Philippines faces several challenges in sustainable urban development financing. One major issue is the fragmented institutional co-ordination that hinders the implementation of sustainable urban development frameworks. Despite progress in renewing national spatial plans and frameworks, the lack of integrated climate action and land use regulations remains a significant barrier. The Philippines' experience with the National Housing and Land-use Regulatory Board highlights the difficulties in mainstreaming comprehensive land use and development plans due to decentralisation issues (UNESCAP, 2020[24]).
The complex taxation and policy requirements for Real Estate Investment Trusts (REITs) also pose a challenge. However, in 2020, the Philippines revised its REIT Act to favour investors and corporations, thereby promoting increased investment in REITs and facilitating their establishment. The enforcement of the new act lowered the minimum public ownership to 33% from the previous 40% (with a requirement to increase to 67% within the initial 3 years upon listing). Additionally, property trusts gained access to tax incentives, including exemption from a 12% value-added tax for the transfer of properties to REITs (Ramintas, 2020[25]).
However, the new act simultaneously raised a constraint, requiring all REITs to reinvest any proceeds from the sale of shares or other securities issued in exchange for income-generating real estate, in the Philippines. For this aim, REITs are now obliged to submit a reinvestment plan (Securities and Exchange Commission Philippines, 2020[26]). This requirement reflects the SEC’s goal to promote the development of the local capital market and nurture Filipino participation in the local real estate industry (Bar and Moises, 2020[27]). While this requirement encourages local developers to found and manage REITs in the Filipino market, it stands as an obstacle to multinational REITs, who tend to make (re)investments in more than real estate markets. Following this new regulation, 5 REITs including Ayala Land, Inc, a subsidiary of Ayala Land, are publicly listed as of January 2022. In the case of Philippines highlight the potential role of tax incentives and alleviated regulation on public ownership to the development of local REIT markets.
4.3.3. Emerging opportunities and instruments for green financing
Despite these challenges, there are significant opportunities for sustainable urban development financing in the Philippines. The introduction of a series of new regulations for green buildings are in place. In 2009 a Building Energy Code (BEC) was introduced, followed by the Green Building Code adopted in 2015, both of which were formulated to reduce emissions through enhanced energy efficiency in building design and construction. Recognising the energy efficiency potential in this policy field, the Philippines Energy Efficiency and Conservation Roadmap (2017-2040) adopted in 2017 commits to reducing energy consumption in commercial buildings by 25% and in residential buildings by 20%, against a 2014 baseline, by 2040. The adoption of the Energy Efficiency Conservation Act swiftly followed in 2019, regulating energy-efficient technologies in buildings, and a new Standard for Climate Smart Buildings is currently under development (Climate Bonds Initiative, 2021[7]).
Public-Private Partnerships (PPPs) offer another opportunity, with Executive Order No. 8 (2010) revitalising PPP initiatives and placing the PPP Centre at the forefront of the national development strategy. The PPP Centre co-ordinates and monitors all PPP projects in the country by enabling implementing agencies and managing the Project Development and Monitoring Facility (PDMF). It provides project advisory and facilitation services, and it monitors and empowers agencies through various capacity-building training programs. The Centre provides technical assistance to a number of institutions, including national government agencies, government-owned and controlled corporations, government financial institutions, state universities and colleges, and local government units (LGUs), to help them implement critical infrastructure and development projects. The Centre also works for advocating policy reforms to improve the legal and regulatory frameworks that govern PPP projects (Republic of the Philippines, 2022[28]). The Centre, for instance, works with the Securities and Exchange Commission (SEC) on policy and process enhancements to facilitate the entry and participation of international institutional investors and pension funds in financing PPP Projects. The PPP Centre in the Philippines serves as an enabling hub, which oversees the pipeline of PPP projects and provides capacity-building for the stakeholder institutions.
The Philippines’ PPP framework overview also highlights the need for better funding co-ordination across LGUs. An encompassing body for funds could help facilitate and allocate the necessary funds among LGUs for PPP projects that involve more than one LGU (OECD, 2016[29]).
4.4.1. Recent developments in funding sources and financing instruments
Thailand has made significant strides in leveraging various funding and financing mechanisms for sustainable urban development. The development of Thailand’s REIT market suggests a potential lesson for such emerging REIT markets. The REIT market in Thailand dates back to the Property Fund for Public Offering (PFPO), which was introduced in 2002. PFPO was first listed in 2003 to invite investment into the real estate industry, but due to its low global recognition and liquidity, it did not become a popular financial instrument. To overcome these challenges, Thailand introduced a new regulation on REITs, to encourage conversion from PFPO to REIT, which has higher market liquidity. Following the success of Singapore, Thailand provided preferential treatments related to value-added tax, income tax, transfer cost and registration fees to promote this newly introduced financial instrument. With these tax merits, Thailand’s REIT market has grown to 25 listed REITs, in addition to 51 PFPOs as of October 2021.
Thailand has also seen successful issuances of sustainability bonds, further highlighting the facility's contribution to developing capital markets in the ASEAN region. Furthermore, pension funds, despite being a significant player in the financial markets of OECD countries (OECD, 2006[30]), are not widely employed in Southeast Asia. However, the potential growth of pension funds in countries like Thailand is expected to provide larger and longer-term investments in the capital market, benefiting infrastructure sectors that require long-term finance.
4.4.2. Challenges in diversifying instruments and leveraging private investment
Despite these funding and financing mechanisms, Thailand faces several challenges in sustainable urban development finance. One significant hurdle is that it hasn’t made good progress in renewing national spatial plans and frameworks towards sustainable urban development and in the enforcement of local land use planning and zoning regulations. Fragmented institutional co-ordination and the complexity of land use and ownership regulations across provinces create barriers to effective implementation. For example, in Thailand, each province has its own land regulations. Due to the lack of co-ordination between the central and municipal governments, as well as among municipal governments, the use of land and land ownership is complex. An option for ASEAN-5 countries could be to strengthen institutional co-ordination in the implementation of national spatial plans. Stronger alignment between national and local spatial planning is needed to ensure effective national spatial planning frameworks.
Another challenge is the public acceptance of new tax laws. The introduction of the New Land and Building Tax Act in January 2020. This Act replaces the regressive and outdated property tax law under the Household and Land Tax Act, B.E. 2475 (1932), the Local Land Development Tax Act, B.E. 2508 (1965), the Notification of the National Executive Council No. 156 of 1972, and the Royal Decree Designating the Medium Price of Land for Land Development Tax Assessment of 1986 (ASEAN, 2020[31]). Residential properties, which were previously exempted from taxation, are now taxable assets under this new act (Charoenkitraj and Amonpiticharoen, 2019[32]). However, due to long-abandoned regulations related to land and building taxation, many Thai taxpayers found the new property tax charges abrupt and unfamiliar. It might, therefore, take some time for the general public to accept LVC, which is based on a similar concept of charging land or properties for tax collection and greater public benefits. Consensus building among a wide range of stakeholders, public and private actors and communities is an important prerequisite for the success of LVC (Mabrurotunnisa and Aditya Iskandar, 2021[33]).
Moreover, while the REIT market has been revitalised, its full potential for green or sustainable projects, including buildings, has yet to be fully leveraged. Simplifying taxation and policies related to REITs could help promote further use of these instruments for sustainable projects.
Not all sustainable projects can generate profits. Thus, private investment is limited to certain sectors. However, a lack of co-ordinated investment between the public and private sectors can create sub-optimal urban development outcomes. For example, in the county, private companies that lead public transport projects can only make investments directly linked to transport services. The decision-making power over the urban space surrounding stations (e.g., public spaces, parks, and parking lots) would increase the bankability of the overall transport project via increased ridership and user charges, in case of parking spaces. A similar challenge can be observed when real estate developers make investments in (bankable) housing development without providing sufficient (non-bankable) urban infrastructure to guarantee the quality of public services (e.g., parks, schools and hospitals) in such urban neighbourhoods.
4.4.3. Emerging opportunities and instruments for green financing
Thailand's commitment to net-zero emissions presents significant opportunities for driving sustainability in urban development. To address the challenges, presented in the case of private investment, two options can be considered. The first option is to encourage the private sector to provide additional investment (e.g., investment surrounding stations) by providing incentives. In some cases, a public authority provides its private counterpart with public assets, including the right to use public land for free or at a reduced cost. The concession of public facilities for refurbishment and/or operation for a defined period is an illustrative example. A reduced or suspended property tax on investment revenues is another commonly used practice (OECD, 2015[34]). A second option could be to use developer levies, like the United Kingdom’s Community Infrastructure Levy (CIL) (OECD/Lincoln Institute of Land Policy, PKU-Lincoln Institute Center, 2022[35]), to raise revenue to deliver co-ordinated infrastructure that supports the long-term sustainability of urban development, taking the wider urban spaces into consideration.
Cascading the national net-zero commitment to sector-level actionable initiatives could drive sustainability in targeted sectors and guide investments in more sustainability-focused projects. For example, the Green Technology Financing Scheme in Malaysia helps energy-efficient and/or energy-performance contracting projects to secure financing. It focuses on the sectors beyond energy, including buildings, transport, waste and water and manufacturing, to drive the national net-zero strategy. Thailand announced Bio-Circular Green Economic Model to drive the national ‘green growth’ strategy. However, the model has a limited focus on food and agriculture, health and medicine, energy, materials and biochemicals, and tourism and creative economy. This model has been more widely used in community-based businesses rather than in urban development.
Furthermore, the ACGF's efforts in improving project bankability and providing technical support demonstrate the role of public funds in catalysing private financing for green and sustainable urban projects. The successful issuance of sustainability bonds in Thailand underscores the potential of such innovative financing instruments to develop capital markets in the ASEAN region.
4.5.1. Recent developments in funding sources and financing instruments
Among ASEAN-5 countries, Viet Nam relies heavily on international donor loans for urban development projects. Specifically, 50 (98%) out of 51 projects are financed by international donors. This can be due to the high ratio of large-scale urban development projects across several municipalities and water, wastewater, and waste management projects. In addition, the development of Viet Nam’s domestic financial market has shown promise, with local banks beginning to offer long-term financing for infrastructure projects. This shift is part of the Vietnamese government's strategy to reduce dependency on foreign currency reserves and government guarantees.
In the early 2000s, infrastructure projects in Viet Nam were fully reliant on the governmental guarantees of convertibility and repatriation. However, the practice was modified over time. In line with the Vietnamese government’s interest in reducing obligations derived from governmental guarantees and protecting its foreign currency reserves, the government introduced new regulations to lower the foreign currency convertibility rate and enforce stricter criteria for receiving government guarantees. Amidst this emerging distress on investors, the Vietnamese domestic financial market has continued to grow, with a few domestic banks showing interest in providing long-term finance for infrastructure projects. The market development of Viet Nam implies that the development of local banking and capital markets is the ultimate solution to address potential currency mismatches associated with long-term urban development projects (World Bank, 2019[36]). Governmental guarantees, a conventional approach to mitigate the future FX risk associated with long-term urban projects, are accompanied by surging concern over enlarging contingent government liabilities and decreasing foreign currency reserves. In the long run, nurturing the domestic capital market and encouraging investors to provide LCY financing is the ultimate solution to avoid future currency mismatches.
4.5.2. Challenges in diversifying instruments and leveraging private investment
Urban development projects in Viet Nam face several significant challenges. One major issue is the lack of systematic mechanisms and criteria for prioritising urban projects, which hampers co-ordination of financial plans at the subnational level. Additionally, the complex and often ambiguous legal and regulatory framework for land management presents substantial hurdles. For example, in Viet Nam, land use is governed by various laws and regulations from different sectors, including the Ministry of Natural Resources and Environment (MONRE) and the Ministry of Construction (MOC) (Box 4.4).
In Viet Nam, land usage is determined by the multiple requirements and regulations of plans from different sectors: the Land Use Plans under the responsibility of Ministry of Natural Resources and the Environment (MONRE), the spatial plans of the Ministry of Construction (MOC), and of plans under a large number of other sectoral laws such as the Housing Law, the Law on Real Estate Business, the Investment Law, the Law of Residence, the Law of Enterprise, and the Law of Commerce. This variety of laws, regulations, plans, and institutions reveals a key limitation of the land policy framework: its lack of co-ordination and consistency. Not only are the institutions divided at the subnational level into departments and branches at the provincial and city levels, but more importantly, land and land use planning issues are regulated by multiple plans administered by entirely different agencies.
These different agencies approach land from their own policy perspectives and follow different schedules and processes. They use different definitions, classifications, and projections for decision-making, often resulting in contradictory or incoherent requirements for land use. For instance, the land use plans of MONRE and construction plans of the MOC define urban land differently and employ inconsistent classifications of land that are informed by distinct criteria. The Land Law lists different land use purposes, classifying it between agricultural, non-agricultural, and non-used land, while the Law on Urban Planning is concerned with “urban planning land” – it distinguishes civil, non-civil, and other lands, with uses classified as residential, public, commercial, service, and industrial. These classifications and plans serve as a basis for land use transfer, transaction, and leasing, and yet their relationship is not specified. This complexity and ambiguity lead to delays in project development, as actors cannot decide which one takes precedence, or how to harmonise both classifications. It also creates a serious administrative burden for city officials who operationalise land use changes, building ownership and land use certificates (BOLUCs) and land use rights certifications (LURCs).
Such complexities also lead to informal developments that undercut efforts to make rational sense of the system. Following the formal procedures, development projects must wait for, and comply with, a series of land use plans at different scales and from different institutions. Under intense development pressure, many projects eventually go ahead without waiting for the finalisation of all relevant plans. Furthermore, the complexity and opaqueness of the current system opens the door to corruption, with informal gifts or payments being requested for the granting of BOLUCs, LURCs, and other construction-related permits.
Source: Author’s elaboration based on (OECD, 2018[37]).
4.5.3. Emerging opportunities and instruments for green financing
Despite the challenges, there are significant opportunities for improving sustainable urban development in Viet Nam. Simplifying the permit and approval system, introducing a "one-stop" service for development and building permits, and enforcing standard processing times for different types of permits could make the approval process more efficient. Strengthening inspections and enforcement to ensure that permitted developments are completed as planned, as well as enhancing the capacity of developers and contractors through better construction licenses, technical and financial audits, and performance guarantees, could also reduce project risks.
Additionally, emerging Real Estate Investment Trust (REIT) markets in Viet Nam have the potential to follow successful international models by implementing regulatory amendments that address market and taxation complexities.
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← 1. A percentage of the listed shares available for trading in the market.