Infrastructure paves the path for AEC

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As the AEC draws near, ASEAN countries are gearing up for transitional challenges and a windfall of opportunities expected with it. Figuring largely in the AEC is infrastructure development, which is necessary to accelerate economic integration within the region, says Angelica Buan in this report.

The Association of Southeast Asian Nations (ASEAN) members comprising Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam, are a leap away from the region’s ambitious goal of becoming the ninth largest economy in the world.

The establishment of the ASEAN Economic Community (AEC), a regional economic integration by 31 December 2015, will mark a milestone in international integration of the ten Southeast Asian member economies.

The blueprint signed by ASEAN leaders during the 13th ASEAN Summit held in 2007 envisions ASEAN, with its 600 million population and annual GDP of US$ 2 trillion, as a highly competitive region, fully integrated with the global economy.

Modelled after the European Union (EU) styled single-market economy, AEC is intended to enhance the national competitiveness of its members in preparation for a more open regional market economy in line with the World Trade Organisation’s commitments and free trade pacts, such as the Trans-Pacific Partnership (TPP) and an EU Free Trade Agreement.

With the AEC, the region is expected to become a single market and production base that will allow for free movement of goods, services, investment, capital and skilled labour.

The AEC is expected to have far-reaching economic consequences, by significantly promoting intra-ASEAN trade and investment and strengthening the global importance of the ASEAN as an economic block. More than 50% of Asia’s exports are intra-regional, and the economic expansions in China and India are expected to boost intra-regional trade further.

Is ASEAN ready for the AEC?

Beyond the promise of progress, the question of readiness clouds the bright prospects of the AEC. Observers say that there is still a lot of groundwork to be done since targets set for AEC are unlikely to be achieved on time.

Most AEC-related reforms require changes in procedures, customs and coordination of government bodies. For instance, Professor Hidetoshi Nishimura, Executive Director of the Economic Research Institute for ASEAN and East Asia (ERIA), says that regional countries should accelerate comprehensive reform, pay due attention to the private economic sector and ensure effective coordination among government agencies.

He adds that the AEC building plan should concentrate on improving administration mechanisms and broader institutional reform, which are considered big challenges for many countries.

At a recent AEC Council Meeting held in Myanmar, the AEC scorecard indicated that about 81.7% of the 229 priority key deliverables targeted for completion by 2013 have been reached.

However, besides the respective countries’ abilities to raise competitive capacity and facilitate trade liberalisation to meet requirements, upgrading infrastructure is another bottleneck.

The Master Plan on ASEAN Connectivity (MPAC) cites that the ASEAN, with a total land area of around 4.4 million sq km, is handicapped by “poor quality of roads and incomplete road networks”.

Infrastructure development

Within the region, varying degrees of preparation are also taking place, yet infrastructure is commonly given the larger weight among all other pre-AEC logistic efforts.

Thus, infrastructure development is being accelerated not only for physical connectivity but essentially to encourage resource sharing, sustain cross-border trade and investment, promote competitiveness, and raise domestic output.

Connectivity among member countries will be facilitated through various modes of transport such as roads, railways, airways, and ports and shipping.

Taking this as a cue, member states, together with the Asian Development Bank (ADB), set up the ASEAN Infrastructure Fund (AIF) in 2012.

The AIF, which is funded by equity from the ASEAN (Malaysia is the largest ASEAN contributor with a US$150 million equity investment, followed by Indonesia with US$120 million), and the ADB, has a total lending commitment of approximately US$4 billion through 2020.

It is expected to finance some six infrastructure projects a year, on the basis of sound economic and financial rates of return, and the potential impact for poverty reduction, according to ADB. However, infrastructure development in the region requires about US$60 billion a year until 2020, which means AIF’s capital base needs to be expanded.

Looking at the up and downsides of ASEAN connectivity

In recent years, ASEAN countries have strengthened their domestic infrastructure, especially roads, highways, ports, and airports, as well as its dams and telecommunication networks. But the lack of paved roads in some countries in the region is a hindrance for further growth.

Figuring largely in the ASEAN Connectivity plan are 15 prioritised projects including the ASEAN Highway Network (AHN), kick-started in 1999, Singapore-Kunming Rail Link (SKRL); and integrated maritime and multimodal transport systems.

The 7,000-km SKRL, expected to be completed by 2020, will link major cities in Singapore, Malaysia, Thailand, Cambodia, Laos, Myanmar and Vietnam, to provide an alternative mode of crossborder cargo transportation.

The AHN aims to construct and upgrade roads connecting ASEAN countries and China. Part of it overlaps with the Trans-Asian Highway network. However, time targets for the completion of certain stages, including the upgrading of roads to Class III international standards, have not been met. It is funded by the ADB and consists of 23 routes covering 38,400 km.

In Thailand, there are already 12 routes for the network (total 6,693 km) where nine routes cover 5,112 km and are linked to the ASEAN countries. The construction of a section of the network, from Kawkareik to Myawaddy in Myanmar, is expected to be completed late this year.

In Indonesia, the government is still scrambling to connect areas nationwide before it can move ahead with the connectivity projects. Meanwhile, based on Bappenas (National Development Planning Agency) data, Indonesia requires US$550 billion worth of infrastructure investment between 2015 and 2019, but the state budget can only cover around $97.3 billion. One of the infrastructure projects under its master plan that has stalled is the 2,700-km Trans-Sumatra toll road linking Bakauheni Port in Lampung to Banda Aceh in Aceh, which is expected to support the AHN.

Vietnam aims to spend US$7 billion on roads, highways, bridges, and general transport infrastructure between 2012 and 2014. The ADB has supported additional infrastructure initiatives, including irrigation projects, with the AIF having approved financing for a pipeline of projects such as the US$100 million loan for a power transmission project in the country – the single biggest loan under the AIF financing.

Brunei has one of the best developed infrastructure, which under its Vision 2035 policy roadmap is expected to boost FDIs. In the pipeline are infrastructure projects worth US$77 million with a focus on roadways and water treatment. Other priority projects include a waste management system and modernisation of the Brunei International Airport Terminal.

Infrastructure to build up the agriculture trade

What is still lacking is infrastructure for small agricultural producers, processors, and traders. The infrastructure needs of small-scale enterprises, i.e., feeder roads, irrigation facilities, inland waterway infrastructure, storage facilities, electricity for remote areas and villages, and intermediate means of transport, are often not met.

Loss during transport or due to lack of storage facilities; and inability to connect producers at lower ends of value chains to markets is hampering valuechain development. One exception is Thailand, where between 1977 and 2000, its rural road density grew faster than local and national roads.

Laos lies on the other end of the scale, with rural feeder roads connecting farms to markets excluded from infrastructure improvements.

In Cambodia, because of years of internal conflict and weak investor confidence, the country lacks the infrastructure it needs to support a thriving agricultural trade.

Construction sectors to boom

Malaysia’s construction sector registered 9.9% growth in the second quarter of 2013, according to the Master Builders Association Malaysia (MBAM). The growth is led mainly by the residential and civil engineering sub-sectors, with the latter registering 10.14% growth due to major construction projects such as the US$7.41 billion Klang Valley MyRapid Transit (KVMRT) project, which is expected to be operational by 2017. The three-line mass rapid transit system in the Greater Kuala Lumpur (part of Klang Valley region) envisages a "wheel and spoke" concept comprising two northeastsouthwest radial lines and one circle line looping around Kuala Lumpur city.

In neighbouring Singapore, the Building and Construction Authority (BCA) forecasts that average construction demand in 2015-2016 will hover between US$25-34 billion a year, for which, 60% of the demand will come from building projects; and the remaining 40% from civil engineering projects.

In the Philippines, the country’s National Economic and Development Authority (NEDA) highlights the construction sector as a growth strategy for AEC.

For Thailand, girding for the AEC spawns manifold benefits for the local construction industry. The Thai construction key trends and opportunities to 2017 study by UK-based market information house Timetric suggests that the country’s construction industry, which had been jeopardised by the global financial crisis and floods, is continuing to recover. It is expected to grow at a CAGR of 3.19% through 2017, supported by government investments in infrastructure development.

Timetric says that the AEC will stimulate Thailand’s construction industry with more industrial, commercial and residential projects being taken up. Further, to promote trade and investment in the country, the Industrial Estate Authority of Thailand (IEAT) is planning to develop four industrial parks in the country by 2015.

Myanmar, which actively prepares for the integration offers several opportunities for the construction segment, Dr Kyaw Thu, Project Engineer of the UN-Habitat and Consultant at Green EHSS Consultancy, pointed out. He says that aside from the country’s abundance in local construction resources and production capability for construction materials such as hard wood, steel, bricks, and cements; there is a strong domestic demand in energy, transportation, housing and other public sector that could boost construction and facility provision.

In Cambodia, construction is among a key industry that supports its economy. Since the country espouses free market and encourages foreign ownership, several foreign-owned construction firms have been set up, spurring investments. According to a latest data presented by the Cambodia Constructors Association at the 37th ASEAN Constructors Federation Council Meeting in 2013, investment has increased by 123% to US$1 billion, compared to a year earlier.

Also fetching interest from foreign investors is Laos. Netherlands-headquartered auditing firm KPMG reports that Japan, for example, is investing in Laos’s manufacturing, transport, agribusiness and construction sectors to expand its economic presence in the region.

Likewise, foreign investors are eyeing Indonesia. The Oxford Business Group says in a latest report that foreign competitors are keen on the Indonesian market, especially the rising demand for construction services and building materials.


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