Infrastructure, Power & Utilities


Calls for coherent regulatory framework & ASEAN Infrastructure Fund in IPU roundtable session.

In a lively and well attended roundtable session, industry giants from the region’s Infrastructure, Power and Utilities (IPU) sector debated and brainstormed some of the barriers and issues they face with the integration of the ASEAN Economic Community in 2015. The session convened senior business leaders from top infrastructure conglomerates across the region (e.g., AC Infrastructure Holdings, General Electric International), representatives from quasi-government agencies (e.g., Manila Water, Indonesia Infrastructure Guarantee Fund, PT Sarana Multi Infrastruktur), development agencies (e.g., World Bank) as well as private infrastructure financiers (e.g., Vina Capital, GIC Special Investments).

Chaired by Jaime Augusto Zobel de Ayala, Chairman of the Philippines’ Ayala Corporation, and co-chaired by Francis Yeoh, Managing Director of YTL Corporation, participants discussed barriers ranging from the disparate economic and infrastructure landscape within ASEAN to the lack of transparent and coherent regulation.

In kicking off the discussion, research partner, McKinsey & Co identified several barriers to unlocking infrastructure in ASEAN countries including:

  1. Governments that are facing fiscal pressures leading to funding shortfalls
  2. Lack of an investor-ready project pipeline resulting in low private sector participation in the projects
  3. Regulatory and institutional inefficiencies which create implementation challenges in both planning and execution of the projects
  4. Ineffective governance where multiple entities are involved in projects resulting in lack of clarity in decision making and delays in execution


McKinsey & Co further identified three themes to kick off the discussion around potential solutions to address these challenges including:

  1. Making better decisions about project section anchored to clear socio-economic objectives with standardised cost-benefit analysis
  2. Streamlining project delivery to ensure seamless execution while ensuring the construction industry increasing productivity of execution
  3. Making the most of existing assets, rather than focus on building new infrastructure (e.g. through the use of technology)

Disparate infrastructure landscape

Early in the discussions, what became clear was a key barrier to integration, was the disparate levels of infrastructure development among ASEAN countries.

While some countries like Singapore have very advanced infrastructure, other countries still struggle with providing safe drinking water, access to electricity and basic sanitation.

This landscape coupled with a low historical spending on infrastructure across ASEAN has the potential to create bottlenecks and constrain growth across the region.

As an example, the infrastructure expenditure as a percentage of GDP for both Indonesia and Thailand from 1992 to 2011 is 2.6 per cent and 2.3 per cent, well below the global average (around 3.8 per cent). This compares poorly with China at 8.3% of GDP. Some countries, such as Vietnam and Malaysia have substantially increased their infrastructure investments in the last decade.

Part of the problem is the high debt to GDP ratios faced by many ASEAN countries, hampering government efforts to fund large-scale infrastructure projects.

Another concern raised is that politicians and governments typically have a short-term view; the relatively faster pace and longer term view of the private sector is not sufficiently addressed by the governments in the region. For example, many ASEAN governments subsidise to keep utility bills much lower than actual cost, which impacts the quality of service citizens get. Power outages and disruptions are still common in many parts of ASEAN, requiring substantial upgrading or replacement of infrastructure.

Another example shared was the liberalising of the automotive industry to boost car ownership but governments have failed to provide adequate road infrastructure to cope with the increasing number of cars on the roads. “Many ASEAN cities are choked with traffic, we build and sell more cars and homes but the provision of roads and power or electricity to meet this increase has not kept pace,” one participant stated.


Lack of a transparent, coherent regulatory framework

There are few consistently implemented regulations around infrastructure projects in the region (e.g., water project that was withheld approval and handed over to a state-owned enterprise at the very end of a long drawn procurement process), resulting in reduced confidence to invest in infrastructure.

The big elephant in the room, according to one participant, was the lack of proper regulation in ASEAN. This combined with nationalistic concerns around foreign infrastructure investors has held back much needed development.

“Regulatory issues in countries with the most pressing need of infrastructure investment have put us off as we are just not comfortable with the macro situation. As a result, most of our infrastructure portfolio investments are largely in developed countries,” explained a representative from an investment fund.

Regulatory frameworks in developed countries, such as the UK and Singapore, were cited as best practice examples. “In the UK, a proper regulatory framework, independent of the government, balances the needs of the investor and consumer equally. “The regulator addresses investor returns as well as consumer demand for fair-priced, efficient utilities. Despite the fact that there have been three successive changes in the UK Government since 2003, the rules of engagement with the regulator does not change.”

Further in many ASEAN countries, there is a dire need for high calibre regulators; a proper regulator would set the rules of engagement for the IPU industry and balance the needs of the investor and consumer equally. This process should be done in a transparent manner through consultation and submissions with business interest and consumer groups, as well as investors.

Highlighting the critical importance of regulators within the water industry, the group discussed the regionally relevant example of the Manila Water Company, which operates within a well-crafted framework for investment and delivery. A sovereign contract between the government and Manila Water Company, as the concessionaire and plainly set out the following:

1) A service agreement of what needs to be provided to an agreed standard
2) Tariffs that should be charged
3) Agreed approach for dispute resolutions

This firm agreement has gone a long way in ensuring there are limited fluctuations in the rules of engagement for all parties involved.


Protectionist tendencies in governments While ASEAN governments realise the need for an integrated ASEAN economic community, many governments sometimes indicate strong preferences for local companies and state-owned enterprises. While this is also tremendously important, these nationalistic concerns can deter long-term investments by foreign investors in a country. There is a misconception about foreign investors in many countries that needs to be addressed proactively.

“Investors in the water industry hold long concessions, often for 10 years or more and invest in long term infrastructure projects so they need to have confidence that there will be coherence and transparency from governments.”

“Many governments seem to equate an investment in its IPU sector with an investment in the country’s security and this is a zero sum game.”



Ayala of Ayala Corporation, in summing up the roundtable, said it was clear that regulators and government needed to be part of the dialogue, along with the business community and consumers to attract infrastructure investors.

He identified both the need to have a coherent regulatory framework and the ability to mobilise money within ASEAN as key steps towards meeting the objectives of the AEC 2015.


Creating a coherent regulatory framework

A transparent, coherent regulatory framework has increased the confidence of financiers to invest in countries like the UK and Singapore. Participants at the roundtable called out several ways to create a meaningful regulatory framework.

One suggestion that almost everyone was excited by is to help set up an Institute for Regulators based in Singapore that will train regulators for the ASEAN countries. This could be set up along with private sector funding, producing regulators with robust qualifications and ensuring regulatory management that is both independent and objective.

Trade agreement instruments (e.g., Trans-Pacific Partnership) could be used as a mechanism for creating regulatory governance across ASEAN; hence there was an appeal to the business community to welcome these agreements, since they could offer an opportunity for regulatory coherency and ensure transparency in government policies.

One participant recommended that as a first step, contracts could be used to achieve regulatory certainty. “Public-Private Parnerships (PPPs) can be created in such a way that they aren’t just about re-negotiating, instead they could be used to build a culture of better regulation. Disputes and uncertainties could then be offset by a government-backed insurance-type product such as a partial risk guarantee,” he offered.

While government guarantees can help attract investors, especially when project viability is in question, others felt that these were a short-term fix, which could detract from the political will to put longer term regulatory transparency in place – a move that would substantially allay the concerns of infrastructure investors.

An innovative suggestion was to bring consumers into the dialogue early on. A participant recommended that the private sector start discussions early with consumers, bringing them on board to avoid the mistrust which often arises among consumers in the void of discussions held only between government and business.

Another idea was to exchange knowledge and solutions across borders, focused on success stories and inspiring change in the region. There was also a push to consider regulatory frameworks at an ASEAN level, instead of individual countries, to adopt changes faster.


Mobilising long-term investment into ASEAN There was much discussion around the lack of viable projects that could attract investors. The limited transparency on the project pipeline as well as the number of local and foreign investors in a country often influences the willingness to invest in long-term large-scale projects. There is increasing need for governments to show commitment by enabling the right environment to accelerate infrastructure projects.

Governments widely recognize that they need private sector investment in their IPU projects; hence one solution was the possibility of raising funds within ASEAN member states as a starting point.

“With an integration framework and a closer move towards an ASEAN identity by 2015, it may be less threatening for ASEAN member states to raise funds between member states.”

Several solutions were discussed to incentivize the private sector to invest long-term in stable markets, including a Guarantee Fund (similar to what the Indonesia government has set up), transparency on foreign investors (e.g., Malaysia’s IPC listing), and finding innovative financing instruments to address the different risks in greenfield projects.

A best practice example shared was the Japanese model for investment, highlighting and commending the Japanese for their strategy of working with regulators and their local companies as well as being patient with long-term investments.

What remains clear is that full integration within ASEAN is only achievable when each individual country attains a certain basic level of infrastructure. There was a general consensus that there were funds and investors eager to invest in ASEAN’s infrastructure projects, provided the right conditions for stable regulatory and policy environment are established.


Sector Champion

Jaime Augusto Zobel De Ayala,
Chairman & CEO, Ayala Corporation

Francis Yeoh,
Managing Director, YTL Corporation

Research Partner
McKinsey & Company
Lin Diaan-Yi, Partner, McKinsey Singapore
Koh Ee Huei, Project Manager, Infrastructure and Electric Power & Natural Gas Practice
Sathya Sriram, Manager, Asia’s Public Sector, Social Sector and Infrastructure Practices

Lin Diaan-Yi, Partner, McKinsey Singapore

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