Infrastructure finance competition heating up

Infrastructure — encompassing transport and storage, energy, communications, and water and sanitation — is the single largest category of official development finance (ODF) in Southeast Asia. Infrastructure development finance accounted for almost 40% of total ODF between 2015 and 2021, averaging about $11 billion a year.

Infrastructure is a key priority for Southeast Asian governments and their external development finance partners. The region faces a substantial infrastructure financing gap. It needs more infrastructure to support economic recovery from the Covid-19 pandemic and other global crises since the early 2020s. The region also needs infrastructure to sustain its positive long-term economic trajectory, meet the Sustainable Development Goals, and rise to the challenges posed by climate change. Even before the Covid-19 pandemic, the Asian Development Bank (ADB) estimated that the region faced an infrastructure financing gap of around 4% of GDP, including for responding to climate change. The International Energy Agency estimates that developing Southeast Asian economies need to more than quadruple clean-energy investment, from $28 billion a year at present to $130 billion by 2030.

The rise of China as a major infrastructure financier has also triggered greater competition among development partners. The launch of China’s Belt and Road Initiative (BRI) in 2013 has led traditional development partners, such as the United States, Japan, and Australia, to launch their own infrastructure financing initiatives. The most notable is the Partnership for Global Infrastructure Investment, launched by the G7 in 2022, which aims to provide $600 billion in financing from public and private sources.

Around 90% of total infrastructure ODF was for economic infrastructure, which includes the transport and storage, energy, and communications sectors. Transport and storage and energy account for the largest shares — 46% and 41% respectively. A small amount (3%) was directed to the communications sector. Water and sanitation accounted for 9% of total infrastructure ODF. In line with the overwhelming focus on economic infrastructure (which is generally expected to generate economic returns), over 90% of infrastructure ODF was provided in the form of loans, with non-concessional loans making up over half of total infrastructure ODF. Grants made up only 7% of infrastructure development finance.

ODF plays a major infrastructure financing role

Despite the considerable scale of Southeast Asia’s economies, the overall volume of infrastructure development finance they receive is making a sizeable contribution to the region’s infrastructure investment, and therefore its growth and development.

Measured relative to the size of individual economies, ODF is a large source of financing for the region’s smallest developing economies — Laos, Cambodia, and Timor-Leste — where infrastructure ODF is equal to several percentage points of GDP. In Laos and Cambodia, infrastructure ODF has been equal to a staggering 67% and 74% of government capital spending respectively. In Timor-Leste, where the government has been able to draw down from its substantial petroleum fund to invest in public infrastructure, infrastructure ODF still plays an important financing role.

In the region’s larger economies, infrastructure ODF is small relative to GDP, but in many cases it is still significant when measured relative to government capital spending. Infrastructure ODF is equivalent to about 10% or more of total government capital spending in Indonesia, Vietnam, and Myanmar. In the Philippines, Malaysia, and Thailand, infrastructure ODF is relatively small in terms of disbursements, reflecting problems with project implementation. But if measured in terms of project commitments, infrastructure ODF in these countries is equivalent to about 10% or more of government capital spending, similar to the level in other large Southeast Asian emerging economies.

China leads but faces competition

China is by far Southeast Asia’s largest source of official infrastructure development finance. Between 2015 and 2021, China provided about $28 billion in infrastructure ODF to Southeast Asian nations or about $4 billion a year. This accounted for almost 40% of all such financing to the region. Japan is the next largest source of infrastructure ODF, providing $2.5 billion a year, while the World Bank, the ADB, and Korea each provide a little over $1 billion a year. France and Germany are the next largest and, combined with the rest of the European Union, “Team Europe” is the sixth-largest infrastructure ODF source. Thereafter, there is a steep drop-off, with Australia, the United States, India, and the United Kingdom the next largest partners, but each providing well under $100 million a year in support.

But while China is the single largest source of infrastructure ODF overall, it is far from dominant in every sector. Japan, for instance, provides slightly more ODF in the transport and storage sector than China. In the communications sector, South Korea provides a similar amount of financing as China, while the ADB and the World Bank are also significant players. China plays a minimal role in the water and sanitation sector, reflecting its focus on economic rather than social infrastructure. Traditional development partners are more focused on this sector. China does, however, dominate the energy sector, accounting for almost 50% of ODF, with Korea the next largest at 14%.

On the other hand, focusing on project commitments (i.e. deals signed) as a measure of China’s role provides a very different picture. Excepting water and sanitation, where its role remains small, China dominates the signing of new infrastructure deals in Southeast Asia. China’s infrastructure ODF commitments averaged about $12 billion a year between 2015 and 2021 — three times that of Japan, the next largest infrastructure partner, and more than half of total infrastructure ODF commitments in the region. On a commitment basis, China constitutes about 65% of total projects in the transport and storage sector, almost half of energy ODF, and almost 40% in the communications sector.

The result is a mixed picture in terms of infrastructure competition, given the significant difference between China’s ODF commitments and its actual disbursements. Over the 2015–21 period, China committed $85 billion in infrastructure projects in Southeast Asia, three times what it actually disbursed in financing. This partly reflects delays with several large projects, notably in Malaysia and Thailand.

Overall, the sheer scale of its commitments shows that China has been offering the region far more in potential infrastructure financing than any other development partner. But while China might be out-signing the region’s traditional development partners, when it comes to actual delivery, the latter are to date still providing a competitive alternative source of infrastructure finance.