Southeast Asian infrastructure benefits heavily from One Belt One Road

The Port of Tanjung Priok, Indonesia. Credit: IPC

 

 

Southeast Asia’s infrastructure is emerging as a major beneficiary of China’s One Belt One Road policy, with Chinese companies accounting for 17% of infrastructure investment across the region in 2015, according to Citibank.  

In a note to investors, the bank said the favorable demographics, strong natural resource base and strategic location of the ASEAN countries mean they are attracting a high proportion of China’s overseas direct investment outflows, nearly a third of which go towards infrastructure development.

Citi estimates ASEAN’s infrastructure needs investment in the order of USD100 billion a year for the coming 10 to 15 years, up to six times historical levels, with particularly high demand for funding of transport and power infrastructure.

In the case of transport, improving port infrastructure and hinterland links is widely seen as central to reducing logistics costs and increasing the competitiveness of economies such as Indonesia, the Philippines, Cambodia, and Myanmar, where ports and hinterland links suffer from congestion, inefficiencies, and poor productivity.

“Removing many of the inefficiencies associated with exporting could lower the prices of goods and services as well as enabling retailers to stock a broader range of merchandise. In addition, improved logistics networks (in terms of both cost and efficiency) will speed time to market and allow companies to be more nimble in responding to new demand,” according to a report by McKinsey & Company entitled Southeast Asia at the Crossroads: Three Paths to Prosperity.  

Major port projects in southeast Asia that have had Chinese investment include the expansion of Kuantan Port and phase 1 development of Samalaju Port, both in Malaysia. Here the backers were Guanxi Beibu International Port Group and China Harbour Engineering Company. The development of Tanjung Sauh Port on Batam Island in Indonesia was funded by China CAMC Engineering Company, and the construction of a deepsea port on Madae Island, Rickhane State, Myanmar, received investment from China National Petroleum Corporation.

Several large Chinese-backed railway and road development projects are also under way across the region.

While One Belt One Road is meeting part of the region’s financing needs, it may notovercome non-financial barriers to infrastructure development, including land acquisition, domestic political instability, and corruption, the bank said.

Ensuring the right regulatory environment for projects is also a key challenge, with fears on the part of foreign investors about the political and legal influence of local business entities and problems that might arise in partnerships, or other areas, during project development and operations.

One Belt One Road is most likely to be acting as a catalyst for additional investment in southeast Asia by countries such as Japan, but China is the dominant player.

“China’s advantage is seen to be in its greater physical and cultural proximity to ASEAN. Being in the middle of supply chains, China has greater scope for vertical integration with ASEAN economies, as compared with Japan, which is largely at the ‘terminal end’ of the supply chain, specialising largely in high-end segments,” the bank said.

According to Citibank, Chinese policy-makers have four main objectives with One Belt One Road. As a facilitator of Europe-Asia connectivity, one of these is to expand international markets for Chinese goods. A second is to secure raw materials for China, which the bank says is becoming a more pressing issue because of vertical integration of regional supply chains within China.

Further objectives of the programme are to provide outlets for excess capacity in China’s restructuring economy and to promote the internationalisation of the renminbi as an invoicing currency for international trade.

Contact Turloch Mooney at turloch.mooney@ihs.com and follow him on Twitter: @TurlochMooney.