International Construction Regional Report: Asia Pacific

According to the Asian Development Bank (ADB), the Association of Southeast Asian Nations’ (ASEAN) infrastructure needs are some US$ 60 billion a year from 2010 to 2020. This is in addition to national projects with significant cross-border impacts such as airports, seaports, and roads to borders.

Kunio Senga, ADB director general of the Southeast Asia department said the region’s needs were well beyond the funding capacities and fiscal resources of governments and multilateral development banks.

“It is crucial to involve the private sector in infrastructure financing if ASEAN is to continue building and growing,” Mr Senga said.
And progress is being made in encouraging more private investment – a trend that is creating new opportunities for construction companies.

The ADB and International Enterprise (IE) Singapore signed a letter of commitment in May to launch a public-private partnership (PPP) initiative to boost infrastructure development within the ASEAN. The initiative will see the ADB work with Singapore agencies, led by IE Singapore, to enhance private sector participation and investments in regional PPP projects throughout the Asia Pacific.

Areas that the initiative will fund are wide-ranging, covering power generation, water management, transport infrastructure and more, and operations are set to begin in the second half of 2013.

Investment activity also looks set to be boosted by a new infrastructure fund that was established by the ASEAN in April last year. The ASEAN Infrastructure Fund (AIF) is set to begin lending in the second half of the year, with a pipeline of some US$ 1 billion in projects for the next three years and loan negotiations currently underway.

Administered by the ADB, the shareholders in the AIF are the governments of Brunei, Cambodia, Indonesia, Laos, Malaysia, the Philippines, Singapore, Thailand, and Viet Nam.

The AIF board has also authorised talks between Myanmar and the ADB, as a possible new member of the fund. Indeed, there are signs that the construction market in Myanmar is becoming increasingly open to the international community in line with the country’s on-going reforms.

Earlier this year, for instance, Bouygues Construction subsidiary Dragages Singapore, in a joint venture with SPA Project Management was awarded a € 74 million (US$ 100 million) contract by Thanlyin Estate Development to design and build the second phase of Star City, in Myanmar.

This is the first contract of Bouygues Construction in Myanmar following the opening of the country and the suspension of international economic sanctions. Work is scheduled to start this month and is expected to take 33 months to complete.

Momentum

And there is strong momentum elsewhere in Asia Pacific, particularly when it comes to PPP initiatives. In Indonesia, for instance, a total infrastructure investment of US$ 203 billion is required to maintain the targets under the government’s Five Year National Development Plan 2010-2014, according to the Ministry of Public Works.

About 29% of this investment is planned to be financed by the central government, 18% by local government and 18% by state-owned enterprises. But the remaining 35% is expected to be financed by the private sector.

The Ministry of Public Works has identified 21 priority PPP projects worth US$ 33.2 billion, including toll roads, bridges, water supply schemes, waste treatment facilities and airport developments.

This growth in construction has fuelled demand for heavy equipment, sales of which jumped from 7,500 units in 2007 to 20,000 units in 2011, according to the Ministry of Public Works.

In fact, the Ministry has now highlighted a shortfall in heavy equipment in Indonesia. To address this supply/demand imbalance, it said the government was promoting the country as a place for international manufacturers and investors to set up factories, instead of importing equipment.

The ADB also highlighted other steps that Indonesia’s government is taking to overcome obstacles to infrastructure development, including new regulations regarding land-acquisition which provide more certainty for infrastructure developments, while a ‘viability gap’ fund has also been established to support PPP schemes.

But there is much work to be done – the ADB estimates that 41% of district roads and 24% of provincial roads throughout Indonesia are in bad condition, for instance.

Similarly, Cambodia also faces substantial funding needs. Investment of between US$ 12 billion and US$ 16 billion is required to build new infrastructure for its growing economy, according to the ADB.
And in view of this, the Cambodian government is also putting more emphasis on PPPs. It has an ambitious range of initiatives under way to strengthen the legal, regulatory, and institutional environment for PPP schemes to be attractive, focussing on improving transparency and quality.

The first projects under the new programme are expected to take shape in 2013 and 2014, for implementation soon after.

Large infrastructure investments are also planned for Thailand, where the government is focussing on water management and transport infrastructure in the wake of the severe flooding that hit the country in 2011. According to the ADB, the water management programme should gather momentum from the second half of 2013, with US$ 1.3 billion projected to be spent this year.

Thailand’s government also plans legislation under which it can borrow the equivalent of US$ 67 billion off-budget over seven years to invest in transport infrastructure, including roads, railways, seaports, and airports.

Major projects currently underway include a THB 29.8 billion (US$ 1 billion) contract to construct part of a new commuter rail system in the Thai capital, Bangkok, which was awarded to a joint venture led by Sino-Thai Engineering & Construction (60%) and light rail specialist Unique Engineering (40%).

Thailand’s Phuket International Airport is also being expanded with a new international terminal and cargo building. The airport has been working beyond capacity for some years, being designed for 6.5 million passengers per year but currently handling an annual flow of 9.1 million. The expansion will allow Phuket to handle up to 12.5 million passengers per year.

Developer Airports of Thailand began the project in October 2012 with a budget of THB 5.7 billion (US$ 188 million), with construction scheduled to be finished in the second half of 2014.
Three new solar power farms are also being built in the Tak and Sukhothai provinces of north-east Thailand by subsidiaries of Bouygues Construction – a US$ 50 million development that is expected to deliver a maximum of 30 MW at peak power.

Indeed, with rapidly growing energy needs, Thailand is one of the most promising markets in Asia for the renewable energies sector, according to Bouygues. The contractor highlighted the fact that the country’s government has set itself the target of covering 25% of the territory’s energy consumption with renewable sources by 2021.

In Malaysia, meanwhile, the government’s Economic Transformation Programme (ETP) is well underway, aiming to upgrade industry and infrastructure. Major investment projects that began in 2012 include a US$ 11.5 billion mass rapid transit rail system in Kuala Lumpur, expansion of oil and gas processing and other energy projects, and a high-speed broadband network.

Performance management and delivery unit chief executive and government minister Datuk Seri Idris Jala said the ETP was attracting both local and foreign investors. He added that private investments had tripled since the ETP was launched in 2011.

“I am convinced that the property sector will also attract interest with many new exciting developments that will help expand our economy,” he said, adding that demand for city-living was projected to continue to rise in line with demand for high-rise buildings and apartments.
“Public transport will be key to liveability in city hubs, as otherwise, the city would be choked by the increasing number of cars,” he explained.

Sustainability

While all this demonstrates that there is a huge amount of construction activity across the Asia Pacific at the moment, it is by no means a guarantee against boom and bust economics. This is demonstrated by the current situation in Papua New Guinea, where a US$ 15 billion liquefied natural gas (LNG) project is nearing completion.
The PNG LNG investment was made by the Esso Highlands joint venture – lead by ExxonMobil, which partnered with various oil and gas exploration companies to embark on the project.

Now that the main construction phases for the project are nearing completion, the ADB expects not just construction activity, but the country’s entire economic activity to slump until gas exports start at the end of 2014.

“The winding down of LNG project construction will dramatically curtail construction and transport activity,” the ADB forecast. It added that a central challenge to the government of Papua New Guinea going forward will be to tackle its energy infrastructure situation, describing the worsening adequacy of supply and distribution networks as “a major barrier to productivity”.

This case highlights the need for a more sustainable, long-term approach to infrastructure investment. But the fact that governments in the Asia Pacific are actively encouraging private investment, and are lining up rigorously selected and better-designed infrastructure projects for possible financing, bodes well for future growth.