How to upgrade Asean’s infrastructure as more global businesses turn to the region

From electricity to public transport and logistics, more inter-regional cooperation and investment is needed, as well as innovation
Hong Kong can both serve as a conduit for mainland Chinese investment into Southeast Asia and provide sustainability finance expertise

Colleen K. Howe

Published: 12:30am, 22 Jun 2023

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All eyes have been on Southeast Asia recently. From China and South Korea to Japan and the United States, international businesses increasingly see the region figuring in their expansion plans.

Some want to build manufacturing bases in the Asean economies to take advantage of the lower labour costs compared to China. Private equity and venture capital companies are interested in the region’s growing start-ups, and other investment opportunities arising from young, digitally savvy populations.

Indonesia, Thailand and Vietnam are shaping up to be key parts of the electric vehicle supply chain and the region will start to figure more prominently in some parts of the semiconductor supply chain.

As a result, and because of higher economic growth forecasts in Asia than in much of the rest of the world, investment into the Association of Southeast Asian Nations has been resilient, bouncing back to the pre-pandemic level of US$174 billion in 2021. It helps that Southeast Asian countries generally still stand to benefit from their demographic dividend, even as East Asian populations age.

Southeast Asia’s infrastructure is one area of focus for foreign businesses. According to surveys, international investors see efficient logistics and infrastructure connectivity as among the most important measures to facilitate more investment in Asean – along with policy measures like streamlined investment procedures and visa support for expatriates.

Recent power cuts caused by a heatwave in Vietnam, for example, have exposed the capacity limits of the electric grid, which badly requires an upgrade, and the need for electricity market reform. This has alarmed foreign businesses and disappointed expectations of Vietnam becoming a regional leader in renewable energy.

Hanoi after some street lights were turned off on May 30 to save electricity as demand for air conditioning soars. Vietnam, which relies on hydropower for almost half its energy needs, has struggled with a series of heatwaves since early Mayas rivers and reservoirs at hydroelectric power plants dried up. Photo: AFP

Congestion is another headache for businesses in the region’s metropolises, although most are working to build or improve public transit infrastructure. Longer distance intercity logistics are also daunting in this region of islands and archipelagos.

To boost connectivity, more inter-regional cooperation is needed. Construction of a rail link to connect Laos with Thailand and Kunming is under way with support from China. Singapore and Malaysia are also reportedly considering reviving a cancelled high-speed railway project between their respective capitals. The potential economic benefits are considerable, though experience suggests more needs to be done to ensure such infrastructure projects have environmental and social sustainability as a top priority.

Innovation can also go some way to solving the infrastructure challenges. In Indonesia, entrepreneurs are working to digitise the trucking industry to improve efficiency. Artificial intelligence can increasingly be incorporated into logistics to cut costs and improve sustainability.

Where will the funding come from? While Asean has long relied on financing from abroad, intra-Asean investment could assume a bigger role in funding infrastructure.

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At the Asean Summit in May, Indonesian President Joko Widodo said Indonesia wants to play a role in the development of Cambodia’s infrastructure. Cambodia wants to leverage its location in the Gulf of Thailand and overland connections to three other Southeast Asian countries to become a logistics hub for the region.

Asia-based multinationals, such as Japan’s Aeon, see the emerging economy as a potential logistics hub. But this will require better infrastructure and lower costs.

Indonesia can help while also using infrastructure financing to highlight its emergence as a rising regional economic power able to chart a neutral course amid US-China tensions.

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The Regional Comprehensive Economic Partnership (RCEP) could encourage more intra-Asean investment as it simplifies cross-border exports within the 15-member bloc and improves productivity. Hong Kong also applied to join RCEP last year, potentially opening up new trade opportunities.

Where the agreement falls short is on the environment and sustainability. Asia’s carbon dioxide emissions embedded in its production have grown faster than in its consumption; the region exports CO2 emissions to the rest of the world. Asia, including Asean and East Asia, is now home to most of the world’s carbon-intensive foreign direct investment. More infrastructure for sustainable development is needed, particularly in manufacturing and energy, which remains predominantly coal-based.

Supply chain and logistics professionals with training in sustainability will be in demand, an area that may not have been on the radar of graduates in the region. Singapore is taking steps to meet the demand by offering training and employment support programmes for professionals in the sector. Improving the mobility of talent across borders could further both regional connectivity and sustainability goals while addressing labour market mismatches that have led to labour shortages and unemployment.

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Hong Kong is geographically oriented towards Southeast Asia, and as an international finance centre, it has opportunities to continue to play an important economic role in Asean alongside growing intraregional investment. This will be important for the city’s future as China’s economic growth slows.

One way is by serving as a conduit for mainland Chinese investment into infrastructure projects in Asean while ensuring compliance with international sustainability standards. Hong Kong can also be a source of funding for greener logistics start-ups, while ventures in supply chain and logistics could find new opportunities in expanding to Asean. While Hong Kong’s closest economic ties may be to the mainland market, much of Asia’s future growth will be in Asean.

Colleen K. Howe is a programme associate at the Asia Business Council.

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