ASFI Blog: Release of the Southeast Asia Economic Strategy to 2040
Pedestrian bridge at Jalan Jendral Sudirman, Jakarta: Sulthan Auliya/Unsplash
Led by Special Envoy for Southeast Asia Nicholas Moore AO, the Government’s recently released Southeast Asia Economic Strategy to 2040 affirms that Southeast Asia is a major opportunity for Australian business – including to meet the region’s growing infrastructure and green energy transition needs. The Strategy makes 75 recommendations for strengthening ties between Australia and the region to advance mutual prosperity and security, many of which aim to increase the flow of Australian private capital into the region. The government has announced it will immediately progress three of the recommendations, and respond to the others in due course.
Opportunities for investment are significant and increasing, but Australian investment in Southeast Asia is declining.
The Strategy identifies significant opportunities for Australian investment in Southeaset Asia – particularly in infrastructure and the clean energy transition. By 2040, the region will require an estimated $3 trillion in infrastructure investment, and have similar needs for green investment.
But grasping the opportunities presented by Southeast Asia’s growth and transition is not assured. The Strategy notes that while global investment into Southeast Asia has almost doubled in recent years, Australia’s investment into Southeast Asia has fallen. Australia invests significantly less into all of ASEAN than it does into New Zealand. In contrast, Chinese investment stocks in Southeast Asia almost doubled between 2016 and 2020, and Canadian stocks grew almost fourfold over the same time period.
Government has a role to play in overcoming barriers to investment in Southeast Asia
Many of the barriers to investment identified in the Strategy have also been raised by ASFI members as part of our work to support DFAT’s blended finance programs in Southeast Asia. These include actual and perceived political and regulatory risks, higher transaction costs, lack of familiarity and local presence, and Australian regulatory barriers such as the Your Future Your Super performance test framework.
The strategy underscores the role of the Australian Government to work with Southeast Asian counterparts, Australian state and territory governments, businesses and communities to help overcome these barriers.
“Some Australian investors continue to view the region’s risk-return trade-off as unattractive. But those who have successfully invested in the region have adopted a long-term orientation, recruited the right local talent, and partnered to understand the local market and its risks. This, in turn, has opened up further opportunities for them.”¹
ASFI supports the recommendations to support Australian private finance and investment into the region, but execution is critical.
ASFI welcomes the Strategy’s recognition that the Australian Government has a role to play in supporting Australian institutional capital to finance and invest in the Southeast Asian green transition. Considered and well-executed interventions could help Southeast Asian countries to meet their ambitious climate targets, build markets for Australian clean energy exports, and support Australia’s foreign policy objectives by strengthening relationships with key regional partners.
Here is ASFI’s take on the key recommendations that relate directly to enabling investment into the region:
Recommendation #38: Australia’s Treasury should lead expanded work with Southeast Asian partners on high-quality and interoperable sustainable finance classifications and climate-related disclosure rules.
ASFI’s response: We strongly support this recommendation and encourage the Government to pursue it in the immediate term, including through Treasury’s forthcoming sustainable finance strategy.
The lack of credible, standardised sustainable finance policy and regulation in the region is a key barrier to green finance and investment. With its own sustainable finance agenda now well underway, the Australian Government is well-positioned to share its expertise to promote credible, inter-operable sustainable finance policy in the region. The structural similarities between Australia’s economy and many countries in the Target Region – in particular our strong mining industry, and our historical dependence on fossil fuels for electricity generation and export revenue – means the Australian sustainable finance taxonomy will be highly relevant for many partner countries in a way that the EU taxonomy (the most widely used globally) is not. Australia is also leading the world in developing a credible, workable approach to defining ‘transition finance’ for our taxonomy – a key concern identified by FIs during ASFI’s work in the region, and a good candidate for technical capacity building between Australian and countries in the Target Region.
Recommendations #23, #44, #45:
Explore the feasibility of new government instruments for reducing risk in investments offshore, including examining political risk insurance.
Establish a strategic investment facility for SEA infrastructure projects, utilising Export Finance Australia (EFA) and other government-supported funding sources.
Establish new investment ‘deal teams’ for SEA, blending private sector and Australian Government capabilities to provide outward investment (including financing) services.
Prime Minister Albanese has announced the Government will proceed immediately with the establishment of the ‘deal teams’. This will be done through EFA which we understand will establish offices in Jakarta, Singapore, and Ho Chi Min City in the first instance. The teams are intended to develop a pipeline of investment-ready projects and advise Australian investors on matters from regulatory approvals to finding local commercial partners.
ASFI’s response: We support these recommendations, with important caveats. Experience in Australia and overseas has shown that using public sector funding mechanisms to de-risk transactions for private capital can work, but the design and resourcing of these mechanisms matters. They require fit for purpose institutional and governance arrangements, carefully considered mandates, and a mix of expertise that combines commercial finance and investment skills with development and impact management skills.
EFA is primarily a provider of debt and has limited flexibility under its existing mandate to de-risk commercial transactions. This means it is more likely to crowd-out private finance than crowd it in. In contrast, the Clean Energy Finance Corporation has demonstrated an ability – in a domestic context – to work with financial institutions and deploy a range of financial instruments to catalyse further private capital. CEFC is a good model for Australia’s international finance. It has deep expertise that is valued by the private sector and could – with appropriate mandate amendments and level of resourcing – be an appropriate vehicle to implement these recommendations.²
¹ Nicholas Moore AO, “Invested: Australia’s Southeast Asia Economic Strategy to 2040” p 16 https://www.dfat.gov.au/sites/default/files/invested-southeast-asia-economic-strategy-2040.pdf
² See ASFI’s submission to the Government’s Development Finance Review for more on how Australia could build its development finance capabilities.