With its foreign-policy pivot towards China, the Philippines looks to have secured extensive mainland investment in its own ambitious infrastructure-redevelopment programme as part of President Xi Jinping's far-reaching Belt and Road Initiative.

Reflecting on change: Manila Bay girds itself for a major infrastructure upgrade.

By pivoting his foreign policy towards China, Rodrigo Duterte, the President of the Philippines, has cannily delivered a huge fillip for his administration's Philippine Development Plan (PDP) – a strategic infrastructure roadmap designed to reinvent the country's economy. At the heart of the PDP are seven massive infrastructure projects, together representing an investment of some P270 billion (US$5.36 billion). Following the President's tactical realignment, it is now expected that China will play a key role in delivering a number of these projects as part of its ambitious Belt and Road Initiative (BRI).

Signalling the start of this China-Philippines infrastructure initiative, the Philippine government and a number of public and private Chinese agencies recently signed a Memorandum of Understanding (MoU). This commits the various parties to a far-reaching infrastructure-development programme, one designed to improve mobility and development across the various regions of the country with a particular focus on the island of Mindanao. Among the priorities identified are enhancing ship-passenger connectivity and cargo handling, providing solutions to Metro Manila's worsening traffic situation and helping to remedy the country's current internal transport problems.

According to Ning Jizhe, Deputy Chairman of the National Development and Reform Commission of China (NDRC), China is fully behind Duterte's 10-point socio-economic agenda, especially where it overlaps with the objectives of the BRI. Speaking after the signing of the MoU, he said: "We hope both sides can nurture these plans and that Chinese business will now be keen to invest in the Philippines."

The eagerness of China to invest in the country was underlined by the recent visit to Manila by a number of senior mainland officials. It is believed that the delegation – which included a Vice-governor of the state-owned China Development Bank and a Vice-president of the similarly state-owned China National Technical Import and Export Corporation – discussed the possibility of developing the port facilities of Manila, Cebu and Davao. The latter is one of the principal cities of Mindanao and was Duterte's former mayoral seat.

The delegation also reviewed proposals for the expansion of the Manila Harbour Centre, allowing it to handle larger vessels. The P7.4 billion project would require the reclamation of 50 hectares of Manila Bay in addition to the 79 already reclaimed to facilitate the development of the Manila North Harbour Centre, the country's largest international commercial port for bulk and break-bulk cargoes.

Commenting on the success of the visit, Red Romero, the Vice-chairman of R-II Builders, the Manila-based construction company that manages the Centre, said: "While this is not the first time we have entertained a Chinese delegation, this group was far more enthused about the project than any previous Chinese visitors."

In other moves, the Philippine government has already green-lit work on a US$183 million container port in Cebu. In order to deliver the project, Mega Harbour Port and Development, the lead contractor, has partnered with China Communications Construction Co (CCCC) Dredging, the world's largest dredging company.

The new facility – billed as Cebu International Port – will extend across an 85-hectare expanse on the shores of the town of Consolacion. Among its proposed resources is a 1,200-metre-long berthing facility.

Explaining the need for the new facility, Edmund Tan, the Cebu Port Authority's General Manager, said: "The proposed new Cebu International Port is expected to provide a lasting solution to the congestion problems at the existing Cebu port as well as the shallow water depth of the Cebu international container berths."

In terms of added connectivity, the Cebu Provincial Government has announced it is seeking Chinese backers for its Trans-axial Highway Project. As well as a 280-kilometre road connecting the northern and southern tips of Cebu, the project's remit extends to a seven-kilometre-long seaport, a 550-hectare reclamation project for Talisay-Minglanilla-Naga and four economic zones in Cebu's Second to Fifth districts.

Expanding upon his plans for the province, Hilario Davide III, the Governor of Cebu, said: "As Chinese financiers are looking to invest in the province, we have pitched the Trans-axial Project to them."

For China's part, its interest in the Philippines was rekindled only after Duterte's administration softened its stance over the controversial South China Sea issue. While the administration may still not view China as an entirely friendly neighbour, it is clearly eager to benefit from its largesse as the Philippines looks to develop its own local infrastructure.

It is not all just about investment dollars, however. A recent joint statement by Dr Zhang Yuyan of the China Academy of Social Sciences and Dr Federico Macaranas of the Asian Institute of Management (AIM) suggested that the Philippines should also take advantage of China's huge expertise in the field of infrastructure construction. Speaking during a recent AIM forum in Makati City, Zhang said: "There is huge, huge room for co-operation."

Geoff de Freitas, Special Correspondent, Cebu

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Despite their differences, China and Vietnam both have much to gain under the ambitious Belt and Road Initiative.

Will prospects for the Hai Phong port be clearer thanks to BRI investment?

Although Vietnam has achieved remarkable economic progress in recent years, its poor infrastructure is still seen as likely to blight any future development. In particular, major network upgrades to its transport, power and technology systems are desperately needed if it is to deliver the smoother and more cost-effective trade flow that is vital for success in the region's increasingly connected markets.

In light of this, it could be argued that China's ambitious Belt and Road Initiative (BRI) could benefit Vietnam enormously. Under the terms of the BRI, China will help fund and construct a world-class network of high-speed railways, motorways, pipelines and ports across South Asia and Southeast Asia, with Vietnam seen as a key component of this blueprint for economic revitalisation.

Vietnam's strategic location and ease of access to its ASEAN neighbours has seen it earmarked for a pivotal role in the BRI. Indeed, its co-operation is required if China is to make good on its promise to deliver a series of trade routes running from Fujian, passing through Southeast and South Asia and onwards to Europe.

A particular focus is the planned upgrade of North Vietnam's Hai Phong port, a development seen as a priority under the terms of the BRI. A US$1.2-billion project, it has been divided into two distinct phases.

Phase one is the actual construction work on the port, a project to be managed by the Vietnam Marine Administration. The second phase is a joint venture between a number of Vietnamese and Japanese enterprises and will involve the construction of two wharves with a total length of 750 metres, giving the port the capacity to service 100,000-tonne container ships.

Once fully operational, the facility will form part of a direct trade link, connecting China and Vietnam's northern region with the US and European markets, while bypassing Singapore. Outlining the priorities driving the development, Nguyen Hung Viet, the General Director of the Hai Phong Port Joint Stock Company, said: "This year, we will focus on investing in the Tan Vu terminal, Hai Phong's leading facility. We plan to enlarge its yard by a further 10 hectares, giving it total yard area of 55 hectares. We will also be building additional administration facilities. Further investments will include the provision of new piers, wharves and cranes."

Despite the obvious economic benefits to both parties of enhancing Vietnam's infrastructure and its connectivity to China, a number of sensitivities remain. In addition to the ongoing territorial dispute regarding the South China Sea, Vietnam has also expressed concerns about the quality of the construction work, the sustainability of the project and about any possible environmental damage.

Highlighting this, a statement from OBOR Watch, a self-appointed monitor of the progress of the Initiative, said: "China's business practices have excited local protests in several countries where state-owned enterprises have constructed energy and infrastructure installations. Indeed, a number of Chinese firms have been accused of cutting corners, ignoring safety standards, and using second-hand or low-quality materials and equipment."

Despite such concerns, Chinese investment in BRI-related projects is still being officially welcomed in Vietnam. During a September 2016 summit in Beijing, attended by the Vietnamese Prime Minister Nguyen Xuan Phuc and the Chinese Premier Li Keqiang, the two sides publicly reaffirmed their commitment to the BRI and to the investments that have already been agreed. These include the China Export-Import Bank's 2013 financing of the Ninh Binh coal-based fertilizer plant and, in the same year, the China Development Bank's investment in Phase One of the Vung Ang Power Plant.

China is also playing a significant role in the development of Vietnam's railway infrastructure. To this end, China Railway Sixth Group Company has been awarded the contract to construct the Cat Linh-Ha Dong urban railway project in Hanoi. China has provided most of the $550 million funding for the project through preferential credit loans of about 1.2 billion yuan ($169 million), as well as through another $250 million in concessional loans.

Another cornerstone BRI project that was high on the agenda at the Beijing summit was a standard gauge upgrade to the rail link between Lao Cai on the border with China's Yunnan province and Hanoi and Hai Phong. Once completed, this will allow greater trade volumes to be carried along the line, a necessity given the expanded capacity of Hai Phong's port capabilities once its own upgrade has been completed.

Geoff de Freitas, Special Correspondent, Ho Chi Minh City

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In order to boost its economy and attract investment, Indonesia’s government is determined to overhaul the country’s essential infrastructure. In line with this, the Sea Toll Road programme – a development with a number of similarities to China’s Belt and Road Initiative – will significantly enhance Indonesia’s maritime capabilities. With the country’s business environment becoming ever more vibrant, while its infrastructure shortcomings become less of a problem, innovative and visionary Hong Kong entrepreneurs – including those in the service sector – should prepare themselves for a whole new world of opportunities.

A World of Opportunities and a Huge Funding Gap

Indonesia is at the very forefront of the boom in infrastructure redevelopment taking place across Southeast Asia. Despite difficulties in maintaining the country’s mandated 7% annual economic growth, President Joko Widodo seemingly remains determined to improve the country’s essential infrastructure.

As part of the 5.5% increase in the overall spending specified in the 2017 State Budget, a total of IDR 387.3 trillion (approximately US$30 billion) has been earmarked for infrastructure development. This is the largest amount ever allocated to such projects and represents an increase of 22% on the previous budget.

In terms of where the money will actually be spent, the Committee of Infrastructure Priorities Development Acceleration (KPPIP) has identified 30 projects – out of 225 national strategic undertakings – as priorities for the period 2016-2019.

The government has adopted an innovative and seemingly effective approach for generating funding for these infrastructure projects. Its new tax amnesty programme, for instance, is said to have proved particularly successful. When its first phase ended on 30 September 2016, the programme had already netted the Indonesian government some IDR 97.2 trillion (approximately US$7.5 billion, 59% of the overall target) in additional tax revenue.

The tax amnesty programme offers unprecedented immunity from prosecution as well as concessional tax penalties to individual and corporate taxpayers who voluntarily declare assets (in or outside Indonesia) that went undeclared prior to 31 December 2015. The amnesty is now scheduled to run from 18 July 2016 to 31 March 2017 (the reporting period of the Indonesian tax authority).

Though considered the most successful tax amnesty programme ever undertaken anywhere in the world, Bank Indonesia – the country’s central bank – is forecasting that the final sum repatriated will still be far below the figure required to complete the current infrastructure redevelopment programme. Indeed, it is estimated that the state and regional budgets will only raise around 40% of the total infrastructure funding requirement as set out in the National Medium Term Development Plan (RPJMN) 2015-2019 – IDR 1.98 quadrillion (approximately US$142 billion) out of IDR 4.8 quadrillion (US$345 billion). It is expected that this shortfall will be covered through co-operation with the private sector on a Public Private Partnership (PPP) basis.

Java: Leading Indonesia’s Regional Investment

Home to nearly 60% of all native Indonesians, Java is the most densely populated island on Earth. It’s also a favourite destination for many of those looking to invest in Indonesia and accounts for 54% of the total investment the country secured in 2016. This includes both domestic (DDI) and foreign investment (FDI), across the six economic corridors stipulated under the Masterplan for Acceleration and Expansion of Indonesia’s Economic Development (MP3EI).

Java is made up of four regions and two special territories. Of these, Banten, Central Java, East Java, the Special Territory of Jakarta and West Java were ranked high on the Top 10 lists of DDI and FDI destinations for 2016, with East Java particularly popular among domestic investors and West Java among foreign investors.

This concentration of investors reinforces the island’s role in driving the country’s industrial development and service sectors under the provisions of the MP3EI. As a result, Java looks sure to remain a prime target for international investors as Indonesia take its place amongst the world’s developed countries.

The comparative lack of interest in investment outside of Java, however, may hamper the country’s overall development. In 2014, in order to encourage a more even spread of investment across the country and in line with his ambition to transform Indonesia into a ‘global maritime axis’, President Widodo announced the Sea Toll Road programme as part of the 2015-2019 National Medium Term Development Plan (RPJMN 2015-2019).

China’s Maritime Silk Road and Indonesia’s Sea Toll Road: The Crossover

The Sea Toll Road program is intended to boost Indonesia’s maritime capabilities, which currently support 40% of its international sea trade flow. It also includes measures designed to strengthen governance and close any security gaps seen as likely to threaten the flow of trade or fishing activities within the waterway.

The programme focuses on enhancing inter-connectivity between islands (local integration) and upgrading port infrastructure (globally connected). When fully implemented, Indonesian ports should be more competitive and more attractive to international shippers and forwarders, particularly when compared to the ports of Singapore and Malaysia, both which are currently more popular channels for international traffic.

As part of the Sea Toll Road project, 24 of the nation’s 111 commercial seaports will be expanded, including five hub ports – Belawan/Kuala Tanjung in Sumatra, Tanjung Priok/Kali Baru in Jakarta, Tanjung Perak in Surabaya, Makassar in South Sulawesi, Bitung in North Sulawesi. Some 19 feeder ports are also within its remit, including Batam in Sumatra, Tanjung Emas in Semarang and Sorong in Papua. The programme will expand their capacities, allowing them to handle higher levels of cargo and passenger traffic between western and eastern Indonesia, while also facilitating the further development of the country’s Industrial Estates.

This hub-and-feeder model has also been designed to increase national security by limiting the movement of foreign vessels to hub ports in domestic waters. At the same time, by utilising the feeder ports for regional consolidation, it lends flexibility to the schedule frequency of many of the ports, while also shortening the routes between them.

Logically, any upgrade to the ports of western Indonesia should increase their chances of attracting vessels looking to trans-ship across the Straits of Malacca without calling at Singapore. The developments in eastern Indonesia, meanwhile, are largely designed to reduce the regional price disparity of goods in western and eastern Indonesia by up to 30%. The intention is to achieve this by consolidating the fragmented forwarding sector and rebalancing the inter-island cargo flows.

At present, six regular cargo routes are being introduced, while around 100 sea transport routes are being optimised in order to boost connectivity between the different regions of the country. By 2019, the plan is to build or acquire 609 vessels in order to support the fleet’s expected increase in passenger and cargo traffic. With such moves being implemented in tandem with other logistics infrastructure projects, in order to ease congestion and achieve shorter holding times for containers at major seaports, it is hoped that logistics costs in Indonesia will be reduced from their current level of 26% of GDP to 19% by 2020, then reduced still further to 9% by 2035.

From a more strategic and international point of view, the Sea Toll Road programme is very much in line with China’s Belt and Road Initiative (BRI), which looks to improve business connectivity between Southeast Asia, Africa and the Indian continent. In light of this then, the development of logistics infrastructure along many of Indonesia’s busiest waterways, including the straits of Malacca, Sunda, Lombok and Wetar, is crucial to the success of both of these far-reaching initiatives.

Opportunities for Foreign Investment

In 2015, the realised funds for infrastructure development totalled IDR 190 trillion (US$14.42 billion), more than double the 2010 allocation. For 2017, another record-high level of funding has been allocated for infrastructure spending. Despite this, Indonesia remains in dire need of private participation in its development programme, as the existing funds can only meet roughly 40% of the total infrastructure funding required up until 2019.

Aside from its major on-going infrastructure developments, such as the Sea Toll Road, Indonesia is committed to several other substantial projects, most notably the provision of facilities for the 2018 Asian Games, scheduled to be held in Jakarta and Palembang in South Sumatra. In order to deliver on these commitments, the government has continually revised its negative investment list in a bid to widen the scope of foreign investment in Indonesia. It is hoped that this will engage the private sector by offering foreign investors more favourable terms with regard to ownership and local SME partnership requirements.

Since September 2015, the Indonesian government has introduced a series of economic stimulus packages designed to boost investment through deregulation and fiscal incentivisation. These measures have included streamlining the approval and procurement procedures required for infrastructure projects, a temporary reduction in tax on revalued fixed assets and cuts to energy prices.

At present, one of the other options available for infrastructure financing is the newly established 57-member Asian Infrastructure Investment Bank (AIIB), of which Indonesia is one of the co-founders and one of its principal backers. To date, the AIIB has approved only one programme in Indonesia – the National Slum Upgrading Project, an initiative intended to revitalise basic infrastructure, including drainage systems and water supply access, in 150 towns and cities across Indonesia. Two more projects – related to improving the safety and efficiency of dam operations and establishing a regional infrastructure development fund – are currently under consideration.

No Strangers to Indonesia: Hong Kong Investors

As far as foreign investment is concerned, Hong Kong is no stranger to Indonesia. In 2016, for instance, Hong Kong was the four-largest FDI investor in Indonesia. In this regard, it was behind only Singapore, Japan and the Chinese mainland, while being ahead of the Netherlands and the US. Between 2011 and 2016, Hong Kong’s realised investment in Indonesia grew at a compound annual growth rate (CAGR) of 76%, rising from US$135.0 million to US$2.2 billion.

In October 2013, during a speech to the Indonesian Parliament, Xi Jinping, China’s President, first outlined his vision of the 21st Century Maritime Silk Road and his plans to establish the AIIB. Since that time, Hong Kong’s investment commitment in Indonesia has soared, rising from US$2.9 billion in 2013 to US$4.5 billion in 2015.

A significant proportion of Hong Kong’s investment in Indonesia has been in the real estate, industrial estate and business sectors. At present, a substantial number of Hong Kong companies have investments in Indonesia, including such well-known property developers as Hongkong Land, the Baleno, Bossini, Giordano and Samuel and Kevin fashion brands, toy manufacturers Lung Cheong and Itacho Sushi, the popular sushi chain.

At present, only a relatively small number of Hong Kong-based SMEs have the financial and staff resources required to manage mega-infrastructure projects. A substantial number of innovative and visionary Hong Kong entrepreneurs – including those in the services sector – are, however, ideally equipped to capitalise on many of the other opportunities emerging across Indonesia. As its business environment grows more vibrant and its infrastructure deficiency becomes a thing of the past, Indonesia’s population is becoming ever more willing and able to spend. In combination, all of this makes Indonesia an irresistible prospect for Hong Kong’s outward-looking business community.

A case in point here is OpenPort, a Hong Kong-based end-to-end logistics solution provider, offering app-based services for tracking business-to business shipments in emerging markets. Since opening its Jakarta office in late 2015, OpenPort has contributed significantly to the development of Indonesia’s logistic sector, an industry estimated to have a potential market value of around US$250 billion.

It has achieved this by introducing a common platform for shippers and forwarders, allowing them to track the delivery of goods in real time. This has resulted in a cost-effective and seamless integration of the logistics network and continuous optimisation of supply chains. This has proved a hugely appealing proposition for all parties involved in the increasingly intricate supply chains required by contemporary businesses.

Overall, OpenPort’s Java Office found success through its partnership with many of Indonesia’s increasingly tech-savvy logistics players. By working hand-in-hand with them, it is now seeking to continuously improve the country’s logistics network.

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