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ASEAN offers a warmer welcome for foreign investors

The 3200 MW combined-cycle plant of Ratchaburi Power Company Ltd (RPCL) in Thailand, which has benefited from a $640 million loan from the Japan Bank for International Co-operation Source: RPCL

The ASEAN energy sector is an increasingly powerful magnet for Foreign Direct Investment (FDI), although global economic turbulence and the region’s struggle to create a coherent business environment continue to provoke lingering growing pains.

Chris Webb

ASEAN (The Association of Southeast Asian Nations) is one of the fastest growing economic regions in the world and has a soaring energy demand driven by economic and demographic growth. The region’s primary energy requirement is projected to triple between 2005 and 2030. Energy demand is expected to reach 1252 million tonnes of oil equivalent (MTOE) in 2030 from 474 MTOE in 2005, an average annual growth rate of 4 per cent1 ” significantly higher than the world’s average growth rate of 1.8 per cent in primary energy consumption for the same period2.

Foreign Direct Investment (FDI), an integral part of an open and effective international economic system and a major catalyst to development, will play an increasingly important role in ensuring ASEAN’s demands are met. Where this FDI will come from is less clear. FDI outflows from developed countries have plunged since 2008, when these nations were hit hard by global financial and economic turbulence.

Intra-Asean FDI Grows

Intra-ASEAN flows, on the other hand, have shown remarkable resilience. Flying in the face of declines in FDI flows from developed countries, intra-ASEAN activity has continued to grow, with an increase of 14.5 per cent over 2008, at the start of the global downturn, to $10.8 billion. The intra-ASEAN share came second only to the European Union (EU), and is rapidly gaining ground against that of ASEAN’s traditional investors.

Meeting the region’s energy needs will mean unprecedented increases in coal use as well as oil and gas imports, which will inevitably also raise greenhouse gas (GHG) emissions. Future investments will set a difficult challenge for ASEAN’s policy makers as they strive to achieve a balance between their stated aims of mitigating climate change with the overriding concern of ensuring security of supply against a backdrop of rapid economic growth.

Until the global financial crisis, FDI flows to Southeast Asia, or the ASEAN sub-region, had grown fast ” 18 per cent in 2007 alone to $61 billion. Nearly all ASEAN countries saw higher inflows. Singapore, Thailand, Malaysia, Indonesia and Vietnam together accounted for more than 90 per cent of investments into the sub-region, although newer ASEAN member countries such as Myanmar, Vietnam, Cambodia and Laos saw the strongest FDI growth, exceeding 70 per cent in each case3.

Yet barriers to free trade still hold back the pace of growth in investment. Despite the best efforts of member countries, and many ongoing initiatives, the ASEAN region remains highly fragmented, partly due to the difficulty of moving goods across borders. Member countries enable trade to different degrees, reflecting the region’s profound diversity.

In June, the World Economic Forum published an analysis of 125 countries in its ‘Enabling Trade Index’ ranking, essentially a guide to the ease of investing and doing business. The ten ASEAN countries ranked from the very top to near the bottom of the table. Singapore came first overall, followed by Malaysia (30th), Thailand (60th), Indonesia (68th), Vietnam (71st), the Philippines (92nd) and Cambodia (102nd).

By highlighting the factors that facilitate the free flow of goods across borders and identifying areas where improvements are most needed, the report aimed to motivate change and to provide a base for dialogue between ASEAN member countries and their partners. The study was also intended as a source of information that could guide outside investors in their business decisions.

Recent information from the ASEAN Secretariat (ASEANSEC) predicts fossil fuels will remain the leading source of energy, with a 84.4 per cent share in 2030, supported by geothermal, hydro and other sources. Coal is set to grow fastest, at 6.9 per cent yearly, as a rapid increase in electricity consumption pushes its share from 11.8 per cent in 2005 to 23.7 per cent in 2030. Natural gas is forecast to increase more slowly, at an average rate of 4 per cent yearly.

Consumption of other fuels, mostly ‘traditional’ biomass, is predicted to creep up only 0.2 per cent, falling from a share of 24.1 per cent in 2005 to only 9.6 per cent of energy in 2030. Electricity use will grow four-fold from 38 mtoe in 2005 to 164 mtoe in 2030. Its share increases from 11 per cent to 18.2 per cent during the outlook period4.

According to the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2010 ‘Investing in a Low Carbon Economy’, there has been a rapid increase in low-carbon FDI in recent years, though it slipped in 2009 with the financial crisis. Significantly, some 40 per cent of identifiable low-carbon FDI projects by value in 2003″2009 were in developing countries, including the ASEAN member nations of Indonesia, the Philippines and Vietnam.

Drive for diversification

But the actual reductions in carbon for ASEAN are miniscule, and the challenges are more serious, despite much rhetoric on climate change from the region. With the projected dominance of fossil fuels, ASEAN is poised to become one of the big contributors to global warming. At the same time, ASEAN risks a heavy impact from climate change, with less ability to contain its effects than other regions. Some governments, already faced with financial constraints, will be confronted with extra costs from climate change mitigation and adaptation in coming years.

As the global financial crisis set in, ASEANSEC noted that rising demand had led countries in the region to scout out and compete for every available energy resource. Natural gas is increasingly scuffled over as demand accelerates. Yet traditional gas suppliers to the world markets, including some ASEAN member states, have imposed policies biased towards domestic consumption and conservation of gas for higher value use.

Regionally, a consensus is emerging that the steady rise in demand makes it critical for ASEAN to embrace all available and possible sources of energy to maintain its growth momentum. Diversification of energy resources and supply sources as a high policy agenda should be pursued. Many ASEAN countries have recently set targets for renewable energy utilization, while some have started opening their doors anew to other options, namely nuclear power, where FDI will play a key role.

FDI, which represents a long-term commitment to the host country and contributes significantly to gross fixed capital formation in developing countries, has been on the rise to ASEAN since 2002. The trend reflects investors’ increasing interest in and confidence about investing and doing business in the region.

Regional initiatives to maintain this momentum operate alongside the efforts of individual ASEAN members to bring their investment climates into line with regionally and multilaterally accepted principles. These national investment measures are fostered by various regional agreements and multilateral bodies that aim to increase the competitiveness of the region in attracting FDI.

Investment initiatives include improvements to the overall investment policy framework, granting of incentives, opening up of sectors for foreign investments and reduction of business costs through lower taxation, as well as the streamlining and simplification of the investment process. Global competition in international trade pushes companies to respond rapidly to changing marketplace requirements, and to know which ASEAN countries offer most potential for investment.

Co-operation on energy goals

ASEAN members’ energy ministers recently reaffirmed their commitment to energy co-operation for regional integration and building the ASEAN Community, stressing the need for co-ordinated efforts in implementing the ASEAN Plan of Action on Energy Co-operation (APAEC) 2010″2015.

Key investments have already brought progress in the implementation of energy efficiency and conservation. Capacity building activities under the Promotion on Energy Efficiency and Conservation (PROMEEC) have been carried out, and the work plan and training curriculum for the ASEAN Energy Manager Accreditation Scheme (AEMAS) have been designed.

Further agreements have been established to seek lines of investment promoting coal and clean coal technology. Member countries have agreed to intensify co-operative partnership in the promotion and utilization of coal and cleaner coal technology while addressing environmental issues and facilitating intra-ASEAN coal-related actions, such as improving the public image of clean coal and exploring an ASEAN agreement on coal supply and trading for regional energy security.

ASEAN ministers have also vowed to continue their regional co-operation on developing renewable energy to achieve their collective target of 15 per cent of all installed power capacity by 2015, including hydropower and biofuels, through the centres of research and development on renewable energy in the region.

Ministers have also agreed to strengthen, on a voluntary and non-binding basis, regional capacity building in civilian nuclear energy power generation for regulators, operators and relevant educational institutions. This will be undertaken through exchange of information and assistance on sustainable civilian nuclear power programmes, in accordance with the respective relevant international and regional agreements and standards.

Such a growth in power demand is expected to put a significant strain on the ASEAN power grid. Ministers have emphasised the importance of completing Phase II of the ASEAN Interconnection Master Plan Study (IMPS), along with recommended guidelines to speed up implementation of the ASEAN power grid to boost reliability of operation, safety standards and procedures in generation and transmission. They have agreed guidelines on a model framework for investment in interconnection projects and cross-border sale and transmission of electricity.

Other efforts to ensure greater security of supply include extensive co-operation in gas supplies, such as agreements to expedite the completion of the Trans-ASEAN gas pipeline, including facilities for liquefied natural gas.

Co-operation deals with other nations

Meanwhile, aside from efforts to further strengthen intra-ASEAN FDI, the organization continues to expand energy co-operation with Russia, the USA, China, Australia and the EU. An existing ASEAN-Russia Energy Co-operation Work Programme should provide significant benefits to the region between 2010 and 2015. It is hoped further investments will speed up capacity building programmes, the development of alternative and renewable energy resources, the expansion of energy infrastructure, the peaceful use of nuclear energy, and the exploration of coal, oil and gas resources. The first ASEAN Ministers on Energy Meeting (AMEM) with Russia will take place next year to discuss possible future investments.

There are also efforts to strengthen partnerships with China and Japan to address mutual issues and concerns relating to energy security, natural gas development, oil market studies, oil stockpiling and renewable energy. The ASEAN Senior Officials Meeting on Energy (SOME) and Energy Policy Governing Group (EPGG) have been established to this end.

ASEAN’s secretary general, Dr. Surin Pitsuwan, has announced deepening energy co-operation with China, South Korea and other East Asian nations. In March, he welcomed to the ASEAN Secretariat a 17-member delegation from China’s Shaanxi province including Zhao Zhengyong, the executive vice-governor of Shaanxi Province, and Zhang Qiyue, the Chinese ambassador to Indonesia. “The ASEAN-China Free Trade Area [ACFTA] agreement, which came into force on 1 January 2010, is a golden opportunity for businesses in ASEAN member states and China to capitalize on the many prospects that ACFTA helped open up,” said Dr Pitsuwan.

Trade between ASEAN and China reached $192.7 billion in 2008, placing China as ASEAN’s third”largest trading partner in 2009, accounting for 11.3 per cent of ASEAN’s total trade. Cumulative FDI flows from China into ASEAN from 2003 to 2008 stood at $5.1 billion. Dr Pitswan encouraged China to increase its co-operation with ASEAN in the energy sector through co-ordination and co-operation with the ASEAN Council on Petroleum (ASCOPE) and the ASEAN AMEM. Shaanxi Province could share its pipeline technology with ASCOPE and AMEM to enable both parties to explore collaborative opportunities, he added.

On a country”by”country basis, China’s FDI in Myanmar alone hit $1.85 billion by the end of the 2009″2010 financial year, with significant expenditures in hydropower, mining, and oil and gas, according to official figures. It puts China as the third largest investor in Myanmar, behind Thailand and the UK. “The FDI flow from China contributes 12 per cent of total FDI in our country,” U Htay Chun, deputy director general of Mynamar’s Directorate of Investment and Company Administration, said recently. Statistics from the Ministry of National Planning and Economic Development put total FDI in Myanmar at $16.05 billion to 31 March 2010. Chun added 63 Chinese firms are investing in Myanmar.

The Philippines has also benefited greatly from FDI, particularly from the US, which reaffirmed its commitment to supporting energy needs while mitigating climate change at the ASEAN Clean Energy, Trade, Technology and Investment Forum last April. The forum, sponsored by the US Trade and Development Agency (USTDA) in co-operation with the US Department of State and the ASEAN Secretariat, followed through on the commitment by President Barack Obama and ASEAN leaders to address issues arising from climate change. USTDA director Leocadia Zak said the US was committed to investing in the deployment of new energy sources and clean energy solutions that will spur the green energy revolution.

“The US can provide funding to ASEAN countries that seek to work with US private sector experts on shared priorities. USTDA’s programme identifies new commercial opportunities and helps to prepare project sponsors for financing and implementation,” said Zak.

USTDA funds account for 45 per cent of total US commitments to ASEAN countries. Washington has also committed more than $44 million to support energy development in the ASEAN region.

Rising interest in nuclear

Enthusiasm for nuclear power is rising across ASEAN, even though the area still lacks an operational nuclear power plant. Of the ten member nations, only Brunei and Laos have no active plans for adding nuclear power into the electricity generating mix. In terms of scale, Vietnam has the greatest ambitions. The country recently announced plans to build eight plants by 2030, producing 15 GW to 16 GW of electricity.

In addition, Indonesia plans to have four nuclear plants producing 6 GW by 2025, while Thailand wants to develop two nuclear plants to generate 2 GW by 2022. Singapore currently generates most of its power from natural gas, which is increasingly scarce, and has initiated a feasibility plan for nuclear power. Other countries in the region are in the process of developing similar plans.

Nuclear power is important for ASEAN nations, which must negotiate bilateral civil nuclear co-operation agreements with nuclear supplier countries such as the United States, Japan, France, Russia, Canada and Australia. Until that happens, they cannot receive nuclear reactors, fuel, equipment, services or technology.

Some ASEAN countries already have such agreements in place, and are on the way to demonstrating their commitment to maintaining international standards of nuclear safety, security and non-proliferation.

Maybe ‘important’ is not the right word to use in such a context. In a region where the International Energy Association (IEA) expects electricity demand to increase by 76 per cent between 2007 and 2030 at an average annual rate of 3.3 per cent growth per annum, ‘essential’ may be more appropriate.

It is estimated that meeting the ASEAN countries’ electricity demand will require investing more than $1.1 trillion in the next 25 years, a clear indicator as to why FDI is so important to the region.


1. ASEAN Energy Outlook, 2009.

2. IEA World Energy Outlook, 2009.

3. World Investment Report.

4. ASEAN Energy Outlook, 2009.

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