Issue 17 Finance and Development Feb 2012 by Noviscape Consulting Group

17 ISSUE

Finance and Development INTRA-REGIONAL PUBLIC-PRIVATE PARTNERSHIPS

PUBLIC-PRIVATE PARTNERSHIPS AND ACCOUNTABILITY IN SOUTHEAST ASIA

FINANCE, INNOVATION AND SOCIAL COHESION INTERVIEW WITH DR. ANUSORN TAMAJAI INFOGRAPHIC: SOUTHEAST ASIA AND FLOW OF OFFICIAL DEVELOPMENT ASSISTANCE

EDITORIAL

BY DR. APIWAT RATANAWARAHA

Department of Urban and Regional Planning, Chulalongkorn University

BY DR. APIWAT RATANAWARAHA

Department of Urban and Regional Planning,

MR. WITCHAYA PRUECKSAMARS

Chulalongkorn University

Department of Urban and Regional Planning, Chulalongkorn University

KEYWORDS: If money makes the world go round, then the management of money, i.e., finance, would dictate whose world will benefit or lose from the spinning. Finance can affect development and poverty in many ways, one of which is through the allocation of savings for investment in public infrastructure and services. How infrastructure and services are financed (pay-asyou-go or borrowing), funded (taxes or user fees), and delivered (public or private) will determine who in society stands to gain or lose. Although the recent global financial crisis has slowed down financial liberalization somewhat, money still sees no boundaries and slithers into places where opportunities lie. The question is, at what cost? In this issue of TRENDNOVATION SOUTHEAST, we spot a few recent signals of finance for development in Southeast Asia. The first article spotlights some trends in intra-regional public-private partnerships (PPP) in the region. A noticeable trend is the emerging but already significant role of China as a financier in infrastructure projects. Concerns are growing as to whether these projects will uphold international accountability standards in terms of environmental and social impacts. The issue of accountability in the context of PPP is further discussed in the second article. It argues that the supposed benefits of PPP arrangements simply do not take place, due to several reasons; and more often than not, PPP is reduced to a model that merely supports corruption and elite capture. The article provides an overview of campaigns and attempts, as well as the driving forces, that can increase the accountability of PPP projects. The third article shows that financial innovations are not necessarily profit-seeking, especially the ones that have emerged from the public sector. The article highlights many efforts that serve to accommodate the region’s changing social fabric and demands. These include such things as the re-orientation of financial instruments and institutional arrangements, the changing of the mindset of bureaucrats, the budgetary support pertaining to the betterment of social well-being, as well as the development of compensation model in the event of a natural disaster. TrendNovation this month interviews Dr. Anusorn Tamajai, Dean of the Faculty of Economics, Rangsit University, and the Director for Supervision and Execution of Policies in Thailand’s Public Debt Management Office. Dr. Anusorn shares his views about the key investment or finance trends that might be related to the poor, given the outlook of ASEAN integration, and the future role of the financial sector in contributing to human/social development and poverty alleviation in this region. Our Infographic of the month features the 2010 flow of Official Development Assistance (ODA), an indicator of international aid flow. The United States remains the largest donor country, while Africa as a region receives the largest amount of ODA. In Southeast Asia, Vietnam receives the largest amount, followed by Indonesia. Interestingly, Thailand is both a donor and a recipient of ODA.

Disclaimer : The opinions expressed herein are those of the authors and do not necessarily reflect the official positions of Noviscape Consulting Group or the Rockefeller Foundation. Copyright © Trendsoutheast 2009 - 2012. All Rights Reserved.

IDEA Public-private partnership (PPP) schemes have become widely adopted among Southeast Asian countries to finance, fund, and deliver public infrastructure and services. Although large infrastructure projects in the region have usually relied on international investors and donors, the sources of finance are no longer limited to the developed world. China is poised to become a prominent financier in infrastructure projects in Southeast Asia, especially in the energy and transport sectors. Concerns are growing as to whether these projects will uphold international accountability standards in terms of environmental and social impacts.

TRENDS / SCENARIOS Enormous pressure to develop regional infrastructure, particularly in energy and transport Between 2000 and 2010, the East Asia and the Pacific regions implemented almost one thousand infrastructure projects with private participation, involving investment of US$209 billion. It is estimated that this region would need to spend about 8 trillion dollars—or about two and a half times the amount spent between 2000 and 2010—to meet critical infrastructure needs between 2010 and 2020,1 of which, roughly two-thirds is for new capacity and a third is for maintaining and replacing existing infrastructure. Eight out of the ten member countries of the Association of Southeast Asian Nations (ASEAN), excluding Singapore and Brunei, need US$1,095 billion to address their infrastructure needs. Such burgeoning demand is attributed to ASEAN’s expanding economies and increasing intra-regional trade that requires larger infrastructure capacity and better connectivity. Continuing industrialization, growing wealth and

Public-private partnerships; China; international accountability; ASEAN integration; hydropower development; Mekong.

consumption, and increasing transport mobility and connectivity in and between cities and regions all require reliable energy supply and supporting infrastructure. Meanwhile, the recent global economic crisis has prompted governments in Southeast Asia to stimulate their domestic and regional demands, as opposed to continuing to rely on the developed West, to sustain growth. As part of this strategic shift, some governments are planning to assist these demands by investing heavily in infrastructure projects.

Growing presence of China China’s presence in infrastructure investment in Southeast Asia has increased substantially during the past decade, particularly in the energy (hydropower) and transport sectors. In Cambodia, three out of five electricity generation projects with private participation that reached contractual closure in 2010 were 100% financed by Chinese capital; the Chinese investment amounted to six times more than the remaining two projects combined. This trend is also observable in Laos and Myanmar, where as many as 45 Chinese companies have been involved in approximately 63 hydropower projects.2 Interestingly, these companies are not exactly “private,” as they are partially owned enterprises of the Chinese government. The Chinese presence is growing as well in the transport sector, specifically in high-speed trains. As part of its Pan-Asia railway plan, China is eyeing to link its southern provinces with Southeast Asia. This network expansion would contribute to China’s ambition to build high-speed rail lines across Asia and India, ultimately connecting to Europe’s networks. In 2010, the Thai government had agreed to borrow about US$400m from China for building the railway network with Chinese locomotive companies. The plan was suspended as of February 2012,3 but it is likely that the ambitious Sino-Southeast-Asian network will be revived sooner or later.

1 ADB/ADBI (2009). Infrastructure for a Seamless Asia. Tokyo: ADB/ADBI. Available from www.adbi.org/files/2009.08.31.book.infrastructure.seamless.asia.pdf 2 China in Burma: The Increasing Investment of Chinese Multinational Corporations in Burma’s Hydropower, Oil and Natural Gas, And Mining Sectors. Earthrights International. September 2008.

http://www.burmalibrary.org/docs5/China_in_Burma-ERI.pdf

3 Sino-Thai high-speed rail link put on hold for now. THE NATION. February 25, 2012. http://www.nationmultimedia.com/business/Sino-Thai-high-speed-rail-link-put-on-hold-for-now-30176665.html

4 ASEAN Infrastructure Fund:

Calls for transnational accountability

In terms of financing sources, a new fund is being established to finance major infrastructure projects across the region. The ASEAN Infrastructure Fund (AIF) is being set up with an initial equity of US$485 million, of which US$335 million will come from nine ASEAN members and the rest from the ADB (US$150 million). The AIF is expected to lend up to US$4 billion by 2020. With projected 70 per cent co-financing by ADB, it is expected to leverage more than US$13 billion in infrastructure financing by 2020. The AIF is expected to finance around six new infrastructure projects each year. Several governments have indicated that they would apply for AIF financing, including an Indonesian shipping lane project and a cross-border power grid project in Indonesia and Malaysia.7

There has been a spurring competition among banks and builders from richer countries in the region to finance and build large infrastructure projects in neighboring countries. For instance, Thailand’s Ch Karnchang is financing and building a $3.8 billion hydropower dam on the Mekong River. Another Thai construction conglomerate, Italian-Thai Development PLC, has signed an $8 billion contract for the deep-sea port and infrastructure project in Dawei in southern Myanmar.4 Malaysia’s Leader Universal Holdings are also investing 100% in two electricity generation and transmission projects in Cambodia. Eager to get involved, these companies (as well as their partners in the public sector) are being accused by the region’s emerging civil society of methodically disregarding the impact of their projects and proposals, in part because the costs of non-renewable resources and pollution are not priced in by the current accounting practices of many governments. Requirements to assess the projects’ impact are also weakly enforced due to legal loopholes. The failure to properly carry out environmental and social impact assessment inevitably leads to the externalization of project costs onto local people and the environment. Hence, even if a PPP project is a success within the scope or objectives that it set out, it may still entail negative externalities, so much so that it may be deemed to be a failure or an unnecessary burden to the recipient country (particularly by locking themselves in an unfair contract). Therefore, as intra-regional investment in infrastructure increases, transnational accountability issues become more important. On a more positive note, the decision by the governments of Myanmar and Laos to refuse potentially-devastating megaprojects from being further pursued is more than welcomed. For instance, the Myanmar government halted the Myitsone dam project, which was being financed and constructed by a state-owned Chinese company (thereby agitating the Sino-Myanmar “friendship”), because its implications are potentially catastrophic—the magnitude of which is comparable to a “weapon of mass destruction.”5 Such decision is an early indicator of public accountability being improved.

Willing to engage: Myanmar’s President, Thein Sein, meets with Hillary Clinton. Source: Wikipedia

Public-Private-Community Partnerships: Local communities are usually left out of the so-called partnership. Future PPP initiatives will have to include the communities throughout the project cycle. Although putting such principle into practice is far from easy, here are some ideas and initiatives:

• As nations are reluctant to accuse their neighbors of

any wrongdoing or meddle with each other’s businesses, there is a need to empower sub-regional or regional institutions to ensure reasonable and equitable use transboundary resources. The Mekong River Commission, for instance, has played an instrumental role in supporting a joint basin-wide planning process and resource management. Its most critical role in recent time has been the facilitation of evidence-base discussions to prevent “bad” dams from getting approval.

China’s ambition: the Kunming-Singapore railway network. Source: Wikipedia

IDEAS FOR INTERVENTION: GOING BEYOND PPPs

• There have also been calls to develop a “Mekong

Standard” for evaluating hydropower proposals in the Basin.8 The standard is to reflect international best practices and be based upon a cumulative/ comprehensive cost-benefit analysis.

PPP support units: The underlying principles of PPPs are the same everywhere, but local conditions require customized solutions. Hence, the establishment of specialized PPP support units or “Centers of Excellence” is of great value: not only do they improve the public sector’s flexibility to make customized solutions, they also make its interaction with the private sector more effective and equitable. Examples include: Public Private Partnership Unit (3PU), Malaysia; Public and Private Infrastructure Investment Management Center, Korea; and The Public-Private Partnership Center of the Philippines. Furthermore, while it is important for the public sector to create enabling policy environments for PPPs and develop “bankable”6 projects, a more crucial role is to regulate the relationship between its partners and keep the playing field level. So in order to develop genuine partnerships and ensure equitable outcomes, the government needs to make clear its contradictory roles of enabling the private sector while also regulating the market. This implies clarifying and strengthening the current legal and regulatory frameworks regarding PPPs.

4 UPDATE 1-Italian-Thai aims to conclude Dawei financing in 2012. Reuters. Mon Dec 26, 2011. http://www.reuters.com/article/2011/12/26/italianthai-idUSL3E7NQ1Q120111226 5 http://www.irrawaddy.org/article.php?art_id=22143 6 A bankable project is one that has sufficient collateral, future cash flow, and a high probability of success so that it is acceptable to institutional lenders for financing.

• There have been a number of PPP projects in urban

settings that have actively involved local communities. In Manila, the private operators have successfully extended water supplies to low-income urban settlements by involving communities, non-governmental organizations and small enterprises in managing metering and billing.9

DRIVERS & INHIBITORS • The increasing integration of ASEAN economies will increase opportunities for private investment in infrastructure projects in the region. The development of regional transport networks is crucial to promoting ASEAN integration, and intra-regional investment in this sector is likely to grow further.

medium-income Southeast Asian economies will only increase private investment in energy infrastructure, especially in hydropower plants (as the last few untapped sources of energy production in the region). Increasing concerns about negative environmental and social impacts may slow down the rush, but they will not stop the trend.

• Technological advancement in the renewable energy sector will encourage a diversification of fuels at the national level and thus provide the private sector with more opportunities to become involved.

• Transport technology, notably improvements in air

freight and containerization, have made it possible to trade with more places in less time and often at lower cost. Air cargo involving Asian countries has grown much faster than in the world as a whole, with international flights within Asia experiencing rapid growth. As such, multimodal shipping and improvements in logistics services will facilitate private investment.10

• Willingness to engage with the world community will

lead developing nations in the region to significant political reforms, such as the ones we are observing in Myanmar, thereby improving transparency and accountability.11

• Rhetoric of modernization and Corporate Social

Responsibility narratives from the state(s) and the private sector often only amount to an effort to co-opt the public and local communities.12 This clearly does not improve accountability.

ABOUT THE AUTHORS Dr. Apiwat Ratanawaraha is an Assistant Professor at the Department of Urban and Regional Planning, Chulalongkorn University in Bangkok, Thailand, where he teaches infrastructure planning and finance, urban management, and economic development. His current research includes projects on city innovations in Southeast Asian megacities, infrastructure justice, and inequality in access to basic services in Thailand. He has been a Visiting Assistant Professor at the Department of Urban Studies and Planning at MIT, teaching infrastructure finance and energy security. He was a Doctoral Fellow at the Belfer Center for Science and International Affairs, Kennedy School of Government, Harvard University, conducting research on infrastructure, technological development and innovation policy. Mr. Witchaya Pruecksamars holds a BSc in Urban Planning, Design and Management and an MSc in Development Administration and Planning, both from University College London. He is now working as a project coordinator and researcher at the Department of Urban and Regional Planning, Chulalongkorn University. His major research interests are in urban and planning history in Thailand, geo-spatial technologies, and geo-politics of hydropower development in the Lower Mekong Basin.

• Burgeoning appetite for energy in China and 7 8 9 10 11 12

http://www.martindale.com/banking-financial-services/article_Norton-Rose-Canada-LLP_1409000.htm http://www.stimson.org/spotlight/laos-xayaburi-dam-decision-requires-a-mekong-standard--1/ http://www.undp.org.in/content/factsheets/DG/PPCP.pdf http://www.adbi.org/working-paper/2010/02/25/3587.accelerating.regional.integration/the.changing.nature.of.asian.trade/ http://www.bbc.co.uk/news/world-asia-pacific-15121801 http://www.internationalrivers.org/follow-money/private-banks-investors/thailand%E2%80%99s-commercial-banks%E2%80%99-role-financing-dams-laos-and-case-

7 1. Fully corporate PPPs style In this scenario, the ruling class, with the overwhelming support of a majority vote and support from other elite groups, will apply full mechanism on PPPs. They will implement privatization in various forms both for full privatization and capitalization. Accountability and conflict of interest will be a big question. This scenario also requires political stability and long term administration by the ruling class. Projects such as Suvarnabhumi Airport in Thailand and Iskandar project in Malaysia reflect this scenario.

BY MR. KAN YUENYONG

Founder, Siam Intelligence Unit

KEYWORDS:

IDEA

Public-Private Partnerships; PPPs; accountability; contract; outsourcing; public financial; public budget; Iskandar; Reversed cross; Securitization.

The recent corruption charged against the spouse of exIskandar Investment Berhad (IIB) executive in Malaysia raised a question on an accountability of the Public-Private Partnerships Project (PPPs) alike in Southeast Asia. According to Star Online, Mohd Amin Suhaimi, believed to be the husband of Arlida Ariff, former IIB’s chief CEO, had been alleged soliciting RM1.6 million as an inducement to obtain a project. IIB, with a total of 3.4 RM billion total assets, was invested by Khazanah Nasional (60%), EPF (20%) and Kumpulan Prasarana Rakyat Johor Berhad (KPRJ) (20%), a company wholly owned by the Johor State Government. IIB will own a significant land bank in South Johor through various financial instruments, and IIB will lead the implementation of various strategic and catalyst Iskandar Malaysia initiatives, including implementing some of the major Ninth Malaysia Plan projects within the Iskandar Malaysia through various Special Purpose Vehicles and partnerships with the private sector. The borderline between public and private is now blurred; accountability is thus a serious question more and more on PPPs project. This paper will examine how accountability will shape the future of PPPs in Southeast Asia.

SCENARIOS Theoretically, PPPs are long term relationships between government and private sectors. Both sectors share responsibility on both decision making and negotiated allocation of risk of the project together. Although PPPs are neither a form of Privatization nor Contracting, since in Privatization the government will either eliminate direct control and ownership of the operation and the delivery of services (full privatization), or it will retain some control by holding some stock in the privatized enterprise. While, in contracting the government will issue a request-for-proposal (RFP) for its required products and services.

2. Reversing privatization In this case, the opposition forces will gain enough backup from other factions in the society. They will employ both the judicial process and running campaigns to force the government to buy back public stock, or reverse privatization. The demolishment of ITV in Thailand occurred through an arbitrator’s judgment to award concessionaire advantage to Shin Corp by an administration court in March 2007. The establishment of Thai PBS, based on public television service, has been considered a supporting case in this scenario. However, due to connected globalization and according to the rule of law, opposition forces cannot easily implement their ideas. They need a well-researched strategy backed by logic to convince the public to support their movement. Public television research from TDRI was utilized in this case. The movement will look at efficiency in the project related to national security and high level of public interest. 3. A well-strengthened accountability for PPPs project

Iskandar Malaysia, a Southern development corridor in Johor, Malaysia.

In PPPs, the government will get an advantage by reducing the learning curve and can access the cost-effectiveness from the service, while the private organizations are willing to share their expertise in order to get long-term service contracts. In this case, accountability will help guiding on mutual benefit for the partnership in mutual respect manner on equal participation in decision-making, mutual accountability and transparency aspect. However, in the real world situation, especially in a developing democratic country, PPPs seems to be used as a financial instrument and a management structure to gain benefit for the elite who gain power from the government. On the other hand, left wing groups will continue to pose their skepticism about PPPs based on capitalist exploitation. They will run their campaign against projects such as PPPs, privatization and so on. The two forces will shape the future of PPPs in Southeast Asia in three possible scenarios as follows:

If neither the ruling class nor the opposition forces can dominate each other, a compromise scenario might be happen. In this case, although backstage negotiation via lobbying and threatening will be on-going, in the forefront it will apply a well strengthened accountability for PPPs project. The ruling class will agree to apply accountability concepts in order to gain public support for the project. They will require project successfulness, in order to please their voting base. Meanwhile, the opposition force will monitor the project, and they will act as an accountability inspector. Thus, the accountability agreement will not just be a paper contract, but it will be forced into reality by such a process.

Reversed cross project proposed by Pansak Vinyaratn, former chief advisor for PM Thaksin Shinawatra, and former advisor for PM Chatichai Choonhavan.

a secure place to avoid mega floods in the future and to maintain fully functioning national administrative work in times of crisis.

• Mega-projects ambition

Pansak Vinyaratn, former chief advisor for PM Thaksin Shinnawatra and advisor for PM Chatichai Choonhavan, suggested that there be the construction of a high speed train supported by The People’s Republic of China from Kunming to the EasternSeaboard in Thailand, and a highway infrastructure built supported by Japan from Malawmang in Burma, to Pitsanulok in Thailand, and on to Danang in Vietnam—called The Reversed Cross project. It may help Thailand to position itself as a logistics center for mainland ASEAN. He pointed out that Thailand could nurture creative industry and green technology along the “Reversed Cross” area. It would also be possible that Thai government could establish a semi public-private enterprise to help develop this special economic zone and real-estate. A multi-layer corporate body would be designed together with multiple financial instruments in order to raise funding such as securitization, follow the Iskandar project in Southern Malaysia, and the government complex in Chaengwattana.

Another possible project is the East-West Southern Economic Landbridge, which will connect the Andaman Sea with the Indochina Sea via a high speed road and rail system across Southern Thailand, instead of the Kra Canal project which was considered a high security risk.

EARLY INDICATORS • An initiative to establish city’s size projects

There is a study from the Thai government to establish a new capital / administrative city center, following the model of Putrajaya in Malaysia and Canberra in Australia. The location could be at Petchaboon, Chacherngsao, Nakorn Pathom, or more recently Nakorn Nayok which had been suggested by the Thaksin government. The Thai floods in 2011 may resurrect the new capital city project, in order to find

There was also a similar model for a Nakorn Suvarnabhumi province. The proposal was announced in October 2005, with a draft bill approved by the cabinet in June 2006. The area would cover Lat Krabang, Prawet, Bang Sao Thong and Bang Phli, and it would have become a special administrative zone. However, the proposal was finally withdrawn by a resolution of the cabinet in April 2007.

• PTT striking from NGOs

Since inception of The Stock Exchange of Thailand (SET), PTT Public Company Limited has always been a major target for NGOs to run campaigns demanding the government buy back its public stock and delist it from the stock market. The rationale has been that this would safeguard energy welfare for Thai people and solve a transparency problem during capitalization in the SET.

IMPLICATIONS • Implement full accountability process in PPPs

Many PPPs projects display poor performance. In order to pose excellent performance and low risk operation as expected, such projects as British private finance initiative (PFI) projects in education, health, criminal justice, and information technology has been proposed, while the only successful project so far has been the road project. Forrer, Kee, Newcomer and Boyer (2010) suggested an approach to apply accountability in six dimensions, which are: 1) risk, 2) costs and benefits, 3) social and political impact, 4) expertise, 5) partnership collaboration, and 6) performance measurement. This accountability process may help PPP projects become more successful.

• Apply the democratic public finance budget concept on public projects

Normally, mega-projects may come with various complex financial instruments. These financial instruments tend to hide public expenditure and financial risk from public audit. Financial instruments such as Special Purpose Vehicle (SPV), Securitization and Sovereign Wealth Funds (SWF) may pose unlimited risk to the public. At the very least public financial law and institution reform, as well as transparent information are needed. The large PPPs investment must be included in the annual public budget and must be authorized by the House of Representatives.

DRIVERS & INHIBITORS • Mega-projects on infrastructure intended to endorse better logistics by China and Japan may leverage PPPs projects in Southeast Asia. • Public opinion for an acceptance of corruption with better performance on public works will pose a limitation in accountability promotion. • A recent anti-corruption campaign from many public and private organizations may activate accountability awareness in public projects.

BY DR. PUN-ARJ CHAIRATANA Managing Director, Noviscape Consulting Group

REFERENCES Forrer J., Kee J. E., Newcomer K. E., & Boyer, E. (2010). Public-Private Partnerships and the Public Accountability Question. In Public Administration Review, May-June 2010. John Wiley & Sons Inc., USA. Iskandar Regional Development Authority. (2011). Annual Report 2010. Retrieved from IRDR website http://www.iskandarmalay sia.com.my Office of the Council of State. (2003). Study paper on law structure for Administrative center city in Malaysia and Australia. PoliticalBase, ITV. Retrieved from PoliticalBase website http:// politicalbase.in.th/index.php/%E0%B9%84%E0%B8%AD%E0 %B8%97%E0%B8%B5%E0%B8%A7%E0%B8%B5 Siam Intelligence Unit. (2012). Transform Thailand. Siam Intelligence Unit, Thailand. Suwanmala C., Kruethep W., and Chuayprakong P. (2010). Public Finance law and institution, case studies from Canada, New Zealand and Singapore. Chulalongkorn University, Thailand. The Malaysian Insider. (2011). Spouse of ex-Iskandar top exec charged with graft. Retrieved from The Malaysian Insider web site http://www.themalaysianinsider.com/malaysia/article/ spouse-of-ex-iskandar-top-exec-charged-with-graft/ Wang Y. (2009). A Broken Fantasy of Public-Private Partnerships. In Public Administration Review, July-August 2009. John Wiley & Sons Inc., USA.

REFERENCES

ABOUT THE AUTHOR Mr. Kan Yuenyong is a co-founder and executive director of Siam Intelligence Unit (SIU) http://www.siu.co.th, an alternative think tank and research service on various social, environment, business and economic issues. He is now studying in the advanced certificate course on Promotion of Peaceful Society (class 3) at King Prajadhipok’s Institute. He was selected by The Friedrich Naumann Foundation to represent Thailand in seminars on Strategic Planning and New Public Management in 2009, held at the International Academy for Leadership, Germany. He formerly worked at Internet Thailand Public Company Limited.agency in Thailand.

DR. TIPPAWAN PINVANICHKUL

Assistant Professor, Graduate School of Management and Innovation, King Mongkut’s University of Technology Thonburi

KEYWORDS:

IDEA In the aftermath of the 1997 financial crisis, under the Washington Consensus, many counties in Southeast Asia were forcibly receiving aid and loans under the policy framework from the World Bank (WB) and the International Monetary Fund (IMF). These came together with a liberalization of the financial sector and foreign control over public finance. There had been a significant institutional amount of reform in banking and public sectors. For the past two decades, the regional economy has rebounded with a strength and immunity to adjust to global market uncertainty, which can be observed as a positive improvement from various economic and human development indicators. Instead of a new round of speculation, a shift in the social paradigm, on-going demographic change, and the recent series of natural disasters will drift the regional financial setting to subscribe to “social cohesive finance” as an alternative investment ideology.

TRENDS / SCENARIOS Modern Bureaucracy with Compassionate Essence The decade of the 2000s was the golden decade for administrative reform in Southeast Asia in creating a cohesive and livable society. There have been various attempts to restructure the administrative function and leverage bureaucratic capacity to undertake wealth creation and welfare distribution. In 2004, Thailand established the Ministry of Social Development and Human Security (MSDHS) with an ambition to transform the country into a quality society, while the renowned social engineering spearheaded by Singapore was reformed to be the Ministry of Community Development, Youth and Sports (MCYS). Singapore has a grand desire to build “the heartware” to achieve “a cohesive and resilient” society. Later in 2006, Malaysia officially established the Ministry of Women, Family and Community Development (MWFCD) with special focus on women, social welfare and sustaining the social institution, similar to the forerunner in Cambodia, the Ministry of Women’s Affairs (MOWA), which was established in 1999.

Administrative reform; Post-Washington consensus; governmental budgeting; natural disaster; social cohesive finance; inclusive innovation; financial innovation

Apart from becoming modernized, the Southeast Asian government intends to be more compassionate! This new generation of ministries will play an active role in setting socio-economic agendas, by investing in social and human development, coping with a fast increase in demands of grass-roots people, and preparing their societies to be ready for the arrival of the ASEAN Economic Community (AEC) in 2015. This is especially true for those emerging economies with a high economic vibrancy (i.e. Indonesia, Laos, and Vietnam). For more advanced countries in the region, uncertainties caused by social, environmental, and political risks will be increased, because their societies are approaching the post-industrialization stage. Social fabric, integration, inclusion, and intangible New generation of social justice (e.g. rights and development ministries in freedom) will constitute this Southeast Asia. complexity.

A Shift towards Social-oriented Budgeting This bureaucracy-dominated region is now joining the Post-Washington Consensus band-wagon. Lessons from the economic crisis, the arrival of the Asian Century, and sophisticated demand from the new rich, expanded middle class along with demographic changes, bringing in different kinds of social phenomena – have all coined this new social fabric. Unlike its Latin America counterpart, which has moved to a left-wing style of public spending, a combination of conventional and progressive approaches to investment in community has been introduced to serve an emerging social demand, ranging from national heritage conservation to boosting-up creative tourism industry and local education in such places as Indonesia and Thailand, and extending social welfare and new benefits for special

11 old school of social development – the progressive and the conservative. This can be seen from public spending in Thailand between 2004 and 2011 (See Figure left). The country enjoys a high rate of public services surplus (e.g. in basic education and healthcare). Also, new investment in poverty reduction (income distribution), social inclusion and inequality (public housing, new income tax reduction) have been increasing over time. As a percentage, some small newly established ministries with a social mission have gained more than a one hundred percent increase in their annual budgets, especially the MSDHS, Ministry of Tourism and Sport (MoTS), and Ministry of Culture (MoC). A big chunk of this budget has been allocated to new public building, social monitoring, and governmental campaigns.

“Fire & Rain”: A Climate Change and Demographic Friendly Finance groups of people, (e.g. the HIV-AIDS subsidized scheme and village fund in Thailand; disabilities and senior citizen supports in Singapore). Some leading nations in the region have already shifted their national budgeting goal to facilitate a new wave of social change. For example, the mission of the Singapore national budget in 2012 is to build an inclusive society and a stronger nation, while Malaysia is focusing on a similar theme - “National Transformation Policy: Welfare for the Rakyat (People), Well-Being of the Nation”. The forthcoming budget for Thailand in 2013 will mainly focus on national reconciliation and water management.

Changing Institutional Mindset for Social Cohesion Some progressive bureaucrats and bankers are already shifting their mindset to accommodate this systematic change. “A forest bond”, proposed earlier this year by the Thailand Development Research Institute (TDRI) and some bankers to finance an environmental conservation project by issuing government bonds, can be seen as one form of financial innovation acting like a platform to shift the mindset among the public, banking, and investment sectors from “doing a charity campaign” into “doing a serious social business”. This new financial instrument can be a showcase project. In the business sphere, since 1999 there has been a new language to express the performance of these corporations, institutions and microfinance firms. Innovation in performance reporting includes introduction of TBL-Triple Bottom Line, DBL-Double Bottom Line and 3P formulation. TBL and DBL requires that corporations report not just on the economic or financial value added, but also on the other two aspects of sustainability: the environmental and social value they add or destroy. This change in the corporate reporting culture reflects the societal expectation on business social responsibility. In contrast, an increasing emphasis on the social venture budget would lead to a clash between the new and the

Recent grand scale natural disasters have uncovered a fragile readiness to tackle problems by national governments. Annual smoke haze in the Kalimantan and Sumatra regions of Indonesia between October and November, and in Northern Thailand between February and March, has transformed the Southeast Asia winter into a season of air pollution. The Thailand Mega Flood Crisis of 2011 left the life of the elderly female labor force in limbo. They were forced to take the choice between attempting to keep their current job with a flooded enterprise by waiting around idle, or finding a new job. The later situation left room for the employer not to pay compensation for dismissal - a life-long benefit and the last big chunk of money for these aged laborers. This is partly because looking for a new job would have resulted in them being disqualified from receiving a year-long compensation, and allowed the employer to hire his preference for a fresh and young workforce. By the year 2030, a quarter of the Thai population will be senior citizens, or 17.8 million people (Foundation of Thai Gerontology Research and Development, 2011). This signals at least three challenges: a shift in the fringe benefit and employment framework for the elderly workforce; a compensation model for natural disasters, which will certainly be the trend over the next decade; and an increase in respiratory and skin disease among the ageing population residing around “the fire & rain” zone!

IMPLICATIONS We may define “social-cohesive finance” as an investment that generates security in basic needs; brings in social and economic orders through a network of relationships and participation for social inclusion and equality through financial and inclusive innovations.

Financial innovation: • Formal institutions (the government and banks): Most of the leading nations in Southeast Asia have already been pouring in money to upgrade their physical infrastructure in order to boost-up economic growth for better livelihoods and environmental conservation

through the development of new financial instruments, tax schemes, financial products, insurance packages and non-financial incentives to secure economic conditions for specific groups of people in employment (the handicapped and aged laborers), individual income generation and health prevention, and emergency housing and sheltering.

• Informal Institutions (social groups and the community): This includes a tailor-made social venture like microfinance for grey-trepreneurial support, network saving promotion, and investment in “active social relationship activities” in order to nurture a grassroots’ learning society and knowledge sharing (particularly on mutual support, trust, and information sharing), and disaster protection infrastructure.

Inclusive innovation: • In this sense, inclusive innovation is a form of long term relationship among the financial sector and other stakeholders like the government (particularly, the regulator) that embrace positive social, environmental, and financial return business initiatives, which should make the country more resilient to future uncertainties. There should be created a “trustnovation” • an innovation that bring trust and retention between the community and other stakeholders (the government and the bank), employers and employees.

REFERENCES REFERENCES

Birdsall, N. and Fukuyama, F. (March/ April, 2011). The Post-Washington Consensus: Development after the Crisis, Foreign Affairs Vol. 90, No. 2. The Center for Responsible Business and Global Scan (2012). Future of Finance, Berkeley: The Haas School of Business, University of California—Berkeley. Retrieved from http://www.globescan.com/pdf/ future_of_finance.pdf Tulchin, D. (2010). Microfinance & the Double Bottom Line: Measuring Social Return for the Microfinance Industry & Microcredit with Education Programs http://www.nationmultimedia.com/2011/08/01/business/Banker-proposes-forestbonds-to-take-care-of-natur-30161590.html http://www.singaporebudget.gov.sg/budget_2012/budget_in_brief.html

DRIVERS & INHIBITORS • More seasonal natural disasters, particularly from wildfires in Indonesia and Thailand, and floods and storms in the Philippines, Thailand, and Vietnam. • Demands for tangible solutions for long term social problems from civil society (e.g. human settlement, job security, diseases cause by national disasters, etc.) • Inefficiency of national government and commercial banks to offer financial innovation to tackle multidimensional issues. • Public and private sectors are already invested more on reforestation, forest fire protection, and emergency health prevention. There have been no specific figures on how much developing countries need to spend on social and environmental protection. Corporate social responsibility figures in large enterprises, especially social-cause marketing expenses, may represent only a fraction of such expenditures.

ABOUT THE AUTHORS Dr. Pun-Arj Chairatana is the Managing Director of NOVISCAPE CONSULTING GROUP and the Principal Investigator of TRENDNOVATION SOUTHEAST NEWSLETTER. He has been involved with various regional scenario buildings and future exercises since 2000. As a policymaker, he was Director of Policy Entrepreneur and Foreign Affairs Department at the Public Policy Development Office (PPDO), the Office of Cabinet Secretariat. He has a background in economics of technological change, innovation management, health and nuclear physics. His expertise is in the areas of strategic foresight, technology and innovation management, public policy, trend analysis and political economy. Tippawan Pinvanichkul, PhD, CPA, is an Assistant Professor at the Graduate School of Management and Innovation, King Mongkut’s University of Technology Thonburi. She got her PhD in Technology Management from Asian Institute of Technology, Thailand. She is currently a Vice President for Property and Finance of the University. She has working experience at SGV-Arthur Anderson (Thailand), Thai Rating and Information Services Co., Ltd., a leading credit-rating agency in Thailand. She is a project leader for important government-sponsored consultancy projects such as Governance Structure of Regional Science Parks in Thailand, Development of Thailand Innovation Capability Index.

INTERVIEW BY

MR. WITCHAYA PRUECKSAMARS Department of Urban and Regional Planning, Chulalongkorn University

Given the outlook of ASEAN integration, what are the key investment or finance trends that might be related to the poor? Moreover, has there been any development particularly in the fields of micro-finance and public-private partnership? “In my view, territorial boundaries will be more seamless. Therefore, the role of financial institutions in helping the poor will have a greater degree of “regionalism”, as opposed to being limited to nations of origin. There might even be a regional standard for banks to be pro-poor. There are many examples that we can measure up to; one wellknown example is of course the Grameen Bank in Bangladesh. In Thailand, we have a similar initiative called the ‘Sut-ja Orm Sub’ (community-based savings groups), though it hasn’t really kicked off.” “Microfinance has been widely adopted in many countries to solve the problems of poverty. In Thailand, we have commercial and state banks, such as Government Savings Bank and the Bank for Agriculture and Agricultural Cooperatives, working on the issue. But they tend to focus only on the quantitative side, which has somewhat limited the impact, because they have to answer to the mandates and targets being set by the central government. The concept of Grameen is significantly different from this. The latter gradually grows, depending on the readiness/ preparedness of the community which it serves.” “Regarding PPP, it is essentially a form of privatization, i.e. the government authorizes the private sector to lend a hand in the delivery of public services and infrastructure. There are a plethora of arrangements such as Build-Transfer-Operate, BOT, etc. In Thailand, most of the PPPs are concessions. It is not very clear what direction PPP will take. Perhaps PPP megaprojects will continue to be popular, or perhaps more

Dr. Anusorn Tamajai

13 “Having said that, I don’t mean that centrallyplanned economies are unable of producing innovations; they can, though at a lesser degree, and they do so by ‘copying’.”

What is the future role of the financial sector in contributing to human / social development and poverty alleviation in this region?

“In order for the financial or banking system to alleviate social problems and poverty, I think the most important factor is that they must provide access to capital and credits for the disadvantaged and the poor.“

smaller-sized PPPs will mat er ialize.” “There currently exists a dilemma: on the one hand, we were taught to believe that we should be pursuing privatization. Because, supposedly, the involvement of the private sector makes the public sector more efficient, it also reduces fiscal burden, and increases competition in services. On the other hand, however, we see problems emerging while we move towards privatization. So the approach of privatization is questioned; in fact, in many countries including Thailand, privatization was just a part of the neo-liberal movement (associated with the Washington Consensus). Even in the US and Europe, we are seeing the opposite of privatization happening: nationalization of the car-making industry, for instance. So the approach is further challenged. But both approaches are not right or wrong, so to speak. There is no silver-bullet, really.” “At the World Economic Forum meeting in Davos, it has been put forward that capitalism managed by the state (such as the ones in China and Vietnam) is better than Western capitalism. This is partly true, of course. Just like its Western ideological counterpart, capitalism by the state has its own problems – though they are yet to surface. So I would say that a pre-mature conclusion has been drawn there.” “Regarding the Western-style way of thinking, one of the key strengths is that it is poised to having the ‘freedom’ to do business and to pursue entrepreneurship. This so-called freedom incubates innovation and creativity, which in turn, allows the pursuit of profit (in the best sense) and the emergence of individualism. However, this freedom must be regulated; otherwise the players in the market and their accumulated capital risk will grow too large, and thereby succumb to their own monopolistic/predatory nature.”

“The groups of people often cannot reach the capital. They simply cannot get loans from commercial banks. This is because they don’t have much, if any, credentials or assets or guaranteed/regular income to act as collateral for debt repayment. Therefore, if we want to make their lives better, sometimes we need to give first, i.e. give them credits so they can invest in their enterprises, or give them money so they can invest in education for their children.” “Moreover, one must bear in mind that the financial system can also hurt these people, particularly due to it having too much speculative activity. As recent events have shown us, such activity has led many countries and regions into financial and economic crises. For instance, we had the Tom Yam Kung crisis back in 1997; and now the repercussion from the recent crisis which occurred in the U.S. and Europe in 2008-2009 is still being felt. We are also seeing Europe being mired in the sovereign debt problem.”

So have there been any innovations to make us more immune to such activity and past mistakes?

“In order to develop immunity, we need to make ourselves more self-reliant especially in economic terms, endorsing a ‘Buddhist’ approach to economics perhaps. We need to have an appropriate consumption level, make smart use of resources, emphasize our relationship with the environment, be socially and collectively responsible, and so on and so forth. So, we need to focus on other dimensions rather than just on numbers or economic growth.”

ABOUT DR. ANUSORN TAMAJAI Dr. Anusorn Tamajai holds multiple positions in leading academic and public institutions alike. He is currently the Chairman of the Audit Committee, Bangchak Petroleum PLC; Dean of the Faculty of Economics, and the Acting Director of the Research Center for Economics and Business Reform, Rangsit University; he is also the Director for Supervision and Execution of Policies, Public Debt Management Office, Thailand Ministry of Finance. He hosts several television programs, namely “Tok A-deed Song Anakod” (Discussing Past for Future), and “Anakod Mueng Thai” (Thailand’s Future), and also a radio program on FM96.5.

Dr. Pun-Arj Chairatana Dr. Apiwat Ratanawaraha Mr. Kan Yuenyong

Co- Principal Investigator

Dr. Donald Arthur Johnson

Editor

Mr. Preeda Chaiyanajit

Project Co-ordinator

Mr. Passapong Boonlueng

Graphic Designer

Regional Horizon / Environment Scanning (HS/ES) and trend monitoring for issues relevant to people. life, and regional transformation across the Sotheast Asian region. Dr. Apiwat Ratanawaraha Mr. Witchaya Pruecksamars Mr. Kan Yuenyong Dr. Pun-Arj Chairatana Dr. Tippawan Pinvanichkul

Author

Dr. Anusorn Tamajai

Information Specialist

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