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ASEAN Economic Community: What's Next After 2015?

ASEAN Economic Community: What's Next After 2015?




by Philip Chu, Advisory Partner, EY


With over 90 per cent of the high priority measures in the ASEAN Economic Community (AEC) Blueprint already achieved, it clearly demonstrates the tremendous effort and commitment of the ASEAN policymakers and stakeholders to see to the fruition of the AEC.

As much as it is important for ASEAN to celebrate the successes it has achieved so far, the journey ahead to full economic integration remains a long and difficult one. With the relatively easier policy changes in the current AEC Blueprint already adopted, there are now other, more challenging, hurdles to be tackled.

Supply chain limitations

With a population of 630 million and rising, a US$2.3tr GDP, six per cent growth over the last 15 years and a rising middle class, it is no wonder that ASEAN has emerged as the third pillar of economic growth in Asia, alongside China and India.

This internal demand, together with China’s push to move manufacturing away from its wealthy coastal cities to inland and abroad, has led to ASEAN’s growing attractiveness as a manufacturing hub. ASEAN’s heterogeneity in development levels can be seen as an edge, as companies increasingly establish ASEANwide integrated supply chains. Differing levels of development, combined with varied industry specialisation across different countries, allow for location complementarities.

Take for example, a major American multinational consumer goods company that houses its regional headquarters and R&D centre in Singapore. The Philippines hosts the firm’s business service centre, while Thailand hosts its marketing hub for beauty, fabric and homecare products. Its operations in the region, with eight manufacturing sites and eight large distribution centres, cover the length of the company’s value chain.

However, issues in the supply chain – specifically the lack of harmonised trade and customs processing, old or outdated ports and airports, poor use of technology and electronic data interchange in customs clearance and port handling – hamper cross-border trade.

Many ports and airports in ASEAN countries are old or outdated. Only a few across the region have modern handling facilities and the equipment to handle large shipments.

For example, the maximum below-thewater depth for a boat at the Port of Yangon is only nine metres. Even at large seaports such as Jakarta’s Tanjung Priok, which handles 70 per cent of Indonesia’s total imports, dwelling times remain long. Congestion at the Port of Manila has been a long-term challenge and is due, in large part, to the deficient state of roads across the metropolis, which hinders the ability to efficiently transport freight to and from the port. These problems are exacerbated by red tape and difficulties associated with obtaining resources for further investment in port facilities.

The lack of ports that meet international standards and the capacity to handle rising trade and a growing economy could hinder or limit the direct transport of goods to major market such as the US, the European Union, Hong Kong and Singapore. Limited capacity also necessitates the additional handling of shipments, which drive up product costs. This also limits ASEAN’s comparable cost advantages relative to competitors such as China.

The human element is also an important issue to tackle. Port productivity varies across countries. As cargo volumes grow rapidly, and technology and knowhow in port operations and management advances, terminal staff members need relevant skills and knowledge to be effective in their duties.

In order to improve port services and enable smoother transfer of goods, shipping productivity and facilities utilisation should be further enhanced. Ports should also improve on-time reliability for all port-related activities so they can operate around the clock. Port and terminal tariffs should be further standardised and simplified to enable greater transparency of shipment costs.

Infrastructure development

The gaps in infrastructure affecting the supply chain are invariably related to the overall state and progress of infrastructure development within ASEAN.

Factors, such as differences between regional and national government priorities; lack of access to funding; local budget constraints; government bureaucracy; land acquisition issues; absence of wellstructured public-private partnership regulatory frameworks and policies; and domestic political issues continue to challenge the pace of infrastructure development in the region.

Some ASEAN countries have taken important steps to establish the necessary frameworks and demonstrate the political commitment to push through reforms to overcome funding and non-funding bottlenecks. Given that infrastructure developments in individual countries have historically been driven primarily by the respective government’s priorities and constraints, better coordination among government agencies across countries will be needed to effectively achieve the regional agenda.

The availability of regional funding support is critical. Given the scale of funding required, greater private sector investment and expertise will be key.

Some of the key requirements to achieve infrastructure delivery success in the region include establishing appropriate PPP regulations and frameworks, and dedicated PPP units; simplifying and centralising, where appropriate, government decision-making processes; and building the public sector’s capacity to deliver and manage complex infrastructure projects.

Tax on the AEC agenda

With the global tax environment undergoing major changes, driven primarily by the OECD’s Base Erosion and Profit Shifting initiative, this invariably can have an impact on how companies design and optimise their supply chains. As such, it is important that ASEAN governments consider including tax as part of the AEC agenda and explore how ASEAN can deliver a single voice on tax developments and ensure its views are seriously considered by the global community.

The impact of global tax developments on the continued attractiveness of ASEAN as an investment destination should not be underestimated. Given that tax increasingly matters to businesses, ASEAN governments can support the development of future AEC policies where additional areas of tax reform can be identified and addressed.

Dialogue is crucial

Finally, barriers to full economic integration will continue to exist despite the best efforts of any regulatory body as long as there is a lack of dialogue between parties. It is important that the AEC drives the momentum of integration through a spirit of dialogue, steady pragmatism in implementation and continued respect of fundamental collective interests to maximise the potential of ASEAN.