KUALA LUMPUR/JAKARTA, March 28 (Reuters) - Indonesia is seeking European investors for $9 billion worth of water, road, air and seaport projects in what will be a litmus test of Southeast Asian countries' ability to seize on ripe financial conditions to upgrade decrepit infrastructure.
Easy global liquidity and investors' eagerness to tap one of the world's few fast-growing regions should create a sweet spot for the region to fill the $600 billion in infrastructure needs the Asian Development Bank identifies over the next decade.
But infrastructure experts say a shortage of projects offering compelling returns, coupled with stifling bureaucracy and regulatory uncertainty, threatens to undermine the ambitious plans of Indonesia, Thailand and the Philippines.
"There's a lot of money floating around but it's money looking for a return," said Bert Hofman, the World Bank chief economist for East Asia and the Pacific.
After years of chronic underspending, governments in the region of 600 million people have begun to sharply raise their infrastructure budgets to improve transport and energy networks.
Indonesia, the biggest regional economy, estimates it alone needs $150 billion worth of new infrastructure, but is only willing to finance 15 percent and has seen few takers so far for the public-private partnerships (PPPs) it is relying on.
Jakarta hopes that will change after a roadshow to Europe this year to market 16 projects from water treatment to ports.
"We're market-sounding," Chatib Basri, chief of the country's investment board, told Reuters. Speaking in Jakarta after a trip to Paris to meet potential investors, Basri said he saw demand coming from France and Germany.
The projects include water and waste treatment plants in the country's most populous Java island, a sector that could be of interest to firms such as France's Veolia Environment, the world's largest private supplier of drinking water, or German industrial giant Siemens.
The projects also include an airport in Java and seaports, in an archipelago of 17,000 islands where an inadequate transport network means high logistics costs.
CHEAP MONEY, ROBUST GROWTH
Having fixed their public finances following a regional financial crisis in the late 1990s, Southeast Asian governments can borrow more cheaply than ever, while local conglomerates and banks are cash-rich on the back of robust economic growth.
A rapidly growing middle class is pressuring politicians to ease nightmarish traffic conditions in "mega-cities" such as Jakarta and Manila, while the massive plane orders being placed by low-cost airlines AirAsia and Lion Air attest to the dramatic growth in regional air travel.
This month, Thailand's cabinet approved a plan to borrow $68 billion to build rail, roads and water plants by 2020. That came days after the operator of Bangkok's SkyTrain, BTS Group Holdings Pcl, said it would raise up to $2.1 billion by listing an infrastructure fund in what could be Thailand's biggest IPO.
Indonesia and the Philippines, far-flung archipelagos with a combined population of 340 million, have passed laws to improve cooperation with the private sector to solve their bottlenecks.
But attracting private funds remains difficult. Project finance lending in Southeast Asia fell 6.3 percent last year to $13.5 billion, Thomson Reuters data shows.
The Philippines, whose recent history is littered with failed or delayed infrastructure plans, has prepared at least 16 PPPs worth more than $4 billion.
So far, only two projects have been successfully bid out. Some foreign firms -- which face tight restrictions on investment -- say they have been put off by a lack of government guarantees on pricing.
In Indonesia, only two PPP projects offered since 2006 have made it to the construction phase -- a 2,000 megawatt coal-fired power plant in Java and an expressway in Bali. Even then, the power project has been delayed by land acquisition problems.
As well as investor-unfriendly lands laws, projects can be held up by sometimes conflicting national and local authorities. Moreover, returns in Indonesia and the Philippines often fail to reflect such risks, said Johan Bastin, chief executive of Singapore-based infrastructure private equity firm CapAsia.
"In my view, the institutional capabilities at local administrative level are underdeveloped, the regulatory regimes largely untested and the judiciary systems somewhat arbitrary," he said. "The returns we see in the markets seem to assume that these problems will be dealt with over time."
He said annual returns on projects were often about 3-5 percent below an "acceptable" level of around 15-20 percent.
MORE PUBLIC MONEY
The passage of a new land acquisition law last year should help jumpstart Indonesia's infrastructure pipeline, although it will only apply to future investments.
Meanwhile, the struggle to attract private investors means governments may have to play a bigger role. Long-delayed plans to build a mass-rapid transit system to relieve Jakarta's 10 million people of monster traffic jams are a case in point.
After plans for a pure private-sector solution were abandoned long ago, it has been held up for years by wrangling between Jakarta and the national government over how to pay back a $1.6 billion Japanese loan for the project.
While public infrastructure spending is rising in the region, it remains well below where it should be, economists say.
Indonesia, which spends only around 3-3.5 percent of its GDP on infrastructure, plans to raise its infrastructure budget by about 11 percent this year. The Philippines aims to double its infrastructure spending from 2.6 percent of GDP. China spends about 9 percent of its GDP on infrastructure.
Some governments' ability to expand infrastructure spending is hampered by heavy outlays on subsidies. Indonesia spent about $22 billion last year on fuel subsidies, and the prospects for reform are dim ahead of a presidential election in 2014.
"Southeast Asia has to rethink radically its strategy on infrastructure," said Frederic Neumann, co-head of Asian economic research at HSBC. "I'm not inclined to bet this is happening really on a broader scale." (Additional reporting by Rosemarie Francisco in Manila and Orathai Sriring in Bangkok; Editing by Alex Richardson)