SYDNEY, Australia – We step out of the elevator and see an expansive, majestic view of Sydney harbor and its skyline – making this a great place to talk about the future of ASEAN, the Association of Southeast Asian Nations, 10 member states set to form a common market next year with a single production base and a consumer pool of about 630 million people. 

Around the table that Monday morning: lawyers, businessmen, specialists in joint ventures and mergers & acquisitions – many of whom had experience or worked in Southeast Asia. 

For Australia, it’s a time to re-assess its investment strategies and paradigms. Is it a western or Asian nation? Many say it’s both. Yet despite being ASEAN’s closest western neighbor, risk-averse Australian companies still prefer to invest in Europe and the West.

That may be changing.

In the past 50 years, ASEAN’s 11% growth rate is the highest annual average economic growth rate in the world. Many believe ASEAN can become a major market – with a combined GDP that could rank as the 7^th largest globally, an aggregate population that is the 3^rd largest and one of the world’s youngest. It also has the world’s top total tourist arrivals, and outpaced China in foreign direct investment last year.

It has ambitious plans in the works. In 2007, ASEAN set a goal of creating an ASEAN Economic Community by the end of 2015. (READ: Winners and losers in ASEAN 2015)

“Southeast Asia’s enormously attractive, but it’s a risk-reward pay-off,” says Adam Strauss, a partner in Herbert Smith Freehills. “There’s a sense that we don’t want to be left behind, that this rapid growth in emerging markets and changing demographics in all countries in Asia and the greater availablility for more competition is something Australia doesn’t want to get left out of. That may be changing attitudes towards risk because we’ve been fairly insular.”

Strauss points out the risks that are top of mind for many of the ASEAN nations, except Singapore: rule of law – issues about lack of enforcement and predictability in most of ASEAN; protection of intellectual property rights; the levels of foreign ownership allowed; and corruption.

Peter Kerr, New South Wales director for Asialink, Australia’s largest non-government center for the promotion of Asia-Australia relations, says Asialink started a task force about 18 months ago to look at these concerns.

“Australian businesses are looking for more certainty,” says Kerr. “They want to go in, but need a level of certainty in order to do that. From a pure investment perspective, business conditions need to be improved – from opening up industries, to relaxing foreign restrictions.”

These concerns become more interesting given that ASEAN collectively is Australia’s 2^nd largest trading partner, just behind China. ASEAN is also Australia’s largest source of imports, with China at #2.

A senior official at the Department of Foreign Affairs and Trade points out that with this significant trade relationship, you would expect investment to follow. “What’s interesting is the investment share has remained constant,” he says. “You normally expect investment to follow trade, but there are a number of factors influencing investment decisions, including regulatory environments.”

Bullish but realistic

Australia’s DFAT seems bullish about ASEAN’s potential but realistic about its problems. “We’re working with ASEAN in order to facilitate and to achieve coherence in FTAs – free trade agreements – and to work to support ASEAN’s economic integration.

Asialink’s CEO Jenny McGregor is as bullish.

“Southeast Asia is a huge opportunity for Australia, but we need to be there and to take the lead,” says McGregor. “There’s much greater interest and attention, but there’s also still a lot of fear.”

The top country in ASEAN that is attracting Australian money is Singapore, which has gone out of its way to attract investors. One businessman talks about how a company setting up in Hong Kong gets a call from Singapore, which offered to make “aggressive changes” to lure the company.

Indonesia is attractive, but our roundtable discussion agreed tensions between the Indonesian and Australian governments and this year’s parliamentary and presidential elections won’t help in the short-term. Thailand’s political uncertainty is pushing away potential investors. Malaysia and Vietnam are also attracting interest. The Philippines, despite its high GDP growth rate, rates low on the totem pole of investment destinations for now. While many are interested in Myanmar, most are taking a wait and see attitude, say those around the table.

“A lot of Australian companies are just risk-averse,” adds Kerr.  “Our fortunes are tied to Asia, but the stuff that comes behind that – the very real investment in the region is really quite low.”

Corruption a key issue

With the exception of Singapore, corruption is a key issue for ASEAN nations.  Strauss says Australian businesses “find it difficult to do business because of ‘facilitation payments’ which make it enormously difficult to get things done.  That’s a real challenge.”

Others counter that wouldn’t be a deal-breaker if there is consistency in approach. Rod Sims, the Chairman of the Australian Competition & Consumer Commission (ACCC) believes competition is the answer.

“Every developing country has issues of corruption at some period of time,” says Sims. “Australia certainly did, but I think the more you have competition, the more you break down monopolies, and it yields many benefits.”

Which is partially why so many are looking forward to ASEAN’s common market.

This early though, many are warning that ASEAN’s economic integration targets for December, 2015 will likely not be met, a message ASEAN itself is failing to tell its partners. (READ: The failure of ASEAN leadership)

An ADB study released last month, “The ASEAN Economic Community: A Work in Progress,” showed low awareness and because of that businesses failed to take advantage of existing benefits from ongoing free-trade agreements.

A total of 77% of respondents from 381 companies in ASEAN member states said they never benefitted from lower tariffs from any free-trade agreement, and 87% said they had not benefitted from investment liberalization.

The study said many firms were more focused on major concerns like “corruption, poor infrastructure and the lack of trained labor.” 

“Be careful of mixed messages,” Asialink’s Kerr reminds ASEAN nations.

I was thinking about that as we were filing into the elevator after our wide-ranging round-table discussion that Monday. I watched the doors close on an amazing view. 

What seems clear is that there is significant interest in the potential of the ASEAN Economic Community (AEC), and that if issues are addressed, investors from Australia and other parts of the world will come. 

The question now is how quickly can ASEAN’s member nations get their houses in order?  Will ASEAN build on its strength, find the leadership it needs, and pull 10 separate nations together? – Rappler.com