Navigating Environmental Compliance Across Southeast Asia

Environmental regulations are improving in countries across Southeast Asia as governments seek to reduce the environmental impact of continued industrialization, urbanization, and population growth on air and water quality. Investors must anticipate regulations and consider them in the context of their investment strategies to ensure that future operations will be compliant within the chosen countries and zones, the project schedule is not impacted by permits to grant allowances, and the project budget accounts for CAPEX and engineering design changes from existing plants. Tractus shares its experience regarding environmental compliance for air and wastewater emissions across the four major economies of Southeast Asia, Indonesia, Malaysia, Thailand, and Vietnam.

ASEAN Air: Improving but still at the bottom of global ranks

Air quality across the industrializing countries of Southeast Asia (ASEAN) is improving. Government policies targeted at addressing the PM2.5 concentrations that meet World Health Organization guidelines have been successful, as the concentration of PM2.5 has steadily declined since 2019. Several factors impact air quality, including agriculture, power generation, vehicle emissions, as well as industrial activity. Even with improved PM2.5 management, many Southeast Asian countries continue to grapple with some of the highest pollution levels in the world, prompting many governments to tighten regulations. The focus of these evolving regulations is primarily on the industrial sector as governments strive to further enhance air quality in the region.

Many policy-based efforts are underway to enhance air quality management. The Government of Vietnam aims to realize a 20% reduction in pollutants like nitrogen oxides and sulfur oxides between 2020 and 2025. It is also considering a law that will impose taxes on greenhouse gas emissions for companies operating in the steel, cement, power generation, and chemical sectors. In Malaysia, the government has been enacting several regulations since 2014, most notably the Clean Air Regulations. These initiatives underscore the long-term commitment to address and mitigate air quality issues within ASEAN.

Economic hubs in Vietnam, Indonesia, Thailand, and Malaysia are among the most polluted cities, primarily due to a concentrated accumulation of vehicle emissions. Industrialized regions generally exhibit lower pollution levels since industrial activities within these areas is often highly regulated, as their impacts can be more visible to the population and are often a source of greater community grievance than vehicle emissions. Within these regions, regulations are therefore more developed to minimize the impact of activity.

Governments are in the process of adopting stricter air emission requirements for industrial activity, but Thailand’s are the most advanced, and potentially a bellwether for the region. Thailand measures air emissions based on the total output per kilogram, per square meter on a daily basis. Thailand also keeps a close eye on emissions of Sulfur Oxides (SOx), Nitrogen Oxides (NOx), and Total Suspended Particulates (TSP) across all of its industrial zones. These limits are determined based on the Environmental Impact Assessment of each zone and are often influenced by factors such as proximity to population centers and elevated pollutant levels within the zone and region. The table below provides a sample of air emissions in four different zones, demonstrating the variances that exist between them.

Not only do emissions need to meet specified thresholds, but zones in certain regions may also have limits to the height of structures that can be erected through air-traffic control zone or national policy restrictions on heights. It is therefore important for investors to verify not just that they can meet the air emission standards in the zones, but also that they can do so with stacks that meet height restrictions. Securing allowances to exceed height restrictions can be a challenge, and when it is required in zones in Vietnam, investors will need to consult with multiple agencies over the course of one-year to be granted an exemption.

Wastewater Emissions

Continued economic and population growth across Southeast Asia is putting strains on water resources. An assessment of country rankings in the Water Resources category, as determined by the Environmental Performance Index produced by Yale University, reveals that countries across ASEAN are faring poorly in protecting water supplies. The Water Resources Ranking is determined based on the proportion of wastewater that undergoes at least primary treatment before discharge, normalized by the percentage of the population connected to a municipal wastewater collection system. The ranking shows that the major countries in Southeast Asia are ranked towards the bottom of 180 countries in the 2022 sample.

Governments are adopting policies to address the improvement of water quality through controlling wastewater emissions. While there are multiple factors that influence water quality, industrial activity is often very visible and therefore a high priority to manage. In Thailand, the industrial sector contributes 17.8 million m³of wastewater daily into public waterways. An industrial region of Pahang State in Malaysia has come under scrutiny for significant discharge of untreated water from chemical, textile and other industries operating in the region. To address these challenges, the governments of Indonesia, Malaysia, Thailand, and Vietnam have each developed their own Water Quality Index (WQI) systems to assess and monitor the state of their surface water. These initiatives enable these countries to evaluate the quality of their water bodies systematically, guiding their water management and protection efforts.

Investors in the region are often surprised by the standards that must be met to be compliant with zone and national wastewater regulations. Meeting these levels often requires extensive treatment processes, and in many cases industrial zones do not have centralized wastewater treatment facilities. This is most common in Malaysia, where the discharge levels must meet strict standards set by the Department of the Environment (DOE). The DOE sets two key standards: Standard A, which is applicable to wastewater discharged into water within catchment areas, and Standard B, which applies to discharge into fresh and saltwater bodies in Malaysia. Both standards set high levels of compliance, reflected in the table below.

Zones in Indonesia, Thailand, and Vietnam all provide wastewater treatment through secondary processing at the zone’s facilities, allowing for investors to discharge at higher levels than the national standard. However, the levels that must be met to discharge into the industrial zone wastewater facility are quite high and require extensive primary treatment. Investors must also pay fees for using the wastewater treatment facility which has a general range of US$0.19 to US$0.82 per cubic meter. Furthermore, there are other items, such as ensuring that the wastewater discharged is within a range of 50- 60% of intake water. If not, the investor must pay fees for wastewater that equal 60% of intake water despite not discharging those volumes.

Wastewater discharge in Malaysia, however, requires further investment costs than in other markets due to stringent national standards. The levels that must be met for Standard A and B can surprise new investors to the country and require substantial additional investment. CAPEX value to develop wastewater facilities are subject to industry, effluent discharged, and other factors, but it can amount to an additional $5 million to the investment project. Investors must also be sure that the plot provides sufficient space for constructing the treatment facility, adding another layer of consideration to the investment decision-making process.

What We Can Do

Tractus has been assisting companies to make informed decisions about where to invest and how to expand their business in Asia and beyond for over 25 years. Our partners and senior management leverage their experience running successful manufacturing and service businesses, bringing this commercial perspective to our client work. We have proven experience advising companies on their location strategies, helping them optimize their real estate portfolios, and identifying the optimal sites to support their companies’ growth. We use a proven, integrated site selection, real estate and incentives negotiations methodology, comparing locations in a systematic and objective way that leads to a defensible result. Let us show you how we can support you to make your next assignment a success.

Authored by

James Meisenheimer is Senior Consultant Manager based in Thailand.