Asia needs investors to help build 21st-century infrastructure

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In today’s difficult investment environment, the question of where to turn to for growth may be right under our feet. The infrastructure that defines a modern economy requires vast sums of money to build, but is essential for achieving even the most basic development goals. Such infrastructure includes roads, railways, airports, power stations and electricity grids, ports, communications, water and waste, as well as social infrastructure such as hospitals, schools and housing—and Asia needs a lot of it.

The Asian Development Bank (ADB) reckons the region’s annual financing needs are currently about US$8 trillion for the period from 2010 to 2020 just to sustain rates of growth at 2009 levels across the region’s developing countries. Reaching a similar conclusion, PwC estimated by the middle of 2014 that any attempt to make up the shortfall requires an annual investment of between US$800 billion and US$1.3 trillion.

Globally, the Organisation for Economic Cooperation and Development (OECD) says US$50 trillion of infrastructure is needed up to 2030. Governments in Asia have typically tried to fund the cost of all this through a combination of taxes, local bank debt, and loans from multilateral development agencies such as the ADB and the IFC.

The latest example of this type of grand government initiative is Mainland China’s much-hyped One Belt, One Road, an infrastructure development programme that aims to roll out a network of roads, rails, ports, power and water that will connect Western China to Eastern Europe, the Middle East, India and Pakistan—paid for out of government coffers and built by state-owned enterprises.

However, the reality is that government funding has its limits in most developing economies. “If you think about what the leader of a country wants, it’s inward investment to stimulate growth and create employment that generates tax receipts and consumption, and is therefore positive for the economy,” says one asset manager. “The challenge is that the majority of economies struggle to find the capital because they’ve got debt financing that they need to support, so what they need is private capital coming in.”

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The money is there, not least because today’s private investors are desperate for returns. Throughout the past century or so, government bonds have been a staple of every investor’s portfolio, providing reliable returns over the long term. But those days are now over.

Since the global financial crisis, central banks around the world have spent trillions of dollars buying bonds in a bid to flood their economies with cash and stimulate growth. This has resulted in a severe shortage of low-risk bonds available for private investors to buy and, thanks to the principles of supply and demand, this shortage has such made bonds more expensive to buy and less profitable to own.

Between these two phenomena—the shortage of money available to pay for Asia’s much-needed infrastructure and the shortage of decent long-term returns available for investors—there could be a rewarding synergy. “What we need to see is a linkage between the private capital requirement and the private capital opportunity,” says the asset manager.

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Bringing private investment into infrastructure isn’t purely about financing. Outside investors also bring much-needed professionalism and discipline to project management and cost controls, which has sometimes been even more important than the money they contribute.

“Governments believe they do infrastructure very well. But if you look at the record, that’s often not the case,” says Michael Barrow, deputy director general of private-sector financing at the ADB. “Across Asia, development has been driven to a very large extent by unleashing the private sector—or at least bringing private-sector rigour to state-owned companies.”

Indeed, in many poor and developing countries, the capabilities of successful private-sector firms outweigh those of their governments. Harnessing this reservoir of competence and efficiency can be extremely productive. And it can also provide a way for private investors to take part. With Hong Kong’s natural role in structuring these complex deals through public-private partnerships and raising the finance to deliver them, investments in infrastructure would appear to be on the cusp of becoming a potential vehicle for private investors.

Another attraction for investors is that infrastructure offers diversification from most other types of investments, as well as satisfying the growing demand for investments that meet certain environmental and social criteria—funding economic development can have a much more positive impact than, say, investing in oil companies or arms manufacturers.

In its survey of fund managers for 2016, Preqin, a provider of data and intelligence to investors in alternative assets, found that about three-quarters of fund managers say that investor appetite for unlisted infrastructure assets has increased during the past 12 months. Preqin follows 480 infrastructure fund managers worldwide, which help manage about US$309 billion in assets.

What is needed now is a greater supply of projects that are structured to be attractive to private investors. “Given the region’s huge infrastructure needs, mobilising private sector investments is vital,” wrote the ADB in a report in January, stressing that projects need to be well prepared and bankable.

Infrastructure debt funds are currently in the relatively early stages of their development, but there has been some growth in supply as the market slowly wakes up to this opportunity. At the beginning of the year, there were 181 hedge funds being marketed to clients that dealt specifically with infrastructure—a 25 per cent increase on last year, with a combined target of about US$125 billion.

Even so, much more needs to be done to allow private investors to take part. Currently, many developing markets in Asia lack a strong legal framework, or adequate transparency or bankruptcy provisions, but most are exploring reforms aimed at creating a better environment for private investors. Such changes would be long overdue.