Asian infrastructure: risks and rewards

04 Apr 2016

Asia is the fastest growing, most dynamic and heterogeneous region in the world. But that growth comes at a cost, with experts calculating more than $US800 billion needs to be spent on infrastructure every year until 2020 in the Asia Pacific region alone.

With government funding sometimes difficult to obtain, project partners are looking to private and institutional investment to fill that infrastructure deficit.

Asia, which includes China, Korea, Japan, South East Asia, and India, has more than $US2.7 trillion in its sovereign wealth funds. Globally, there is more than $US50 trillion available from pension funds, insurance companies and institutional investors of which only 0.8 per cent has so far been invested in infrastructure. 

Macquarie Group’s Asia CEO, Ben Way, says Asian infrastructure is becoming increasingly attractive for both Asian pension funds and those outside the region. 

Competition for projects will come, he adds, but for now, many investors still have a low understanding of Asian markets, doubting their own capabilities to assess deals in such ‘foreign’ environments.

“Often it’s not until people come and see a toll road in Korea, or a power business in India or a water business in China that they realise these are much better built and operated pieces of infrastructure than you have in many developed countries.”

The likelihood of ongoing low interest rates also makes project development in Asia more attractive. Added to that, much of the region is expecting GDP growth of around 7 per cent over the next decade, and the biggest movement of people from rural to urban areas in the history of the world. 

According to Way, this means by 2026 there will be 221 cities in China that have a population of 1 million people. By comparison, Europe now has 35 cities that size. Urbanisation is likely to bring with it a rise in family wealth, as analysts predict about 45 per cent of the world’s household savings will be driven by Asia in the next five years. 

By necessity, every country is building, renewing or selling down infrastructure, feeding the anticipated $US8 trillion infrastructure gap expected to arise within a decade. 

“The drivers are obviously different for each region, but in my 15 years in infrastructure we have not seen a confluence of government policy in major economies that has been so strong in terms of stimulating investment in infrastructure,” Way says. 

Korea is changing from an export driven economy, with heavy reliance on roads and ports infrastructure, to an economy driven by innovation and urbanisation. 

Head of Korean Infrastructure, Chul Hum Paik, says deal flow in the country is particularly robust, as balance sheets of the major family run conglomerates (which control about 39 per cent of the economy) or the government are re-evaluated, and distressed or non-core assets sold down. 

“Interestingly, I think you will have more emphasis on urban infrastructure and with Korean wealth rising, people are demanding better services,” Paik says. 

That includes social infrastructure like schools and hospitals. But Macquarie sees better investment value in infrastructure linked to real estate, and social developments around railway stations, bus terminals and shopping malls, where the risk is hedged against credit wraps from family conglomerates operating businesses in those developments.

Way points to the progress on the Modi project in India as offering a signal that India’s government is keen to unlock infrastructure investment in the country.

“Prime Minister Modi is focused on reconnecting with the world, through proper policy development and reform which he hopes will lead to much better economic growth.”

The government’s priority, according to Way, is making the investment environment more friendly to all sources of capital, including foreign investment. Land and tax reform, along with greater transparency, is seen as the way forward.

Evidence of the change came in 2014, when about $US46 billion of direct investment flowed into India, the first time in living memory that figure has been higher than China, Way says.

China is also facing a period of change to its capital pools. Tax revenues have fallen, in part as a result of the large volume of land sales made by the government.

As a result China’s government is looking for a greater variety of capital. It knows that capital from the Asian Infrastructure Investment Bank, the growing bond market, and some continuing, strategic capital from state owned enterprises needs to be augmented, Way says.

“If you take China as an example, there is $US1.5 trillion in infrastructure planned over the next 15 years. We think that leaves a funding gap in China alone of about $US275 billion.” 

For investors, Asia’s changing demographics, reinvigorated political will across many countries, and growing demand from various governments for new lines of funding make infrastructure developments particularly enticing. 

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