Building a better Asia – public, private, partnerships and profits

Worse, the effects on the environment – water resources, air quality, waste disposal, and a mushrooming greenhouse gas emission footprint – have added another dimension to this situation.

Ironically though, the amount of money required to improve necessary infrastructure and to keep the environmental impact of emerging market growth under control adds up to Asia’s best broad-based business and investment opportunity in years, according to some of its leading proponents.

The macro metrics

Back in 2007 the Asian Development Bank, prominent Manila-based multilateral lender and a major development finance player in the space – estimated that Asia’s overall infrastructure funding shortfall amounted to about $300 billion per year. Official Indian estimates pegged their shortfall at about $350 billion by 2012.
Three years later, these estimates have risen appreciably. The ADB’s chief economist Jong-wha Lee now says the need will be more like $750 billion regionally between 2010 and 2020, for a total of $8 trillion.

India has seen a similar rise in estimates according to Archana Hingorani, Chief Executive of Infrastructure Leasing & Financial Services (IL&FS).

She told AVCJ, “It’s extremely difficult and speculative to assess the [investment] requirement for infrastructure beyond a decade, especially in India. Infrastructure requirements have been moving targets over the past few years, and are now assessed as totaling a trillion dollars or so from 2012-17 by the Indian government. This is double what was expected to be spent from 2008-12. And other estimates, based on the requirement and availability of capital, range between $1-1.75 trillion over the next decade.”

The counterweight long put forward in addressing these costs region-wide is Asia’s $3 trillion plus in foreign currency reserves (half of which are held by China). However, a lack of efficient institutional processes capable of supporting the viability of infrastructure financing options has made it difficult to mobilize these funds. Within this, there is a big need to strengthen national and regional bond markets.

Private sector poised?

So far, the private sector’s engagement in providing funding has been limited. But again, figures vary. The ADB estimates that private investment makes up 20% of the total. Other estimates say it accounts for than 1% of GDP, depending on the jurisdiction.

Is the proportion of private sector participation growing, falling or status quo? The answer depends on the source. But a consensus is building that a tipping point of some sort is shaping up; or may have been passed, in the form of massive individual country fiscal stimulus programs, in particular led by China. Infrastructure has been the biggest beneficiary.

In part that is due to Asian governments being more pointedly aware that they need to involve the private sector. That is matched by a fast-growing number of private investors focusing on the return potential in doing so.

“Total private sector investments from 1990-2008 were estimated at around $293 billion in East Asia and the Pacific, and $160 billion in South Asia, according to the World Bank,” says Joe Yamagata, Deputy Director General of ADB’s private sector operations department – the ADB having carved out a role as a first mover/conduit in catalyzing private business investment in this area.

Though no statistics are yet available for 2009, “East Asia and the Pacific attracted $22 billion and $15 billion in 2007 and 2008 respectively. The decline in [2008] was likely due to the financial crisis. But the opposite was seen in South Asia over the same period, where infrastructure investment captured about $28 billion and $33 billion in 2007/2008 respectively. We interpret this to be a result of economic growth, largely in India, less affected by the crisis.”

The hope is that ongoing recovery will see this private sector investment component continue an upward trajectory through 2010.

Deven Karnik, Managing Director and Portfolio Manager in the Asia Infrastructure Investment Team at Morgan Stanley, is bullish for this and other structural reasons. “It is recognized that a minimum percentage of GDP [infrastructure investment] is needed to sustain growth rates,” he says. If a country has underinvested in infrastructure, or if growth has exceeded the levels on which earlier investments were made, an opportunity is created for outside capital to play a role,” he told AVCJ. “Other important factors will include the resources of the public sector in that country, and the regulatory framework that applies to private participation.”

Getting governments ‘effectively’ onside

ADB’s Joe Yamagata agrees with Karnik’s take, saying, “Many [governments] have initiated and implemented new regulatory frameworks. The Indian government has established public-private partnership (PPP) cells in all states to promote PPPs in economic infrastructure,” including roads, ports, highways, water, power and telecoms infrastructure. “And the Vietnamese government issued Decree 108 in November 2009, which provides for more favorable treatment for investors and banks.

“Meanwhile, Thailand has also announced a second economic stimulus package, under which a program to promote private-sector participation even for social infrastructure, such as schools and hospitals, was included. Additionally, the Thai MOF has also endorsed a new PPP policy framework for the procurement of major infrastructure problems.”

IL&FS’s Hingorani notes however, that the funding mix – and the attractions – of the subsectors are anything but uniform. 

“The specific sources of funding are a function of that sub-sector’s perceived maturity,” she told AVCJ. “Telecoms, ports and airports, for instance, have a larger percentage of private participation, as high as 60-75%. Other mature sectors, like roads, power and gas, are more evenly balanced (25-35%). On the other hand, sectors like water supply and irrigation are not expected to witness any significant private participation in the near- to medium-term future. Overall, in India, 30% of infrastructure is expected to be funded by the central government, 40% by the state government, and the balance by the private sector.”

Taking it to another level

Looking ahead, there is still much to be done by regional governments to build interest among private investors. And a big item on this list is making programs more holistic, ADB’s Yamagata believes.

“Currently, investors feel that the development cost of private-sector infrastructure is high [when compared to the risk], so they charge a higher risk premium and/or are reluctant to look at small PPP transactions. But if governments are able to come up with a standard procedure – i.e. documentation, selection and incentives – this would go a long way to enabling greater private sector participation.”

Further development of local capital markets is another key, as these are the gateways that allow investors to source the kind of funding that is essential to private sector infrastructure projects, and especially those receiving revenues from municipalities in local currency, such as water, waste water treatment and waste-to-energy projects.

Finding the sweet spots

As to what exactly the best bets are, IL&FS’s Hingorani says that the interest in any given sector is dependent on the risk appetite and return expectations of that particular investor.

“Sub-sectors like telecoms and roads are well-established with respect to their business model, regulation and market interest,” she explains. Thus the returns from these projects are lower than ports or power projects, in which there is a perception of higher risk as a result of environmental and land clearance.

“We are also seeing interesting opportunities in niche infrastructure subsectors, such as delivery of urban services like waste management and logistics, cargo management, free warehousing zones, etc.”

As business models in India evolve, and as the government continues to embrace PPPs, momentum will build.

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• Topics
• South Asia
• Infrastructure
• Infrastructure
• Infrastructure
• Regulation
• Performance
• Archana Hingorani
• IL&FS Investment Managers
• Asian Development Bank