Asia’s infrastructure gap: Poor structuring of deals

The time is ripe to develop infrastructure as an attractive asset class. If infrastructure projects are structured efficiently, and private funds brought in at the optimum time, the region’s infrastructure gap can be narrowed

Chinatown. Illustration: Ratna Sagar shrestha/THT

Chinatown. Illustration: Ratna Sagar shrestha/THT

2016 is the year to defy herd instinct and pack behaviour, and seek out opportunities that will prove worthwhile when financial markets bounce back from the trough. If investment in infrastructure seems too daunting to undertake at a time when Southeast Asia’s economies are cooling, now is precisely the time to pursue it. For infrastructure financing, when structured right, could make for an attractive asset class for the institutional community with huge positive impact on the region’s economies. Better-linked physical infrastructure which promotes the seamless movement of goods and services will also edge the 10 members in the Association of Southeast Asian Nations (ASEAN) a step closer to achieving its goal of seamless regional connectivity.

The Asian Development Bank forecasts that Asia needs US$8 trillion in the decade to 2020 to plug the infrastructure deficit. As countries move up the value chain and urban populations expand, demand for transport, logistics and utilities will only continue to grow, increasing the burden on public funds.

Rising urbanisation in countries such as Indonesia and the Philippines will spur greater need for physical infrastructure and power generation capacity. Indonesia’s Planning Commission is focusing its projects on mass transit, toll roads and airport development while the priorities of President Benigno Aquino III’s government are in the development of ports, expressways and energy projects. Given the massive requirement, the region may still face a funding shortfall even if the newly-launched Asian Infrastructure Investment Bank (AIIB) provides annual loans of US$10-15 billion for the first five or six years.

It is, however, a misconception that private investors are not interested in infrastructure projects, and that this is to blame for the deficit. Instead, it is often the poor structuring of such initiatives that keeps private money at bay.

Commercial banks can provide the missing link in the infrastructure development picture. Not only do these banks have the ability to take on greenfield project risks and provide liquidity, they can also work with governments to create the right conditions for
financing, which help in the creation of a sustainable pipeline of bankable projects. Commercial banks’ ability to structure transactions appropriately, so that risks sit with the most suitable party, is the key to unlocking new sources of capital for infrastructure development.

The money management community, which lacks the appetite for diverse risks generated from projects in their initial phase, is more likely to provide longer-term infrastructure financing if short-term bank loans have been used to fund the early phases of the initiatives.

This mechanism works both ways. Greater institutional investor appetite will enhance the interest of commercial banks, which will then have greater surety that their capital can be recycled within an acceptable timeframe. Similarly, a deeper infrastructure bond market will also provide an additional source of liquidity for the region’s infrastructure development.

Multilateral development lenders, such as the AIIB, can still play a critical and complementary role in Southeast Asia’s infrastructure ecosystem. By providing assistance and guarantees, which has the effect of reducing risks, AIIB can make capital projects more attractive to commercial banks and institutional investors. Commercial banks also play a leading role in the coordination of regional projects, enabling cross-border projects to take root and bear fruit. Not only will higher-quality infrastructure catalyse trade and investment ties among ASEAN members, greater physical connectivity will also attract more visitors to the region, increasing consumption and growth. The World Bank estimates that a 10 per cent increase in capital investment into infrastructure projects contributes to a 1 per cent growth in GDP.  Still, the basics have to be set right. Governments need to create an environment with a consistent legal and regulatory framework, alongside transparent governance and decision-making processes. Without these conducive conditions, investment in emerging economies will be viewed as more risky than similar opportunities in more developed countries. In the infrastructure financing world, the concept of the zero-sum game is real. Governments will be well-placed to engage experienced business advisors such as commercial banks to help in the development of clear and consistent frameworks and transparent procurement arrangements that safeguard private investors’ interest.  Infrastructure development is not a silo initiative. It calls for a coordinated approach involving collaborative governments; multilateral development lenders; commercial banks with well-established global networks and expertise in appropriate risk structuring; viable capital markets and cash-flushed institutional investors.

And commercial banks are the fabric that binds all these parties together.

The time is ripe to develop infrastructure as an attractive asset class. If infrastructure projects are structured efficiently, and private funds brought in at the optimum time, the region’s infrastructure gap can be narrowed. And institutional investors will have a new opportunity to put their funds to work for a worthy cause with potential long-term returns.

Kanwal is Regional CEO, ASEAN and South Asia Standard Chartered Bank

A version of this article appears in print on March 31, 2016 of The Himalayan Times.

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