Looking ahead at infrastructure development in Asia
Tackling Asia’s vast infrastructure gap
head syndications - Asia Pacific, International Finance Corporation
Kian Min Low
chief development officer, JERA Asia
group CEO, Sindicatum Renewable Energy
regional head of Southeast Asia and South Asia, Vena Energy
executive director, project & export finance, Standard Chartered
managing partner, Capital Square Partners
head of corporate strategy, Clifford Capital
managing director, I Squared Capital
partner and head of infrastructure advisory, KPMG
Wee Meng Thoo
head of investments, TMT sector, Leonie Hill Capital
head of capital market solutions, global structured finance, investment banking department, Asia, Sumitomo Mitsui Banking Corporation
global head of securitized product & solutions sales, Standard Chartered
president, BDO Capital & Investment Corporation
Boo Hock Khoo
former vice president, operations, Credit Guarantee and Investment Facility (CGIF)
head of Asia Pacific, infrastructure & project finance, Fitch Ratings
executive director, Infrastructure Asia
president director, PT Penjamin Infrastruktur Indonesia
head of Asia global structured finance, investment banking department, Asia, Sumitomo Mitsui Banking Corporation
editor-in-chief, The Asset
managing editor, The Asset
While 2018 saw a slight slowdown in infrastructure projects for various reasons, this year is expected to see an increase, according to the panel at The Asset’s 4th Asia Infrastructure Finance Leaders Dialogue held in Singapore this year. To facilitate this, there is a greater need for more project financing and new financing structures.
“The first half of last year was significant but the second half slowed down in terms of issuance, reflecting the volatility of emerging markets. We’ve had a good start to this year as the deal activity rise has been very strong,” says Sajal Kishore, head of Asia-Pacific, infrastructure & project finance, Fitch Ratings.
“The second half last year was also strong in terms of activity. I think that is just a reflection of the complexity of transactions in the infrastructure space. We’ve also had a few elections this year so there was a pause particularly in Indonesia and we expect that to pick up now,” adds Kishore.
“We expect project finance to be better than last year,” says Luca Tonello, head of Asia global structured finance, investment banking department, Asia, Sumitomo Mitsui Banking Corporation. “There is a lot of activity in markets like Taiwan and with Chinese clients in Asia and globally. Vietnam has done quite well because some deals are in the process of closing, while there’s a lot of activity in frontier markets like Bangladesh.”
“We’ve started to look at India where the framework of projects, which I think will improve after the elections with Narendra Modi having a stronger mandate, there’s an opportunity for international banks like us,” adds Tonello. “India and China are obviously huge markets on our doorstep so we have to look at them with a long-term perspective.”
The Philippines is set to see certain large infrastructure projects unfold such as the renovation of major airports, though private financing will have a different role than usual.
“We will have the largest infrastructure investments in the history of the country. But project finance in terms of volume and deal flow will be less primarily because the government has shifted from PPP to G2G (government-to-government) so the private sector is waiting until the infrastructure has been built by the government,” says Eduardo Francisco, president of BDO Capital & Investment Corporation.
Besides airports, Francisco adds there are lots of other opportunities for unsolicited proposals in the Philippines. “We see it with airports, tollways and bridges. The key is to team up with big sponsors and developers because it’s unsolicited - so you’re in early and working with them.”
Energy projects continue to be a mainstay of capital markets while airports and toll roads will see a lot of activity, says Kishore, who described Australia as a leader in road construction while there will be a lot of issuances in Indonesia.
“Airports are a big story in Asia, there is a rising middle class, low-cost airlines, and most airports are bursting at the seams. We had some issuances by Indian airports recently which we rated, that’s something we’ll continue to see in developed and emerging Asian markets,” says Kishore.
Indonesia will be a major country for infrastructure projects, having already seen a wave of construction begin a few years ago after President Jokowi unveiled ambitious plans. There is more in store in the years to come, especially in housing, roads and schools.
“We have already seen an acceleration of infrastructure development in Indonesia since three years ago. We have 30 projects, of which 10 are toll roads. There are also ICT and power projects. US$600 million will be used for hospitals and schools,” says Armand Hermawan, president-director, PT Penjamin Infrastruktur Indonesia.
“Project finance will be increasingly important for Indonesia because the project sizes are larger, so this is difficult to be addressed by corporate finance,” adds Hermawan.
Among the promising infrastructure sectors in Asia is renewable energy, such as solar, wind and hydro power, though the rate of adaption varies between countries.
“Southeast Asia is kind of disappointing as the scale is not quite there. India and Taiwan are top markets that offer scale and planning. India has created solar parks in which you bid and they provide infrastructure. The framework has been developed so counterparty risk is better. Taiwan has a plan and everybody knows what is expected,” explains Tonello.
The need for infrastructure financing has led to new types of partnerships, including those between different countries.
“We found the Silk Road Fund had been successful in other places, but not so much in Southeast Asia. Surbana Jurong has been involved in early-stage master planning in Southeast Asia,” says Boo Hock Khoo, former vice-president for operations at Credit Guarantee and Investment Facility (CGIF), about a partnership between China’s Silk Road Fund and Surbana Jurong, a Singapore-based infrastructure consulting firm.
“It still took about six months to put together. The end result is interesting though it is not so big - US$500 million - but the positioning is interesting because it could invest in minority equity or mezzanine,” adds Khoo.
“The deficit in infrastructure is so huge, we need all cylinders firing, whether it’s foreign currency or local currency or CLOs. All kinds of solutions need to be on the table. For us, we’re not large enough to affect the markets but our role is to find solutions. We try to mobilize indigenous savings in respective local markets, try to fulfill 70-80% of capital structure in at least matching currencies and if need to, build that as an asset class,” says Khoo.
To this end, the CGIF is introducing the Infrastructure Investor Partnership (IIP), an infrastructure financing platform. “We’re trying to mobilize equity from the 13 governments of the Asean nations and Japan, China, and Korea. We want to start with Japan where savings are abundant. We won’t use US dollars, but get them to write yen cheques and pull that into capital. The Japanese government will provide first-loss equity in yen. From that, we hope to issue mezzanine bonds to conservative pension funds and insurance companies in Japan, and create a leveraged capital base on which we will issue guarantees to Asean local currency loans and bonds,” says Khoo.
New technology can also be applied to infrastructure development to help Asian countries with their infrastructure needs. “Recently, we’ve been talking to partners about whether technology is applicable in emerging Asia and the answer is, it is very relevant. Some of the technology is not hard or costly and can reduce the cost per unit for construction. We are already applying it in building design. A lot of emerging Asia is open to using PPVC (pre-fabricated pre-finished volumetric construction), which can reduce the cost per unit,” says Seth Tan, executive director of Infrastructure Asia.
“A lot of companies and government haven’t harnessed data enough. You can drive efficiency in operation and maintenance planning and in the whole value chain, which would save costs and defer some of the new infrastructure that needs to be done now. This would be immediately adaptable to emerging Asia,” adds Tan.
The current global and regional economic slowdown might be ground for concern, but panelists like Kishore are optimistic about infrastructure development. “There could be pauses here and there but looking at the longer-term picture, the scale and investment that is required, I don’t see that happening. Infrastructural spend is both a contributor to GDP and a beneficiary of GDP growth. A good example is Australia, which spends more in terms of infrastructure as a proportion of GDP compared to similar countries, which has benefited the Australian economy,” says Kishore.