Driving private capital into ASEAN’s Belt and Road

Public-sector infrastructure funding is falling short in ASEAN. Can private Belt and Road funding plug the gap?

The Belt and Road initiative has made much-needed progress in bridging ASEAN’s infrastructure gap. Yet the majority of funding under Belt and Road still comes from China – which alone cannot fill this deepening gap. Has the time come for the private sector to step in?

Estimates by the Asian Development Bank suggest developing-Asia needs to invest USD26 trillion in infrastructure projects from 2016 to 2030.1

That comes to USD1.7 trillion a year – which for context, is almost five times Singapore’s 2018 GDP.2

With all countries in the ASEAN region falling along specified Belt and Road corridors, the initiative is somewhat of a natural fit for ASEAN’s infrastructure market. Yet even with Belt and Road, only 50 per cent of the investment needed for ASEAN countries is currently being met. As such, the Chinese government and other national governments now need to partner with the private sector to further bridge the infrastructure gap.3

Attractive infrastructure

Globally, the appetite for private investment has never been stronger.4 The amount of private capital raised in infrastructure worldwide reached a record USD92 billion in 2018, 22.7 per cent more than the previous record of USD75 billion in 2017.5

As interest rates remain low and stock markets trade close to their peaks, the primary appeal of infrastructure is the long-term, predictable and regular cash flows, according to Surya Bagchi, Global Head of Project and Export Finance at Standard Chartered.

On average, these funds returned over 13 per cent to investors from January to September 2018, higher than real estate or private debt.6 Furthermore, infrastructure can help private investors to diversify and protect against inflation.7

Belt and Road – a driver for private capital

While there is a lot of private capital aimed at infrastructure globally, much of it is directed towards North America and Europe.8 But China and ASEAN governments are keen for this to change.

“Belt and Road is approaching that tipping point for private sector involvement,” said Bagchi. “There will definitely be more private participation going forward.”

Indeed in 2017, China – Belt and Road’s ideator – announced that public-private partnerships (PPPs) are the “preferred” model to facilitate the completion of Belt and Road projects.9 Of the many ways that private investors can get involved in infrastructure, PPPs play a “pivotal” role in financing projects, reads a report by PwC.10

One large-scale example of a Belt and Road project where governments and the private sector worked together is Noor Energy 1, a 950-megawatts solar power project in Dubai – now the largest single-site concentrated solar power plant in the world.11

Innovative debt attracts private capital

Aside from infrastructure funds and PPP projects, less traditional instruments such as infrastructure project finance securitisation and green bonds are another avenue attracting private investment into ASEAN’s infrastructure market.

Such products are now making their debut in the region: for example, Asia’s first infrastructure project finance securitisation raised USD458 million in July 2018. This take-out facility was designed and structured by Singapore’s Clifford Capital, with Standard Chartered as one of the joint global coordinators – and consisted of project and infrastructure loans across 16 countries and 8 industry sub-sectors.12

Elsewhere in the capital markets, Asia-Pacific as a whole raised a record USD21.9 billion worth of green bonds in the first half of 2019, an increase of 29.6 per cent from the same period a year ago.13

Assuaging risk perceptions

At a governmental level, there is definitely a consensus that private participation is the way forward to address the infrastructure needs of the ASEAN region, explained Standard Chartered’s Bagchi. But what has been achieved on the ground varies across countries and sectors, he said.

Research by KPMG shows that while providers of international private capital are interested in the opportunities of Belt and Road, many perceive them to be of higher risk.14 Deficiencies in institutional systems, capacity, capabilities, experience and service models exhibited by the Chinese government and the governments of countries along the Belt and Road means that providers of international private capital take a more cautious approach towards financing them.15

While private investors may regard projects in ASEAN’s emerging markets as more uncertain, it’s interesting to note that the credit quality of infrastructure debt in emerging markets is moving closer to those in advanced economies, according to research reports by credit rating agency Moody’s Investors Service.16 On the whole, Moody’s also shows that default rates on project finance bank debt is at its lowest since 2010.17

And in an attempt to assuage private investors’ worries, ASEAN members and China, Japan and South Korea are creating an insurance scheme that would protect private investments in Asian infrastructure projects of up to USD1.5 billion.18

ASEAN’s gaping infrastructure hole is a threat to the region’s growth prospects, which has far-reaching consequences on trade, businesses and societies. While there is no doubt that Belt and Road will help to alleviate some of these infrastructure needs, China and partnering ASEAN governments cannot win this battle on their own.

The ability for ASEAN countries to continue growing at their current rates – spurring trade and development – will largely depend on how much infrastructure can be delivered in the coming years. With this risk to prosperity imperilling the region, the only way the gap can be plugged is if the private and the public join forces to tackle this problem together.

1 Asian Development Bank. 2018. Closing the infrastructure gap in Asian infrastructure

2 The World Bank. Singapore data. Accessed 13 Sep 2019. https://data.worldbank.org/country/singapore

3 Standard Chartered. 2019. ASEAN needs to re-think approach to US$2.8 trillion infrastructure gap.

4 PwC. 2017. Global infrastructure investment – the role of private capital in the delivery of essential assets and services

5 Preqin. March 2019. opens in a new windowGlobal Outlook: Alternatives Investing in the 2020s

6 Preqin. July 2019. Quarterly Update: Infrastructure Q2 2019

7 PwC. Global infrastructure investment – the role of private capital in the delivery of essential assets and services. 2017

8 Preqin. July 2019. Quarterly Update: Infrastructure Q2 2019

9 Siau Wui Kien. 2018. An overview of China's public-private partnerships and their use in the belt & road initiative of Southeast Asia

10 PwC. 2018. Understanding infrastructure opportunities in ASEAN

11 ACWA Power. Accessed 13 Sep 2019. Projects – Noor energy 1

12 Clifford Capital. Inaugural infrastructure project finance securitisation platform in Asia. Accessed 13 Sep 2019. https://www.cliffordcap.sg/bayfront-infrastructure-capital

13 The Asset. 11 July 2019. Asia-Pacific raises record-high volume of green bonds in first half

14 KPMG. 2019. Charting the course of Belt and Road cooperation together

15 ibid

16 Moody’s. 1 March 2019. Average credit quality of infrastructure securities in emerging markets has moved closer to that in advanced regions

17 Moody’s. 1 March 2019. Project finance bank loans show lowest 10-year cumulative default rates since at least 2010

18 Nikkei Asian Review. 4 May 2019. Asia to lure private infrastructure loans with insurance scheme

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