Infrastructure investment experts argue that more public-private partnership (PPP) arrangements are needed to enlarge the pool of suitable infrastructure assets in Asia.
Speaking at AsianInvestor’s Insurance Investment Summit in Hong Kong last week, speakers from insurer AIA and the Asian Development Bank also said the financial services sector should develop more products that institutions such as insurers and pension funds can get behind.
Australia has shown that institutional investment can be a key factor in funding infrastructure projects, said Brian Murray, head of economic strategies at Hong Kong-based AIA. China is taking a more public-sector approach, and could be the catalyst for a real shift in infrastructure investment, he noted.
“I think the Chinese, by elevating infrastructure when they hosted the G20 and the increasing influence of the Asian Infrastructure Investment Bank, has changed the conversation,” said Murray. “Now all of a sudden infrastructure investment is front-page news – the sexiest topic in finance other than fintech,” he added.
Australia a model for Asia
But when it comes to a solution for bridging the infrastructure gap, only Australia’s public/private model and China’s largely public model stand out, he said. It’s difficult to find anywhere outside Australia where PPP is happening” added Murray.
As insurance companies and pension funds in Asia continue to seek ways of boosting returns, infrastructure investment is increasingly becoming a part of the mix. In Australia, it is already a core part of many superannuation funds’ asset allocation, typically making up 10% of their asset allocation across equity and debt holdings.
Australia has been able to close its infrastructure gap, said Murray, because pension funds accumulated these assets and created structures with state and local governments.
He believes the same trend is coming to Asia as the region’s infrastructure funding needs grow ever larger. The Asian Development Bank (ADB) issued a report on February 28 stating that from now until 2030 the Asia-Pacific region faces a $26 trillion-dollar infrastructure shortfall. That’s equivalent to 2.4% of the region’s GDP.
"You’ve had that same build-up of capital in Asia, and it’s so far been invested in low-yielding government bonds. So I don’t think there’s a lack of demand,” said Murray. “The financial services industry has been a little derelict in their duty by not creating products to meet that demand.”
He advocates that the Australian model for infrastructure funding resonates with insurers in Asia, “because it marries our long-term liabilities with the gaping holes in the region’s infrastructure”.
Frédéric Thomas, senior investment specialist in the infrastructure finance division at ADB, made similar points to Murray.
While multilateral groups like ADB could take more responsibility for bridging the gap, Thomas noted, “in terms of public versus private, if a government doesn’t put projects out to bid and create a clear governance structure, you are not going to get private capital to move in.
“And the financial services industry has to create the vehicles that you can use to invest in those projects,” he agreed.
Progress on products
Progress is being made across the region on this front, noted Murray. For example, the Philippines cleaned up governance under the last administration and created a framework for infrastructure development.
Moreover, India is making a big infrastructure push, he added, creating business trusts that allow fund promoters to package infrastructure as a retail product, rather like a Reit. “They’ve created a government-backed investment vehicle that gives them a nice credit wrapper for domestic infrastructure investment.
“It’s not easy for governments to implement this sort of agenda,” added Murray, “so what they have achieved [in these countries] is impressive by any standards.”
As AsianInvestor has reported, Australia’s state governments are proving quite pragmatic about the increasing desire of asset owners to take unsolicited stakes in infrastructure assets.
In October, AustralianSuper and Melbourne-based fund manager IFM Investors succeeded in an audacious A$16.2 billion ($12.2 billion) bid to buy 50.4% of electricity company Ausgrid without going through a formal sale process.
And just this week, Queensland-based fund house QIC closed the QIC Global Infrastructure Fund (QGIF) with A$2.35 billion of capital commitments. QGIF is a pooled unlisted investment vehicle with interests in three infrastructure assets; Lochard Energy (which owns and operates the Iona Gas Plant), the Powering Australian Renewables Fund (a joint investment with AGL and the Future Fund) and the Port of Melbourne.
Damien Frawley, chief executive of QIC, which has A$79.5 billion ($57.6 billion) in AUM, said the fund had received strong support from overseas investors, including institutions from China, Japan and Korea, as well as from the US and Europe.