To fill the multi-trillion-dollar gap in infrastructure investment that is projected in Asia over the next 15 years, the region will need much greater participation from the private sector, including institutional investors. But in order to get that, better inducements are needed such as credit enhancements, minimum guarantees, and Brownfield project offerings, the Asian Development Bank said on Tuesday. 

Developing Asia will need $26 trillion or $1.7 trillion per year for infrastructure investments in 2016-2030, ADB estimates. Excluding China, the expected gap in infrastructure investment in the first five years of this period is $308 billion annually of which $187 billion is seen coming from additional private investment. 

Private infrastructure investment typically comprises 75% debt and 25% equity, with most of the debt taking the form of bank financing, said Rana Hasan, a director at the ADB, at a press conference in Hong Kong as the development bank published its findings. But that funding mix looks set to change as Basel III compliance comes into force and bank funding becomes more constrained.

If Basel III comes, the cost of funding for banks is likely to go up by 2% to 5%, said Vivek Rao, principal financial sector specialist in the public management, financial sector and trade division of the ADB's South Asia department, on the sidelines of the event. 

That’s a big challenge to overcome, and that's why equity and bond market issuance for infrastructure financing has become quite critical, said Hasan, who works in the development economics and indicators division of the ADB's economic research and regional corporation department.

Institutional investors normally participate in infrastructure projects by investing in bonds, but they are the most risk-averse kind of investors, so they invariably need to cover their biggest investment risks.

Guarantees and enhancements

Potential initiatives to mitigate some of the risks involved in infrastructure investment include minimum level guarantees. Some big infrastructure projects in Korea now use this model as a lot of banks “have been burned” after some traffic projects failed to deliver the profits that were projected, Rao said.

Minimum level guarantees are something that should be built into infrastructure projects, he said.

Credit enhancements on infrastructure bonds are also needed because some long-term institutional investors have certain credit-rating thresholds that need to be met before they can invest, Zhuang Juzhong, ADB’s deputy chief economist, said at the event. 

In the case of international investors, there is often a minimum A rating, Rao said, which is why the Credit Guarantee and Investment Facility (CGIF) was established in November 2010. The CGIF provides guarantees on local currency-denominated bonds issued by companies in Asia. It was set up by the 10 members of the Association of Southeast Asian Nations, together with China, Japan, Republic of Korea, (Asean+3) and the ADB.

Brown over green

When it comes to making minority equity investments, meanwhile, there is a preference among some asset owners for established infrastructure projects over new ones. That at least seems to be the case among insurance companies, which are usually very risk-averse and have many risk-management policies to comply with, but which may actually have some money to invest in this way.

Joseph Wang, chief investment officer at Taiwan’s Cathay Life, for example, told AsianInvestor in January that when it came to alternative investments like infrastructure and real estate, his firm liked brownfield projects but steered cleared of greenfield projects.

The trick therefore may be to involve different types of investment over the life-cycle of an infrastructure asset.

“So maybe you really need to think of the model [and] ... have a sovereign equity partner which invests initially and gets out in the brownfield phase in about four years’ time," said Rao.

That way, some of the investment risks that trouble institutional investors are covered, he said, noting just how discussions around such models of infrastructure investment were already taking place in Singapore and Japan.