The Asian Infrastructure Investment Bank (AIIB) has pledged to invest $4 billion during 2019 as it seeks to accelerate infrastructure funding and encourage more institutional investor capital into new projects.
The China-established multilateral development bank also aims to improve data collection on infrastructure financing as it believes that will be key to driving more private capital into this asset class in Asia.
Joachim von Amsberg, vice president of policy and strategy at AIIB, told AsianInvestor on Tuesday (January 29) that good data is the “holy grail” for encouraging more infrastructure investment into developing Asia.
That view was echoed in its inaugural Asian Infrastructure Finance 2019 report released on the same day.
“The first step toward creating infrastructure as an asset class for private sector investors would be to increase the level of data quality to facilitate high-quality brainstorming around key issues, for international comparisons, and to help market participants make informed financing decisions,” the report noted.
The report, which was supported by The Economist Intelligence Unit and industry experts, analyses infrastructure financing cost and construction cost in eight markets including China and India and provides a short-to-medium term market outlook for those countries.
Von Amsberg noted that Asia suffers from an infrastructure investment paradox. The region has huge infrastructure needs – the Asian Development Bank estimates the region requires $1.7 trillion a year in investment – and there are asset owners in Asia and globally with trillions of dollars available to invest into infrastructure. But so far, it has been very difficult to persuade these investors to support regional infrastructure projects.
Part of the reason for this is a lack of quality data. Von Amsberg noted that potential investors want to understand specific project costs, likely investment returns, and the risk in construction and execution. More work is needed to get this information into the hands of investors.
“Most people agree that there’s no silver bullet to solve the [infrastructure financing] paradox; there’s not a single action that will unlock the trillions of dollars flow,” said von Amsberg. “It’s really many different actions that need to be taken, starting from the policy framework in the country and the regulatory framework to the macroeconomic environment to the project preparation.”
Peter Douglas, director at the CAIA Foundation, which funds research and commentary into alternative assets, noted that while technical analysis and modelling techniques for infrastructure projects already exist, they are not always available or accessible to the investors who might be interested in infra investing.
“It’s a highly specialised asset class and needs expertise to evaluate. That expertise is gradually percolating to the asset owners, but it’s a gradual change,” he added.
AIIB’s 2019 report aims to become the institution’s first step towards building “an information repository that can be shared with the community”.
In addition to trying to solve the data bottleneck, AIIB is also seeking to directly encourage infrastructure projects, and intends to approve $4 billion of projects this year. This will be on top of almost $7.5 billion of financing it has provided in loans and other lending since it was established in 2016, said von Amsberg.
He believes AIIB’s participation in such projects will “give comfort” to investors by mitigating the risk profile of infrastructure deals.
“Governments play a very important role in the risk profile of an infrastructure project, and an MDB has privileged access to governments; they are our shareholders, so investors expect governments [to] behave and comply with contract [terms], …. when an MDB is part of the deal,” said von Amsberg.
In the near future, AIIB intends to focus on expanding the brownfield infrastructure market – the market that involves upgrading or modifying infrastructure assets that are already constructed – in Asia.
“Greenfield assets [which are created via completely new projects] have a higher risk profile, I think institutional investors have shown more interest in portfolios with brownfield assets where the risk profile is known, the construction is completed, and you can create a portfolio that scales [up],” added von Amsberg.
One area of focus for AIIB in this regard will be Eurasia rail connectivity, which has the potential to bring about more Europe-China trade and integrate central Asia with other regions, he added. Inter-country trading of reneweable energy is also “potentially a very exciting medium-term opportunity,” he said.
The report also highlighted this point: “By encouraging countries to link up their grids, regions with untapped renewables capacity could attract much-needed investment, boost their own supplies and export their surplus,” it said.
Given the huge funding gap for Asian infrastructure, projects should be open to tapping funds from a diverse range of sources, noted Ray Tay, vice-president and senior credit officer for project and infrastructure finance at Moody's Investors Service.
“The continued development of project bonds, private infrastructure funds, infrastructure project finance collateralised loan obligations and other channels are a positive for the infrastructure sector as a whole, as they provide various outlets for institutional investors to gain access to long-dated assets, he told AsianInvestor.