Governments urged to take on more Belt and Road risk

Large institutions such as CPPIB, HSBC and Macquarie flag obstacles deterring private capital from investing in emerging market infrastructure.
Governments urged to take on more Belt and Road risk

Most investors will continue to shun infrastructure in emerging markets, including projects covered by China’s Belt and Road initiative (BRI), unless governments take on more of the risk.

That is the view of some members of a heavy-hitting panel that met in London last Thursday as part of the ‘Think Asia, Think Hong Kong’ conference organised by the Hong Kong Trade and Development Council.

The speakers – who included senior executives from Canada Pension Plan Investment Board (CPPIB), HSBC, IFC and Macquarie – also flagged other obstacles holding back investment such as long-term currency risks and outdated regulations affecting local institutions. Also cited as an issue was many Western investors' lack of familiarity with emerging Asia.

Some 90% of infrastructure across Asia is funded by governments or multilateral organisations, but more must come from private capital, given the scale of the region's needs, noted Ben Way, Asia chief executive at Australian bank Macquarie. Emerging Asia needs $26 trillion of infrastructure investment by 2030, according to the Asian Development Bank.

As it is, there is a global mismatch between the potential supply of capital for infrastructure investment and the demand for it. Whereas 80% of institutional capital sits in the West, 80% of the needs are in the developing world, said Ram Mahidhara, chief investment officer for infrastructure at International Finance Corporation, part of the World Bank.

Of the $100 trillion-plus in pension funds, sovereign wealth funds, insurers and others worldwide, just 10% going into infrastructure would be a big boost, he said, speaking on the same panel. Chinese institutions such as China Development Bank, China Investment Corporation, insurer China Life and Silk Road Fund have, between them, already committed some $900 billion to BRI deals.

However, Way said most investors were unwilling to consider infrastructure opportunities – generally greenfield deals – in markets like Bangladesh, Indonesia and Vietnam. They are generally put off by the long-term nature of such deals – potentially 20 years or more – especially in countries that are seen as less predictable from a political and regulatory perspective.

Making it comfortable

To inspire more confidence, EM governments should follow the example of South Korea, which successfully drew foreign money to develop the country’s infrastructure after the Asian financial crisis of 1997/1998, Way said.

To do so, he noted, it implemented attractive public-private partnership (PPP) arrangements, offering investors minimum-revenue guarantees on infrastructure projects in case they did not perform as forecast. As a result it created a high level of comfort among private investors – particularly equity investors.

“That sort of transparent risk framework is exactly what is needed in places like Bangladesh, Vietnam and Indonesia,” Way added.

Alain Carrier, head of international at CPPIB, agreed that governments could bridge the risk of greenfield assets by artificially lowering the risk to attract investors. 

CPPIB also advocates asset recycling by governments – that is, switching capital from established assets that have already attracted capital into emerging projects that can be developed to a stage where they can attract much more capital, Carrier said.

Ultimately, when it considers infrastructure deals CPPIB looks for rule of law, a solid regulatory framework, predictability and strong local partners. “If you don’t have the predictability, you need a very strong legal underpinning,” he said.

Carrier said these factors are features of the emerging markets in which CPPIB makes most of its infrastructure investments, namely Chile, Peru, Mexico and India.

Some governments in the developing world recognise the risk issue, agreed Way, citing Thailand as a place where he had seen positive moves on this front.

He also noted that there are institutions such as the Hong Kong Monetary Authority – through its Infrastructure Financing Facilitation Office – and the Hong Kong Trade Development Council that look to bring expertise to the EM countries in question.

Other issues 

Way flagged two other challenges: domestic capital blockages and Western ignorance.  

While countries such as China and Korea have been able to fund their infrastructure buildouts from deep pools of local pension and insurance capital, many BRI-related markets don’t have that luxury, said Way. This is because of outdated regulations that prevent institutional investors from allocating funds to infrastructure.

The second issue is many foreign investors’ unfamiliarity with emerging Asia. There are still many people making investment decisions about Asia that have never visited China or India, let alone Bangladesh or Indonesia, said Way.

“We need people to come to see these markets, meet regulators, meet construction companies and so on,” he said. “Unless they’ve seen and touched it, it’s hard for them to get comfortable with investing in Asia.”

A further issue with EM infrastructure investment is that of long-term currency risk, said Samir Assaf, CEO of HSBC Global Banking & Markets, also speaking on the panel. Banks need to help remove the FX risk, which is often difficult with certain emerging markets, he added.

However, currency risk is not a core issue for some. CPPIB typically does not FX-hedge infrastructure projects, said Carrier, preferring to see it as part of the “overall basket of risk”.

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