For all the rising desire of institutional investors to consider infrastructure investments, the concept of buying into Greenfield projects remains a bridge too far (to use an apt metaphor).
Greenfield projects, or those that need to be funded from the concept stage all the way to completion, contain for more construction, funding and political risk around them than infrastructure that has already been built (known as Brownfield projects when it comes to funding).
But China's Belt and Road initiative involves huge amounts of Greenfield funding, in the realm of over $1 trillion. Convincing institutional investors to part with their funds in support of these projects will not be easy.
A critical step will be for institutional investors to partner with other funds that boast on-the-ground expertise.
Perhaps more critically, it means teaming up with multi-lateral organisations such as the International Finance Corporation, which have decades of experience in financing Greenfield projects in emerging markets, or ones planning to pass cash-generating assets to private investors, such as the Asian Infrastructure Investment Bank (AIIB).
“Multi-laterals can assist private sector financeable projects by identifying projects and consulting in the early stages of development,” said Eastspring Investments' chief investment officer Virginie Maisonneuve.
Even experienced sovereign wealth funds need such help. CIC has invested $10 billion into Belt and Road countries, but it often lacks sufficient local expertise in and so seeks to work with sector investors, other international institutions and local partners, said Li. He pointed to platforms CIC has set up with other state institutions, such as the Russia Direct Investment Fund.
Similarly, China Everbright Limited (CEL), the Hong Kong-based investment arm of Chinese financial group China Everbright, is seeking to partner with Chinese enterprises or local asset managers such as those in Indonesia to make Belt and Road-related investments.
Daniel Hu, managing director of CEL’s overseas infrastructure fund, told AsianInvestor that such contacts normally have better industry or local knowledge.
CEL signed an agreement in April 2016 to acquire the Tirana International Airport in southeastern European country Albania, which is on the Belt and Road route. It transferred the assets into its new infrastructure fund in July.
The China Silk Road Fund uses law firms and investment banks such as Goldman Sachs and Morgan Stanley to help conduct its due diligence, noted Luo. It has already committed $6.8 billion to 16 projects, usually by co-investing with a leading company in the field, especially from China, but also partners with multilateral financial institutions.
Banks also have a key role to play in encouraging infrastructure investing.
Vivek Rao, a principal financial specialist at the Asian Development Bank, told AsianInvestor that lenders can best manage infrastructure pre-construction and completion risks, because they have long-term relationship with project sponsors and access to information and security, which is “otherwise not available”, he said.
However, Basel III requirements are set to effectively raise the funding cost of banks by between 50 and 110 basis points, making bank loans more expensive, Rao said. So they will need complimentary financing from the capital markets.
The idea would be for banks to finance projects in the pre-completion stage, while “there is opportunity or scope for the institutional investors to play a role” to buy the equity or debt behind a project after it is completed, Rao said.
Asset owners prefer buying infrastructure debt to making direct Greenfield project investments.
It would be easier to issuer such debt were multilateral institutions to provide some kind of debt enhancement to infrastructure projects. This could consist of credit guarantees, which help raise the debt rating of a project into the investment grade area, and thus make them much easier for many institutional investors to buy into, Rao said.
Investors are also likely to be more confident of investing into Asian infrastructure if they have a predictable pipeline of projects, and if each one possesses measurable risk-return profiles, said Claus Fintzen, CIO and head of infrastructure debt at Allianz Global Investors.
One means of doing so is to catalogue the performance and risk metrics of infrastructure investments, and from there create performance benchmarks to help investors select projects with more investment upside.
EDHEC Infrastructure has made some headway in this area. It has created a number of infrastructure indices, modeling “free cash flow to equity”, capital structure, payout volatility and duration by country and industry over time intervals for numerous projects, both Greenfield and Brownfield (already constructed infrastructure, which is thus less risky), noted Maisonneuve.
Governments can encourage investments via attractive public-private partnership (PPP) arrangements. Korea did so after the Asia financial crisis of 1997, offering investors minimum-revenue guarantees on infrastructure projects in case they didn’t perform as forecast, said Macquarie’s Way. That helped equity investors in particular become comfortable.
But to formulate PPPs, emerging market governments across Asia will need to strengthen procurement and regulatory frameworks to attract investment, Rathbone said.
Some have done so. Indonesia enacted the Land Acquisition Act in February 2015 to ease the acquisition of land from private landowners for needed infrastructure. And the previous Philippines regime implemented a strong PPP programme through the PPP Centre under the previous administration of president Benigno Aquino, which led a few PPP projects, for example Macatan Cebu Airport.
Insurance players can play a role as well. Stuart Ashworth, Asia Pacific managing director of financial solutions at Willis Towers Watson said the insurance market was heavily involved in various Belt and Road projects via property insurance, construction insurance and liability insurance.
A combination of experienced existing multilaterals, better assessment and more favourable regulations could yet help convince more Asian asset owners to place some of their funds into China's gargantuan infrastructure plans.
Click here to read part one of this AsianInvestor October/November magazine feature, which looked at the vast needs of China's Belt and Road initiative for funding.