Institutional investors are becoming increasingly welcoming of more investment related to infrastructure, but they continue to harbour reservations about doing so in Asia, primarily because of higher operational and political risks.
A decade ago, pension fund chief investment officers (CIOs) typically lamented the difficulty of finding infrastructure investments that would fit with their generally cautious investing approach. Since then, however, private asset owners have invested over $1 trillion in infrastructure assets globally, according to OECD data.
But the asset class has enjoyed less success in Asia, however, with regional asset owners having been reluctant to increase their exposure beyond the US and Europe.
Korea’s Public Officials Benefit Association (Poba), for example, mostly invests into infrastructure linked assets in Europe, North America and Australia. Jang Dong-hun, Poba’s CIO, told AsianInvestor that Asian infrastructure investment is still immature and has higher risk.
“There is some growth potential, but each country has different and broadly less stable economic structures and politics that don’t meet our expectations. Infrastructure investment is a long-term commitment. We think that it is too early for us to invest in Asian infrastructure.”
He added that while Poba recognises that political leaderships change and new regimes take over, this a problem where an investor’s infrastructure exposure is materially affected. There is a higher risk of this in much of Asia, he said.
Dennis Chan, head of infrastructure with China Ping An Insurance in Hong Kong, believes this reticence may not last forever. He told AsianInvestor that asset owners will need to expand their horizons to consider the possibilities offered by innovative infrastructure companies in the coming years.
“Across Asia, there is likely to be interest in unlisted infrastructure, which has traditionally attracted pension funds and insurers, but increasingly we are going to see the emergence of innovative hybrid infrastructure firms focusing on last-mile communities. Debt financing for these firms is currently a problem.”
One example is the development of pay-as-you-go solar energy, which the World Bank estimates now provides access to energy for 420 million people worldwide.
Developments like these are ideally suited to countries like Indonesia, which comprises thousands of islands, Gordon Noble, partner at the Melbourne-based Blended Capital Group, told AsianInvestor. He gave the example of Oxfordshire and Nairobi-based Mwezi, which currently provides solar lighting for 50,000 households in Kenya through a pay-as-you-go model.
Considering the geographic and political challenges in countries such as Indonesia and India, last-mile infrastructure offers more opportunities for investors than large infrastructure projects.
“While there are some bankable projects that may be attractive to infrastructure financiers, because Indonesia’s geography is made up of 17,000 islands, there is a need to consider last-mile infrastructure,” said Noble.
This would cater for isolated communities without paved roads and with little access to communication, he added.
Similarly, looking at the infrastructure funding challenges in India, Noble observed that opportunities for last-mile infrastructure have the potential to deliver greater economic and social outcomes than large infrastructure projects.
“The challenge for India will be to invest in city infrastructure while also opening up new investments in last-mile infrastructure; this will require different models," he said.
Infrastructure investments also have an environmental, social and governance (ESG) aspect because they can be an important engine to promote a country's economic and social development.
However, “pension funds and insurers will need to demonstrate to governments that they are worthy of being trusted as long-term custodians of assets,” Noble said.
"There is a low level of trust in Europe and US, which is based on the poor outcomes to communities achieved in some instances when assets were privatised or handled through public-private partnerships (PPPs),” he said.
A NEW MODEL NEEDED?
In Australia, Melbourne-based investment management company IFM Investors believes the current procurement model for large infrastructure projects was not working as well as it could.
“This is because it relies on attracting large constructors while limiting the role for local medium-sized constructors and long-term equity owners. When things go wrong with construction, equity providers are passive,” chief executive David Neal told AsianInvestor.
The result is that construction and budget risks are transferred back to governments, which causes substantial delays and cost overruns in some large projects, he added.
Bidding consortia also tend to be dominated by participants that exit shortly after construction is complete. They have little if any interest in the infrastructure asset’s long-term operational performance and outcomes for the public.
“IFM and industry super funds are reluctant to invest on these terms,” said Neal.
IFM has proposed a new infrastructure investment concept called 'Down Under – the Building Australia Model', which focuses on governments using a competitive public tender process to bring in a well-capitalised, long-term equity partner early on to support appropriate infrastructure projects.
A similar model might work in Asia. Poba’s Jang told AsianInvestor that “infrastructure investment [would be] a suitable asset class for these funding requirements."
But he warned that the expected return would need to meet the pension fund’s internal targets if it is to attract more insurers and pension funds. "Investors would expect a bigger benefit,” said Jang.