“In Southeast Asia, the GDP growth rates are far higher than those recorded in the OECD countries”-
The financing needs of the emerging markets including Southeast Asia are huge. The current scenario of financing is a little tough: banks are adopting a more cautious approach towards extending funds to infrastructure projects, while equity players are apprehensive about investing in the sector. Mark I. Kleinman, Senior Managing Director and General Manager, Sales and Project Finance, GE, shares his views regarding the current scenario, issues and challenges, and the outlook for infrastructure financing in the emerging markets including Southeast Asia…
What is your overall perspective of the current investment and business climate for infrastructure projects globally, in general, and Southeast Asia, in particular?
Globally, infrastructure needs are huge. With regard to the current infrastructure needs, the Organisation for Economic Cooperation and Development (OECD) estimates that infrastructure projects worth about $3.5 trillion worth are under consideration. As for the financing of these projects, there is a funding gap: only about $2.5 trillion has been earmarked for the financing of these projects. The financing gap is likely to continue, primarily because the banking industry is still recovering from the global recession. Also, more pressure has been exerted on banks on the regulatory front due to the implementation of Basel III norms.
Then there is alternative funding that has raised billions of dollars. During the first half of last year, over $15 billion was raised through infrastructure funds alone. This trend continues to accelerate.
We at GE want to make sure that our customers understand that we provide what we call “the total commercial solution”. Essentially, we want to be the advisers and partners for our clients – they could be government agencies or private developers. Over the last 10 years, we have financed over 3,000 projects. With regard to Southeast Asia, there are big infrastructure needs. Besides, every location has different specifics. Whether they need gas turbines, wind turbines, or even equipment for medical care, we try to manufacture the right equipment as per the requirements. At GE, we also try to provide the right financing package and serve as a facilitator by providing a total commercial solution to the customers.
How important is Southeast Asia for GE, in terms of the projects that have been undertaken in the past and will be taken up in the immediate future?
Southeast Asia is extremely important. These are the emerging/growing markets. Here, the GDP growth rates are far higher than those recorded in the OECD countries. Besides, the need for infrastructure is also far bigger, compared to the OECD counterparts. Roughly, 40 per cent of industrial revenue comes from the emerging markets. About 20 per cent of this sum comprises transactions that are partially funded by sales and project finance. Last year, the emerging markets contributed over $40 billion in revenue; we financed over $10 billion of this amount, in one form or another.
What kinds of financing does GE provide?
We do a variety of financings: some are traditional, while others involve letters of credit. In some other cases, we also get some equity in the transactions. Besides, there is a lot of work that we do with the export credit agencies (ECAs) of various countries like the US, France, and Germany.
From a financier’s perspective, how do you view the creditworthiness of infrastructure projects in Southeast Asia currently?
It is specific to the project. On the basis of our talks with investors around the globe, we know that they are interested in investing in infrastructure. Many of these are global financial institutions, insurance companies, pension funds, and sovereign wealth funds. They are interested in investing, as infrastructure is the “asset class“ of this decade: apart from the long duration, it also produces good and solid yields. The key concern of investors is that they don’t know enough about infrastructure and do not understand the risks involved in infrastructure projects and the difficulty in identifying the right projects.
Currently, are you finding bankable projects in the region?
It really varies. There is a lot of interest in the renewable energy sector. Other sectors like gas- and coal-based energy generation, along with health care, also have generated significant interest. Investors are interested in putting their funds in these sectors. We have also, both at the formal and informal levels, collaborated with a number of investors. For instance, in October, we signed an MoU with Macquarie Bank to invest throughout Asia, also potentially, the Middle East, Africa, etc. Macquarie is also working with a bunch of other institutions. We are encouraging people to bring us transactions. The general perception held by people is that the early days of a transaction are difficult: sometimes you may need money (where at times we can help); sometimes you need advice (where again we can pitch in). Going forward, we think public–private partnership projects will be very important worldwide.
How do you see the future role of bank lending, given the implementation of Basel III norms that are stricter with regard to long-term lending?
Basel III has placed some stringent capital requirements on infrastructure as an asset. So either banks have to earn outsized returns, or they cannot carry these assets in their balance sheets. Based on our findings, most of the investor interest is not from the banking community, but from the non-banking sector. So that takes us back to private equity (PE) funds, pension funds, and insurance companies.
What are the trends you expect for PE investments in the infrastructure sector in the coming years?
PE firms have become a very popular vehicle for large investors to put their money in. However, the problem is that PE investors lack expertise (to identify the right project). A lot of PE funds worldwide have raised a significant amount of infrastructure funds, but they do not know where to invest.
Given the low interest rate environment in the OECD countries, PE investors are looking to invest outside of that. Within PE, I think a significant number of funds are focused on the energy sector: the spread is between renewable energy (wind and solar) and thermal energy. Besides, there are other funds that focus on the oil and gas sector, which is currently booming across the world. So, pension funds, wealth funds, sovereign funds, and insurance companies, combined, have a huge pool of capital; they are looking to invest in promising areas.
What is your outlook for the coming two–three years for Southeast Asia’s infrastructure sector? What role would GE play?
I would hope that our role would continue to increase, given the need and desire to implement infrastructure projects. GE, I hope, would participate increasingly. We want to continue to grow, work with more sponsors and developers, get projects off the ground, and bring in the required funding. Infrastructure development is good for any country, given its potential to create more employment and a good business line eventually. This is why the emerging economies are more important to us, as the opportunity for growth in infrastructure is immense.
