Uncertainty over trade policy and increasing protectionist measures in infrastructure development contributed to a decline in private sector infrastructure investment in 2019. Even though monetary policies have become more accommodative, these are not translating into more private sector financing because investors perceive rising risks to investment. The importance of infrastructure investments in this context is well recognised. Many governments are facing increasing constraints, with public debts rising at the same time as infrastructure investments are falling. This has naturally led policymakers to seek other sources of funding to meet their countries’ growing infrastructure demands. Knowing that public sector budgets cannot shoulder the burden alone, they are emphasising the need for more private capital mobilisation to close the infrastructure gap.

Financing constraints

When it comes to working with the private sector, poor project quality or unsupportive policy frameworks limit the amount of resources available for investment. On the one hand, the private sector is reluctant to invest because of insufficient financial returns, too many risks, or both. On the other, government actions have also been limited by lack of revenues, or fiscal or debt constraints. Multilateral development banks (MDBs) can provide finance and expertise to assist developing countries, but they too will face balance sheet and capacity constraints, as well as limits in the amount of concessionary finance. MDBs are not replacements for country policies or institutions.

Trends in infrastructure financing

Private sector infrastructure financing activity in Asia declined in 2019 compared to the previous year; however, with a seemingly strong project pipeline for the next year, markets continue to remain optimistic. The total value of private transactions reaching financial close in Asia declined from $218 billion in 2018 to $196 billion in 2019, a decline of around $22 billion. The transport sector recorded the highest transaction value of $50 billion in 2019 and accounted for nearly 25 per cent of the total financing. This was followed by the oil and gas sector with a transaction value of $46 billion and conventional power with a transaction value of $37 billion.

Of the total decline of $22 billion, the highest decline was in the case of the conventional power sector ($7.31 billion), followed by transport at $6.58 billion, and the renewables and water sectors at $4.17 billion and $2.19 billion respectively. Conventional power accounted for 34 per cent of the decline, indicating a significant shift away from conventional power. The oil and gas and telecommunication sectors declined marginally.

The first half of 2019 was an active election cycle for much of Asia, as a number of key regional economies held their general elections through April to May. Investors leaned towards caution and preferred to postpone key investment decisions. Indonesia, in particular, registered a 73 per cent decline in investment during 2019. Market participants across the spectrum agree that while banks have the risk appetite to lend, unpredictable regulatory environments and the lack of proper risk allocation mechanisms for project prioritisation have hampered the growth of the Asian infrastructure finance market. The local content requirements in the renewables sector in Indonesia and the programme of unsolicited proposals in the Philippines are some key examples of local challenges in the focus countries.

Shift to sustainable energy

Over the past few years, many institutional investors have demonstrated clear intentions to invest sustainably. Large pension funds have reported an increase in capital allocation to green investment assets including green bonds, green equity indexes, clean energy projects, etc. This demand has coincided with greater supply, as estimated by the Global Sustainable Investment Alliance (GSIA). According to the GSIA, global sustainable investment assets grew 126 per cent from 2010 to $30.7 trillion by 2018. Green bonds, a more specific fixed income definition, saw an increase in global issues from $3 billion to $168 billion over 2013-18. However, the increase in capital allocation is mainly for publicly traded securities. Pension fund allocations in unlisted infrastructure assets have been flat over 2013-17. In general, institutional investors are not investing much in greenfield infrastructure in emerging markets (EMs). There are several major obstacles inhibiting increased EM infrastructure investment by institutional investors, including the perception of EM risks as being excessive, the greater efforts needed to make projects bankable, etc.

Asia’s energy transition from conventional to renewable energy is well under way. Between 2015 and 2019, investments in conventional power in Asia declined from $58 billion to $37 billion. At the same time, investments in renewable energy nearly tripled from $10 billion to $28 billion. Although investment in renewable energy continues to be smaller in absolute terms than in conventional power investments, its share in total energy investment is steadily rising in Asia. The gap between the values of investment in the two sectors has narrowed since 2015.

There is rising interest from private players such as banks to finance renewable sector projects across Asia. The targets set by Asian governments are also supportive of boosting renewable energy generation in the region. Corporate offtakers are likely to provide a boost to renewable energy investments. Traditionally, the key investors for most energy projects were state-owned energy utilities. Lately, this has changed as several multinationals have begun to sign power purchase agreements (PPAs) to purchase power directly from renewable energy producers (corporate PPAs) in a bid to reduce their carbon footprint.

As the share of renewable energy grows, the transmission and distribution networks will have to adapt to the intermittent nature of renewable power generation, as well as invest in energy storage systems; these will have to go hand in hand. In the short to medium term, Asia’s reliance on coal will continue, given the variable nature of renewable energy and Asia’s voracious demand for power. However, overcoming these challenges and giving renewables the support they need to grow is crucial for Asia if it intends to get on the sustainability track.

Stronger policy support in terms of pricing, together with harmonising standards, can provide a greater impetus to sustainable investment. MDBs have an opportunity to play an important role both in mobilising finance towards sustainable investments through the products they offer to private sector investors as well as the standards they uphold. Ultimately, collective efforts are needed to mobilise funds for sustainable investments that can further contribute to achieving the sustainable development goals (SDGs) and the objectives of the Paris Agreement.

Innovative capital structures

In Asia, infrastructure financing through bank lending is proving to be unsustainable as heavy exposures to the infrastructure markets have led to huge burdens on their balance sheets. Therefore, the need for Asian countries to diversify from bank lending into alternative capital sources to finance infrastructure projects is becoming increasingly apparent.

Pension funds

In the recent past, pension funds from developed countries have shown active interest in the Asian infrastructure market. In September 2019, the Canada Pension Plan Investment Board (CPPIB) announced its first infrastructure investment in Indonesia – the acquisition of a 45 per cent interest in PT Lintas Marga Sedaya (LMS), the concession holder and operator of the Cikopo-Palimanan (Cipali) toll road. This operational toll road is an important link in Java Island’s transportation network.

Bond finance

Project bonds provide an opportunity for borrowers to tap into capital markets for debt. For an infrastructure project, project bonds issued by a special purpose vehicle are an alternative form of debt finance. Since 2017, there has been a revival in Asia’s project bond markets. In July 2019, Vietnam issued its first project bond, refinancing the 1,240 MW Mong Duong 2 power station. The issue was $678.5 million in senior secured notes, due in 2029 at the rate of 5.125 per cent. In December 2018, Indonesia raised $1.25 billion in its first Asian sovereign sukuk green bond sale. In April 2018, Indonesia’s Star Energy Geothermal (Wayang Windu) offered green project bonds worth $580 million at 6.75 per cent. In October 2017, Thailand’s Nam Ngum 2 Power Company raised $179.3 million through a project bond for its Lao PDR-based 615 MW hydropower plant. In August 2017, Indonesia’s Paiton Energy raised a $2.75 billion non-recourse debt through multiple sources and was listed on the Singapore Exchange. In 2016, Aboitiz Power in the Philippines issued bonds worth $225 million to refinance a 676.9 MW geothermal project.

The uptake in project bond issues in Asia over the past few years signals a growing appetite for an alternative to bank financing in Asian countries. As banks seek to reduce exposure to infrastructure projects, bond finance could provide a viable alternative. Most bond issues have been refinancing transactions. However, the use of bond finance in Asian countries will be limited to markets with investment-grade ratings. Market sentiment is positive in terms of the future outlook for bond finance as a key source of debt financing at the brownfield stage of projects.

Post COVID-19 implications

The disruptions brought about by COVID-19 also highlight the importance of sustainable and resilient infrastructure. Firstly, developing economies will need to increase investments in healthcare and public health infrastructure. This is especially crucial in the context of megatrends such as urbanisation and increased trade connectivity. Without proper public health infrastructure such as clean water and sanitation, developing economies will remain vulnerable to such outbreaks. Secondly, public health infrastructure needs to be supported by robust information and communication technology (ICT). ICT improves efficiency in healthcare delivery and epidemic control. Mobile communications, broadband internet and computing have been used in epidemic response, and are particularly helpful in delivering information when transport services are curtailed.

Thirdly, infrastructure supporting economic activities and supply chains will have to be more resilient. With the COVID-19 outbreak, businesses are naturally looking to strengthen the resilience of their supply chains against such outbreaks and natural disasters in general. This could mean diversifying their production, supplies and markets. This could also mean employing ICT to better monitor the various aspects of supply chains, making more use of automation, online commerce, etc., to ensure that production and trade can continue despite disruptive events. To support segments of the population affected by quarantine or stay-at-home arrangements, a robust supply chain is needed to keep them supplied with essentials. Affected populations will have to be supported by good national and cross-border ICT infrastructure.

Infrastructure financing is expected to be highly subdued in the first half of 2020. Once the immediate task of containing COVID-19 is over, the focus will need to shift from crisis management to assisting developing economies invest in adequate infrastructure for development, as well as to prevent and mitigate the impact of future outbreaks. The Asian Infrastructure Investment Bank (AIIB) has approved financing for satellite ICT infrastructure to provide connectivity to remote areas in Indonesia, as well as financing for many water and sustainable city projects across Asia. Post-crisis, the AIIB expects infrastructure development to rebound in line with underlying infrastructure demand, as well as the added priorities that arise from the outbreak. As a multilateral organisation, the AIIB will work with various stakeholders to prioritise infrastructure projects in areas of sustainable cities, resilient infrastructure, healthcare and ICT. Raising infrastructure spending and investing it well for development remain critical.

In sum

Recognising that it will always be very difficult to consistently pick good infrastructure projects ex ante, the key is to put in place a framework to guide public and private sector investment choices. Investing better does not suggest that there will be perfect investment foresight or that all projects will be successful. Rather, it is about putting in place a set of conditions that will allow the public and private sector to make better choices so that each country can, on balance, arrive at broadly good investment outcomes.