Hopes on new sources of infrastructure financing-

The Southeast Asian economies are focusing more on the development of infrastructure. According to Asian Development Bank (ADB) estimates, an investment of about $600 billion is required for the region’s infrastructure development by 2020. So far, government-sourced funds and bank credit have been the traditional sources of funds for financing infrastructure projects in the region. However, other sources such as bonds and multilateral aid have gained importance in the past few years. While the potential of emerging sources such as private equity (PE), sovereign wealth funds SWFs) and region-specific funds is yet to be tapped, these are expected to play an instrumental role in future financings.

Southeast Asia Infrastructure takes a look at key developments in the infrastructure financing sector of the region in the past 10-12 months…

Public financing: Government funds are the mainstay for meeting the financial requirements of infrastructure projects in the Southeast Asian region. Conforming to the trend, over 60 per cent of the total infrastructure investments in the region were sourced through budget funds. As per available data for the latest budgetary allocations of countries such as the Philippines, Singapore, Malaysia, Thailand, Brunei and Indonesia, $23.67 billion was allocated for infrastructure development in 2013–14. While Singapore was allocated the highest sum of $9.53 billion, the lowest allocation of $0.06 billion was witnessed in the case of Brunei. According to reports, the region’s budgetary allocation towards infrastructure development declined by about 7 per cent during 2014. As far as the year-on-year trend is concerned, countries such as Malaysia reduced their budgetary allocation for infrastructure projects. On the other hand, economies such as Singapore and the Philippines beefed up the fund allocation for the same.

The proportion of funding requirements met by the respective governments of the region is high; nonetheless, there is more scope for an increase. However, this too would be a difficult task, given the growing fiscal pressure. In the near term, the dominance of public funds in meeting the financing requirements of the region’s infrastructure projects is likely to remain intact as it would be a time-consuming process for other sources to gradually take the lead. In facilitating this, the governments are required to play an active role.

Bank lending: As witnessed in other countries, the role of the region’s banking sector in meeting the funding needs of infrastructure projects is a crucial one. While the exact amount of bank-sourced funds for the whole region cannot be ascertained due to the unavailability of data for certain countries, a rough trend can be gauged from the statistics available. For countries such as Malaysia, Singapore, Brunei and Cambodia, $19.35 billion was extended by banks to infrastructure and related sectors (till July 2014), as compared to $22.65 billion extended in 2013. The positive sentiment among banks has been on account of improvement in the economic outlook and increase in bankable projects that emerged in the sector. While the sector remains a key financier to the region’s infrastructure sector, the trend may be affected by the adoption of Basel III norms, which include stricter conditions for extending long-term credit. Further, project bankability will be the key factor in determining the quantum of bank lending to the sector.

Multilateral funding: The uneven development across the Southeast Asian region makes it an important recipient of funds from international financing agencies. These include ADB, the World Bank, and the Japan International Cooperation Agency (JICA). As of November 2014, funds to the tune of $3.12 billion were extended across the region’s infrastructure projects. This was 30 per cent less than the previous year’s $4.56 billion. Among these lenders, JICA’s contribution was the maximum, accounting for about half of the total lending. A country-wise analysis shows that the maximum exposure of these lenders is confined to Indonesia, Vietnam, Myanmar and the Philippines. Power, road and transportation projects have received the maximum financial support from these entities.

In addition to these agencies, the OPEC Fund for International Development (OFID) is also an important financier of infrastructure projects in the region. As of December 2014, OFID had a total commitment exposure of $0.3 billion across Cambodia, Vietnam, Thailand, Myanmar and Laos. The projects funded by OFID have a varied presence across sectors such as transport, energy, and water supply and sanitation.

Bonds: Tapping into the bond market is one of the most preferred ways of securing long-term financing for infrastructure projects. Given that traditional funding sources such as government financing and bank credit are likely to be impacted by fiscal pressures and adoption of Basel III norms respectively, bond financing assumes greater significance.

As of September 31, 2014 the total amount of outstanding bonds by the top issuers in the region was over $53 billion. This was in contrast to bonds with an outstanding amount of over $42 billion in the corresponding period of the previous year. With regard to the trend across countries, Malaysia retained its top position with 12 bonds (as witnessed in 2013), with an outstanding amount of $30.95 billion. Other countries such as Indonesia, the Philippines, Singapore and Thailand also resorted to the bond financing route. Countries such as Myanmar, Cambodia and Laos still lag behind by a large margin. Considering the sector-wise split, 90 per cent of the outstanding amount pertained to the transport and energy sector. This was followed by telecommunications, oil and gas, and water.

PE participation: While PE participation in the region is far below its potential, the region still has a fair amount of activity. As per the latest data available, during January–May 2014, among all member countries, Singapore posted the maximum deal value of over $3.1 billion. Other countries, such as the Philippines, Indonesia, Malaysia and Vietnam, also witnessed some deal-making activity. Compared to 2013, however, there was a significant fall in the deal value witnessed in these countries; on the other hand, Singapore posted a massive hike. According to market forecasts, the region is likely to pick up in the PE space in the future. This is expected to be driven by untapped opportunities in emerging economies such as Myanmar.

Region-specific funds: Region-specific funds such as the ASEAN Infrastructure Fund (AIF) are also an emerging source of funding for infrastructure projects. In May 2014, the AIF approved financing for two additional infrastructure projects. This includes a $100 million loan for a power transmission project in Vietnam. The overall estimated cost of the project is $380 million. ADB will further lend $200 million for the project and the remaining $80 million will be financed by the Vietnamese government. In the same month, the AIF also approved financing of a $40 million sanitation project in Indonesia. While approvals have been received, no lending activities were witnessed. Another significant development during the year was Myanmar’s willingness to join the fund.

In addition, there exists the $3 billion China-ASEAN Investment Cooperation Fund, which meets the financing requirements of infrastructure and energy projects of the ASEAN member countries. In addition, the Chinese government has announced that it will contribute $40 billion to set up a Silk Road Infrastructure Fund in order to boost connectivity across Asia, including related projects in the Southeast Asian region.

Other sources: In the past few years, financing sources such as SWFs and financing from export credit agencies (or exim financing) have emerged as potential solutions for meeting the financing needs of infrastructure projects.

While many of the world’s largest SWFs are financed via oil revenues, SWFs in Southeast Asia are largely non-commodity based. Though few in number, Southeast Asian SWFs and national investment funds have gradually gained prominence. These funds hold portfolio investments in several projects and companies. For instance, Malaysia-based Khazanah Nasional has stakes in companies operating in the transport and logistics (Malaysia Airport, MAS, Penerbanhgan Malaysia, etc.), construction (UEM Group, PLUS Malaysia, UEM Builders, Opus Group), communications (Telekom, Axiata, Astro Malaysia Holdings) and power (Tenaga Nasional, Northern Utility, Shuaibah Water and Electricity) sectors. Besides domestic holdings, these SWFs are also carrying out transactions overseas. For instance, Singapore-based Temasek Holdings is in the process of acquiring stakes in China-based banks such as the China Construction Bank and the Bank of China.

With reference to exim financing, countries such as Japan, China, India and Korea have been regularly providing financing to companies in the infrastructure sector. As of March, 2013, the Japan Bank of International Cooperation had cumulative exposure of 6,058 projects worth 12,889.1 billion yen. During the year, it extended financing to 61 projects worth 304.4 billion yen in the region. India’s Exim Bank too had an exposure of over $738 million towards the region’s infrastructure projects. As per reports released in April 2014, the Chinese Exim Bank provided credit to 46 transport infrastructure projects in the ASEAN region during 2014. The bank has aided the construction of 24 highways, three railways, one port, three airports and nine bridges in the region. Apart from these, exim agencies of other countries, such as Malaysia, Thailand and Vietnam have been involved in some of the key exim financing activities in the infrastructure space. The power (both conventional and non-conventional) and road sectors have been the primary recipients of these exim funds.

Outlook

While there is a huge gap between the demand and supply of infrastructure funds, bridging this gap is not an unattainable task, though it’s a difficult one. This calls for a combined effort from both the government and the private sector. Reforms are required on the institutional level to boost investor confidence. Besides, efforts are also required to develop and deepen the financial markets which would take away some burden from the traditional sources of funds. From another point of view, the present scenario warrants all efforts that would enhance the bankability of infrastructure projects in the region. Without any steps in this direction, it is quite possible that there will be a dearth of funds in the region for implementing infrastructure projects.