Infrastructure on the Belt and Road

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Private finance expected to fill the gap in funding Asian infrastructure projects

PUBLISHED : Thursday, 06 July, 2017, 6:03pm
UPDATED : Thursday, 06 July, 2017, 10:30pm

Asia faces a US$820 billion annual shortfall in funding for infrastructure projects but with Chinese lenders coping with tightener monetary policy, private financing is expected to step in and increase its share over the next few years, say fund managers and analysts.

Hong Kong is also expected to play a key role in filling the gap and mobilising funds from institutional investors for the region’s infrastructure projects.

Since China launched the Belt and Road initiative to invest US$900 billion in infrastructure across Asia and Europe, Chinese lenders have taken the lead in funding for the region’s infrastructure projects.

According to statistics from Dealogic, Chinese banks accounted for more than 60 per cent of Asia’s infrastructure funding last year, reaching US$38.4 billion.

However, that seems inadequate to meet Asia’s growing needs for infrastructure financing.

Earlier this year, the Asian Development Bank (ADB) estimated that Asia must invest US$1.7 trillion annually in infrastructure until 2030 to maintain its growth momentum, whereas the region currently only invests half of that amount each year.

Private sector funding needed to fill infrastructure investment gap

The ADB said government reforms could only bridge up to 40 per cent of the financing gap, while the rest needs to be filled by the private sector.

“The government alone can not provide all the funding needed for the Belt and Road infrastructure projects,” wrote Zhou Xiaochuan, governor of the People’s Bank of China, in an article in China Finance magazine last month.

He called for a market-oriented and sustainable financing system, encouraging greater co-operation between government and private capital.

“International financial centres along the [Belt and Road] route, such as Hong Kong, can play an important role in mobilising funds from global institutional investors for infrastructure projects in the region,” Zhou said.

“Private funding is valuable for infrastructure projects in emerging markets,” Virginie Maisonneuve, chief investment officer of Eastspring Investments, told the South China Morning Post.

It’s “efficient” and “competent”, she said.

Eastspring Investments, the Asian asset management business of Prudential, recently signed an agreement with the International Finance Corporation (IFC), the World Bank arm that supports private infrastructure projects in developing countries.

Under the agreement, Eastspring will invest US$500 million along with IFC debt financing for infrastructure projects in emerging markets (EM).

Why Europe and the US cannot afford to ignore China’s belt and road

The agreement is part of the IFC’s Managed Co-Lending Portfolio Programme (MCPP), which seeks to raise US$5 billion from global institutional investors for infrastructure in emerging markets by 2021.

Maisonneuve said the US$500 million investment mainly comes from Prudential policy holders, who are also looking for safer ways to invest in rapidly growing emerging markets.

“We hope to find attractive investment returns for investors in an era of low interest rates,” she said.

“Although central banks look set to shift policy towards tightening, interest rates will not rise quickly.”

“The G20 and other global institutions have been calling on multilateral lenders and the private sector to find ways to help close the global gap in infrastructure funding,” said Tony Adams, infrastructure chief investment officer for Eastspring.

We hope to find attractive investment returns for investors in an era of low interest rates
Virginie Maisonneuve, Eastspring Investments

“The structure of this partnership breaks new ground in providing a credit enhanced platform for our clients to participate in a portfolio of emerging market infrastructure loans.”

To meet with the requirements of institutional investors, who are more risk sensitive, the IFC will absorb limited first losses on the programme’s investments, according to Jingdong Hua, treasurer for IFC.

In October, the IFC signed a similar partnership with Allianz Group, which also intended to make an investment of US$500 million in emerging markets’ infrastructure.

KPMG analysts predicted that a key emerging trend in 2017 for the infrastructure world is increased participation by private capital in both funding and project development.

“This year, we expect a shift towards more responsible leadership, both from governments and from the private sector,” said James Stewart, global infrastructure chairman for KPMG, in a recent research report.

Over the coming years, they expect governments and multilateral organisations to increase cooperation with the private sector in many of the infrastructure projects.

“Trillions of dollars a year are required to bridge the infrastructure gap in emerging markets, and it is impossible for the public sector alone to fulfil such needs without substantially drawing in private sector capital,” Norman Chan, chief executive of the Hong Kong Monetary Authority, said at the signing ceremony of the IFC and Eastspring agreement.

On the other hand, there is no lack of investor interest in infrastructure investment.

“Hong Kong, as an international financial centre, can play a key role in bringing together key stakeholders for infrastructure financing,” he said.

Last year the HKMA created the Infrastructure Financing Facilitation Office (IFFO) to facilitate infrastructure investment and financing in Asia. Partners of the platform include development banks – such as the IFC, ADB and China Development Bank – large international institutional investors, as well as companies with necessary technologies or operational capacity in the development of projects.