The Asian Debt Opportunity (Infrastructure Investor, December 2015)

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21INFRASTRUCTURE INVESTORFUTURE OF INFRASTRUCTURE

TRENDS

Increasing public and corporate debt in Asian markets is likely to have an impact on privateinfrastructure investment in the region, writes Siddharth Poddar

The Asian debt opportunity DEBT

T

he shortfall in infrastruc-

ture spending in Asia is a

story that has been told

many times. Infrastructure

demand in the region continues to

outstrip supply and the infrastructure

gap continues to widen year after year,

despite the best efforts of governments

in the region.

Asian economies have grown at rapid

rates over the last decade-and-a-half and

while growth rates in the region’s emerg-

ing economies have fallen somewhat

over the last two years, they still remain

healthy. Rapid economic growth coupled

with increased urbanisation and healthy

population growth have all brought the

region’s inadequate infrastructure into

sharp focus.

Developing economies in Asia

are faced with major infrastructure

requirements – a fact acknowledged

by governments and investors alike –

as infrastructure development has not

been able to keep pace with the demand

for infrastructure. Poor infrastructure,

particularly in the form of inadequate

road networks and a shortage of power,

is inhibiting growth in several Asian

economies.

Owing to these factors, there has always

been a role in infrastructure development

for private investors. But Allard Nooy, chief

executive of InfraCo Asia, takes it further:

“I think it’s fair to say that, in certain mar-

kets, there has been an increase in pri-

vate sector appetite.” A big part of that

increased appetite comes from another

story beginning to play out in Asian infra-

structure: the region’s rising levels of debt.

DEBT AS A DRIVER

Compounding the issue for Asian gov-

ernments has been the increase in debt-

to-GDP ratios over the last decade-and-



22 INFRASTRUCTURE INVESTOR FUTURE OF INFRASTRUCTURE

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a-half, particularly since the onset of

the global financial crisis. While public

debt in Asia, barring a few countries,

is relatively low compared to developed

markets, levels of corporate debt have

increased significantly in a few countries.

According to the McKinsey Global

Institute (MGI), public debt in China has

increased from 26 percent of gross domestic

product (GDP) in 2000 to 41.7 percent in

2014. In the same timeframe, public debt

in Japan increased from 129.4 percent of

GDP to 235.5 percent of GDP and in South

Korea it increased from 23.5 percent in 2000

to 47.5 percent in 2014.

China has also witnessed a sharp

increase in its corporate debt-to-GDP

ratio, to 178.3 percent in 2014 from 91.4

percent in 2000. India, where public debt

levels remain low, has seen an increase

in corporate debt from 28.9 percent of

GDP in 2000 to 55.1 percent in 2014.

While debt levels in India remain low

compared to other economies, there are

sectors in which corporate debt is high.

One of them is India’s infrastructure

companies, which can have an impact

on the development of infrastructurein India.

According to MGI, government, cor-

porate and household debt amounts to

205 percent of total annual economic

output in Asia – a sharp increase from

the 144 percent debt-to-GDP ratio wit-

nessed in Asia in 2007, before the onset

of the global financial crisis.

While increases in household debt do

not necessarily have direct implications

for private investment in infrastructure,

investors will have their eye on risinglevels of corporate and government

debt.

Economies in the region are already

faced with fiscal constraints and

increased public debt-to-GDP ratios

could result in a squeezing out of infra-

structure spending. That, in turn, is

likely to be another catalyst for increased

private sector investment in infrastruc-

ture in certain Asian markets.

In Europe, for instance, an S&P study

of 16 countries showed that between

2003 and 2012, transport investment

in these countries declined as a result

of increases in overall levels of govern-

ment debt.

Hans-Martin Aerts, head of infrastruc-

ture at APG Asset Management Asia, says:

“Many governments in the region have

recognised these constraints and have

committed to structural reforms to pro-

vide a better infrastructure investment

framework and this should crowd-in pri-

vate investment in the sector, hopefully

leading to increased overall spending on

infrastructure development.”

Moreover, even those Asian countries

in which public debt is not a concern

just yet are still faced with fiscal con-

straints, particularly as they have a lot

of catching up to do in terms of spend-

ing on healthcare, education, housing

and social welfare. China, for instance,

is faced with an ageing society and its

government is ramping up expenditure

on healthcare and pensions.

Aerts believes that spending in these

areas could catalyse more capital into

infrastructure. “Improvements in educa-

tion and healthcare would trigger more

investments in hard assets,” he says. He

goes on to add that infrastructure assets

can play an important role in the portfo-

lio of pension funds, as these investments

are expected to generate long-term, stable

cash flows that match long-dated pension

liabilities. “Therefore, a higher contribu-

tion to pension programmes could lead

to more investments in infrastructure,”

he says.

DEBT AS A CONCERN

While increased public debt is likely

to provide investors with more oppor-

tunities to invest in infrastructure,

opinions in relation to high levels of

corporate debt are mixed. Take India,

for instance.

“Economies in theregion are alreadyfaced with fiscalconstraints andincreased public debt-to-GDP ratios couldresult in a squeezingout of infrastructurespending”

Hans-Martin Aerts



23INFRASTRUCTURE INVESTORFUTURE OF INFRASTRUCTURE

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On the one hand, several of India’s

large infrastructure companies are over-

leveraged, and as a result, have been

exiting from projects and selling assets. With the levels of debt in these compa-

nies continuing to rise rapidly, a spike

in the number of infrastructure trans-

actions can be expected as more com-

panies sell assets to generate cash flow.

In August, a consortium compris-

ing Brookfield Asset Management and

Core Infrastructure India Fund acquired

six road and three power projects from

Gammon Infrastructure Projects, as the

latter sought to raise funds to repay debt.

But there are also concerns relating tothe high levels of debt Indian infrastruc-

ture companies hold in relation to either

investing in these companies or partnering

with them locally.

Andrew Kwok, a Singapor e-based

senior vice president in Partners Group’s

private infrastructure team, says that the

structure of corporate debt in India

makes it a tough market for investors.

“The biggest thing for a foreigner to get

comfortable with is that generally in the

banking market, you cannot fix the rate

of debt. The pension funds, which are

seeking stable yields, would be uncom-

fortable in India, as you cannot lock-in

the cost of the debt easily.”

As such, leverage levels need to be

considered more seriously when com-

pared to a country where the pricing

can be fixed. Kwok says that this may,

however, be changing as we now have

instances of independent power produc-

ers doing local note issues at a fixed rate.

In September, Indian independent

power producer ReNew Power Ven-

tures was guaranteed an INR4.5 billion

(€63.7 million; $67.8 million) project

bond, the first issue under a $128 mil-

lion project bond guarantee set up by

the Asian Development Bank and the

India Infrastructure Finance Company.

“As momentum builds on that, it will

open more opportunities for foreign

investors. I think the Indian authorities

are aware of that and they are consid-

ering the facilitation of strategies like

dollar tariffs which may pave the way

for dollar lending,” he adds.

BANKABLE PROJECTS SCARCE

While governments acknowledge there

is a need for infrastructure investments

to meet rising demand, there is a scarcity

of bankable projects in the region. “You

can count the real transactions on your

fingertips,” Kwok says.

Aerts agrees. He says there is no lack

of private capital ready to be deployed in

Asian infrastructure and private players

would like to invest more. However, thereis a shortage of good deal flow. “Poor pro-

ject preparation and lack of coordination

seem to be the bottleneck to infrastruc-

ture development,” he says.

In addition, factors such as “regu-

latory risk and stiff bureaucracy” have

been slowing down the implementation

of infrastructure development, he says,

adding that “less bureaucracy and better

coordination across various authorities

will lead to more infrastructure projects

getting off the ground”.

One of the markets that has been

disappointing in this regard is Indone-

sia. Investors say that while there have

been all sorts of enabling vehicles to

incentivise private ownership of assets

and private investments, the latter, par-

ticularly of foreign origin, have been lim-

ited. Nooy says that while the Indonesian

storyline is great, the execution is not

and is faced with many hurdles including

an enormous bureaucracy.

Moreover, pension funds are not will-

ing to take development risk, although

what has changed is that some now are

wil ling to take construct ion risk. “In

other words, they don’t come in the

origination phase and the structuring

stage, but are willing to come in at the

financial close stage and are willing to

take construction risk,” he says, adding

that they are available to invest in oppor-

tunities with no dividends or cash flows

“Governments inthe region haverecognised theseconstraints andhave committed tostructural reforms

to provide a betterinfrastructureinvestment frameworkand this should crowd-in private investment”Aerts




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for two to three years and that is a “sig-

nificant” change.

But in the midst of all this, there

are a few bright spar ks. Kwok says theprogress made in some markets has

been encouraging. “The number of

marquee transactions in the renewa-

bles sector is a positive and I think

that theme will continue into the next

year,” he says.

WHERE HAVE WE SEEN REAL

CHANGE?

The Philippines’ public-private partner-

ship (PPP) programme is a bright spot.

Kwok says the Philippines has madegood progress with its PPP programme,

with a number of PPPs already trans-

acted. “They have invested in a central-

ised PPP coordination centre and are

ahead of their peers in developing the

PPP regime,” he adds.

Nooy says he is also quite bullish on

the Philippines’ renewables sector, “where

the government has generated an ena-

bling legislation for feed-in tariffs which

has created huge interest from investors”.

In September, APG Asset Management

acquired a minority stake in a portfolio of

solar projects in the country. The invest-

ment was made alongside the Philippine

Investment Alliance for Infrastructure, a

Macquarie-managed fund dedicated to

infrastructure investment in the Philip-

pines. The portfolio consists of two solar

projects located in Negros Occidental, a

province in the Western Visayas region of

the Philippines, which are expected to be

fully completed in early 2016.

With India’s ambitious targets in the

solar and wind sectors, it is no surprise

that India is being seen as a success story

in recent months, particularly as the gov-

ernment does not have the means to

meet its ambitions on its own. The sector,

among others, has gathered attention

and is seeing private capital flowing in.

In February, Singaporean conglomer-

ate Sembcorp Industries acquired a 60

percent stake in Green Infra, an Indian

renewable energy company, for $168.5

million. The company says it is looking

to triple its renewable energy portfolio in

the next five years and will mainly targetIndia and China for growth.

In the larger infrastructure space, last

year, APG Asset Management set up a

joint venture with Piramal Enterprises to

provide mezzanine financing to Indian

infrastructure companies. The joint ven-

ture recently concluded a $150 million

investment in GMR Infrastructure, one

of India’s largest diversified infrastruc-

ture companies.

PROGRESS MAY BE SLOW, BUT

IT’S STILL PROGRESS

For the moment, Asia seems to have

most of the ingredients in place for

greater private investment in infrastruc-

ture. Efforts are being made to make

projects more bankable, although pro-

gress is slow in this regard.

For instance, another investor says

that he doesn’t think there will be any

swift changes over the next 12 months

besides the Philippines and the renewa-

bles sector in India. “Everyone has been

holding their breath for Indonesia, but

if you said things are going to be freed

up in the next year, I think people would

start laughing at you,” he says.

Developments such as the conceptu-

alisation of the China-led Asian Infra-

structure Investment Bank could poten-

tially help address this issue. The bank,

which has a war-chest of $100 billion to

support infrastructure development,

could, like other multilaterals, facilitate

the provision of viability gap funding

to make projects commercially viable.

Besides, as one investor says, it also

creates a bit of competitive tension

between the various multilateral agen-

cies, which one expects will have a posi-

tive impact on infrastructure develop-

ment. That should come in handy as

rising debt levels and the region’s huge

infrastructure needs drive more projects

to the market. n

“I think it’s fair tosay that, in certainmarkets, there hasbeen an increasein private sectorappetite” Nooy

Documents

The Asian Debt Opportunity (Infrastructure Investor, December 2015)