Navigating Asia’s Infrastructure Investment LandscapeAn interview with Principal, Private Markets at Mercer
Strong economic growth, a growing population and evolving demographic trends such as urbanization are a few of the themes that define Asia, but they also directly contribute to another theme: the need for greater investment in infrastructure across most countries in the region.
Particularly in emerging Asian economies, governments are often faced with a paucity of resources for infrastructure development, which results in the demand for private investment, often from overseas. Mark Murray, an infrastructure specialist at Mercer, speaks to BRINK Asia about the challenges faced by private investors in Asian infrastructure and how investors can prepare for them effectively.
BRINK Asia: Asia’s massive infrastructure requirement is well-documented. What infrastructure subsectors do you think offer the most opportunity in the region?
Mr. Murray: I think in Asia, very generally speaking, the opportunities would be in renewable energy generation and also gas-fired generation in those countries with adequate gas supplies, as it helps supplement the transition to renewable energy over the longer term. In Asia, I’d also encourage a focus on investment in transport assets. Asia is a high population growth region, and it’s almost inevitable there will be many successful investments in transport infrastructure to service population growth, and so if it’s toll roads, airports, other assets—those will be areas I’ll be focusing on in Asia right now.
BRINK Asia: On the flip side, when you look back over the past few years, what sector do you think displays the greatest unfulfilled promise when it comes to investments in infrastructure in Asia?
Mr. Murray: That is an excellent question. I would suggest, perhaps, the scale of investments in energy utilities by private investors hasn’t been what it could have been, by comparison to investments in energy utilities in Australia, for example. Opportunities have not often been created for private investment in these assets, because assets have remained wholly publicly owned. That said, I think there is still tremendous scope for investment for private capital in these assets in Asia—not sure when it will happen, but I expect it to happen.
BRINK Asia: When we look at it in terms of markets—specifically emerging Asian markets—would it be the same opportunity set that you look at, in terms of sector?
Mr. Murray: In terms of sectors, I think one is better off investing potentially more in regulated assets in developed markets, where the regulatory framework is more certain and more established and has a longer track record. In markets that are more emerging and at an earlier stage of development, I think it makes more sense potentially to be investing in assets that are highly contracted or where there are long-term concession agreements—for example, those include renewable energy generation assets on the one hand and transport assets on the other.
BRINK Asia: We commonly hear that emerging Asia largely offers greenfield investment opportunities that are fraught with construction and other related risks. Is the opportunity set changing? Do you think there is sufficient opportunity even in the brownfield space in developing Asian economies?
Mr. Murray: There certainly are opportunities for brownfield investment in Asia. For example, toll roads in India have been a recent focus of some investments for some managers. However, there is a great deal of scope for governments in the region to attract more private capital for investment in brownfield assets, which would supplement the substantial greenfield opportunities. I think it is important for investors to consider the whole spectrum of investment opportunities that Asia has to offer as they go about building their infrastructure investment portfolios in order to diversify their risk exposure.
BRINK Asia: How important is finding the right partner for infrastructure projects in Asia?
Mr. Murray: The right partners fall in a couple of camps. One camp is the right construction counterparty, which will actually build the asset—if it is a greenfield asset, that party should be a construction firm with relevant global experience and a demonstrated track record in building those kinds of assets. Another partner that is going to be important is a local investment partner who understands the local investment landscape and potentially has good government relationships and other networks. This is important for any investor coming into a new country or coming into Asia for the first time.
BRINK Asia: What are your views on local partners’ links or ties with governments?
Mr. Murray: It could go both ways. At times there’s been a significant focus on exactly what government relationships some investors do have—I know that has been a focus in Australia on some occasions recently—but on the whole, I’d say that relationships with government are a key, strong point that a local investor could bring to the table for a foreign investor coming into Asia or indeed anywhere else. Government relationships are important to have, particularly when thinking about infrastructure assets that touch a lot of people’s lives and need government support directly or indirectly.
BRINK Asia: We know there’s a huge funding gap in infrastructure in Asia. Private investors, on their part, speak of their desire to put money into Asian infrastructure opportunities. But are governments doing enough to attract private capital?
Mr. Murray: There’s still a substantial funding gap. I think some of that funding gap has been driven by tremendous recent population growth that requires more assets to be built and also by expectations that people rightly have in Asia, that Asian countries should have access to the same kind of infrastructure that people elsewhere have.
Singapore is an excellent case study of a country that has done a lot to attract investment into infrastructure development, and that’s from a variety of sources, including private capital in Singapore and around the world. Are governments doing enough? Well, there are lots of things governments can do—some of it is around establishing clear, consistent agreements that investors can have confidence in over the long term, supporting legal frameworks and regulatory frameworks that will encourage investments. All these things are being looked at by different governments across the region—certainly, they could always be doing more, and we would encourage governments across the region to make these improvements to frameworks. As Asian governments do that, more private capital will flow into the region’s infrastructure than we are currently seeing.
Exhibit 1: APRC’s Infrastructure Project Bankability Guidelines
BRINK Asia: For an investor outside of Asia looking to get exposure to infrastructure in Asia, what are some of the biggest challenges or concerns, and how ought they be addressed?
Mr. Murray: For an investor looking at Asia, perhaps the first thing to think about is the fact that it makes a big difference based on which countries you are thinking about investing in—it doesn’t make sense to think about an exposure to Asia; it makes sense to think about exposure to individual countries and which countries are going to be attractive for specific investments and, from there, to think about which sectors in which countries are attractive. All those issues help to define more clearly what an investor should be doing when looking to invest in Asia and give a clearer focus to an investor’s potential activities in the region.