Much of Asia is currently trying to fight its way to prosperity with one hand tied behind its back. The Asian Development Bank estimates that Asia will need at least USD8 trillion over this decade in infrastructure investment if it is to meet the needs of its growing population.
The problem is not a shortage of money: according to data from the International Monetary Fund, Asian savers put away USD5.6 trillion in 2011 alone, and there is enough excess liquidity in western financial markets looking for reliable long-term returns to make a significant dent in the shortfall.
The problem is not a shortage of money... Asian savers put away USD5.6 trillion in 2011 alone
The problem is that the framework and instruments needed to bridge the gap are only just being developed. Governments, the traditional providers of funds for essential public infrastructure are facing increasing budget pressures and thus private funding is becoming more important. Bank finance, Asia's traditional source of capital, though more available in Asia than other regions, is becoming both scarcer and more expensive, and bond markets are still a work in progress in most of the region.
Infrastructure matters. Asia needs power stations to provide electricity to its burgeoning factories, improved and extended roads and railways to transport its goods to customers and ports, ports to load exports onto ships, hospitals to reassure increasingly affluent populations that their health is safe, and effective telecommunications systems so migrant workers can call their mothers to tell them how healthy and wealthy they are.
HSBC expects Asia ex-Japan GDP to grow 6.3 per cent in 2012 and 7.3 per cent in 2013. That may be breakneck growth by western standards, but other data show that if infrastructure bottlenecks could be eliminated, growth would be much faster.
India is the world's second-largest producer of fresh fruit and vegetables, but is battling food-price inflation as 40 per cent of the crop rots before it gets to market because of its crumbling road system and a shortage of refrigerated rail cars; China estimates that it needs to spend USD600 billion over the next decade just to solve its water shortage problems; 38 per cent of Indonesians still have no access to electricity; there is no east-west rail link running all the way across south-east Asia; and the list goes on.
For many, Asia is synonymous with trade, but in a study published in 2009 the ADB found that in value terms only 1 per cent to 5 per cent of Asian intra-regional trade was conducted with neighbouring countries, compared with a global average of 25 per cent, largely because of infrastructure shortfalls.
Much of the funding problem stems from the immaturity of Asia's capital markets. The region has traditionally relied on bank loans for expansion which is a finite pool of liquidity, and bond market investors – especially in times of turmoil – tend to prefer plain vanilla investments, preferably with solid ratings attached.
We are seeing some gradual but important changes. Certain more mature regional banking networks – places like Australia, Singapore and Japan – have a demonstrated appetite for provision of longer-term infrastructure financing across the region. And in some countries, such as Thailand and the Philippines, domestic banks have increased the amount of liquidity available for longer term financing for domestic infrastructure projects, especially in local currencies. However, Malaysia has shown that developing economies can also tap into the capital markets for their infrastructure financing.
Malaysia has created a thriving infrastructure sukuk market supported by two domestic ratings agencies and a strong domestic investor base. Malaysia launched the world’s largest sukuk, USD9.9 billion for an expressway company earlier this year, and HSBC Bank Bhd is a joint lead manager on a government-guaranteed USD8 billion sukuk programme for Kuala Lumpur’s Mass Rapid Transport system.
And capital markets are becoming more interested in refinancing greenfield and brownfield projects. Sponsors are increasingly looking to recycle capital out of the banks and into capital markets when a project has been built and derisked – and then to use the banking market to go back into greenfield projects.
There are also signs of greater flexibility in transnational financing. In 2011 HSBC arranged the financing for a USD1.95 billion power plant currently being built in northern Vietnam. The 1,240Mw Mong Duong 2 project set many new benchmarks: at USD1.46 billion, it represents the largest amount of debt ever raised in Vietnam; the longest debt tenor (18 years); and the first large-scale involvement of the Korean export credit agencies in Vietnam.
The structure of the deal hints at some of the ways that Asia could loosen its infrastructure funding pinch. It taps into Asia's sovereign wealth funds: China Investment Corp, an investor in AES Corp, the project's majority owner, took a 19 per cent stake. It uses loan guarantees to encourage commercial participation: although the Korean government agencies KEXIM and K-Sure provided direct loans, they also provided guarantees which persuaded commercial lenders to finance approximately 60 per cent of the project.
There are huge opportunities out there in terms of stimulating Asia's capital markets, and helping them to play a very major role in infrastructure finance. Experts have differing views as to the scale of the potential economic benefits from infrastructure investment, especially in more developed economies. However for many emerging countries where the shortfall is so significant, inaction is not an option.