If Asia is to maintain its growth momentum, then there needs to be a huge investment in transport, communication and power infrastructure. According to the Asian Development Bank (ADB), it will take $1.7 trillion per year to finance theprojects and build them sustainability.
It will take the combined efforts of public and private finance to realise those aims but Asian habits must also change if the region is to both supply the projects to attract international investors and mobilise its own private capital to play a part.
That change has started.
There is undoubted political will to embrace sustainability in infrastructure and create the financial system to pay for it, not least in China.The People’s Bank of China reckons it will need to spend Rmb2 trillion ($302 billion) per year domestically to “curb the unbearable pollution” afflicting the country. That number was the spur to develop its green financial framework; it wants private investors to contribute to the cost.
Going green is not just limited to Chinese aspirations. The rest of the region has signed up to the Paris climate agreement too and there have been a number of green bond guidelines released throughout the region. In November, even Association of Southeast Asian Nations (Asean) members were able to overcome their tendency to procrastinate by agreeing to a set of green bond standards.
“Everyone is keen to display their green credentials,” Luca Tonello, head of project finance at Sumitomo Mitsui Banking Corporation, said. “Countries want economic resources to be built sustainably.”
Environmental, social and governance (ESG) issues are not just supported at the political level.
They are increasingly integrated into the mandates of corporates, banks, and major investors around the world. Asia’s financial system must adapt to encourage the flow of private capital held by responsible global investors to sustainable developers in the region.
LENDING LANDSCAPE
Infrastructure projects in Asia are currently financed in a variety of ways. At one end of the spectrum, direct government-to-government lending is loaded with regional geopolitical connotations, while policy-driven bank lending supports the international ambitions of thedomestic exporters and contractors. Many projects are, therefore, not necessarily structured to international standards.
“It’s not unusual to see domestic policy banks supporting their local companies efforts overseas,” Jackie Surtani, head of the Asian Development Bank’s infrastructure division, said. Projects are not always financed under traditional project finance terms.”
It makes for a landscape of few “bankable” deals that are priced and structured to international commercial standards.
That will need to change if projects are to become secure enough to warrant the participation of international investors, particularly as they will become more important as the pressure on public funds and banks increases.
International banks used to be major liquidity providers to projects in the region. But increased capital charges on long-term lending made them less eager to get involved, so they have been replaced by regional banks (notably in domestic currency business), export credit agencies,and multinational finance institutions.
There are hopes that pension funds and insurer will eventually step in too.
“It’s a very simple logic,” Surtani said. “Ideally, long term infrastructure assets are most suited to the likes of pension funds needing to match their long-term liabilities.”
It may be an attractive equation, but there are obstacles to overcome.
Institutional investors are interested in projects from jurisdictions that are politically and legally stable, and ones that are already generating (preferably) hard-currency revenues.
Those dynamics are more a feature of developed markets in Western Europe and North America where a growing pool of institutional fundsislooking to invest ininfrastructurefor diversity and long-term returns.
It has given rise to a wave of new debt and equity infrastructure platforms.
Debt funds are chaperoned into deals through the use of credit enhancement tools and guarantees provided by multinational agencies. It is a practice that could be transferred to Asia, indeed the ADB this year gave a partial guarantee to the first green bond in the Philippines.
It is not just credit risk that needs to be mitigated in Asia, however.
“Infrastructure finance in emerging markets is complex and it takes time to tailor projects to international investment standards,” said Daniel Mallo, head of natural resources and infrastructure, at Societe Generale Corporate & Investment Banking in Asia Pacific.
Political risk, off-take agreements and foreign-exchange volatility are just some of the issues that need to be addressed.
Yet there are signs the region is embarking on the first steps in attracting private capital to lend to infrastructure.
In July, the first investment-grade international bond for an infrastructure project in Asia for 17 years appeared when Paiton Energy managed to sell $2 billion of notes. Asian investors dominated the allocation, suggesting there is enough institutional interest in Asia to refinance the right kind of deal.
That’s encouraging since there had been little prior evidence of Asian institutions breaking into infrastructure finance.
The institutional liquidity is there in Asia but funds have been more focused on high-yield and distressed debt than infrastructure, although that is changing.
This year Eastspring, the Asian asset management arm of Prudential,became the first Asian investor to sign up to MCPP Infrastructure, aprogramme run by the World Bank’s International Finance Corporation (IFC) that plans to raise $5 billion from global institutional investors for infrastructure projects in emerging markets. Eastspring agreed to raise $500 million for the programme.
MCPP Infrastructureis designed to help institutional investors increase exposure to emerging markets infrastructure. Through the programme, IFC originates, approves, and manages a portfolio of loans that mirrors its own portfolio in infrastructure. It will provide Eastspring with co-lending opportunities.
ESSENTIALLY GREEN
Just as institutional investment has been slow to take off, so has the regional adoption of sustainability.
In the Global Sustainable Investment Alliance’s review of 2016, Asia ex-Japan represented less than 0.25% of global sustainable and responsible investments (SRI) and that represented an increase of 14% over two years. Change is likely to speed up, however, as governments, multinational development banks,and shareholders demand ESG considerations are integrated into corporatevalues.
Green finance is seen as essential in drawing in the $68 trillion of funds signed up to the United Nations Principals for Responsible Investment.
The Green Finance Initiative, sponsored by the City of London Corporation, published a report in in October on Greening the Belt and Road, with reference to China’s grand blueprint for inter-regional development.
The ADB is also making green finance a priority. In August, it launched its Green Finance Catalysing Facility (GFCF), which proposes a finance framework for governments and multilateral development banks (MDBs) “to better leverage development funds for risk mitigation, generate a pipeline of bankable green infrastructure projects, and directly catalyze private finance.”
A lack of deals is a common complaint in sustainable finance but creating a pipeline of bankable projects is going to take time.
The most likely route for investors to gain immediate exposure to sustainable infrastructure in Asia is through the green bond market– either directly by buying, say, Indian Railway Finance Corp’s$500 million 10-year bond launched in December or, most likely, indirectly through bonds issued for on-lending by sovereigns, MDBs and commercial banks.
In recognition of the indirect transfer mechanism into the real economy, IFC has joined European asset manager Amundi to establish a $2 billion green bond fund that will buy bonds issued by banks in emerging markets, including those of Central Asia.
Standardisation, measurement, and impact remain concerns for green bonds. China, for instance, which accounting for the greatest proportion of issuance, allows investment in clean coal projects. Bonds linked to coal, in particular, are not accepted internationally and the same can be said for many lending banks.
SHIFTING WINDS
It is a sign coal projects will become harder to finance in future as the world transitions to carbon-neutral power production.
“Coal is now a small market concentrated on a limited number of countries,” Mallo said. “The pendulum has shifted into renewables: wind, hydro and solar, which are on the rise globally and catching up in Asia Pacific.”
That shift towards renewables is playing outin Taiwan, which has embarked on a rapid development ofsolar and wind energy as it phases out nuclear power. It has positioned green finance as one of the most important policies in encouraging private funds into the exercise. Offshore wind in Taiwan is one of the brighter infrastructure spots around Asia.
Although much of the development and finance will be satisfied domestically, there is potential for international participation. In fact, someinternational firms already provide technology and manufacturing experience. Danish fund manager Copenhagen Infrastructure Partners acquired three offshore wind sites under development and has a Taipei project office.
Asia needsprivate capital to finance its long-term infrastructure ambitions, but it will only come if projects are structured to attract international investors. For investment to flow in the near term, it will require government support, MDB risk mitigation, and the transparency provided by green finance.
It could also do with a sea change in the Asian mindset in placing sustainability at the heart of their investment strategies.
