Macquarie plans infrastructure funds in China and India

The China fund will source money from local investors via a JV with CITIC Securities.
Macquarie Bank is looking to China and India as the next two countries where it is likely to set up infrastructure funds, following its successful fund endevours in Singapore and Korea, the head of the bankÆs Korea-listed fund said yesterday.

China and India will both be big with regard to project investment opportunities, which will be the most important factor for how rapidly private investments into infrastructure will be able to grow in the next 10 years. Deal flow will be critical, says Nick van Gelder, addressing a Macquarie Asian Infrastructure Forum in Hong Kong, which is jointly organised by Macquarie, FinanceAsia and AsianInvestor.

ôItÆs not capital that may prevent the development of this sector, itÆs the deal flow,ö van Gelder says, noting the limited private investment opportunities in countries like Japan, Taiwan and Thailand. Indonesia, on the other hand, is an example of a country where the government has shown a commitment to encouraging private investments into new infrastructure projects and, as restrictions are being eased, this should open up investment possibilites there, he adds.

Macquarie, which is the largest manager of infrastructure funds in the world, has yet to make its first infrastructure investment in India, but is looking at a number of possibilities both here and in China, says van Gelder, who has recently broadened his responsibilities from Korea to also include the rest of Asia. Like in other countries, Macquarie will not invest in India unless it can get a controlling stake that gives it the ability to improve the operational efficiency of the individual asset and so far it hasnÆt been able to find a suitable project, he says.

In China, the investment bank has chosen a different business model, however, and is currently in the process of forming a joint venture company with CITIC Securities, which will be looking to explore investment opportunities in the infrastructure space as well as to help shape a necessary regulatory framework in which to launch and manage infrastructure funds.

This JV, which is 51% owned by CITIC and 49% by Macquarie but managed by the Australians, will be dedicated solely to domestic Chinese money.

ôThe company is being set up to facilitate the development of private domestic investments into infrastructure and to ensure that money held by domestic insurance and pension funds can participate in infrastructure projects,ö explains Doris Ng, a managing director responsible for MacquarieÆs China funds business.

The aim, she says, is to help bridge the gap between ChinaÆs underfunded pension system and the insurance companies' need for higher returns on the one hand and the huge need for infrastructure development on the other.

As part of building this long-term platform, Macquarie is using its experience in other markets to educate the various parties about infrastructure as an asset class and to help the government create an environment that is favourable to private investments. Among other things, Ng notes, this will include starting to regulate the people who manage the money.

Having signed a JV agreement in March this year, Macquarie and CITIC are aiming to have all the approvals in place to formally launch the company by March 2007, but the first actual investment into an infrastructure asset or project could be six to 12 months away, Ng says.

According to van Gelder, toll roads are likely to be a first point of entry into these new countries, just as it was in Korea and many other non-Asia countries with water supply and waste water treatment being other early investment opportunities. Airports are also showing a propensity for private investments, which makes them interesting, he says.

In his speech at the conference, van Gelder noted the growth opportunities for infrastructure investments by highlighting a few key numbers, like the projection that the Asian population will grow by 600 million people between now and 2025, increasing the demand for all forms of infrastructure and essential services.

According to the World Bank, there will be a need for $849 billion of infrastructure spending between 2006 and 2010, with 25% of the demand coming from Asia.

Looking at the other side of the equation, the number of infrastructure funds operated by Macquarie increased from two in 1996 to 14 in 2004 and to 27 in 2006 as pension funds and life insurers led the drive for alternative investments that could match their long-term liabilities. The funds provided an average annual return of 17.8% during that period.
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