The right time for infrastructure

Andrew Yee of Standard Chartered IL&FS Infrastructure Growth Fund talks about Asian infrastructure post the credit crisis.

From a conference room at the top of his hotel in Hong Kong's Central district, Andrew Yee is ready to talk infrastructure. The setting is apt for the discussion as the view encompasses much of Hong Kong's iconic infrastructure -- the bustling port and the under-construction Stonecutters Bridge to the west, the rising International Commerce Centre across the way, and the skyline of Kowloon stretching on to the Lions Rock Tunnel and old Kai Tak in the east.

As joint chief executive of the Standard Chartered IL&FS Asia Infrastructure Growth Fund (SCI Asia), Yee is managing one of the few new funds on the block. Announced in 2007 as a joint venture between Standard Chartered Bank and India's IL&FS, the $601 million fund currently has more than $200 million in investments throughout the region and it is growing -- fundraising plans call for $800 million by the third quarter.

"Our broad business strategy is to invest in platform companies," says Yee. "What I mean by 'platform' is Asian infrastructure companies with multiple operating assets (that are) generating real operating cashflow."

By investing in platform companies, Yee hopes to "de-risk" the infrastructure investment process for institutional investors. "While it may be riskier to buy a power plant in China than a power plant in the UK, what we're saying (to investors) is you might take on slightly higher risk, say maybe 20% or 30% more risk, but your returns are doubling," he says.

The platform companies SCI Asia invests in are some of Asia's largest infrastructure operators. The fund's current investments cover a large swath of the infrastructure spectrum, from toll road operators (India's ITNL) to power generators (China's Meiya and Malaysia's Malakoff) and water companies (China's Crystal Water and Standard Water).

CLSA research calls the platform companies SCI Asia invests in "lower risk" infrastructure stocks -- companies past the project investment stage with positive cashflows and little chance of cost over-runs, often with existing power, water, road, rail, port or airport concessions.

Lower risk companies outperformed the MSCI ex-Japan index by 15% and higher risk infrastructure companies by 18% for the year ending in March.

One of the few pieces of good news to come out of the economic crisis is lower risk infrastructure investments are becoming more affordable. "We see 2009 and 2010, even 2011, as great opportunities to acquire quality Asian infrastructure assets at reasonable prices," says Yee. "$600 million in April 2009 money is probably worth $800 million or $900 million in April 2008 money simply because asset values have come off and most of our competitors have disappeared."

SCI Asia hopes to push that $600 million to $800 million by the third quarter despite the bear market. Yee is "confident" the fund will achieve its goal.

Little more than a year ago, the infrastructure scene was dominated by new, untested greenfield projects at inflated prices; the established, concession-holding and dividend-generating companies were already held by other infrastructure funds.

"Most of those (funds) in the Asian infrastructure space have gone home," says Yee. "And, if they haven't gone home, they're staying around for the short-term while they liquidate assets to redeploy capital and send it home."

Probably the most notable exit from the Asian infrastructure fund scene is Australia's Babcock & Brown who entered liquidation in March.

"There's a lot of difference between someone simply holding the rights to a concession versus someone who has built an infrastructure asset on-time, on-budget and then getting it to profitability," says Yee. "We'd far rather invest in somebody who has done that before, can show you the operating assets and can further invest in that asset as well as greenfield opportunities, than someone without that experience who can only show you a piece of paper with rights to a concession."

"Now, when you can buy quality operating assets at reasonable prices, those more marginal (greenfield) projects are unlikely to get financed," he continues. "That's going to mean the build-out of Asian infrastructure is going to slow down."

"Slow down" are two words Asian governments do not want to hear. Since last fall, a total of $522 billion in stimulus funds have been dedicated to infrastructure in the region. The hope is to offset the decline of private sector infrastructure spending -- predicted to fall 10% to 30% this year -- with the government variety.

"Of the Chinese government's (nearly) $600 billion fiscal stimulus, 70% is going into infrastructure -- mainly rail first and roads second," says Yee. "What is interesting is the government is actually tweaking (the stimulus) for the domestic economy," he continues. "Where previously it was focused on ports, which are more export focused, they're now switching to really stimulate domestic demand through investment in rail and roads. This is a long-term positive."

Still, infrastructure spending across the region is expected to be flat this year. According to CLSA, Asia ex-Japan government spending on infrastructure is set to increase 20% year-on-year to $378 billion. However, the almost equal drop in private sector spending will offset these gains.

Renewable energy is a passion for Yee. Before joining Standard Chartered, he helped launch the Renewable Energy Asia-Pacific fund and has worked in renewable energy investments in Australia and the UK. Under his co-direction, SCI Asia has invested in two companies -- Meiya and Crystal Water -- actively involved in China's "green" energy push.

China's State Council has mandated that by 2010, 5% of China's power must be generated from renewable sources, increasing to 10% by 2020.

"There is so much opportunity for renewable power in China," says Yee. "The government is being very proactive in encouraging (green) projects by setting a decent tariff, by giving tax breaks, by encouraging investors to protect the environment."

Still, Yee's passion for renewable energy does not get in the way of his search for positive investment returns for the fund. "We've instituted a lot of financial discipline into our invested companies and it's not just about building market share or putting a (certain) number of megawatts down on the ground," he says. "It's about generating good returns."

And good returns abound in Asian infrastructure. Growing populations with an increasing appetite for good roads, reliable power and clean water means the return on investments, done correctly, should only go up. That guarantee, coupled with the correction in asset prices due to the economic crisis, has Yee conclude, "We've got the right team in the right place at the right time". 

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