Infrastructure in Asia - a growth market
Infrastructure - a global challenge
Infrastructure expansion and modernisation are the biggest challenges facing societies across the world in the 21st century. Not least from a financial perspective. Global consulting firm McKinsey estimates that up to USD 60 trillion will be needed by 2030 to bring global infrastructure up to an appropriate level.* (McKinsey: Infrastructure productivity: How to save $1 trillion a year) Investor interest in this sector is increasing constantly as a logical consequence of this. Efficient traffic routes, sustainable energy production and distribution and a reliable water supply are generally considered to be the most important and most capital-intensive target segments.
The task of financing this huge investment requirement is too much of a burden for the governmental institutions in most countries due in the majority of cases to strained budget situations. The World Bank estimates that the aspiring emerging economies would have to pay 8% of their GNP per annum* (PwC: The World in 2050) in order to maintain the existing infrastructure and keep up with additional infrastructural measures in response to high economic and population growth. Most countries, however, maintain significantly low investment levels for budgetary reasons with the result that the infrastructure can no longer keep pace with economic momentum.
Capital requirement encounters desire for stable, projectable returns
Governments across the world have identified this discrepancy and consequently push for the integration of private equity providers, often in the context of Public Private Partnerships (PPP). Given the current situation on the international capital markets - low interest rates, high government debt, smouldering political conflicts - these intentions meet with great interest among investors. This is because infrastructure investments promise stable, projectable returns with minimal or no correlation to other asset classes where the risk is calculable, and consequently meet the substantial requirements of major institutional investors such as insurance companies, pension funds and foundations. As a result, the significance of infrastructure project financing by private and institutional investors will increase further.
Global powerhouse shift
The need for infrastructure expansion is tangible particularly in Asia, which became a global powerhouse a long time ago due to constant growth of the population and the economy. Half of global GDP is already generated in Asia. Three European countries, Germany, France and the UK are currently ranked in the top ten countries that are most productive in economic terms, but by 2050 only Germany will still be in this position. Countries such as India and Indonesia will have found their way into the top 4 positions by this point.*
Asia's further growth will, however, be determined to a large extent by the success of the changeover from an export-driven economy to one supported by domestic demand. A prerequisite for this is even stronger anchoring of Asian economic momentum among the wider population and an associated increase in private consumption. An infrastructure is needed for this, however, which keeps pace with economic momentum and also involves the regions outside the major Asian cities in the continual growth.
Major need to catch up as far as infrastructure investment is concerned
Numerous national economies particularly in South East Asia, where dynamic economic growth shows no apparent signs of slowing down, are facing far-reaching structural challenges. A study by consulting firm McKinsey shows that the infrastructure in most Asian countries is underdeveloped in spite of the favourable economic growth. Electricity production in India is up to 20% below peak time requirements as a result of inadequate investment. In Indonesia, infrastructure investments of around 6% of GDP in the 1990s have fallen to just 3% in the last ten years. The knock-on effect of this has been a deterioration in areas such as energy and utilities, transport, housing construction, communication and water supply, and a dip in economic growth of between three and four percentage points. *
It is therefore clear that efforts need to be intensified in order to recover lost ground and establish an infrastructure that meets modern industrial standards. Particularly regions where there has been no further development of the infrastructure for decades need to benefit from booms and prosperity. The many regions, which are notorious in terms of a lack of electricity supply, need access to a reliable energy supply. Ports, airports and transport routes on land and on water need to be adapted to the new, growth-related requirements or rebuilt completely. Telecommunication networks too need to be modernised and expanded to provide national and international communication routes that are commonly accepted today.
Urbanisation megatrend is an infrastructure driver
Furthermore, urbanisation particularly in Asia necessitates significant investment in infrastructure. Estimates indicate that in 2020, around 20% of the population in the Asia-Pacific region will live in towns and cities. That is around 500 million more people than in 2013.* China has already confirmed this trend over the past ten years. The percentage of people living in towns and cities has risen from around 40% in 2003 to today's figure of over 54%.* The large conurbations, which are consequently nearing their saturation point in terms of infrastructure, require major investment in public transport, utilities and disposal systems, and in housing construction.
McKinsey estimates the investment requirement in Asiatic infrastructure in this decade alone to be around USD 8 trillion, the Asian Development Bank is anticipating USD 750 billion per annum until 2020.*
Traditional backers unable to cope, foreign investors welcome
Infrastructure projects in Asia have so far been financed by the state or domestic, often state-controlled banks. However, this financing model cannot keep pace with current and projected growth. Given their significant budget deficits, many countries are unable to cope and are looking for alternative financing solutions in order to implement their infrastructure projects.
Consequently, the policy-makers have opened their doors wide to private investors. Regulatory restrictions or previous investment hurdles have been fundamentally reworked and often removed completely in favour of attractive investment incentives and privileges for foreign investors. Public Private Partnerships (PPP) in particular, but also direct investments by foreign equity providers are models that will come to the forefront more and more over the next few years.
Infrastructure. Indispensable. Sustainable. Profitable.
Significant impetus from Asian Infrastructure Investment Bank
The most recent and impressive example of the paradigm shift in Asia is the founding of the Asian Infrastructure Investment Bank (AIIB) managed by China in summer 2015, the sole task of which is to acquire capital for infrastructure investment in Asia.
The involvement of a total of 57 countries, including all the major economies in Europe and a large number of Asian countries, is a clear signal of the dwindling importance of the USA as a central economic power and a clear vote of confidence by these countries in the financial and political stability of the region and the significance of the infrastructure market in Asia.
The AIIB can provide a crucial impetus in lifting Asia's infrastructure on a broad level to the level enjoyed in the Western world and encourage follow-up investment by private investors. Upgrading roads, rail networks, ports, power plants, power grids and telecommunication networks would bring new growth momentum in Asia from which the rest of the world, and not least investors in Asia, would profit.