Asia's economy is projected to grow by 6.3% in 2016, compared with 6.4% in 2015. However, it still has underdeveloped infrastructure in energy, transport, housing, water, sanitation and telecommunications. This infrastructure deficit has hindered economic growth, especially energy and transport, the two sectors most critical to growth.
In addition, other risks that investors face include public-private partnerships (PPPs) having vague and poorly defined policies, capital controls inhibiting cash flow repatriation, weak regulatory and legal systems, poorly structured partnership agreements, uncertain foreign ownership restrictions, as well as illiquid capital markets that hinder investor exits.
Despite the negatives, attractive opportunities remain: the Asian infrastructure market is projected to grow at 7% a year, spending $5000bn a year by 2025. Between 2010 to 2020, the Asian Development Bank estimates that about $8000bn in infrastructure investment is expected to be committed to Asia-based projects, with about $1000bn available to private investors through PPPs. Yet, very little was done between 2010 to 2013, if China’s big infrastructure development is excluded.
Improvements are gradually under way. Traditional government financing of infrastructure projects is now seeing more private capital in the form of PPPs via debt financing. China and Malaysia have sufficient local private capital capacity to fund infrastructure needs but not Indonesia, India, Philippines, Thailand and Vietnam. Ways to mitigate risks include offshoring structures in established Asia financial centres, incorporating a holding company in a tax-friendly location, and adopting an integrated equity and debt PPP participation model by offering products across the value chain.
Investment opportunities are in the energy and transport sectors, especially in advanced clean technologies. In the energy sector, rural electrification is one opportunity. In south-east Asia alone, an estimated 160 million people are un-electrified and almost 80% of them live in rural and remote areas. Association of South-east Asian Nations (Asean) power grid still offers newly proposed sections with estimated completion by 2020: from Malaysia’s Rantau Panjang to Thailand’s Kolok, from Sabah (Malaysia) to the Philippines, from Sabah to Sarawak (Malaysia) and from East Sabah to East Kalimantan (both in Malaysia).
The International Energy Agency estimates that south-east Asia’s energy demand will increase by more than 80% between 2013 and 2035. Thus, Asian demand for energy infrastructure, such as power plants, wind farms and hydropower plants, remains very high with increasing population growth, urbanisation and intra-Asia trade from regional trade agreements, such as the Trans-Pacific Partnership.
In the transport sector, roads and railway are another opportunity. More regional trade agreements will see more people and goods travelling across Asian borders. Increased tourism will also see more airports being built. In terms of rail opportunities, the Singapore-Kunming Rail Link is one of the two flagship Asean land transport infrastructure projects. It was started in 1996, but was delayed by unfinished sections spanning 1780 kilometres in several areas, such as Cambodia, Laos, Malaysia, Myanmar, Thailand and Vietnam. This $15bn regional railway line spans 5000 kilometres from Singapore to the Chinese city of Kunming.
Asian infrastructure investment requires long-term commitment, diligent regular research to monitor constant changes, a careful choice of business models, patient building of teams and expertise, as well as selection of competent Asia partners such as financiers, engineering, procurement, construction contractors and distributors.
Lawrence Yeo is CEO of AsiaBIZ Strategy, a Singapore-based consultancy that provides Asia market research and investment/trade promotion services.