APAC: 2018 Infrastructure outlook: Asia

14 December 2017 - 12:00 am UTC

Renewable energy projects will continue to sell like hot cakes next year, as more investors seek to cash in on  Asia’s infrastructure boom. Meanwhile debt investments are becoming more attractive in a broader range of economies and sectors

Continued strong economic growth across the Asian region will likely create a supportive environment for infrastructure investment in 2018, market participants are predicting.

“Lower returns in Australia, America and Europe is seeing a shift as large asset managers are looking to Asia to get a slightly better yield,” says one Hong Kong-based banker.

“There is an increasing trend for pension funds to look for assets in this part of the world,” observes InfraCo Asia’s CEO Allard Nooy.

The need to meet COP21 commitments and transition to low carbon energy generation has given a rising number of investors a toehold in the region, opening the door wider to infrastructure funded by the private sector.

One factor behind the success of the USD 5bn Equis Energy sale this year is that it was a rare committed seller, and lured infrastructure powerhouse Global Investment Partners to the region. “The Equis sale generated a lot of positive sentiment,” says the above-mentioned banker. 

“This year was a year of transition, renewable energy was more at the forefront and centre than in prior years, led by European and American utilities de-emphasising [fossil fuel-heavy assets] leading to disposals,” he adds.

“In the next year, we would again see the public sector will be the main sellers [of infrastructure assets in Japan], but may also see the private sector would emerge as the seller in the area centered around renewable energy assets,” says Takanori Fukushima, researcher at Sumitomo Mitsui Trust Research Institute (SMTRI).

Market participants are predicting a wave of heightened activity on the debt front, as lenders to mature assets look to refinance out by issuing project bonds.

Managing director, banking with Barclays in Hong Kong, Gordon Youl, says project bonds that have successfully funded Indonesian power projects will be adopted in other countries and sectors across the region.

“There’s interest in different product types – including water and oil and gas infrastructure,” he says. “We expect that category of investor [Asian insurance companies] will be interested [in project bonds] and play a key role in developing the market,” he adds.

Challenges remain for those seeking equity investments, however, because buyers and sellers have different return expectations in most infrastructure sub-sectors.

Reform, distress
Roads, renewables, power and telecoms are going to be the most watched sectors in India next year according to Mumbai-based bankers and analysts.

Distressed companies off loading assets will be a key driver of activity in 2018, says Ajay Manglunia, head of fixed income at Edelweiss Financial Services.

India’s banking system has close to INR 10trn (USD 156bn) of bad loans, with the power sector accounting for a quarter.

According to ratings agency ICRA about 60GW of thermal power projects are stranded, either due to lack of fuel or power purchase agreements. Business opportunities for asset reconstruction companies have arisen as lenders have forced developers to cut debt by selling assets.

In China, the restructuring of state-owned enterprises is also giving rise to investment opportunities.

“This year we’ve seen state-owned enterprises selling off non-core assets – that’s coming through,” says Sean Taylor, Deutsche Asset Management’s Asia Pacific CIO.

Compared with 2017, there will not be too many “surprises” for the coming year because the government will continue to implement policies ironed out in 19th National Congress says Tsang.

“We are likely to see a renewed thrust on reforms across state-owned enterprises (SOEs), as well as in energy pricing and pro-environmental policies,” says Fidelity International portfolio manager Jing Ning. China’s corporate indebtedness is largely concentrated in SOEs she observes, increasing pressure to shed non-core assets.

“Next year we will see a raft of new railways, roads and renewable projects in China as the government is working to fulfill its 2020 targets laid out in the country’s 13th Five Year Plan,” says Vivian Tsang,

‎Moodys’ North Asia rating head for project and infrastructure finance. “That will translate into a lot of investments,” she adds.

While large PPP projects are still going to be dominated by state owned enterprises, Tsang believes there will be more room for private investors. She notes that the recent suite of strict rules forcing limits on the total size of PPPs allowed to be undertaken by SOEs could see them slow down their pace in bidding for these projects. To introduce more private investors, the government will also encourage trusts, fund and insurance companies to invest in PPPs.

In the environment sector, waste treatment projects will continue to see robust demand as land is becoming costlier in China for the disposal of waste observed Tony Fei, senior analyst with broker RHB Securities.

Stakeholder engagement
Japan’s ruling LDP party’s win in October’s snap elections secures Prime Minister Shinzo Abe’s position for years to come and should mean investor-friendly policies continue to roll out, including the privatization of publicly-owned infrastructure assets.

The Japanese government is considering whether to add publicly-owned hydro power plants, industrial water facilities and forestry to the list of assets to be run as infrastructure concessions.

“In Japan, privatization taking an advantage of concession deals will likely expand,” says SMTRI’s Fukushima.

Attracting public pension funds as investors in funds – such as the newly launched Marunouchi Infrastructure Investment Limited Partnership – is expected to help ease public concerns about commercial entities running basic services such as sewage. The Mitsubishi-sponsored fund reached a JPY 30bn first close on 30 November.

“If the launch of infrastructure funds becomes fully in progress, that makes it easier for pension funds, regional banks and others to invest in infrastructure assets,” observes SMTRI’s Fukushima. “There may be an increase in liquidity via the use of infrastructure funds in part,” he adds.

Japanese investors will likely pay attention to such areas as storage battery (overseas) and data center and forestry (in Japan) according to Fukushima.

LNG, renewables
A key focus for greenfield opportunities will be LNG to power opportunities, alongside renewable energy. Consultants believe that there may be as many as 20 new countries importing LNG by 2020 that do not do so today observes Societe Generale’s  Asia-Pacific head of energy, metals and mining Daniel Mallo.

“A significant number of those 20 will be in Asia. We’re seeing Thailand, the Philippines, Bangladesh, maybe Sri Lanka, Myanmar and Indonesia looking to bring in LNG to fuel new power sources,” he says.

At the same time, Mallo notes that “renewables have been lagging in southeast Asia compared to the rest of the world and we expect a pickup in adding capacity”.

The addition of renewable energy capacity is seeing more transmission and distribution opportunities arise – as grid stability issues arise – along with consolidation.

“It’s a great consolidation happening in the renewable energy space,” India Ratings associate director Vivek Jain said. “The smaller developers are either selling out to larger players when the valuation is attractive or are looking for partners.”

On the frontiers
The near-term outlook for the region’s frontier markets has improved, observes Fitch, a ratings agency. IMF-supported programmes in Mongolia and Sri Lanka are being implemented.

InfraCo Asia’s Nooy says that the sale of its Metro Power and Gul Ahmed Wind Power wind assets in Pakistan this year “attracted interest from a wide range investors”. Daelim Energy, an industry player that wants to invest more in renewable energy was the successful bidder. Other bidders included renewable energy private equity funds, a few Middle East-based infrastructure funds, and a handful of other industry players.

“The number of times that we’re approached by foreign direct investors to help give them an idea of investing in the region’s more emerging markets, and wanting to partner on projects, is increasing,” says Nooy.

Belt and Road
China’s Belt and Road Initiative has helped fund infrastructure development in frontier markets like Pakistan. It is also spurring a huge increase in investment in transport infrastructure across the region, which has long seen more investment in airports and ports than roads and railways. Notably, the Kuala Lumpur-Singapore high speed rail project is one section of a planned high speed rail backbone running south from Yunnan’s capital Kunming.

Moody’s Tsang argued that Belt and Road Initiative will continue to be the “predominating theme” when it comes to China’s outbound investments. “That means a continuous flow of deals themed with improving connectivity across Eurasia countries,” she observes.

Project bonds
The issuance of project bonds by a funding vehicle for Indonesia’s second largest independent power producer Paiton Energy in August 2017 may indicate a significant development for the financing of infrastructure projects in Asia according to Moody’s.

The Paiton issuance “demonstrated demand for this type of structure, for amortising bonds,” says Barclays’ Youl.

As the market develops it will move beyond projects in investment-grade countries – such as Malaysia, Indonesia, the Philippines and Thailand – to sub-investment-grade markets like Vietnam, and lower quality credits in developed markets – projects that don’t have such a long operating history, such high-quality sponsors, lower quality off takers, he says.

“The low hanging fruit is issuance where there isn’t currency risk, but as structures develop investors will take on more currency risk,” he says, adding that bonds that expose investors to volatile emerging markets currencies are unlikely to be tagged investment grade.