The COVID-19 pandemic has battered economies across the Asian region, and governments are currently scrambling to get back on the growth track. One way is via a substantial increase in infrastructure investment, but with the public purse stretched thin, funds are being sought from private investors as well as other governments.
With vaccinations commencing across the Asian region, there is reason to believe that the end of the COVID-19 pandemic is not too far away. There is no doubt that the pandemic has taken a heavy economic toll on the region, and governments will be keen to get back on track of economic growth soon. One way to do this would be through investing in the infrastructure; the Asian Development Bank (ADB) has estimated that developing Asian economies need $1.7 trillion a year in climate-adjusted infrastructure investment in transportation, power, water and sanitation and telecommunications.
Projects lawyers in the region say some countries have already begun quite active in this regard. “In South and Southeast Asia, the most active jurisdictions have been Bangladesh, India, Indonesia and Vietnam, with a particular focus on renewables, including India’s recent hybrid auctions,” says Jean-Louis Neves Mandelli, a Singapore-based partner at Shearman & Sterling. Additionally, there is transportation - where significant under-capacity continues to be an issue, despite COVID – LNG import/LNG to power and water and sanitation projects.”
Nick Merritt, the global head of infrastructure, mining, and commodities at Norton Rose Fulbright, has similar observations. “Indonesia still has a number of projects including in the waste and transport sectors,” he says. “Power remains very active in Bangladesh as the country has pivoted away from an energy plan primarily based on new coal capacity towards LNG – to replace the reliance on depleting domestic natural gas assets – as well as solar projects Renewables remains very active in India, as well as in Vietnam.”
Tom Luckock, a Beijing-based partner at Norton Rose Fulbright, adds that China remains active in the infrastructure area. “The main focus is what is referred to as ‘new infrastructure’ as part of the COVID stimulus package and also as part of China’s 2060 carbon pledge,” he notes. “New infrastructure includes data centres, grid and on some interpretations renewables. Electric vehicle-related infrastructure has also been advancing, as has environmental waste and, to a lesser extent, water projects. There is some growing discussion around pulling back the stimulus package which may see a slight pullback in infrastructure investment.”
Prior to the pandemic, only about two-thirds of the financing requirement mentioned above was being met, a vast majority of which came from government spending. But now, with governments in the region having ploughed funds into combating the effects of COVID-19, funds are being sought from private investors, as well as other governments.
Neves Mandelli says that even before the pandemic, one trend that was emerging in many jurisdictions in the region was the development of strategic government-to-government relationships to foster the development of infrastructure projects. “Countries like China, Japan, Korea and more recently the United States, are among those who have been most active in the South and Southeast Asian region,” he notes. “But we also are seeing a number of Middle Eastern powers, such as Saudi Arabia and the UAE focus on investment in this region Asia, particularly in countries such as Bangladesh and Indonesia. We expect the government-to-government relationships will likely also mean that corporates and financiers – especially the ECAs and DFIs – from these states will continue to play an essential role in the development and financing of large-scale infrastructure projects in the region.”
Another significant development has been the increased participation of international infrastructure funds, such as the Canadian pension funds, but also private equity firms, such as iSquared and Cube, in regional infrastructure projects, he observes. “This trend started before the pandemic and was originally focused on brownfield projects, especially in India,” says Neves Mandelli. “More recently we have seen some of them take on greenfield infrastructure investment in the region.”
He adds that while ECAs, DFIs and multilaterals continue to provide most of the debt financing for infrastructure projects, there is also an increasing appetite for international commercial banks to provide long-term financing in many of these jurisdictions without ECA or DFI/multilateral involvement. “We have seen this in Bangladesh when at the height of COVID last year, SMBC and Clifford Capital provided long-term financing for the Summit-sponsored 300MW Gazipur II IPP, as well as in Indonesia where SMBC refinanced the Sidrap wind farm,” observes Neves Mandelli.
Merritt says that Indonesia is trying to mobilise capital via its new sovereign wealth fund to attract inward investment for capital into Indonesia and possible share sales of some of the state-owned enterprises. And in China, the COVID stimulus packages focused investment on the domestic economy,” says Luckock. “As a result, outbound investment took a back seat and Chinese state-owned and private investors focused back on the domestic economy. Competition has been tough for projects particularly in attractive areas like batteries and data centres and environmental waste.”
Meanwhile, Nicky Davies, another partner at Norton Rose Fulbright says the firm has been seeing an increasing number of renewable energy funds investing in Vietnam. “These funds will likely be keen to do more in other emerging markets in Asia as the trend towards renewables,” she notes. “That said, others are continuing to take a more conservative approach, favouring the more developed markets such as Japan, Korea and Taiwan.”
RISKS FOR INVESTORS
From an investor’s perspective, emerging markets have a not-wholly undeserved reputation for risks, and lawyers say it would be good to keep this in mind. Merritt of Norton Rose Fulbright says that the overriding inhibitor to investment in Asian infrastructure is market risk. “It’s why the power sector has been so successful in comparison to other sectors as governments have largely shielded the investor from market or demand risk,” he notes. This contrasts with most other proposed projects where demand risk is largely expected to be taken by the private sector, particularly in transport. A more balanced approach to market risk would likely improve investor interest and perhaps one thing we have hopefully learnt from the pandemic, is that risk (and reward) may be best shared.”
His colleague, Luckock, says that the key risk for Chinese infrastructure projects are around receivables for the offtake. “This has traditionally been the case for renewables where the grid has delayed payments of the tariff, but it also applies to water and other sectors,” he adds.
Neves Mandelli of Shearman observes that most of South and Southeast Asia had been experiencing sustained significant economic growth for many years, and thus perhaps the biggest challenge for investors now is forming a view of whether – and how – the pandemic has changed the long-term economic fundamentals that underpinned the investment in those economies.”
“Many large-scale airport projects are planned across the region, from Indonesia, to Thailand and the Philippines, usually from before the pandemic. There is a question as to what the aviation sector will look like post-pandemic and what demand projections should be used to model future passenger traffic. Investors are likely to be more concerned about managing the downside demand risk, perhaps by using more conservative assumptions and/or seeking additional comfort from host governments.”
—Jean-Louis Neves Mandelli, Shearman & Sterling
“A good example is in the transportation sector,” he says. “Many large-scale airport projects are planned across the region, from Indonesia to Thailand and the Philippines, usually from before the pandemic. There is a question as to what the aviation sector will look like post-pandemic and what demand projections should be used to model future passenger traffic. Investors are likely to be more concerned about managing the downside demand risk, perhaps by using more conservative assumptions and/or seeking additional comfort from host governments.”
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