Asia needs more financing products to bridge the infrastructure investment gap as well as steer capital towards funding developments that cannot access traditional financing markets.
The assessment came from financial experts who spoke at a recent infrastructure forum in Singapore. They noted that it’s easier to secure capital for big ticket, scalable infrastructure projects but that financing small and mid-sized developments is a challenge.
Rapheal Erasmus, managing director for strategy and capital formation at Singapore-based Pentagreen Capital, said smaller projects by small and mid-sized developers may be fundamentally sound and commercially viable. But they may lack the scale, track record and capital structure to access traditional financing that rely on a blend of equity investments, bank loans and bonds, with repayment tied directly to the project’s cash flows or the sponsor’s balance sheet.
“It could be a mismatch between risks and available capital — risks such as construction risks, optic risks or just emerging-market risks that some investors find difficult to price, but that are manageable,” she said during a panel discussion at the Asia Infrastructure Forum on June 16.
“Another issue that we often see is scale. [Institutional investors] finance very large projects, similar to banks, which often like large tickets. You end up with mid-sized, small developers which cannot access the conventional financing [markets] because they are too small.”
She advocates a holding company or HoldCo mezzanine structure as a solution to fill the lack of suitable financial products. The project developer in this structure finances all or part of its equity contribution in the project company or holding company with third-party loans. Erasmus said the structure is often used in developed markets but less in emerging Asia.
“When you are a mid-sized developer growing from a 100 megawatt to gigawatt [project], you not only need senior project financing, but you also need financing to bridge equity gaps; this is where we see a demand for HoldCo mezzanine. Higher risk debt financing is lacking at the moment in emerging Asia,” she said.
Investment gap
The Asian Development Bank estimates that Asia needs US$1.7 trillion of annual investments in infrastructure development through 2030 for the region to maintain economic growth, battle poverty, and mitigate climate risk. That’s double the current actual investments of $881 billion a year.
According to a blog post on PricewaterhouseCoopers’s website, there is growing investor appetite for well-prepared infrastructure projects that are affordable, socially equitable and environmentally sustainable, but many Asian jurisdictions lack a robust pipeline of attractive, investment-ready projects.
These projects typically draw the attention of institutional investors like US asset management giant BlackRock Inc.
“For us, infrastructure investing is investing in scale opportunities, into assets that provide a very essential service to society and to industries,” Brad Kim, managing director for global infrastructure funds at BlackRock, said at the panel session.
Other fundamental considerations he listed were clarity on how the assets earn revenue and return capital to investors, and a deep enough investor market that would allow the company to realise its investments and exit at the right time.
Kim said such fundamental considerations remain important in the current uncertain environment, but that there is also greater scrutiny on the downside: can investments survive and deliver returns when geopolitical tensions rise or supply chains are disrupted when making investment decisions?
Energy infrastructure
Heightened geopolitical tensions in recent years have driven countries towards building resilience in energy security by expanding investments in energy infrastructure across Asia.
“Conflicts and tensions have become ‘business as usual’ in the past two years. What we have seen is a lot more talk around resilience and security and sovereign, from energy to chips,” said Lim Wee Seng, group head of energy, renewables and infrastructure, sustainability, project finance and strategic advisory at Singapore’s DBS Bank.
As a result, there is a shift from interdependent, leveraged supply chains to localised manufacturing to build sovereign capabilities to reduce exposure to external shocks, Lim said during another panel session.
He said DBS is most invested in renewable energy in Australia and India, noting that they are among the biggest in Asia Pacific for renewables with very successful investment models.
“India has been a bright spot for quite a while, largely because they have tidied up the investability of power purchase agreements for renewables,” he added.
The Asia Infrastructure Forum was organised by the Singapore government with the World Bank as a strategic partner. The fifth such forum since 2019, it aims to bring together institutional investors, developers and multilateral banks to tackle Asia’s infrastructure investment needs, including mobilising private capital and strengthening cross-border collaborations.
