Asia has a huge infrastructure gap. Home to many of the world’s fastest-growing economies, the region is experiencing intense development and urbanization involving billions of people. This has fuelled the need for infrastructure of all kinds: from energy projects and transport systems to social infrastructure and telecoms networks. Private sources of capital have been instrumental in helping bridge the funding gap for these projects, but in the past two years this type of investment has tapered off – so how will Asia continue to drive its expansion?
The global infrastructure industry has boomed since 2015, and deal-making activity in Asia has seen a particularly sharp rise. A period of steady investment up to 2012 saw around 300 infrastructure deals in the region annually, totalling less than $30bn a year; however, both the number and value of deals announced each year have soared since then. In 2016, there were 677 deals announced in the region worth a combined $111bn – more than twice the number of deals and 4x the total deal value recorded just four years prior.
Activity has since subsided: the number of deals announced in 2018 fell to 342 from 430 in 2017, and just 61 deals have been announced so far in 2019. Similarly, total deal value remained high in 2017 at $107bn, but fell to just $39bn in 2018 and amount to only $7.0bn in 2019 so far.
Tightening the Belt
This rise and fall in activity seems to coincide with China’s headline Belt and Road Initiative, which has fuelled infrastructure investment across Asia and beyond. First announced in 2013, its inception marks the beginning of the rapid rise in infrastructure activity in Asia. By the same token, recent criticism of the Initiative and a perceived scaling-back of its reach have occurred at the same time as a fall in overall activity.
When looking at investment across the region, this does not seem to be borne out. For one, a lot of activity associated with the Belt and Road Initiative is not happening in Asia – though there was substantial investment in the region, activity also occurred in Africa and Europe. Moreover, it is India that has been home to by far the largest proportion of infrastructure deals in Asia in the past 15 years. Since the start of 2005, there have been 2,278 infrastructure deals announced in India – more than twice as many as in China (992). Japan follows India and China with 328 deals – meaning that two of the three largest infrastructure markets in Asia are not involved with the Belt and Road Initiative.
India’s position as the most active infrastructure deal-making market in Asia, and as one of the largest in the world, is seemingly driven instead by internal circumstances. India not only boasts a booming economy, but is making a large-scale, rapid shift from an agrarian economy to an industrial one. As such, its large population and rapid development have created a huge need for infrastructure, while its unindustrialized history means it does not have large networks of pre-existing assets. These challenges are much like those faced by China over the past 25 years; but, unlike in China, India has not sought to meet this need with only government-backed investment, instead turning to private sources of capital alongside state investment, which is why it has seen such strong activity.
If the Price Is Right
This may be due to more widespread concerns about global equity market: investors and fund managers alike are concerned that equity markets are reaching a peak, and at the end of 2018, 61% of those surveyed told Preqin that a correction is due within the next 12 months. Pricing has certainly been as high for infrastructure investments as in other asset classes, and fund managers may wait to see if prices will correct in the coming months if equity markets do see a downturn. However, one of the key advantages of infrastructure cited by investors is its low correlation to other asset classes, and so the impact that a market correction would have on infrastructure asset pricing is uncertain.
Another consideration is the nature of the assets and projects that are most prevalent in Asia; renewable energy projects make up the largest proportion of infrastructure deals both globally and in the region. This has climbed year-on-year, up from around 20% of deals in 2005 to over 50% in 2018. This growth is at the expense of transport and utilities projects: while these are still major components of the deals market in Asia, as a proportion of total deals these sectors have contracted. Transport and utilities assets are the most likely to involve government funding or support, while renewable energy assets are more likely to be entirely privately owned. While the cost of renewable energy per kilowatt has decreased drastically over the past 15 years, it is a competitive sector and asset pricing is noticeably higher than other asset types, which may deter some fund managers from making investments.
Many infrastructure projects in Asia are greenfield developments of new assets, rather than the acquisition of existing assets at the secondary stage or the rejuvenation of brownfield assets. This reflects that the region has greater demand for new infrastructure capabilities than its more developed counterparts, like Europe, where three-quarters of deals are for existing revenue-producing assets. However, greenfield assets also require a great deal more regulatory oversight and public consultation. Fund managers may have perceived a more difficult environment for these kinds of projects in the past 18 months after the 1MDB scandal over the misuse of public funds in Malaysia, or due to political pressure in boom economies like India and Indonesia.
The Future Is Bright
Ultimately, it is difficult to attribute the slowdown in Asia’s infrastructure activity to any single source, and for a continent as large and diverse as Asia it is likely an oversimplification. Yet, there are positive signs that any downturn may be temporary; after all, the global infrastructure market is buoyant, and new capital is flooding into the marketplace at a record rate. At the same time, the underlying structural infrastructure needs of Asian nations have not yet been met, and given the pace of development, are growing.
It is true that the global industry and worldwide governments have yet to fully bridge the funding gap to make public infrastructure a worthwhile investment for private sources of capital – but this is not a complete deterrent. With competitive pricing in the developed North American and European markets, fund managers are likely to turn increasingly to Asia as a source of potential investment opportunities. As it stands, it seems likely that the stratospheric rise of infrastructure in Asia is unlikely to be hampered for very long.
To read more analysis on infrastructure deals in Q1 2019, read the Preqin Quarterly Update: Infrastructure, Q1 2019, or login to Preqin Pro to search for specific activity.
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