Asian infrastructure offers insufficient returns: S&P

Institutional investors say there is a dearth of infrastructure projects in Asia that meet their credit quality and return parameters, according to a new Standard & Poor’s report.

“So far, financing infrastructure projects in Asia has continued apace with banks and governments largely assuming the load,” said the ratings agency. “Still, their capacity to accommodate more projects will be insufficient to fill the enormous funding gap we project to 2030.”

Global infrastructure spending will reach $57 trillion by 2030, with China overtaking the US to become the world’s largest investor in infrastructure as a percentage of its GDP, forecast the Organisation for Economic Development and consultancy McKinsey & Company.

Infrastructure needs in Asia will be driven by demand for roads and transportation and for services such as water or electricity distribution networks.

Yet pension and sovereign wealth funds say the political and economic challenges of emerging markets in Asia are not matched by acceptable risk-reward profiles, according to the S&P report.

Many countries in the region lack a strong credit culture or legislative system, which means enforcing contracts could be problematic. The risks also include frequently changing policy and tax and tariff regimes that are detrimental to infrastructure projects.

As infrastructure investments in EM are riskier and more complex than they are in more developed markets, many investors don’t have the necessary expertise to evaluate projects properly, said S&P.

To take on these risks, investors demand higher returns than government bonds offer, added the report. But infrastructure projects usually can't charge more than that because their services or products, such as electricity and water, must be affordable to end-users.

Besides, because banks offer low-cost financing and are more willing to extend credit on less stringent terms than other entities, they dominate infrastructure investment in Asia, the report noted.

What’s more, governments in Asia remain big infrastructure investors – this means returns for projects in Asia often fall below those institutional investors are prepared to accept.

But projects that encompass social, economic and environmental factors are appealing to institutional investors with ethical mandates, the report said, although in Asia these types of investments are underdeveloped.

S&P argued that greater participation by institutional investors would raise standards because they exercise more intense scrutiny of projects than do banks in Asia.

Areas that private funding have penetrated include toll roads or charging fees and tariffs.

But further changes are needed to boost private-sector investment, said S&P. They include supportive regulatory frameworks, strong legislative controls, and governments making greater efforts in negotiating capital market funding and developing technical and design skills.