Sovereign funds see growing opportunities in EM infra
Global sovereign wealth funds have been a significant force in the funding of major infrastructure projects across the Asia region.
Their ability to work in partnership with one another allows them to participate in billion-dollar deals with a high degree of confidence — a confidence that is not always demonstrated by banks and other financing channels.
Despite the sometimes higher level of risk attached to emerging market allocations, some institutions like Singaporean sovereign investor GIC see a growing opportunity set in emerging markets infrastructure.
“GIC’s institutional familiarity with emerging markets has enabled us to be an early investor in its infrastructure sector. Relative to our peers, we have a sizable infrastructure portfolio in emerging markets,” said Ang Eng Seng, GIC’s chief investment officer for infrastructure.
Overall, GIC has 29% of its infra portfolio invested in emerging markets, 14% in Asia, and a further 5% in Asian developed markets.
ROADS TO PROSPERITY
GIC forecasts that global infrastructure investment needs are expected to total around $70 trillion between now and 2040.
Its latest investment in the sector is backing the expansion of Indonesia’s toll road network.
The $1 billion investment, made in association with Metro Pacific Tollways Corporation, is for a 35% stake in Jasamarga Transjawa Tol (JTT), a subsidiary of the Indonesian state-owned toll road operator, PT Jasa Marga. JTT is a network of 13 toll roads in the provinces of West, Central, and East Java.
According to an official announcement, the investment will allow JTT to raise capital, maintain a healthy leverage level, and continue expanding toll road networks across Indonesia.
GIC typically invests in infrastructure businesses with high barriers to entry, regulated returns, or long-term contracted revenue models.
The portfolio strategy comprises primarily direct investments in private or listed infrastructure businesses, either through equity or non-investment grade infrastructure credit.
For example, the Singapore sovereign fund is a long-term partner of Acen, the renewable energy platform of the Ayala Group, a Philippines conglomerate, enabling Acen to expand its green investments across the region.
GIC’s backing has enabled Acen to double its attributable operating and under-construction capacity to 4GW in the Philippines, Australia, Vietnam, Indonesia, and India.
OVERCOMING HURDLES
Indonesia’s sovereign investment fund, INA, has so far garnered more than $27 billion in co-investment commitments as part of its effort to boost economic growth, partnering with GIC, Abu Dhabi Investment Authority, and China’s Silk Road Fund, among others.
A common criticism of government funding in Indonesia is that the bulk of the money gets eaten up by Java, the country’s economic heartland.
INA is conscious that it has to be even-handed, and chief investment officer Stefanus Ade Hadiwidjaja told AsianInvestor that ex-Java commitments are still the bigger portion of its allocations.
By contrast, while Indonesian domestic banks are active in financing the country’s infrastructure development, many of them are often hesitant about project financing.
Meanwhile, there is little or no direct investment from insurance companies, pensions funds, or family offices, according to Irman Boyle, director of the advisory group with Jakarta-based Indonesia Infrastructure Finance (IIF).
“There are many obstacles to developing a bankable project pipeline,” Boyle told AsianInvestor.
“We need to educate the contracting authorities, the government ministries, and the local governments. We need to prepare the regulatory framework and budgets related to public projects.”
EMERGING FOCUS
While it may be true that emerging countries are going to benefit from increasing investor allocations, the bigger challenge is likely to be in ensuring that investment, development, and sustainability outcomes are spread equitably between developed and emerging markets.
KPMG’s 2024 report “Emerging trends in infrastructure” predicted that infrastructure investors, developers, and operators are expected to start to pay much more attention to the emerging markets. However, parts of that investment, which falls under dirty energy, is a cause for concern.
“It is likely that future investments into traditional energy sources will be channeled to the emerging markets, where regulations are less clear and where some countries still have not defined their decarbonisation pathways or set net-zero targets,” said the report.
“Not only could this create an imbalance in how the benefits of the energy transition are spread around the world, it also creates significant risk for investors seeking to fund projects in hard to abate sectors in these countries (steel and cement in particular). As a result, attempts to develop cleaner, more sustainable infrastructure in these markets are being marginalised.”
The solution, in meeting the UN sustainable development goals and the transition to low carbon, would be “a greater focus on capability development, investment in R&D and creating new pillars of economic growth through decarbonisation, energy efficiency, and smart infrastructure.”