When the Asian Development Bank published its 2017 Meeting Asia’s Infrastructure Needs report, it estimated the region would require investment of over $26 trillion – $1.7 trillion per year – through to 2030, to be invested across its power, transport, telecommunications, and water and sanitation sectors.
“The demand for infrastructure across Asia and the Pacific far outstrips current supply,” ADB President Takehiko Nakao said at the time. “Asia needs new and upgraded infrastructure that will set the standard for quality, encourage economic growth, and respond to the pressing global challenge that is climate change.”
This was well before a global pandemic and a more volatile macroeconomic and geopolitical environment – including rising energy prices as a result of the war in Ukraine, rising inflation and interest rates, and escalating tensions between the US and China – were added to the mix. Emerging Asia’s infrastructure needs, however, remain as pressing as ever. The question is: will the heightened uncertainty of today’s investment environment deter the private capital crucial to helping Asia meet its infrastructure needs?
The answer, quite simply, appears to be no. While today’s heightened uncertainty can’t be overlooked when sizing up infrastructure investment opportunities across Asia’s developing markets, the fact that the demand for infrastructure in these markets continues to outstrip supply suggests they’re unlikely to be written off as viable investment destinations anytime soon.
This is especially true of fund managers and investors with track records of investing in Asia’s emerging markets, who are well-versed in the ebb and flow of the region’s economies. As Sanjiv Aggarwal, energy infrastructure partner at Actis, points out, Asia has had to grapple with certain macroeconomic trends like rising energy prices well before such trends became a global concern.
“The need to move away from fossil fuels began long before the invasion of Ukraine,” Aggarwal says. “Asia had already seen an increase in the price of coal and liquefied natural gas thanks to the economic revival in the wake of covid-19… Issues such as these were already creating problems even before the war in Ukraine highlighted just how fossil fuels can be used as geopolitical instruments.”
In addition, he notes that, despite the new level of uncertainty in the investment landscape, the move by governments across the region to create more favourable policy frameworks for the flow of private capital into infrastructure projects is continuing to create new opportunities for investors in the asset class.
“The case for developing Asia lagging far behind in terms of capital stock per capita is quite clear and the need for investment in these physical assets very immediate. Governments in the region realise the same and also believe that investment in infrastructure is the best way to get back to growth in a post-pandemic world,” Aggarwal says.
“Many Asian countries have accelerated the push for investment in infrastructure, facilitated by ambitious national infrastructure plans, policy measures, and increased opportunities for private sector participation. This is resulting in the increasing emergence of PPP opportunities across India and Southeast Asian nations.
“These countries are strongly committed to developing and upgrading infrastructure facilities and to making infrastructure development a centre-stage effort to support sustainable post-pandemic recovery.”
Nick Parsons, head of research and ESG policy at asset manager ThomasLloyd Group, agrees. Parsons believes that Asia’s emerging markets are as strong as they have ever been, and that they will continue to grow in the face of current volatility thanks to three key trends across the region. These, he argues, are population growth, economic growth and urbanisation. With all three themes combining to create increasing demand for sustainable infrastructure and renewable energy projects in particular, Parsons says that his firm – which is mainly focused on sustainable infrastructure in the emerging markets of Asia and launched the renewable energy-focused ThomasLloyd Energy Impact Trust plc on the London Stock Exchange in 2021 – remains undeterred in its investment approach.
“Asian economies are now much better placed than at any time in recent history to withstand global shock. Overall, their macroeconomic performance and their resilience has improved enormously over the last 30 years,” he explains.
“Increasing geopolitical uncertainty doesn’t change our strategy. In fact, if anything, it confirms it and underpins it… If you’re an investor in emerging markets in Asia, it’s hard to see why broader geopolitical uncertainties would lead you to change that strategy. There are still more people, there’s still more growth, there’s still more urbanisation. What led you to have that strategy in the first place is still there.
“We’re certainly not complacent about it and we do update our risk assessments and our thought processes. But, as we see it, our strategy is as valid today as it’s ever been.”
Heightened risk, still compelling
Merriden Varrall, director of KPMG Australia’s geopolitical hub, also views Asia’s prospects for infrastructure investment as strong, given the region’s demographics, expanding consumer class, urbanisation and enthusiastic adoption of new technology. She does highlight, however, the need for firms to consider both current and potential political and economic instability when assessing investment opportunities. “Companies operating in the infrastructure space in Asian emerging markets will have to carefully navigate geopolitical currents, including the competing strategic aims of China and the US, as there will be growing pressure to align with a certain set of standards and protocols, possibly to the exclusion of others,” Varrall says.
“Because of growing uncertainty and mistrust, trade and investment flows will increasingly follow lines of trust and reliability, not just efficiency and low costs.”
As the region transitions to green energy, she says supply chains facilitating the development of renewable energy projects, particularly the supply of the critical minerals required for such projects, need to be “very carefully reviewed for long-term robustness and reliability”.
“Supply-chain resilience in general is going to become an increasingly challenging issue for the infrastructure sector,” she predicts.
Despite existing challenges, Varrall agrees that the region’s infrastructure landscape contains considerable opportunities for investors, especially in the areas of sustainable infrastructure, renewable energy and digital infrastructure. With investors now more focused on ESG metrics than ever before, and as Asia moves towards a more sustainable future, the region’s emerging markets could well be regarded as increasingly attractive investment destinations.
“Societies around the region are calling for greener, fairer, and more sustainable infrastructure, which creates great opportunities for equitable and sustainable infrastructure investment… At the same time, renewable energy is now the cheapest form of power in a number of emerging Asian economies,” Varrall points out.
“The digital transformation and the demand for digital connectivity is also offering huge opportunities for growth… Of course, as these opportunities grow, so do cyber-related risks, but that is another space where infrastructure can rise to the challenge.”
“Asian economies are now much better placed than at any time in recent history to withstand
Citing Indonesia’s plans to spend $429 billion on infrastructure in 2020-24 – up 19 percent from the $359 billion spent in the 2015-19 period – and the Philippines’ ‘Build, Build, Build’ programme targeting the upgrade of the country’s infrastructure facilities and the rollout of a new renewable energy programme, Actis’s Aggarwal says that Asia’s emerging nations are narrowing in on their net-zero obligations.
“A key catalyst that is leading to the need for new forms of infrastructure creation and sustainable infrastructure creation is the opportunity and obligation that Asia has to move towards energy transition and a net-zero future,” he says.
India’s commitment to the energy transition is clear, Aggarwal adds, as the country closes in on its 175GW renewable energy target for 2022 and looks to achieve its 450GW target by 2030. While Southeast Asia has not adopted renewable energy as fast, he recognises the region’s potential in the renewables space.
“Reshaping the current ecosystem from resource extraction to electrification is one of the largest challenges APAC has ever faced. Immediate opportunities lean toward driving energy efficiency and renewables, scaled by grid modernisation and electrification, and on the horizon, rethinking transport, emerging carbon-capture technologies and hydrogen innovations,” he says.
Growth trends in the digital infrastructure space are also compelling, he adds, with Asia-Pacific leading the growth in data consumption and expecting substantial future growth in the short to medium term.
“Within APAC digital infrastructure, data centres have garnered huge supply-side infrastructure investments… For the first time, the major cloud providers are building their own greenfield locations in developing APAC locations and reducing the reliance on the metros of Singapore, Tokyo, Beijing, Shanghai and Sydney,” Aggarwal says.
With the International Monetary Fund’s latest 2022 economic forecast for emerging and developing Asia now at 4.6 percent – a downgrade by 0.8 percent of its previous forecast for the year, but higher than the IMF’s downgraded economic forecast for global growth of 3.2 percent – Parsons is confident that Asian emerging markets will remain attractive investment destinations in the years to come, particularly for infrastructure investors looking to make a difference and accelerate the region’s move to a more sustainable future.
“Longer term, the investment case is compelling,” he says. “To have real impact, you must invest in real assets. And $1 invested in emerging markets in Asia will get you more impact than that same dollar in Australia, in Europe or in North America. It buys you more land, it buys you more labour, and, therefore, it buys you more impact.
“For the impact story, there has to be a growing focus on emerging markets in Asia, which adds up to a compelling investment case.”