In the US, president Biden has made clear his intentions to put infrastructure on the front burner to help boost not only an infrastructure in need of upgrading and repair, but also an economy battered by a global pandemic. His approximately $2 trillion package will rely heavily on tax increases from the rich and corporations.
But elsewhere in the world, like in the Asia-Pacific region, infrastructure is increasingly becoming a huge opportunity for large institutional investors and private equity firms. In many ways, the market is still in its growing stages and the opportunity for investment is as diverse as the region.
According to the Asian Development Bank, developing Asia will need to invest $26 trillion from 2016 to 2030 if the region is to maintain growth momentum and respond to climate change. Of the total climate-adjusted investment needs over 2016-30, $14.7 trillion will be for power and $8.4 trillion for transport. Investments in telecommunications will reach
$2.3 trillion, with water and sanitation costs at $800 billion over the period.
The region annually invests an estimated $881 billion in infrastructure (for 25 economies with adequate data, comprising 96 percent of the region’s population). The infrastructure investment gap – the difference between investment needs and current investment levels – equals 2.4 percent of projected GDP for the five-year period from 2016 to 2020 when incorporating climate mitigation and adaptation costs. Excluding China, the gap for the remaining economies rises to a much higher 5 percent of their projected GDP.
One of the most important trends affecting the need for infrastructure investment is population growth and demographic changes.
Michael Burns, a partner with PwC Australia, says “population growth is always going to cause pressure for governments to provide greater infrastructure because infrastructure provides you with capacity, but also fighting against congestion – especially when we are talking about transport infrastructure”.
It is migration rather than natural population growth that is likely causing governments to take pause and reassess their needs.
“If you look at the numbers it is quite staggering,” says Frank Kwok, head of Asia-Pacific at Macquarie Infrastructure and Real Assets. “Over half of Asia’s populations are now living in urban cities and half of the world’s middle class are living in the region. And it is the middle class that is demanding more and better infrastructure.”
For that reason, Kwok notes, core infrastructure – things like toll roads and transportation – are still very important opportunities in places like India, for example.
Others in the industry agree. Prateek Maheshwari, managing director with OMERS Infrastructure, says the “increasing population, rising middle class and educational levels all feed into a propensity to spend [on new and improved infrastructure]”.
The region, much like the rest of the world, is taking a second look at energy and how it can be more sustainable and renewable. “There is a very strong realisation of decarbonisation especially in a region that is dependent on coal,” says Maheshwari. This move towards “energy transition” is a very big theme in the region.
Sharad Somani, partner and head of infrastructure, KPMG Asia-Pacific, says green capital is becoming more available from investors, especially as sustainable infrastructure attracts investors. “The Asia-Pacific region is in a position to take advantage of that wave,” he adds. “For example, Vietnam is going to install 12GW of wind by 2025 out of which 7GW is already approved for commissioning.”
A recent example of these opportunities occurred in June 2020. Sharp Energy Solutions Corporation completed a mega solar power plant in Ninh Thuan province, Vietnam, which is expected to generate more than 76,000-megawatt hours per year. The plant is the newest addition to SESJ’s five other existing solar power plants in the country.
And the opportunity does not end there. Vietnam’s energy demand is expected to rise by over 9 percent from 2021 in the next decade. The Ministry of Industry and Trade, in a draft report, forecasted that Vietnam will need about $128.3 billion of investment to develop its electricity industry in the 2021-30 period.
Bright prospects for China
Of course, China is the world’s largest manufacturer and installer of solar photovoltaic power systems. The country has set a target to be carbon-neutral by 2060. Its latest five-year plan for energy shows it could increase annual installations of solar power generation capacity to as much as 85GW, about double the country’s current rate. Last October, the country brought a 2.2GW solar farm online – it is currently the world’s second largest in terms of generation capacity.
“So, the investment opportunity in renewable energy is pretty huge,” says Somani, “and this is also working as an advantage for the emerging countries in Asia-Pacific… and it is a compelling case for all utilities to develop as much renewable energy as possible.”
He adds that much of the money being invested in the region is coming from China, Japan and even the Middle East. So far, says Somani, while North American developers and strategic investors are not very active, institutional investors have started to invest in brownfield transport and RE opportunities in the region.
Others agree, like OMERS Infrastructure senior managing director, Asia-Pacific Christopher Curtain. Speaking about Australia specifically, he says the energy transition story will continue and present interesting investment opportunities. “It is an evolving space, but there is a general need to invest capital, decarbonise the grid and present new opportunities to customers and users and the general society as a whole. So, we think it is an interesting space to continue to monitor. Sustainability is important in general and will drive a lot of opportunities in different sectors.”
Certainly, the global pandemic has highlighted the need for reliable digital networks to allow people to communicate and work safely from their homes. The trend towards flexible work was occurring anyway and covid-19 accelerated it further. The infrastructure around digitisation and data has become even more important as a result, especially in Asia-Pacific.
“The exponential growth in the Asia-Pacific region, where in countries like China and India, 20 years ago people did not have mobile phones and have gone from nothing to 3G and 4G, we have seen the take-up of data grow significantly,” explains Kwok.
He adds that combining GDP and the growing middle class, you see the demand for assets such as cell towers and data centres having even greater opportunity in Asia-Pacific than elsewhere, where some of that infrastructure is more built-up.
Even as the sectors and infrastructure needs are being addressed today, other areas are already being considered for future investments, such as a focus on smart cities, for example, and electric vehicles coming online. Somani says that while the opportunities are high in these areas, so too are the risks. It is in these areas, he adds, that multilateral banks are becoming more important and interested.
Investors keen on the region need to also consider their local knowledge of markets given the diversity of each country. “The key thing for us is understanding the local market,” says Kwok. “That is why we have teams in eight countries across the region searching for, investing and managing our portfolio companies because the dynamics in each country are so very different and being on the ground is absolutely critical.”
It is the diversity of the Asia-Pacific region that can make investment challenging but also rewarding for large-scale investors. For the region itself, infrastructure is a means to an end.
Says Burns: “A natural reaction by governments to a large financial crisis is to build and grow your infrastructure base. Because investments in infrastructure create a lot of jobs, they tend to be engineering-heavy projects so if you are trying to direct economic stimulus, infrastructure is a way of doing that.”