Asian governments must source long-term financing from cash-rich pension funds in Europe and the US to fill an $8 trillion infrastructure black hole over the next decade, according to leading experts.
Western pension funds are increasingly looking to Asia as they are hamstrung domestically by historically-low sovereign bond yields, jittery equity markets, and a continued economic and political uncertainty in the eurozone.
However many funds look to Asia with caution, balancing the need for yield with lingering concerns about a region where state-led infrastructure projects and private sector capital have not always mixed.
Many said there were clear benefits accruing from matching Western capital with Asian demand for projects ranging ports and railways to hospitals. “The sheer quantity of long-term duration investment needs from pension funds in the Western world alone could buy all the infrastructure in Asia five times over,” said Spencer Lake, co-head of global markets at HSBC.
Hank Morris, North Asia adviser at Hong Kong-based alternative asset manager Triple A Partners: added: “There is definitely growing interest among Western pension funds in supporting Asian infrastructure.
“We are seeing more money flooding in all the time, and Asian funds themselves are starting to join forces with global institutional investors. Local money is starting to realize that Asian infrastructure has potential.”
Asian infrastructure is seen by many as central to the region’s economic growth. Hiroshi Watanabe, vice president at Japan Bank for International Cooperation, told Emerging Markets that much private sector finance currently ended up being invested outside the region, or diverted from infrastructure projects.
“We need to work out how to develop the region’s capital markets and to mobilize and utilize Asian money within Asia,” he said.
Asia has a mixed record with infrastructure projects that blend public financing with private capital. Malaysia has become a standard-bearer in recent years, rolling out a series of successful public-private power projects.
Lake at HSBC said investors would be attracted to the sector if Asian governments worked together to build a cohesive legal and financial framework. “They would like to have a mechanism to come in, in size, and fulfil the huge chunks of their portfolios that are allocated to long-dated, emerging markets-oriented infrastructure investments,” he said.
Yesterday ASEAN launched a $485 million fund to pump capital into infrastructure projects around the region. The ASEAN Infrastructure Fund (AIF), funded largely by the ADB, which stumped up $150 million, and the governments of Malaysia and Indonesia, who pledged $150 million and $120 million respectively, will fund up to six sovereign infrastructure projects a year, with a maximum lending cap of $75 million per project.
Nag told Emerging Markets: “The aim is to get a track record, and get a AA rating on the projects, which will mean that central banks will be able to invest in them,” Nag added.
Total lending to infrastructure projects by the AIF alone will total $4 billion by 2020, but adding in investment from central banks and, ultimately, private investors, Nag said that number could be leveraged to more than $13 billion.