Here's an article of interest though from yesterday's AFR.
Asian trillion-dollar infrastructure spend transforming region
http://www.copyright link/content/dam/images/g/r/9/x/n/j/image.related.afrArticleLead.620x350.gr968n.png/1473240117113.jpg
Sarah Shaw from 4 Dimensions Infrastructure says it has focused on regulated utilities and pay-for-use assets, Danielle Chloe Potts
by Mark Abernethy
The numbers can be overwhelming. The amount of money invested into Asian infrastructure between 2015 and 2025 is expected to be about US$5.3 trillion ($7 trillion), and in 10 years will be worth about 60 per cent of the world's infrastructure spending.
According to PwC and Oxford Economics, in roads alone the Philippines will increase its infrastructure spending by about 300 per cent between 2010 and 2025, and China about 250 per cent.
In its 2016 report, Infrastructure Australia says that by 2031 Asia will represent about two-thirds of the world's middle-class population, creating huge demand for Australian produce and skills.
The Asia Pacific region's populations are moving to the cities at the greatest rate seen, necessitating root-and-branch rebuilds of every type of public infrastructure from connectivity constructions – roads, rail, ports and airports – to social infrastructure – schools, hospitals, universities, technical institutes and aged-care facilities – and modernising infrastructure such as power networks and stations, telecom, and hydro-electric dams.
http://www.copyright link/content/dam/images/g/r/9/z/t/a/image.imgtype.afrArticleInline.620x0.png/1473140258260.png
Along with this comes the inevitable government build-out that involves everything from office buildings and depots to defence and law-enforcement investment, and municipal services infrastructure of water, sewerage and drainage.
One infrastructure fund manager who spoke to The Australian Financial Review said the investment community was working towards an expected massive infrastructure spend in Asia over the next three years, of which a third would be provided by sources external to the Asian economies.
Chris Heathcote, chief executive of the Global Infrastructure Hub, says the massive build-out of public infrastructure in the Asia-Pacific region is already starting and it has a lot to learn from the Australian industry in particular, and the global industry in general.
Productivity gains
"The productivity gains from building the right infrastructure, and the multiplier effects from that investment, are incredibly important to our region at the moment," says Heathcote. "Just as there's an opportunity to get it right, it's also an expensive exercise to get it wrong."
Global Infrastructure Hub is an initiative of the G20. It's a not-for-profit organisation that seeks to produce best-practice guidelines and a certain amount of standardisation, so that infrastructure projects have the best chance of meeting their objectives.
He says Australian infrastructure players are so experienced in the design-fund-build-operate system of infrastructure – especially in public-private funding arrangements – that their expertise is needed in the Asia-Pacific region.
"There is a wall of cheap money available to governments right now," says Heathcote, "but if you make the wrong decisions on your infrastructure, you live with the consequences for a long time."
He says Australian companies essentially invented the modern public-private partnership (PPP).
The important work that grew out of the Australian PPPs was not so much the finance but the risk-apportionment.
"When you look at misunderstandings and mistakes in funding and building infrastructure around the world, it's the risk-apportionment that the players get wrong," says Heathcote. "Which part of the public-private partnership is assuming which risk, and at what cost? Having a model for that fundamental part of the project is invaluable to the governments in Asia, and Australia has all that experience and expertise."
Strong position
He says Australian contractors, financiers and advisers are in a very strong position with the wave of infrastructure building, and it is crucial for these nations to get the correct advice because the multiplier effect of infrastructure – between 1.5 and 2.5 times initial investment, in the general economy – can only happen if the infrastructure is the right quality and not too expensive.
"You don't want the multiplier effect taken up in paying too much for it," he says. "It's hard to get the economic benefits if you overpay."
Heathcote says the opportunity for Australia's infrastructure industry is not confined to planning, funding and building new projects and cites three tiers of infrastructure: maintenance, removing pinch-points, and new projects.
"There's going to be as much work in the first two tiers as there is in new projects," he says. "As these emerging countries build the new roads, power networks and airports, making the most of what's already there will be an important part of the mix. Australian companies will be involved in that, too."
The role of Australia in the infrastructure of emerging markets is also manifested in investment. Sarah Shaw, global portfolio manager at 4D Infrastructure, says funds such as hers are booming because of the growth of infrastructure assets in these markets.
"We're focused on regulated utilities and pay-for-use assets, such as toll roads and tunnels," she says.
4D Infrastructure has a fund which has a concentrated investment portfolio of 30-60 listed global infrastructure stocks.
Chronic underspend
Shaw says with between $US60 trillion and $US70 trillion needing to be spent on infrastructure in emerging markets, there is a large gap that can be filled by external private investors, including Australians.
"A chronic underspend on critical infrastructure over the past 30 years – in virtually every nation – has created a steep demand to not only stymie the deterioration of infrastructure, but also accommodate the demands of a growing population.
"The emerging middle class, especially in developing economies, continues to demand more and improved infrastructure."
She says the burgeoning middle classes in emerging markets such as China, India and members of ASEAN have greater needs, and use more infrastructure.
For example, fewer than 10 per cent of the population of China own a car. "As car ownership picks up, they need roads to drive on and it doesn't matter if they drive a Hyundai or a Porsche. So we invest in building and operating toll roads."
Similarly, only 5 per cent own a passport, yet "they're already turning up as tourists in huge numbers. As more Chinese own passports, there will have to be more airports. So we invest in airports."
Shaw says some of the emerging markets are realising that they need capital from an asset sale, while also wanting more productivity out of an existing public asset. So they are "privatising" or "recycling" the assets into private ownership.
While the Asia-Pacific nations are looking to government-funded projects and PPPs, in Latin America there is an established listed infrastructure market as the governments of Brazil, Mexico and Chile attempt to shift the ownership of assets to the private sector and make users pay for the infrastructure.
Shaw says the risk is not as great as the term "emerging markets" suggests, and that most of the risk assessment is about looking at sovereign risk and the quality of securities law and sharemarket regulation in the investment country.
She also says that some of the emerging nations are more sophisticated and forward-thinking in their infrastructure programs than more developed nations: "The United States is not very advanced in private ownership of public infrastructure assets."
Supportive policies
Shaw says 4D Infrastructure favours emerging Asia and Latin America for infrastructure investment. She says Indonesia has a big focus on infrastructure investment with supportive policies for operators willing to invest; China has sustained domestic demand; and India has a young population to support a sustained period of economic growth.
Jon Howie, head of iShares Australia, says the infrastructure industry is taking on funds as the demand for construction continues in emerging economies.
He says $US7 billion flowed into the "ETI" infrastructure ETF since the beginning of the year – in Australia it is available as "EEM".
On the Australian exchange is an ETF called "IEM" – an iShares BlackRock infrastructure fund which covers 840 global infrastructure stocks in 27 countries.
"We have a really big investment in infrastructure in the emerging markets, as these countries become more middle class and upgrade their infrastructure to the OECD's level."
Howie says the "IEM" fund has risen 20 per cent since January 1, and another ETF – the "IHEB", which covers emerging markets government bonds in the "IEM" countries – has risen 16 per cent since January.
He says infrastructure building in emerging markets is stimulating the bond and fixed interest markets.
"Institutions are the main buyers of the 'IHEB'," says Howie. "There's a 4.7 per cent yield to maturity on the ETF, and you get broad exposure to emerging markets."