Mainstream Asean infrastructure financing as an asset class: Heng Swee Keat

“The goal is to draw in private sector participation on projects that provide reasonable returns with reduced project volatility,” said Mr Heng (centre).
APRIL 05, 2018 - 8:00 PM

ASEAN finance ministers on Thursday pitched their countries' infrastructure projects and steps taken to mitigate the risks for investors.

Led by Singapore Finance Minister Heng Swee Keat, they called for a collective effort which would be more efficient in meeting international investors' concerns.

While Asean countries have been successful in tapping the private capital market for infrastructure financing, it is also time to step up efforts, said Mr Heng, who was the keynote speaker at the World Bank Singapore Infrastructure Finance Summit.

Last year, Indonesia's second biggest power producer PT Paiton Energy's US$2 billion project finance bond attracted some US$9 billion orders.

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"The opportunity set is large but much work is needed to mainstream Asean infrastructure financing as an asset class," said Mr Heng.

The Asian Development Bank estimates that, for the 15-year period from 2016 to 2030, Asean's infrastructure investment needs will total US$2.8 trillion or US$184 billion per year.

Asean needs to increase the visibility of its investment opportunities and projects, said Mr Heng.

"We need to showcase the good projects available in each country, as well as promote Asean as an investment bloc," he said.

In the energy sector, there are about 77 renewable energy projects in hydro, solar, wind, geothermal and biomass, geographically spread out across Asean.

In transport, rapid urbanisation and increased mobility have raised demand for transport infrastructure and more efficient transport networks. There are 219 road and bridge projects alone in the pipeline in Asean.

Mr Heng said Asean has to improve the bankability of its infrastructure projects, at the individual project level.

"The goal is to draw in private sector participation on projects that provide reasonable returns with reduced project volatility," he said.

Where the expected revenue may not cover costs fully, governments can step in to increase its bankability by providing co-funding, raising user charges, or extracting additional funding from value created from the project.

Where there are sufficient revenues to cover cost but exposure to certain risks remain high, risk-mitigating measures such as government guarantees and credit enhancements can come into play to reduce the risk premium.

Multilateral development banks can play a role too, he said, citing the World Bank International Finance Corporation Managed Co-Lending Portfolio Program. The programme facilitates the participation of institutional investors in infrastructure by allowing institutional investors to invest in infrastructure loans originated by the IFC, with some first-loss protection, and to enjoy benefits of scale and diversification through investing on a portfolio basis.

Mr Heng also called for standardised documentation and said appropriately drafted public private partnership contractual provisions will provide investors with greater assurance.

Singapore's Infrastructure Asia office which launches this month will harness the collective capabilities of public sector agencies and private sector firms, and partner with key stakeholders across the region to catalyse more project opportunities to meet Asia's infrastructure needs, he said.

One of its key initiatives will be to develop a multi-year capacity-building programme for regional government officials.

Brunei Minister of Finance II Mohd Amin Liew Abdullah said his government partners with the private sector to set up a holding company operating it commercially to raise funds for the country's seaport, telco and transportation projects.

Indonesia has 245 projects in the pipeline costing US$327 billion and the government can cover less than 20 per cent of the cost, while another 20 per cent will come from state enterprises, said Finance Minister Sri Mulyani Indrawati.

"The private participation is really necessary," she said.

The government has taken steps to allay investors' concerns on land acquisition risks, construction risks and government policy risks, she said.

Ms Indrawati also said it is inefficient for a country's finance minister to contact each institutional investor and called for an Asean institution to showcase the region's infrastructure projects.

"I have to travel and be in Parliament," she said.

Thailand has changed the public private partnership (PPP) law to make it more promotional and fast track projects, said Finance Minister Apisak Tantivorawong.

The previous PPP focused on procedures which meant transactions could take up to 24 months.

The revised PPP law also sets out certain returns for investors, he said.

Thailand will also launch an infrastructure fund later this year, he said.

Surya Bagchi, Standard Chartered Bank global head, project and export finance, said there is an increasing trend of private sector investors interested in funding infrastructure projects.

"This ranges from commercial banks which are skilled in assessing projects during their construction phase to infrastructure and pension funds, insurance companies which prefer the long term stable yields and good credit ratings of completed projects.

"In order to unlock the potential for private funding into infrastructure, the projects in the region need to be structured to be bankable so that they can meet the credit rating guidelines of the private sector," he said.