Roadblocks and breakthroughs In Asia-Pacific infrastructure finance

June 14, 2018

HONG KONG - Institutional investors are eager to play a greater role in financing Asia-Pacific infrastructure, but a number of roadblocks can limit participation, S&P Global Ratings says in a report published today.

"Infrastructure offers long-duration investment opportunities and tends to have a lower default rate than the corporate sector," says S&P Global Ratings credit analyst, Richard Langberg.
 
But in Asia, investors often have trouble finding deals that match their mandates and risk settings.
 
“For example, greenfield infrastructure projects in the region's emerging markets are often subject to frequent delays due to land acquisitions, right-of-way and environmental clearance issues,” the report says.
 
“Thus, some investors would prefer to provide financing at a later stage in the process.”
 
New instruments such as Komodo bonds in Indonesia (first issued in 2017) and Masala bonds for India (2016) provide a wider international investor base to the issuing companies without exposing them to currency risk, the report says.
 
However, limited options to hedge long-term foreign-exchange is a drawback for investors. Shifting regulatory frameworks are another constraint.
 
"Institutional investors are seeking commercially viable projects with good cash flow visibility," says S&P Global Ratings credit analyst, Abhishek Dangra.
 
"Regulatory uncertainties create risk premium and risk aversion."
 
China recently halted its generous subsidy program for solar-power investments, while announcing a plan to gradually reduce tariffs for renewable energy to gradually bring them in parity with other fuels.
 
"There is tension between China's goal to liberalise electricity markets and also promote renewable energy," says S&P Global Ratings analyst, Gloria Lu.
 
"As a result, we can get surprises even in segments viewed favourably by the Government."
 
In Australia, the report says, regulators and business are having some robust exchanges over pricing issues. The country has also seen some disputes on a number of
public-private partnerships (PPPs).
 
"Australian PPPs remains a strong asset class,” says S&P Global Ratings credit analyst Richard Timbs. Looking back over the past decade, we'd find that 90%-95% of these structures go smoothly, without major challenges or disputes.
 
"(Australian) State Governments have strong and clear guidelines in place for development of PPPs."
 
The report looks at other frequently asked questions in the infrastructure sector, including "green bonds" for clean-energy projects, renewables sectors in India, and the potential for more credit guarantees by multilateral institutions on major projects.  www.standardandpoors.com (ATI).