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Infrastructure megatrend: Constructing an infrastructure...

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    Infrastructure megatrend:
    Constructing an infrastructure portfolio


    PAID POST BY CREDIT SUISSE
    Tuesday, 20 Jun 2017 | 1:34 PM ET

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    Building roadways and transporting water may sound like the purview of public works departments, but infrastructure is increasingly being recognized as a growing investment area. At the recent Credit Suisse Global Megatrends conference, a panel of experts discussed how providing such basic necessities can catalyze economic growth and higher employment rates in underdeveloped regions - and why private investors should consider putting capital toward them, particularly in Asia.



    Slow but steady

    Currently, institutional investors and pension funds allocate only a sliver of their assets – around 4 percent - to infrastructure projects, noted one panelist, Cledan Mandri-Perrott, head of infrastructure finance and PPP (Public-Private Partnerships), Singapore, The World Bank Group. Globally, private participation in infrastructure projects has declined from a peak of $217 trillion in 2012 to $30.8 trillion in 2016, according to World Bank data.


    Yet, infrastructure assets have some compelling features for private investors. As long as the infrastructure generates cash flows and returns, "it offers private investors access to a long duration asset with positive yield," a category that can be hard to find in the current low-interest rate environment, says Nannette Hechler-Fayd'herbe, head of investment strategy and research for Credit Suisse. They can also carry some significant social returns. Considering benefits such as improved health from clean water and shorter travel times on better roads, the average economic internal rate of return of infrastructure projects implemented by ADB (the Asian Development Bank) in developing Asia in the last 50 years ranged from 14.3 percent for air transport to 33 percent for conventional power generation, the report estimates.
    "Better investor protection, particularly cross border, is a key step in attracting private investors to infrastructure"
    The need for private investment in public infrastructure is growing, since, in many cases, governments simply aren't making the investments necessary to maintain economic growth. As it stands now, over 400 million Asians still lack electricity; roughly 300 million have no access to safe drinking water and 1.5 billion lack basic sanitation, according to a recent Asian Development Bank report that looked at infrastructure needs and spending in 45 Asian countries. To remedy those problems and help the infrastructure become more sustainable, the region will collectively need to invest $14.7 trillion in power, $8.4 trillion in transport, $2.3 trillion in telecommunications and $800 billion in water and sanitation projects between 2016 and 2030.

    Compared to current spending, that's a near-term gap equal to $459 billion, or 2.4 percent of projected GDP (gross domestic product) between now and 2020, noted panelist Michael Barrow, director general of private sector operations for Asian Development Bank. Excluding China, the gap widens to 5 percent of regional GDP. Case in point: Panelist Jose Lim, president and CEO of Metro Pacific Investment Corporation, noted that actual infrastructure investment in the Philippines is well below the government's target of 7 percent of GDP. As a result, only 60 percent of metro Manila residents receive piped water 24 hours a day.


    Shoring up the foundations of infrastructure investment

    To persuade more investors to engage in such investments, both the World Bank and ADB are advocating innovative approaches to attract more private investment in infrastructure. "Better investor protection, particularly cross border," is a key step in attracting private investors to infrastructure, says Hechler-Fayd'herbe. Developing project bond financing vehicles to attract a broad array of private investors is one key recommendation of the recent ADB report, with more credit guarantors and better credit rating systems. Creating stronger bankruptcy laws is another. "We have to think about not only de-risking projects but de-risking countries," says the World Bank's Mandri-Perrott. Investors can also buy shares of publicly-traded investment firms that specialize in infrastructure development and operation, such as Metro Pacific, or invest in projects directly to vary the risk profiles and return potentials of infrastructure projects.

    Power generation and transport infrastructure - Asia

    In terms of headline project areas, power generation and transport infrastructure are key priorities in Asia, as they "allow industry to develop and economies to grow," says Hechler-Fayd'herbe. In coming years, she expects affordable housing to rise to the top of the list. "Due to very low interest rates worldwide and a rapid urbanization in emerging markets, the cost of housing has gone up to such an extent that it has become unaffordable in many countries," she says. "We expect efforts to go in this direction, with again a role to play for private investors in coordination with the public sector."
    For more information, visit: gmc.credit-suisse.com/en/about-gmc/megatrends
 
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