Asia’s Trillion-dollar Test

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It is the world’s busiest passenger railway. It carries 23 million passengers a day, operates 65,000km of track and employs more than a million people. But India’s rail network requires significant investment to bring it into the 21st century.

Prime Minister Narendra Modi’s government is planning to spend about USD125 billion on India’s rail system between 2015 and 2019 as it targets infrastructure schemes to drive economic growth.

It is just one of many infrastructure projects across Asia that require huge investment. Schemes worth trillions of dollars are in the pipeline, from major tunnels and bridges in China to new power stations in Malaysia.

HSBC economists estimate that USD11.5 trillion must be invested just in urban infrastructure by 2030 to meet the needs of Asia’s fast-growing cities.

The need for such projects is clear. Good infrastructure provides the basis for successful economies. And as Asia’s population continues to expand, a growing middle class has increasingly high expectations of transport, power and other civic amenities.

HSBC economists estimate that USD11.5 trillion must be invested just in urban infrastructure by 2030 to meet the needs of Asia’s fast-growing cities. China and India require hundreds of billions of US dollars to counteract past underinvestment and adapt to future needs, while the 10 member countries of the Association of Southeast Asian Nations have a long wish list of energy, transport, power, water, waste and other projects.

But who will pay for these schemes?

Multilateral organisations such as the World Bank and the Asian Development Bank have long played a key role in funding Asian infrastructure and the former has already approved billions of US dollars in loans to support India’s rail upgrades.

Individual governments have also made substantial commitments. India has set up the National Investment and Infrastructure Fund, while Japan announced in May 2015 that it would make USD110 billion available for infrastructure projects across Asia. And China has set up its Silk Road Fund, pledging USD40 billion to develop new high-speed railways, bridges and ports in Southeast and Central Asia.

But more investment will be needed – and some regional leaders are exploring new partnerships to help meet this challenge.

China, for example, recently launched the Asian Infrastructure Investment Bank (AIIB), which is backed by 56 other countries. Starting with USD100 billion in capital, the AIIB will focus on developing infrastructure in Asia, prioritising power generation, energy, transport, rural infrastructure, environmental protection and logistics.

Two of the AIIB’s signatories, Indonesia and Turkey, have also founded the Islamic Investment Infrastructure Bank in conjunction with the Islamic Development Bank. This will support infrastructure projects using Shariah-compliant financing techniques.

Partnerships between government and private-sector companies (public-private partnerships), backed by financing from a range of sources including bank funding, will also continue to play a crucial role in plugging Asia’s infrastructure funding gap.

Finding funding for large infrastructure deals around the world became harder after the global financial crisis. Yet many banks, including HSBC, stayed active and continue to arrange and advise on infrastructure deals, particularly in the difficult-to-fund construction and early post-construction phases of projects.

Similarly, pension funds and insurance companies, often working with banks, are increasingly helping to finance infrastructure. They are attracted by the long-term cash flows that infrastructure projects tend to produce, which match their own long-term responsibilities. In more mature infrastructure financing markets, such as the UK and North America, institutional investors have participated in bond issues and invested in equity. They are now eyeing similar opportunities in Asia.

There is, then, appetite from a wide variety of organisations to fund Asia’s infrastructure. But there are still hurdles to overcome.

Not all projects will make the kind of returns that will satisfy investors, who want to know that a new toll-road or waste water plant will generate the cash flows to cover their investment. In some markets, lack of transparency and a weak regulatory or legal environment mean deals will not be suitable for public-private partnerships. In other cases, government or other guarantees will be necessary to reduce risk and make infrastructure deals palatable.

Asia’s infrastructure challenge is great. Meeting it will require a new level of co-operation between governments, multilateral organisations and the private sector.