Investor Comfort The Pace Of In by jianglifang


									                                                                        April 14, 2010

Investor Comfort? The Pace Of
Infrastructure Development In Asia
Depends On It
Primary Credit Analyst:
Ian Greer, Melbourne (61) 3-9631-2032;

Table Of Contents
Diversity across Asia creates different development needs
Pension funds are a good litmus test
Investor comfort can be enhanced by solid institutional frameworks
Early-support mechanisms also have their place                                                   1
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Investor Comfort? The Pace Of Infrastructure
Development In Asia Depends On It
Post crisis, the idea of investor comfort has been much bandied about--hardly surprising in a global market in need
of a panacea to soothe frayed nerves and restore confidence. But when it comes to infrastructure, we see investor
comfort not so much as panacea but as paramount. In a region as diverse as Asia, in which each country has specific
infrastructure needs and faces different challenges, foreign private investment is comparatively low and has been so
since the Asian Crisis of more than a decade ago. Investors point to the need for policymakers and regulators to
create attractive and rewarding operating environments in which investors can operate. Investors need to know that
risk is reasonably balanced against a transparent and consistent regulatory environment that is enforced in a fair
manner and that regulators have the resources and policy support needed to meet global-best-practice standards.

Diversity across Asia creates different development needs
When discussing infrastructure in Asia, it is important to take a granular view of the region from the outset. Asia is
not homogeneous, and nor are the development needs and ambitions of its many countries. India urgently requires
basics such as roads and power to maintain its strong growth, while more advanced countries such as Japan need to
invest in upgrading and replacing existing infrastructure. General attitudes vary, too. China, Japan, and Korea tend
to be more outward focused, keen to export their own skills and equipment through investing in infrastructure
beyond their own borders. Similarly, some countries have a need for foreign investment if they are to maintain their
growth; here, private investment is not an alternate form of procurement but, instead, fills a funding gap and enables
much-needed projects. Last year, for example, India accounted for about 9% of all global project finance. Across the
region there are also various levels of skills and experience; some countries are more willing to bring in and learn
from foreign expertise while others privilege self-sufficiency and prefer to learn from their own mistakes. Finally,
countries themselves are granular; in India, for instance, the variations are geographic in that some states such as
Gujarat and Maharashtra have more-developed policy environments to support infrastructure spending than others.

Instead of dwelling on the existing inadequacies that hamper infrastructure investment in Asian countries to varying
degrees, we will focus here on the institutions and practices that investors have said they prefer any country to
have--and these are by no means exclusive to Asia--in order for them to feel confident enough to commit funds and
to take on risk. The urgency surrounding the need for these conditions cannot be overstated; it is by now a
hackneyed truism that infrastructure development in Asia's emerging economies is sorely needed, and lots of it; the
Asian Development Bank (ADB) calculates $750 billion is required per year, from 2010 to 2020, to meet Asia's
basic infrastructure needs. Megatrends forecasted for the next few generations will see population growth soften in
the world's developed countries and rapidly expand in emerging economies such as those in Asia. In many countries,
foreign direct investment--and, indeed, active involvement--in projects is essential to support the pace of growth to
fuel the development required. The region's public sector, however, may not have the capacity to fund all of it.

Pension funds are a good litmus test
Because pension funds have long-term needs matched by infrastructure, we believe that a salient question to ask
when assessing investor comfort is--would a pension fund invest in this project? Pension funds generally have tightly

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                                 Investor Comfort? The Pace Of Infrastructure Development In Asia Depends On It

regulated investment limits, very conservative risk tolerances, and will only become involved with soundly
creditworthy entities. And it is in pension funds that a lot of Asia's available savings reside; indeed, a key issue for
the region is finding ways to unlock this money for sound, long-term infrastructure projects. While they already
invest indirectly through deposits with banks, this is limited and being short-term means that it's not an ideal
funding mechanism for infrastructure. Creating direct investment will stimulate a domestic capital market, a goal for
many Asian countries. Indeed, when fundamentals such as good creditworthiness are in place, funds and
infrastructure projects enjoy a very close match of investment horizons. For example, one such fund from Korea is
one of several co-investors in a landmark desalination project in the Australian state of Victoria. The attractions of
this project for such an investor include: tangible state support, a strong and predictable policy environment; the
backing of a diverse, international banking group with experience in desalination and project finance transactions; a
similarly well-credentialed equity group; and an experienced and diversified design-construct consortium.

Investor comfort can be enhanced by solid institutional frameworks
To examine the fundamentals of investor comfort more specifically, we believe that the framework for creating
favorable conditions could well start at the institutional level. In a recent working paper, the ADB pointed out that
these institutions can be formal (constitutions, laws, regulatory bodies and their mandates) and informal (codes of
conduct and cultural norms and the like). A particularly important recent trend is the expanding role local
governments are playing, as market facilitators and as regulatory bodies mandated to create fair and level playing
fields for infrastructure investors. As investors have said time and again, a project's attractiveness depends heavily
on whether local authorities and those appointed to implement regulations are willing and able to do so without
fear or favour. No investment environment will ever be free from the concerns of the real and political world, but to
attract funds--domestic and foreign alike--investors will want a system in which clarity, fairness, and consistency
form the bedrock on which they can make decisions about risk and reasonably predict returns. The promise of
recourse to proper legal representation is also crucial; jurisdictions in which contracts, for example, are enforced
fairly by the courts are immediately more attractive to outside investors.

More broadly, a key question for those contemplating involvement in any project is: who is looking after the
interests of investors? Before the global financial crisis, monoline insurance companies--whose sole business was
credit enhancement--provided not only credit enhancement but also skills and an alignment of interest with
investors. This produced an environment in which pension funds could be unlocked and which saw the creation of a
capital market in infrastructure debt. Similar structures are now being investigated in Asia.

Investor comfort is obviously premised on those involved in a project being highly expert in their fields, but perhaps
less discernable at the outset is how willingly those in authority (government, legal, regulatory) are also prepared
and, indeed, mandated to assume ultimate responsibility that lasts for the duration of a project. Perhaps even more
fundamental is the question of whether those in authority effectively have the power and processes to make
responsible and relevant changes to legislation to create a more enabling investment environment.

Also at the institutional level, the involvement of multilaterals such as the ADB and World Bank, and other
organisations such as the Japan Bank for International Cooperation and the Australian Agency for International
Advancement (AusAID), can be an effective way to attract investors. When these organisations lend their names,
their credit quality, and their financing experience to projects--for example, AusAID, the World Bank, and the ADB
joining forces to help get a bridge built in Vietnam's Mekong Delta--the financial management capacity of a project                                                                                     3
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                                               Investor Comfort? The Pace Of Infrastructure Development In Asia Depends On It

is enhanced along with the level of comfort investors will experience in committing funds.

The way a country generally goes about its business, while less clearly defined than codified practices and
institutional frameworks, is no less important to investor comfort. How transparent is the bidding process? What
are the grey areas? Do government-related and other entities operate at arm's length from one another, or are they
inextricably entwined? Investors are looking for environments in which there's a clear demarcation between the
private and public sectors, there's adequate transparency around sources of funding, and where entities' good credit
standing enables bond issuance to flourish.

Early-support mechanisms also have their place
A key final point is that, with scarce resources, projects would logically be selected based on carefully-thought-out
rationales and conceived of as part of a larger and longer-term plan, rather than at the suggestion of a private
investor. This will mean that from time to time projects may need a boost to be commercially viable enough to
attract private funds. Investors have found a degree of comfort in early-support mechanisms such as viability-gap
funding, a partial government subsidy used widely in India and Korea that allows a project to get off the ground and
be commercially attractive. And in Indonesia there's the Indonesia Infrastructure Guarantee Fund, which is funded
by the World Bank and set up specifically to guarantee the government's ability to fulfil its obligations to a project.
The World Bank also wants the fund to be a central analysis point to ensure that the developments it enables have
strong business cases. While the long-term attraction of infrastructure as an asset class hinges on the evolution of
sophisticated and lasting institutions, the pragmatics of shorter term solutions such as viability gap funding and
guarantee funds cannot be overlooked as emerging economies search for ways to lure investor funds and unlock the
region's vast savings.

The private-sector funding of infrastructure is not the panacea for all problems, but by creating the right investment
environment many countries have found other benefits such as the creation of a domestic capital market.
Governments have reported that the processes needed to attract private funding have also improved general
government procurement and the efficient allocation of funds. As Asia's policymakers and market participants look
for viable and sustainable ways to promote regional growth in the wake of the global economic downturn, policies
and practices that increase investor confidence will form an increasingly important part of a shared vision for Asia.

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