S'pore as global hub for infrastructure finance

THE global infrastructure finance market will grow to US$9 trillion (S$12.8 trillion) by 2025, according to projections by PricewaterhouseCoopers (PwC), with half of that amount accounted for by emerging markets. This is three times greater than the current notional size of the global over-the-counter (OTC) market in commodities and equity-linked instruments combined.

Global projections of real GDP growth point decisively towards a shift to the rapidly urbanising emerging markets, which predominantly are in Asia. Major Western economies, accounting for 58 per cent of global GDP in 2000, are expected to account for less than 42 per cent by 2030. In contrast, Asia/Oceania's share of the global pie will jump from 22.4 per cent to 36 per cent over this same period. Emerging Asia's share of infrastructural spending is expected to grow from 30 per cent to 48 per cent from 2012 to 2025.

Sovereign wealth funds (SWFs) are the key investors in infrastructure. Asian SWFs dominate the infrastructure asset class with China leading, followed by Abu Dhabi, Singapore, Kuwait and South Korea.

As a growing asset class, infrastructure needs capital markets scalability, risk sharing and marketability so that investors can seamlessly allocate their infrastructure holdings using advanced portfolio management techniques available to institutional managers of already marketable asset classes. Currently, the infrastructure market is nascent, fraught with liquidity, regulatory and transparency issues.

Herein lies an opportunity for Singapore. Ironic as it may seem, despite its limited land, Singapore's financial expertise, human capital and ability may well see it as the next-generation infrastructure finance hub and ecosystem for Asia.

Infrastructure investors - such as sovereign and pension funds, and insurance corporations - look for steady, predictable and guaranteed cash flows. Among alternative investments, infrastructure accounts for the largest proportion in sovereign wealth funds' asset allocation. Of this, 79 per cent have a dedicated allocation to it compared to less than 40 per cent among long-term liability investors.

Although infrastructure is already a de facto asset class, it has the potential to grow as it becomes more creditworthy and liquid. Infrastructure plays can become substitutable for other asset classes like fixed income. Once investors in the more liquid and long-term asset classes feel comfortable enough to reallocate assets to it, the infrastructure market will expand. However, for this market to have liquidity, it is imperative that it is prudently regulated with well-capitalised institutions.

Currently, the risk management needs of infrastructure are scarcely met. An ecosystem that provides regulation, dispute resolution, asset recovery, price discovery, market making, liquidity and settlement needs to be enabled.

Despite possible sovereign guarantees, sometimes backed by multilateral agencies, infrastructure projects can still go awry. A case in point would be instructive.

The Indonesia Infrastructure Guarantee Fund (IIGF) is a single-window institution which is well capitalised and rated AA- for the appraisal and approval of Public Private Partnership (PPP) projects requiring government guarantees.

The IIGF's presence notwithstanding, a recent highly publicised Indonesian government-related incident - where the nature of a large infrastructure project and post-funding sovereign commitment were vastly altered during the course of its implementation - highlights the potential need for infrastructure finance market reform from the PPP perspective. It is one that requires careful pre-planning, sufficient transparency and governance, and time-consistent policies, along with the right sovereign credit assurance when necessary.

It is imperative that the current lack of non-financial project performance guarantees for global markets (where consistent governance standards can be applied across countries) is addressed and implemented on a priority basis. This should also be part of the infrastructure finance ecosystem structure, similar to the federal guarantee for infrastructure bonds in the US.

While investors tend to view infrastructure assets as long-term cash flows that provide them with asset-liability management capability, the OTC nature of this market tends to inhibit this capability. This forces infrastructure to be clubbed with private equity-type investments, creating hedging that is approximate, "noisy" and dependent on listed infrastructure indices. Again, the need for a clear, listed, transparent financial market in infrastructure is apparent.

Singapore clearly emerges as a prime location for an infrastructure finance ecosystem as it is highly rated; business-friendly, with a fully functional and robust infrastructure and regulatory system; safe; and easily accessible. And to top it off, it is at the physical intersection of all the major parties, and is itself a major investment participant.

Apart from meeting all of the market-critical criteria, Singapore's performance from an infrastructure investment perspective has been outstanding - it has ranked as the world's most attractive market for infrastructure investment for two years running given its leadership in knowledge, transparency and governance. Other structuring centres come in at a much lower rank than Singapore in this space.

The case is clear: Singapore can be a leading candidate for developing the infrastructure finance market.

As infrastructure asset allocation becomes more uniform across regions, there will be more standardisation in product development, origination and appetite as the market matures. By extension, there will be more trading, though not necessarily of the high-frequency kind.

The future capital structure of infrastructure assets are likely to develop: (1) as tranche-based hybrids, similar to asset-backed securities (ABS) and mortgage-backed securities; (2) as a form of Reit (real estate investment trust) to provide investors with liquid stakes in mature infrastructure assets and receive special tax benefits and high dividend yields; and/or (3) as plain-vanilla deferred coupon (or accrued interest) bonds.

As the infrastructure market grows and evolves into the next multi-trillion-dollar asset class, and if governed right and managed transparently, it will undoubtedly be the revolutionary equivalent of the ABS and Reit markets, and Singapore should be its rightful global hub.

Ranjan Chakravarty is a visiting research consultant at the Centre for Asset Management Research and Investments (CAMRI) at the National University of Singapore (NUS) Business School, where Joseph Cherian is Practice Professor of Finance and Director of CAMRI.

This article was first published on January 6, 2016.
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