Asian Infrastructure Opportunities - Why Now?
By HSBC Australia
Infrastructure construction will surge in Asia in the coming years as governments work together to address a shortage of transport, communications and power assets.
The surge in infrastructure projects will create millions of jobs, boost productivity and facilitate international trade, and will also create opportunities for global investors to fund the projects and for construction and services firms to build and operate them.
The B20 Infrastructure & Investment Taskforce estimates that by 2030 some US$60–70 trillion of additional infrastructure capacity will be needed globally, but under current conditions only US$45 trillion would be built, leaving a gap of US$15–20 trillion1. Much of this shortfall will occur in Asia. HSBC estimates that to 2025 Asia will require US$11.5 trillion of investment in infrastructure from urbanisation alone.
However, governments around the region and indeed around the world have recognised the importance of making up the shortfall and so are working together through several new initiatives to get more projects underway.
One Belt One Road
China is planning to build a New Silk Road for international trade, stretching from Shanghai and Beijing through Xinjiang to Kazakhstan, Pakistan, Afghanistan, before spreading into central and Western Europe.
Announced in 2013 by President Xi Jinping, the initiative will be a key part of China’s economic and overseas development plans for years to come and commits US$40 billion for infrastructure in the region.
One Belt, One Road aims to build a land-based economic belt and a maritime route with roads, railways, ports and airports. Its initial focus will be on infrastructure investment that promotes cross-border trade to ensure that goods, services and capital can flow easily on land (the “belt” connecting China, Central Asia, Russia and Europe) and sea (the “road” linking China to ASEAN, India and Africa).
This initiative is mutually beneficial for China and the countries it will be investing in.
The investment and construction boost could increase gross domestic product of countries in the region and provide less developed nations such as Pakistan, Bangladesh and Vietnam with power, transport and communications assets.
Frances Adamson, Australia’s Ambassador to China expects, the project to boost demand for iron ore and other raw materials which Australia exports to China and other countries participating in ‘One Belt, One Road’. Australian firms could also benefit from providing inputs to ‘One Belt, One Road’ infrastructure projects, such as design, engineering, environmental management and logistics, as well as accounting, financial and legal advice.
In the longer term, by improving connectivity around the region, Australia could also benefit from increasing demand for its exports. For China, it could help revitalise local industries where there is an excess of capacity, such as cement, steel and aluminium, and by promoting growth throughout the region, increase demand for its exports.
HSBC estimates the total investment in planned and started projects could reach RMB1.5 trillion in the coming years. The New Silk Road will involve public and private investors, as well as international organisations.
The Asian Infrastructure Investment Bank
China’s commitment to infrastructure in the region goes beyond the New Silk Road. It is also one of the founders of the newlyestablished Asian Infrastructure Investment Bank (AIIB).
With a proposed US$100 billion capital base, the AIIB will focus on the development of infrastructure and other productive sectors in Asia, including energy and power, transportation and telecommunications, rural infrastructure and agriculture development, water supply and sanitation, environmental protection, urban development and logistics.
At September 2015, approximately 50 countries had signed up to support the bank with initial capital contributions totalling US$50 billion and each country will have a share of the bank proportional to their capital contribution. China is the largest shareholder, with a 30 per cent stake followed by India, with 8.5 per cent.
Australia is the seventh largest contributor, with a 3.8 per cent stake and in September 2015 its Parliament passed legislation to formally enable it to become a founding member of the AIIB. The Government hailed the AIIB’s benefits for the Australian economy, saying local firms will have the opportunity to build some of the infrastructure and the initiative will open freight corridors that will allow Australian businesses to export more products to these markets2.
The AIIB will have a strong focus on investment, as Zhou Yuan, the head of strategy for the China Investment Corporation pointed out earlier this year. “If you can’t expect a return - that is, if you can’t expect infrastructure projects to pay you a dividend some time down the road, you can’t call that investment any more. You might as well call that a Marshall Plan,” he told a conference in Hong Kong in 20153.
The AIIB has a range of potential tools, from investing directly, taking a slice of the risk, providing guarantees or helping to ensuring the right advice is given up front to structure projects to be more attractive for outside financing and investment. It is expected to be operational by the end of 2015.
The Juncker Investment Plan
The European Union aims to unlock EUR315 billion in private and public funds for investment in infrastructure projects in Europe. While the plan is for infrastructure investment across Europe, at its eastern end it will link in with the New Silk Road initiative, boosting trade links between Asia and Europe.
“It just needs transparency and the will to work together. We must engage to make sure that our plans fit at both the macro level and the operational level,” European Commission President Jean-Claude Juncker said of the linkage in an interview earlier this year.
“I can see and I understand the motivation and value of China’s Belt and Road Initiative. The benefits are not just for China itself; Europe, too, stands to benefit from better connections with Asia’s dynamic economies.”4
By packaging up and structuring the projects, these initiatives will create new opportunities for infrastructure investors.
Many pension funds and sovereign wealth funds have mandates to put funds into infrastructure but can find it difficult to find suitable projects to invest in, and these initiatives will help fill the gap. Investors will be able to invest in a wide range of industries and risk profiles and across a wide geographic spread – ranging from advanced economics such as Singapore to less advanced destinations such as Pakistan.
Construction and engineering firms are obvious beneficiaries, but while the project costs grab the headlines, the trailing opportunities from some of these projects is huge, because they will also need to be maintained and operated.
For European or North American companies, Australia can offer a good stepping stone to Asia because it’s strong financial, trade and people links, as well as stable political environment and regulatory/legal framework. It is also the best place to start for a service provider which wants to expand into this part of the world.
Taken together, the infrastructure initiatives have the potential to boost economic growth and boost trade in the Asia-Pacific region and will create many opportunities for investors, builders and service firms.
1 The B20 Infrastructure & Investment Taskforce report, July 2014
2 Press release issued by the Australian Government Treasury, September 2015
3 Financial Times’ Investment Management Summit, June 2015
4 ‘Europe to benefit from China’s Belt and Road Initiative’, China Daily USA, May 2015
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