ANALYSIS-Is Asia on cusp of new infrastructure boom?
By Dominic Whiting and Umesh Desai
BANGKOK/HONG KONG, Nov 10 (Reuters) - Investors are again scouting for infrastructure deals in Asia, which craves roads, ports and power plants to keep its economies in the fast lane, but failed projects from the late 1990s meltdown and political risk still haunt many countries.
Over the next five years East Asia will require $1 trillion in infrastructure funding while Southeast Asia will need up to $60 billion, law firm Clifford Chance Wong Pte Ltd estimates.
Indonesia is offering risk-sharing to try to make long-term private funding palatable and Singapore has floated public-private partnerships (PPPs). India eased rules on inward investment in construction last year as it dawned that it needed $320 billion to overhaul roads, ports and power systems.
But a tour of Bangkok is a stark reminder of the dangers.
Unfinished water treatment works are a monument to how Britain's Northwest Water, now a unit of United Utilities Plc. , was burnt when Thailand's economic bubble burst in 1997, the baht currency was devalued, and successive governments fell.
An elevated high-speed Bangkok rail line by Hong Kong's Hopewell Holdings is nicknamed the "hopeless project", and its abandoned concrete structures "stonehenge", as plans to raise funds selling station-side homes died in a property crash.
"There's a rhetoric and reality gap," said Paul Reddel, head of the World Bank's public-private infrastructure advisory unit.
"There are a lot of headlines about strong growth, but where are the projects? There's also a mismatch between returns and risk. Returns are being beaten down to single digits."
ABP, Europe's biggest pension fund, plans to pour 4 billion euros (US$5.14 billion) into global infrastructure over three years because it makes a good fit for its long-term liabilities.
The Dutch fund is setting up an office in Hong Kong, but a lack of financial tools in Asia worries Robbert Coomans, ABP's head of alternative investment at ABP.
"In Europe you can hedge, but here, can you really get a 30-year hedge on a currency?" Coomans said. "The problem is that it's so expensive that in the end there's no return left.?"
VERGE OF BOOM
The Asian Development Bank (ADB), which provides soft loans for infrastructure, has started offering currency hedging.
It will swap hard currency for local currency with developing Asian countries for tenors stretching to 15 or 20 years. The local currency will in turn be lent to infrastructure project developers, sponsors, and financial intermediaries.
"We are on the verge of an investment boom in infrastructure," said ADB Vice-President Lawrence Greenwood.
"It's triggered by having pro-reform governments come in and undertake both sound macro policy and structural reforms that have been politically difficult in the past."
He cited Indonesia's government, which has set aside about $440 million to provide financial guarantees and land for projects. But some analysts say that is too little to draw the $20 billion of investment the country wants.
Investors are also sniffing around China, where booming trade and manufacturing have put strains on ports, railways and power grids; tThe Philippines wants to spend $7.2 billion; and Thailand has hatched a plan for a $45 billion binge -- although political turbulence in both countries, including Thailand's military coup in September -- threaten to derail the plans.
Patience is most definitely a virtue.
Thailand just opened a new $4 billion airport after 40 years in the works and Manila airport's third terminal is set to open over four years late after the government settled a compensation case with a building group led by Germany's Fraport AG .
Union and public pressure put paid to ideas of privatising Thai power generation, although Malaysia's identical plan to let private producers plug into a power pool is being revived.
Sensing an opportunity, fund managers are creating infrastructure packages for investors, with Australia's Macquarie Bank at the forefront with private and listed South Korean funds and a fund of global assets listed in Singapore.
Fund manager IL&FS is planning an India infrastructure fund, with investors expected to stump up around 80 percent of the $750 million for buying roads, ports and power assets as well as some new projects. It promises internal rates of return of 20 percent.
But Asian politics are a big gamble for investors. Pet projects are often abandoned when governments fall, partly because new deals can become personal money spinning schemes.
The $2.9 billion Dabhol power plant in India built by Enron Corp., was mothballed for nearly five years after a billing dispute, complicated by a change of state government.
"Politicians are short term, so your project has to fit into their timeframes," said IL&FS Managing Director Shahzaad Dalal.
By Dominic Whiting and Umesh Desai
BANGKOK/HONG KONG, Nov 10 (Reuters) - Investors are again scouting for infrastructure deals in Asia, which craves roads, ports and power plants to keep its economies in the fast lane, but failed projects from the late 1990s meltdown and political risk still haunt many countries.
Over the next five years East Asia will require $1 trillion in infrastructure funding while Southeast Asia will need up to $60 billion, law firm Clifford Chance Wong Pte Ltd estimates.
Indonesia is offering risk-sharing to try to make long-term private funding palatable and Singapore has floated public-private partnerships (PPPs). India eased rules on inward investment in construction last year as it dawned that it needed $320 billion to overhaul roads, ports and power systems.
But a tour of Bangkok is a stark reminder of the dangers.
Unfinished water treatment works are a monument to how Britain's Northwest Water, now a unit of United Utilities Plc. , was burnt when Thailand's economic bubble burst in 1997, the baht currency was devalued, and successive governments fell.
An elevated high-speed Bangkok rail line by Hong Kong's Hopewell Holdings is nicknamed the "hopeless project", and its abandoned concrete structures "stonehenge", as plans to raise funds selling station-side homes died in a property crash.
"There's a rhetoric and reality gap," said Paul Reddel, head of the World Bank's public-private infrastructure advisory unit.
"There are a lot of headlines about strong growth, but where are the projects? There's also a mismatch between returns and risk. Returns are being beaten down to single digits."
ABP, Europe's biggest pension fund, plans to pour 4 billion euros (US$5.14 billion) into global infrastructure over three years because it makes a good fit for its long-term liabilities.
The Dutch fund is setting up an office in Hong Kong, but a lack of financial tools in Asia worries Robbert Coomans, ABP's head of alternative investment at ABP.
"In Europe you can hedge, but here, can you really get a 30-year hedge on a currency?" Coomans said. "The problem is that it's so expensive that in the end there's no return left.?"
VERGE OF BOOM
The Asian Development Bank (ADB), which provides soft loans for infrastructure, has started offering currency hedging.
It will swap hard currency for local currency with developing Asian countries for tenors stretching to 15 or 20 years. The local currency will in turn be lent to infrastructure project developers, sponsors, and financial intermediaries.
"We are on the verge of an investment boom in infrastructure," said ADB Vice-President Lawrence Greenwood.
"It's triggered by having pro-reform governments come in and undertake both sound macro policy and structural reforms that have been politically difficult in the past."
He cited Indonesia's government, which has set aside about $440 million to provide financial guarantees and land for projects. But some analysts say that is too little to draw the $20 billion of investment the country wants.
Investors are also sniffing around China, where booming trade and manufacturing have put strains on ports, railways and power grids; tThe Philippines wants to spend $7.2 billion; and Thailand has hatched a plan for a $45 billion binge -- although political turbulence in both countries, including Thailand's military coup in September -- threaten to derail the plans.
Patience is most definitely a virtue.
Thailand just opened a new $4 billion airport after 40 years in the works and Manila airport's third terminal is set to open over four years late after the government settled a compensation case with a building group led by Germany's Fraport AG .
Union and public pressure put paid to ideas of privatising Thai power generation, although Malaysia's identical plan to let private producers plug into a power pool is being revived.
Sensing an opportunity, fund managers are creating infrastructure packages for investors, with Australia's Macquarie Bank at the forefront with private and listed South Korean funds and a fund of global assets listed in Singapore.
Fund manager IL&FS is planning an India infrastructure fund, with investors expected to stump up around 80 percent of the $750 million for buying roads, ports and power assets as well as some new projects. It promises internal rates of return of 20 percent.
But Asian politics are a big gamble for investors. Pet projects are often abandoned when governments fall, partly because new deals can become personal money spinning schemes.
The $2.9 billion Dabhol power plant in India built by Enron Corp., was mothballed for nearly five years after a billing dispute, complicated by a change of state government.
"Politicians are short term, so your project has to fit into their timeframes," said IL&FS Managing Director Shahzaad Dalal.
