Tapping the infrastructure boom
With billions of dollars of spending slated for new infrastructure in emerging markets over the next decade, investment managers are keen to take a slice of the cake. For example, Russia has pegged $185 billion for pipelines and ports to facilitate the export of commodities. The CEE is looking to spend $25 billion on a trans-European road and rail network, and Brazil has allocated some $100 billion across a range of sectors to support telecoms, engineering and construction, and transportation. But tapping this opportunity is far from straightforward.
Philippe Guigny, senior emerging markets manager at CAAM, which has just launched an Indian infrastructure equity fund, says that infrastructure investment is now a key theme for governments. “In resource-rich countries we are always looking at those sectors anyway because these are the drivers of growth for emerging markets and underpin natural resource exports. Asia, Eastern Europe and Latin America are all taking measures to enhance their infrastructure but we think there is more potential in Asia as the population is so much bigger.”
China and India in particular have already attracted a lot of interest, but direct investment in this space is not for the novice. Trusted Sources, an independent research firm, has recently published two reports in collaboration with consultancy Urandaline, to examine the impact and the scope for investment, of infrastructure modernisation in China and India.
“India is more interesting for investors because you can go direct or there a large number of companies available, from cement companies, such as Ambuja Cement and ACC, to manufacturers of railway rolling stock such as Siemens India,” says Lawrence Brainard, chief economist at Trusted Sources. He points out that India is way behind in its infrastructure spending, and therefore has a political imperative to address it. “They also need to draw on the private sector in a way that the Chinese don’t.”
Patience required
Almost US$500 billion is budgeted for infrastructure spending in India’s 5-Year Plan budget to 2012, and one third of this is expected to come from private firms. But Brainard warned that this would test the country’s political flexibility and the patience of potential investors.
“For direct investors the most important judgement is the political judgement. Power is one of the most politicised sectors in India, so there are tariff controls. As an investor this means this is only a good opportunity if you are able to manage the political risk.” And only a handful of Indian companies have the political contacts to get things done, he believes.
Most private direct investment has to be done in the form of a Public Private Partnership (PPP), and therefore adequate legal documentation and the choice of partner is crucial. “As a foreign investor, you will be in a partnership with a state or federal entity so it’s critical that you think about how those interests are balanced,” he says.
“With the railways, which is a huge monolithic industry, you would also want a big local partner with clout. You need to think about the leverage of the local parties.” Indian Railways, which owns a lot of the prime real estate in cities, has failed to develop its sites due to internal feuding, with a plan to build budget motels at terminals becoming bogged down by bureaucracy and infighting.
The port sector is less politicised, with the minor ports competing with each other to attract investment, and 30-year licences on offer to private operators: “So one of the best opportunities for direct investors is to go into one of these developments,” says Brainard. But he adds that it is essential that the state government commits to connectivity – that is, ensuring there is the road and rail access to get the freight out.
“The problem is that the notion of Indian infrastructure is so sexy now, there is more money than projects, which has pushed down the rates of return. There are too few good projects.” He says that with something like the metrorail projects, which are being done on a PPP basis, there is strong competition because this is viewed as a long-term opportunity – the winning groups hope to use it as base from which to expand.
Jonathan Fenby, director of China research at Trusted Sources, says it is a similar story for China, where sub-contractors will be needed for huge projects. “The emphasis at the moment is on getting foreign investors into sectors where the Chinese lack the technical know-how,” he explains. “They are now trying to move up the value chain because places like Vietnam and Bangladesh can undercut them on cheap labour.”
Sectors of particular interest include railways, energy, seaports and inland waterways, and water and waste management, as these lag behind what is required both to meet consumer demand and to keep industry moving forward. However, Fenby warns that political constraints are evident as powerful interest groups seek to protect their turf.
Coal by wire
For example, Chinese railways are very inefficient with lots of stopping services and single tracks. This has made it difficult to convey coal from the coalfields in the north to the booming coastal cities. “China is currently a net importer of coal because it has been quicker and easier to import coal from overseas than to bring it through the interior,” said Fenby. “This has led to a move to build power stations at the coal mines with the aim of transmitting the electricity over long distances to where it is needed – what they call ‘coal by wire’. But that needs a massive improvement in the electricity grid and there is no Energy Ministry.” A proposal to set one up was opposed by the big power generators.
Similarly, a proposal at the National People’s Congress in March to set up a central transport ministry will not include the railways due to powerful vested interests within the Ministry of Railways. Fenby believes that the ambitious network expansion plans unveiled by the Ministry of Railways will be insufficient to meet the demand from passenger and freight that is envisaged over the coming decades, but suppliers of signalling equipment, rolling stock, sleepers, and steel might be worth a look.
Bureaucratic wrangling is also accentuating a water crisis in China, with approximately a dozen ministries and government departments involved in water policy. On a positive note, the sea ports were deregulated and decentralised 15 years ago and foreign investors have gone in. “The question now is whether this can be applied to inland waterways, as Central and Western China could be opened up by making the Yangtze River a modern transport hub,” Fenby says.
If you want to read more about the opportunities in infrastructure investment in both emerging and developed markets, please visit:
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