Andrew joined a panel at Infrastructure Investor’s HK summit on 15 November 2017 to discuss dynamic changes in the infrastructure sector and to assess what are the risks and opportunities for existing and future investments? SG’s Head of Infrastructure Finance, Asia Pacific, Gavin Munro moderated; GIC’s CIO Eng Seng Ang, the IFC’s Head of Infrastructure and Natural Resources for Asia and the Pacific, Hyun-chan Cho and Atkins’ Director for Strategy, Asia Pacific, Catherine Li also joined.
Financial institutions look to infrastructure for returns which are stable, inflation linked and long term, say 15 – 20 years. Such assets are rare enough in Asia, as it is, but the problem is getting more acute as ever faster technological change (yet alone the remorseless changes in urbanisation and demographics) mean that, towards the end of that time frame, infrastructure assets will be performing very differently from how they perform today. This has not been aired much to date but no longer can cash flow projections presume a steady, indefinite increase in the revenue line.
Take the example of a toll road. On the one hand, driverless vehicles will make for much more efficient traffic management so toll roads will be able to accommodate correspondingly higher volumes of traffic. On the other hand, augmented – and virtual – reality technology may enable people to travel much less. Or combine the two and maybe that six lane road can be reduced to four, opening up development opportunities for well connected real estate.
Or an airport. The consensus (which is usually right and / or self fulfilling) is that passenger numbers will continue to grow relentlessly. But typically more than 50% of an airport’s revenue is derived from duty free shopping. Tax authorities worldwide are closing leakages in their tax takes and duty free shopping could be eliminated at the stroke of several coordinated pens. Passengers shop at duty free, yes, to take home gifts for loved ones, but essentially to kill time between checking in and boarding, a window which will only shrink as checking in becomes more efficient (baggage handling is the critical path).
Cars currently spend most of their life sitting in car parks. With the shared economy, expect their utilisation to explode so much of today’s car park capacity will be able to be resumed for other, more productive purposes.
In other sectors, life may not change as much. This year’s $2 billion blow-out bond deal for Paiton Energy in Indonesia was for a coal fired power plant at a time when longstanding investors such as Engie and AES are exiting coal. The plant is already twenty years old so will be forty years old (mostly replaced like the proverbial axe and its handle) when the bond’s balloon payment is due. Expect some tweaking of the PPA along the way.
What if the new technology of intelligent Operations and Maintenance and other aspects of Smart Cities doesn’t work? There was a time when lenders required support from technology providers in case debt service was impacted by their as yet unproven technology not working as promised. Lenders are unlikely to get that these days.
Which of these outcomes will eventuate? As Chinese Premier Zhou Enlai said in 1972 of the French revolution 183 years earlier, it is too early to say. What we do know is that technology introduces a whole new set of risks for those looking to invest in or lend to infrastructure assets over this sort of time frame. Can this risk be addressed? Of course. As with any other risk, the private sector will take the risks that it understands and thinks that it can control and / or be compensated for taking; and host governments, perhaps supported by the multilateral and bilateral agencies, will take the rest.
Expect more flexible concessions based on sharing the upside and downside risk in the form of shadow tolls, availability / annuity structures and more; thus sharing the rewards too; shorter loan tenors with government – backed balloon payments (ouch!); and more.
Andrew was one of several speakers (at 1:44) interviewed on the sidelines of the conference: the big unknown is how much of China’s Belt & Road Initiative will eventuate.
