Challenges & Opportunities for Listing Regional Infrastructure Assets

• Business Trusts have developed into a suitable vehicle for funding big-ticket infrastructure assets that generate cash flow. The 11 Business Trusts listed on SGX currently average a cash distribution yield of 6.0%.
• ADB forecasts US$8 trillion of infrastructure projects to be built in Asia through to 2020, which amounts to almost US$2,000 per person.
• With limits to government financing, regional equity and debt markets are obvious avenues to help fund the infrastructure bill. However, as of the end of March 2015, the FTSE Emerging Infrastructure Opportunities Index was less than one-sixth the size of the FTSE Developed Infrastructure Opportunities Index.

As reiterated at the G20 meeting last November by Asian Development Bank (ADB) President Takehiko Nakao, Asia’s infrastructure investment needs are estimated at US$8 trillion through to 2020.
Nakao noted that with limited public and multilateral resources,  the region’s vast domestic savings are not being effectively mobilised to finance these investments. Furthermore, to attract private-sector financing, the region needs an enabling environment – well-developed local financial markets that can provide adequate long-term local currency financing and tap on the region’s high savings rate, he noted.
Infrastructure-related stocks on SGX
There are a number of sectors that are associated with infrastructure development- namely Healthcare, Industrials, Financials, Materials and Utilities. Examples of such companies are Singapore Technologies Engineering, AusNet Services, NSL and Tat Hong Holdings.
The sector perhaps that is most exclusively associated with infrastructure is the Utilities Sector, while the portfolio products most associated with infrastructure are Business Trusts. Business Trusts have developed into a suitable vehicle for funding big-ticket infrastructure assets that generate cash flow.
As noted in the recent Market Update - REITs, Stapled and Business Trusts Offer High Yields, a Business Trust is a trust that runs and operates a business enterprise. Registered Business Trusts must have a trustee-manager whose role is to safeguard the interests of beneficiaries (referred to as ‘unit holders’ under the Business Trusts Act) of the trust and to manage the business of the trust. As detailed in the tables below, the 11 Business Trusts listed on SGX currently average a cash distribution yield of 6.0%.
Challenges in Infrastructure Financing
Specific Asia infrastructure needs that remain high include roads, rail and potable water, and local financial markets can play a major role in this. Nonetheless, political capital and bureaucratic coordination remain a key challenge in infrastructure financing. For many parts of emerging Asia, including India and Indonesia, infrastructure development and management efforts have been stymied by the lack of political clout behind specific projects.                                                                 
Assuming political mandates and coordination are in place,  the next challenge is to find the right blend of funding. An infrastructure project must generate a competitive or adequate return on capital and avoid aggravating income inequality, while serving a broad economic need. In emerging Asian economies, infrastructure projects will almost always have a combination of public and private sector objectives.  Hence, infrastructure reform in Asia is being re-branded from a public-private partnership perspective.
As noted in the APEC Guidebook on Quality of Infrastructure Development and Investment, appropriate incentives under a performance-based approach should be built to enhance the private sector’s motivation to operate the project efficiently. At the same time, the Guidebook notes infrastructure projects are expected to provide long-term stable and sustainable public services to a large number of beneficiaries.
Listed infrastructure projects can be inclusive to all stakeholders, while attracting a broad pool of funding. Once listed, the value of a unit in an infrastructure project can take into account net operating revenue, net assets and cash flows, in addition to the outlook and prospects for future value. Market forces will price the units accordingly, and both public and private unit holders can vary their exposure as required.
The Current Role of Capital Markets
As at end-March 2015, the FTSE Emerging Infrastructure Opportunities Index was less than one-sixth the size of the FTSE Developed Infrastructure Opportunities Index, according to the FTSE Asia Monthly Index Performance Report.
From an investor perspective, the yields of these two indices are comparable – at 2.95% for the FTSE Emerging Infrastructure Opportunities Index and 3.09% for the FTSE Developed Infrastructure Opportunities Index. In terms of risk, based on annualised monthly returns, the volatility of the Emerging Index has been 16.4% over the past five years versus 11.8% for the Developed Index.
Given ASEAN’s  geographical diversity and varied infrastructure requirements, an increase in listed infrastructure assets from this region should further develop the capital markets by providing a market mechanism for property and rights previously handled by bureaucratic coordination, thereby:

• Helping to raise inbound foreign direct investments (FDIs).
• Helping to orientate the FTSE Global Infrastructure Opportunities Index and the funds that track them towards emerging economies.
• Increasing the breadth and diversity of listed projects and the theoretical reduction of the volatility of a portfolio of ASEAN infrastructure assets.