The rewards for infrastructure investors in APAC can be lucrative, but the region is not without its risks—particularly political ones
Results from our survey are remarkably consistent on the challenges and risks faced by infrastructure projects across the region. Nearly two-thirds (59 per cent) of respondents consider political risk to be the biggest threat to project success. This may stem from governments inexperienced with large-scale projects or dealing with foreign private investors; unstable regimes; or the slow pace of project implementation, which is a common criticism in APAC.
An example of politics halting infrastructure’s progress was seen in the postponement of the construction of the Kuala Lumpur and Singapore High Speed Railway in September 2018. The project’s delay has come in the wake of the new Malaysian government of Mahathir Mohamad initiating efforts to reduce the country’s debt burden with cuts in spending.
’Politics and policy issues often break infrastructure projects and restrict private investments‘, says a partner of one investment fund in Singapore. ’The main problem for investors is political uncertainty. If governments lack authority, they are thus restricted in taking clear decisions‘.
Politics and policy issues often break infrastructure projects and restrict private investments. If governments lack authority, they are thus restricted in taking clear decisions
Given these challenges, governments looking to attract investors need to provide them with a level of political and legal stability or at least a certain level of compensation, should that stability not be available for the reasonable life of the project. This may mean stabilisation clauses in their contracts or some form of governmental assurance that the laws as applicable to them will remain stable.
Inadequate regulatory regimes are cited by 38 per cent of respondents. Clearly, certain countries are seen as still having much work to do to improve the way their infrastructure projects are regulated and developed to legal frameworks. According to one project sponsor’s head of M&A: ’Emerging markets in the region have different governmental systems and various types of policies that reduce transparency—especially taxation policies and trade regulations. Corruption remains a major concern in some jurisdictions’.
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Trade wars and weather hazards
When asked about the threat of trade wars and economic sanctions affecting investment across the APAC region, our research delivered a mixed response: 50 per cent of respondents agreed or strongly agreed that such sanctions would have a negative effect, while 43 per cent disagreed.
59%
see political risk as the biggest challenge to investing in infrastructure in emerging Asian economies
Energy—and specifically offshore wind—sectors illustrate what may happen if sanctions and trade tariffs increase, because these industries rely heavily on components made and distributed from different places within and outside the APAC region. Trade disruption may increase costs, or it may simply shift supply networks to areas not affected.
Respondents are also concerned about the risks of climate change or extreme weather for projects in the APAC region. This is hardly surprising given the figures on natural disasters in the region. According to the UN’s Global Humanitarian Overview 2019: ’Asia and the Pacific remain the world’s most disaster-prone region, vulnerable to both sudden and slow-onset disasters.’
Emerging markets in the region have different governmental systems and various types of policies that reduce transparency— especially taxation policies and trade regulations
Our survey confirms that the majority of investors are extremely vigilant when it comes to mitigating these particular risks. Only 24 per cent of respondents said their business models have not changed as a result of climate change risks. More than a third (38 per cent) said they are investing only in countries where disaster recovery and protection against the effects are a high priority, and 25 per cent said they only invest where the risks are low.
Such comments could be seen to be painting a bleak picture of prospects, but it’s worth noting that despite the risks, our figures reflect investors’ interest in non-OECD developing APAC nations. Indonesia, for example, backed by regional institutional investors, is the top country for respondents after Australia, India and Singapore. The sheer depth of opportunity is drawing their interest and the overall picture of regulation and reliability is an improving one.
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