In the good years before the credit crisis, Asian
governments and local banks were busy stepping up their
infrastructure spending as foreign banks and investors plunged
into the sector. Authorities across the region crafted a rash
of new regulatory frameworks while launching concessions for
monopoly assets, ranging from toll roads to power projects.
This flurry of activity raised hopes that deal volumes would
gradually recover from the years of lacklustre infrastructure
investment that followed the 1997 Asian crisis.
But fast forward to 2010: the higher cost of bank capital
the primary financing source for Asian projects
and risk aversion from foreign lenders is derailing the
private-sector infrastructure investment drive.
Despite the thaw in the project finance market, borrowers
and sponsors across the region are facing higher project
financing costs. Says Conor McCoole, head of Asian project
finance at Standard Chartered: Bank appetite is
returning, and competition between lenders has kicked in
but we are not anywhere back to pre-crisis levels.
Western fund managers, who had been stepping up exposures to
Asian infrastructure before the crisis, have since stopped.
There is no urgency among foreign investors to increase
their allocations to infrastructure funds, says Anoop
Seth, co-head of Asian infrastructure investments at private
equity firm AMP Capital, citing the lower country risk and
attractive margins in home markets.
Higher liquidity premiums and the greater bargaining power
of lenders over developers and public clients have conspired to
increase costs. Seth says borrowing costs for benchmark term
loans for project finance deals have jumped by around
1.53% on average.
Even India where domestic bank finance overwhelmingly
funds infrastructure projects borrowing costs have
increased by 1% to around 10.511% for nine- to 15-year
term loans for greenfield power projects, says S Nanda Kumar,
global infrastructure and project finance analyst at Fitch
Ratings in Chennai.
There is no single Asian project finance market in a diverse
region of 44 countries with varying levels of infrastructure
investment and different levels of importance of local versus
global bank participation in project financing.
HUGE ASIAN NEED
Asias infrastructure needs are vast at a time when
global commercial banks have less financial firepower. In a
landmark study last year, the Asian Development Bank estimated
the region would need to spend $7.9 trillion up to 2020 on
projects including installing or upgrading transport networks,
energy networks and communications systems. It also called for
another $287 billion to be spent on specific regional
projects, with the combined investment to add $1.6
trillion or 10% to developing Asias GDP by 2020.
The post-credit crunch landscape has led to a flight to
quality in most markets and forced public banks and
multilaterals to ramp up spending. Projects with high up-front
construction costs and lower margins are being snubbed as
competition between global banks dwindles.
The global crisis led to a collapse in the western project
finance market, given the high degree of leverage and slack
covenants, says Andrew Yee, joint CEO of Standard
Chartereds Asia Infrastructure Growth Fund (SCI Asia). By
contrast, Asian project deals have, in general, demonstrated
sufficient financial flexibility: a long concession life and
surplus cashflow after debt service. As a result, projects
with the notable exceptions of Indian airports and ports
in emerging south-east Asia have managed to weather the
weaker economic cycle.
Michael Barrow, director in the private-sector operations
department at the ADB, says Asian projects have withstood
the crisis relatively well as they had simple structures
because the region has underdeveloped capital markets. As
a result, western banks are generally not buckling under the
weight of impaired project finance loans.
But a tug-of-war has broken out between bankers at the
global firms who want to ramp up project lending, and home
regulators calling for balance sheet restraint. Increased
regulation, higher reserve requirements and higher capital
costs will make project financing less attractive as the
business ties up loans for a long period of time, says
Ryan Orr, a leading project finance expert and executive
director of Collaboratory for Research on Global Projects at
For many other global banks, long-term lending in
emerging markets has been relegated to the second division.
This is a structural consequence of the global crisis,
says McCoole. The head of project finance at a Japanese
commercial bank says: Before the crisis, banks funded
themselves largely from short-term money markets and used that
capital to lend long term. But that link is fundamentally
broken now and hit project finance heavily.
The basic tenet of lending billions of dollars of long-term
debt at a low margin may have worked in the boom years, but
banks are waking up to the new reality of higher capital
requirements. Whats more, the ability to turn over
capital is increasingly important for banks now, making
banks more wary of long-term lending, says Yee.
Over the past 10 years, the Asian project finance market has
seen a retreat from such names as Deutsche Bank and US lenders,
such as Citi. In recent years, European players such as Calyon,
Dexia, HSBC, Société Générale and
Standard Chartered and Japanese players have dominated the
project finance market. Those banks with project finance
experience and balance sheet strength now have a competitive
Market sources say Deutsche Banks tentative plans,
pledged in 2007, to re-enter the Asian project finance
business, after retreating in 2000, are in disarray. ANZ and
Barclays Capitals bid to diversify its Asian project
finance business outside Australia is on hold. Meanwhile, RBS
and ING are struggling with the legacy of merchant bank-style
lending as long-term loans to clients in aviation and shipping
stay soar due to weak global exports.
Political pressure to repatriate capital to home markets is
also derailing the Asian project finance business for
bailed-out banks. For example, RBS inherited a profitable Asian
project finance business through its 2007 acquisition of ABN
Amro. However, the banking group has been forced to downgrade
its project finance business as it scales back its balance
sheet in the wake of its part-nationalization by the UK
From some western lenders, it is more attractive
to finance PFIs [private finance initiatives] and other
infrastructure projects in home markets where there is less
country risk, and so we have not seen global banks make a
strong comeback here on the back of the stimulus plans,
says Frederic Blanc-Brude, director of Infrastructure
Economics, a consultancy based in Shanghai.
But Bharat Parashar, CEO of Emerging Markets
Partnerships joint venture with Daiwa Capital Asia Fund,
says global banks can make considerable returns from vanilla
deals, such as simple one station power projects, which offer
strong revenue streams due to growing economic activity.
According to Dealogic, the Asia Pacific region accounted for
41% of global volume in 2009, compared to 27% in 2008. The
largest deal to close in 2009 was the $18 billion Papua New
Guinea LNG project, which comprised $14 billion debt and $4
Stephen Paine, global head of infrastructure finance at UBS,
says: Banks are reviewing all their business streams in
the wake of the global financial crisis, but infrastructure as
a sector is perceived to be a good sector due to strong
economic demand for nationally critical, monopoly
Asian project finance deals, excluding Japan and Australia,
were worth $97.7 billion in 2009 compared with $63 billion in
2008. But these statistics mask the fact that Chinese and
Indian state-backed enterprises dominate the landscape. State
Bank of India led the mandated arranger rankings with $27.0
billion from 51 deals in 2009 and advised on 34 projects worth
The global crisis has accelerated the rise of local
and mostly state-backed financiers in Asian
project finance as they grab higher market share as domestic
financial systems deepen. Nevertheless, global banks still have
a competitive advantage in renewable energy projects, in places
such as China, after their experience of the business in
developed markets. For example, European banks have been
scrambling to arrange and finance Chinese power projects, first
in hydroelectric sectors, then wind and solar projects and now
in the waste management sector, says Yee at Standard
But increasingly, heavy competition from cash-rich local
banks for certain projects is threatening the push by global
banks into the project finance market. For well established
infrastructure projects such as thermal power plants in
south-east Asia, local banks are dishing out project finance
loans at competitive rates, which is squeezing out a lot
of the bigger global banks, says Yee.
Chinese state-owned banks have aggressively stepped up
lending outside the country and provide concessional lending to
projects that favour Chinese developers from Indonesia to
Pakistan. But analysts are alarmed at the frenetic pace at
which Chinese banks are disbursing loans to select projects.
If there is going to be a bubble, local banks are more
likely to be the ones driving it even though the Asia
crisis of 1997 left many people burnt because,
lets face it: memories are very short, says
Blanc-Brude at Infrastructure Economics says, This
push by Chinese banks may affect project financing standards,
as often the risk management and due diligence is lacking.
Moreover, exchange rate risk is not absent in these projects
since funding is principally provided by Chinese banks in US
dollars. For example, Bank of China financed a $535
million coal-fired steam power plant in Teluk Naga, Indonesia
last May as a quid pro quo for Chinese equipment purchases.
Before the crisis, analysts cited the regions
underdeveloped capital markets and weak regulatory regimes as
the biggest barriers to Asias infrastructure investment
drive. These issues still weigh heavy on the market.
But the post-crisis landscape faces the new problem of
reduced global bank capital an issue that is likely to
darken the project market outlook for years to come.