Funds make beeline for infrastructure

With trillions of dollars to be spent on infrastructure in China, India and other fast-growing emerging markets in coming years, private funds are pouring into a sector with clear opportunities - and plenty of risk.

Asia is littered with infrastructure projects that failed during the financial crisis of a decade ago. Others lost money, were hit by corruption, or were unnecessary in the first place.

While backers say the increasing receptiveness of governments to private funding for big projects makes infrastructure more attractive nowadays, politics and bureaucracy as well as rising material and labour costs all threaten to crimp returns.

Investors big and small are flocking to the sector as Asia and other emerging markets rapidly urbanise, attracted by potentially steady long-term returns in real assets as a hedge against volatile financial markets.

The case for infrastructure spending is obvious: In India roads, power supplies and airports are notoriously inadequate after decades of under-investment. In Beijing, every day brings 1,200 new cars to the Chinese capital's gridlocked streets; large parts of China are girding for another summer of power shortages.

"For a fridge, you need reliable electricity generation. For cars you need roads," said Macquarie strategist Stewart Ferns. "Infrastructure investing is the best way to play the emerging markets scene at the moment in terms of the growth."

Last month, Morgan Stanley and a fund set up by General Electric and Credit Suisse said they had raised nearly $10 billion collectively to invest in infrastructure projects around the world.

In Asia, private equity firms have raised $1.45 billion so far this year for dedicated regional infrastructure funds, according to the Asian Venture Capital Journal, approaching the $1.84 billion raised for all of 2007.

Launches

Societe Generale's Lyxor Asset Management and Macquarie both launched infrastructure funds this year that are open to retail investors, while the fund arm of UBS said infrastructure funds are a top priority in Asia.

"Governments are facing increasing budgetary constraints and many recognise that the private sector has a crucial role to play in the ownership and operations of infrastructure assets. The long-term opportunity is therefore enormous," said Christof Kutscher, head of Asia-Pacific at UBS Global Asset Management.

This month, Merrill Lynch lifted its forecast for emerging markets infra-structure investment to $2.25 trillion a year - or five per cent of gross domestic product - over the next three years from $1.25 trillion. China, the Gulf and Russia are set to be the biggest spenders, with energy and transportation soaking up the bulk of funds, Merrill said in a report.

Questions over land title, contract terms, and control can plague infrastructure projects, especially in emerging markets, giving advantage to local players with knowledge and connections.

So far this year, emerging markets transport infrastructure stocks have underperformed global equities, according to Reuters EcoWin.

MSCI's index for the industry - one of several sectors that falls under the broad infrastructure umbrella - has fallen 26 per cent over the past six months, compared with the five per cent drop in MSCI's global stocks index.

It has taken years for India to live down the legacy of Enron's $2.9 billion Dhabol power plant, which was built during the 1990s and mothballed for nearly five years over a billing dispute that was complicated by a change in state government.

"A less opaque regulatory environment would certainly help bring more investment," said Markus Rosgen, head of Asia Pacific equity strategy at Citigroup.