Pensword Capital

Hence, electricity generation in India is 16 per cent to 20 per cent short of what is needed to meet peak demand, due to persistent underinvestment and poor maintenance. This can be seen in most emerging Asian countries, perhaps with the exception of China.

In Indonesia, infrastructure investments dropped from 5 per cent to 6 per cent of GDP in the early 1990s to 2 per cent to 3 per cent of GDP for much of the last 10 years. According to global consulting firm McKinsey, the consequent deterioration in energy, transport, housing, communications, and water facilities has restrained economic growth by 3-4 percentage points of GDP.

But things are about to change, it said in a recent report. 'Across the Asian region as a whole, we calculate that around US$8 trillion will be committed to infrastructure projects over the next decade to remedy historical underinvestment and accommodate the explosion in demand.'

Traditionally, most Asian infrastructure projects have been funded by governments or domestic banks. Foreign investors were mostly excluded. Those that were allowed to participate faced severe restrictions, including complex regulatory and legal regimes, uneven workforce quality, and occasional political interference, the consultancy noted.

'In the wake of the financial crisis, however, we have started to see signs that global private capital is increasingly welcome. The combined effects of increased stimulus spending and reduced tax receipts have increased deficits, with the result that restrictions on foreign investment are easing and a growing number of projects are being carried out under public-private partnerships (PPP). We estimate that over the next 10 years, fully US$1 trillion of the US$8 trillion of projected infrastructure projects will be open to private investors under PPPs.'

The questions for owners of global capital are how to identify the opportunities, how to mitigate the main risks, and how to develop appropriate entry strategies, said McKinsey.

It added that more than 80 per cent of the demand for infrastructure investment in emerging Asia over the next 10 years will come from energy and transport, the sectors most critical to supporting heightened economic activity.

Much of this new investment will be in advanced technologies. For example, Asia may leapfrog developed economies in its adoption of clean-energy technologies, thanks to falling costs and improving effectiveness.

So there is this huge upcoming opportunity for international investors to fund the infrastructure developments in emerging Asia. But my question is: Is there money to be made by private investors in investing in infrastructure projects?

A few of the infrastructure-related stocks or funds listed on the Singapore Exchange have less than stellar performance. For example, the infrastructure play of the 1990s, Ipco, crashed spectacularly. And more recently, CitySpring Infrastructure Trust has seen its value shrink by 10.7 per cent a year between February 2007 and March 2011.

Macquarie International Infrastructure Fund, on the other hand, rewarded investors with a -0.33 per cent return a year in the five years to March 2011.

Is such poor performance just a Singapore phenomenon, or do infrastructure plays in other countries exhibit similar returns?

I did a quick study of the returns of infrastructure-related stocks or funds around the world. I surveyed about 20 of them. Included in the crop were India's Reliance Infrastructure, Hong Kong's Hopewell Highway Infrastructure, and the S&P Global Infrastructure Index.

I tabulated the annual equivalent of these securities' return in the last five years. And for those with less than five years' track record, return is calculated for the period that they are listed.

All returns are converted into Singapore dollar terms. From the table, you can see that only six out of the 21 securities listed registered positive annual return in the five or less years to March 2011.

The best performer is India's Infrastructure Development Finance Co which has rewarded investors with 13.9 per cent a year since 2006. The company offers infrastructure project financing services. It primarily finances energy, telecommunications and transportation projects.

The second best performer is Australia's Spark Infrastructure Group which invests in utility infrastructure assets in Australia. It returned 13.4 per cent a year.

Hong Kong's Cheung Kong Infrastructure Holdings - which develops, invests in, and operates infrastructure projects such as power plants, toll roads, and toll bridges in Hong Kong, China and other countries, in addition to manufacturing infrastructure materials such as cement, concrete, asphalt and aggregates - turned in a decent 7.1 per cent a year.

Most, however, registered negative returns. On average, the return is -2.6 per cent. This compared with the Straits Times Index's 4.7 per cent return, and S&P 500's -2.4 per cent return. Bombay's Sensex, meanwhile, rewarded investors with 7.5 per cent a year in the last five years.

However, for those with longer track records, when measured over a longer period - say 10 years - their returns improved significantly. India's SREI Infrastructure Finance which provides financing for infrastructure equipment, and for infrastructure projects and renewable energy products is the star. It has returned a whopping 38.4 per cent a year in the last 10 years. IVRCL Infrastructure Projects, an Indian construction company that builds bridges and power plant pipelines, and does site levelling, canal modernisation and road works, came in second with a return of 32.7 per cent a year.

The average return is 16.5 per cent. This compared with STI's 6.3 per cent, the S&P 500's -0.35 per cent and Sensex's 16.7 per cent.

As can be seen, all the outstanding performers above are companies directly involved in the infrastructure development or which finances infrastructure projects. Meanwhile, the professionally managed infrastructure funds have all chalked up poor performance.

One takeaway perhaps is that locally run infrastructure firms are more in tune with the local conditions and therefore may be run more successfully.

Investments projects by foreign funds meanwhile may encounter political pressures, environmental considerations, and local issues, which may result in disruptions or delays. Or the funds may be overly eager to get the projects and overpay.

Also, the infrastructure theme does blow hot and cold over time. In mid-2000, it was hot, which resulted in the poor performance in the following five years. Back in early 2000, everybody was too obsessed with the dotcom world to pay much attention to the bricks and mortar of roads and bridges. That explained the outsize returns in the following 10 years.

As for now, the fever for infrastructure has not quite yet picked up. So this may present a good window of opportunity to get in.

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