Decade of Investment Needed to Fund Infrastructure Boom

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Monday, September 15th, 2014
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Having already accounted for more than half of worldwide growth in the sector since the end of the global financial crisis, the Asia Pacific region is set for an infrastructure boom expected to last for at least a decade, one of the world’s most reputable consulting firms says

PricewaterhouseCoopers says it expects the dollar value of investments in public and private infrastructure assets to grow by an average compound annual rate of between seven and eight per cent between now and 2025 to reach $US5.36 trillion, or 60 per cent of the world total.

PwC says demand for capital assets within the region is being driven by a combination of strong growth (notwithstanding slowing growth rates in China), the need of many countries to maintain competitiveness as they gain increasing prominence as global trading partners and an ‘infrastructure deficit.’

The research firm says few significant inroads have been made in infrastructure in the region since Asian Development Bank estimates in 2009 put the dollar value of the deficit of $US4.1 trillion in power and electricity, $US2.3 trillion in roads and $US1.1 trillion in telecommunications assets.

Furthermore, it noted mature economies such as Australia also need to upgrade economic and social infrastructure – hence the mass of projects currently getting started or in planning on the eastern seaboard.

Still, with a number of governments facing fiscal constraints,  the report warns private capital would be needed to meet these requirements, and that attracting sufficient volumes of such capital would require measures to strengthen legal frameworks, raise the effectiveness of project structuring and planning and improve the equitability of risk allocation between public and private stakeholders as well as the technical legal and financial skills of government officials. Outside help will be sought on the latter point where necessary.

An example is Indonesia, where the report says in response to a collapse in foreign investment following cancellation of concessions given to international consortia which invested in the development of large electricity projects as the currency crisis hit in the late 1990s, the government has since established a fund to enhance the investment grade of projects through the provision of guarantees, worked to improve processes for developing and progressing projects and passed laws strengthen rules relating to compulsory land acquisition.

By contrast, it says in Australia, a number of cases which saw developers lose out on major road projects when traffic volumes fell well short of projections (as was the case on Brisbane’s Airport Link) may mean project sponsors will only support future developments under current risk allocation models by requiring higher projected rates of return.

Still, PwC’s Australian managing partner for deals Sean Gregory points to examples such as WestConnex, whereby participants are looking to offset the revenue risk found in greenfield roads by combining their delivery with proven revenue streams from existing toll road assets and East West Link, where the state will retain revenue risk until the roads open and revenue levels are more established, as examples of lessons having being learned.

“We expect other planned toll road projects, such the Perth Freight Link will also contemplate using similar approaches to capturing the value of user charging,” Gregory said.

The PwC reort comes amid growing debate within Australia surrounding the challenges associated with financing infrastructure development in an environment of tight fiscal constraints.

In July, the Property Council of Australia (Victorian division) unveiled an analysis of 14 different funding models used in Australia and oversees, and assessed their suitability for different types of projects within that state.

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