Despite bright economic prospects, most emerg-
ing Asian countries—China, India, and the
Association of Southeast Asian Nations (ASEAN)—
continue to suffer from underdeveloped
infrastructure. In India, for example, electricity
generation is 16 percent to 20 percent short
of what is needed to meet peak demand, thanks to
persistent underinvestment and poor mainte-
nance. In Indonesia, infrastructure investments
dropped from 5 percent to 6 percent of GDP
in the early 1990s to 2 percent to 3 percent of GDP
for much of the last ten years. We estimate that
the consequent deterioration in energy, transport,
housing, communications, and water facilities
has restrained economic growth by 3 to 4 percent-
age points of GDP.
Naveen Tahilyani,
Toshan Tamhane, and
Jessica Tan
Asia’s $1 trillion infrastructure
opportunity
We believe that situation is about to change.
Across the Asian region as a whole, we
calculate that around $8 trillion will be
committed to infrastructure projects over the
next decade to remedy historical under-
investment 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.
Foreign investors are finding more open doors than in the past.
But the way forward is far from clear.
M A R C H 2 0 11
f i n a n c i a l s e r v i c e s p r a c t i c e
2Asia’s $1 trillion infrastructure opportunity
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 ten
years fully $1 trillion of the $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.
Growing demand for outside capital
More than 80 percent of the demand for
infrastructure investment in emerging Asia over
the next ten years will come from energy and
transport, the sectors most critical to supporting
heightened economic activity. Exhibit 1 shows the
full breakdown.
Our analysis suggests that much of this new invest-
ment 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.
Several countries, such as China and Malaysia,
have sufficient financial depth in their
domestic private-capital markets to meet their
infrastructure funding requirements
(Exhibit 2). Foreign investors should therefore
focus on countries such as India, Indonesia,
Thailand, Vietnam, and the Philippines, where
the financial markets have less capacity.
Although the environment is changing, even in
these countries the bulk of infrastructure
investments will likely remain effectively closed
Exhibit 1
Investment needs for Asia’s identified and pipeline
infrastructure projects, 2010–20, $ trillion
Annual growth rate in investment
spending, 2008–18, %
Energy and transport sectors will provide much of
the demand for infrastructure investment.
MoCIB 11 2010
Asian infrastructure
Exhibit 1 of 5
Source: Asian Development Bank; Clean Edge; World Bank Private Participation
in Infrastructure (PPI) Database; McKinsey analysis
4.1
Energy Telecom
1.1
Transport
2.5
Water and
sanitation
0.4
Total
8.1
Infrastructure
(global)
Infrastructure
(Asia-Pacific)
Clean energy
(global)
Clean energy
(Asia-Pacific)
6.0
8.2
10.9
18.9
2.3x
3 March 2011
to private investment. The obstacles are varied.
Many governments, for instance, have ill-defined
PPP policies that, because of their vagueness,
inhibit private participation, while capital controls
frequently deter investors who worry that they
may not be able to repatriate their cash flow. Weak
regulatory or legal systems intensify the risk,
and while shallow or illiquid capital markets make
private investment necessary, they also compli-
cate exit strategies. Exhibit 3 calculates the effect
of restrictions on foreign direct investment
in India, Indonesia, the Philippines, Thailand,
and Vietnam.
Despite all this, Asia remains an exciting place for
infrastructure investment over the next ten
years. India alone is set to spend $500 billion on
projects from 2007 to 2011, thereby raising its
infrastructure investment from 4 percent to
8 percent of GDP per annum. Domestic capital
markets will finance some but not all of this
demand: as in other parts of the region, global
investors will have an opportunity to fill
the gap.
Key risks to be managed
Once they have decided to invest, foreign firms
must overcome several risks. Thanks to political
pressures, environmental considerations, and
local issues, there are often long delays between
planning and project approval; this can severely
affect capital deployment and productivity. The
Hangzhou Bay Bridge project in China, for example,
was held up for 10 years, and the Bandra-Worli
Sea Link in Mumbai, India, required more than
20 years before approval was finally given.
Exhibit 2
G
ap
in
in
fr
as
tr
uc
tu
re
sp
en
d
in
g
,1
%
Foreign capital
required
Thailand
Philippines
Indonesia
Vietnam
Brazil
India
Hungary
Chile
Malaysia
China
South Africa
Turkey
Egypt
Mexico
Peru
Colombia
Tunisia
Nigeria Slovakia
Morocco
CroatiaBulgariaRomania
Argentina
Russia
Pakistan
Funding
can be largely
sourced
domestically
Financial depth,2 %
In much of Asia, demand outstrips financing.
MoCIB 11 2010
Asian infrastructure
Exhibit 2 of 5
1 Gap in needed vs actual infrastructure spend as % of GDP, 2009.
2Value of bank deposits, bonds, and equity as % of GDP, 2009.
Source: McKinsey Global Institute
9.0
0
5.0
20 400
4.5
60
4.0
100 140 160 180 200 220 240 260 280 300 320 340 36012080
3.5
3.0
2.5
2.0
1.5
1.0
0.5
4Asia’s $1 trillion infrastructure opportunity
As in other parts of the world, infrastructure
investors in Asia should have long invest-
ment horizons and should be prepared to have
capital locked up for many years.
They need to be wary of—and ensure they make
changes to—partnership agreements that are often
poorly structured and drafted due to a lack of
skills or experience in government departments.
They should plan for the possibility of continuing
political, legal, and regulatory uncertainty
with respect to foreign ownership restrictions,
capital controls, and partnership terms.
During the 1997 Asian financial crisis, for
example, several countries suddenly imposed
capital controls, which in some cases were only
lifted many years later.
And global investors must find ways around
capital markets that lack the full range of financial
instruments for risk mitigation. For example, the
foreign-exchange (FX) markets for some emerging
Asian currencies might not be liquid enough
to allow full hedging of a currency exposure, while
local derivative instruments may be insufficient
to offset particular risks.
Offshore products or structures domiciled in
financial centers like Singapore and Hong Kong
Exhibit 3
%
United
States1
India IndonesiaUnited
Kingdom
Vietnam Thailand Philippines
Restrictions vary on private-sector participation and
foreign direct investment.
MoCIB 11 2010
Asian infrastructure
Exhibit 3 of 5
1 No limitations. However, critical infrastructure projects are subject to congressional review.
2100% for building railway infrastructure; rail operations are run solely by government.
349% applies to fixed-line infrastructure; limit for mobile infrastructure is 65%.
4100% for greenfield projects; 40% for brownfield projects.
Source: Ministries and government departments for investment planning and business development
Power
Airports
Railways
Telecom
Water
Irrigation
Ports
Roads
100
1004
100
100
100
100
100
95
100
100
100
100
100
100
100
40
100
100
0
0
100
49
100
74
100
100
100
100
100
40
100
100
100
49
100
49
100
100
100
100
100
100
100
100
100
100
100
49
100
95
100
100
100
100
100
100
100
1004
100
100
100
49
100
55
100
1002
100
100
100
100
100
40
100
100
49
49
100
493
100
74
100
100
100
100
100
1004
100
100
49
0
100
95
0
0
100
100
100
100
100
1004
100
100
100
100
100
100
0
0
100
100
100
100
Max FDI <50% Max FDI <30%
Max FDIMax private
5 March 2011
could be a solution when local currencies are
illiquid. One example is the use of a Singaporean
dollar fund (or fund of funds) that then invests
in, say, Vietnamese infrastructure assets. The cur-
rency risk between Vietnamese đόng (VND)
and the Singapore dollar (SGD) is mitigated by
a simultaneous synthetic contract that is
renewed annually. While this does not completely
do away with the currency risks, it reduces
the volatility significantly.
Another option is to set up a holding company
in a tax-friendly jurisdiction rather than
have the investment in the underlying infra-
structure special-purpose vehicle (SPV),
which is a domestic asset. The fund-raising entity
enters into a contract outside the country,
which at least partially helps to reduce the
sovereign risk.
Third, partnerships between foreign players and
a dominant local institution—SBI-Macquarie
Fund in India and the CIMB-Principal fund in
ASEAN are two examples—can help.
Selecting the right form of participation
In addition to mitigating the inherent risks,
investors must choose the right participation model
if they are to maximize. Exhibit 4 explains the
choices, several of them suitable for use in a PPP.
Foreign investors and institutions typically
follow an equity-led entry strategy in the initial
years, since their local balance sheets tend to
Exhibit 4
Description
There are eight infrastructure participation models.
MoCIB 11 2010
Asian infrastructure
Exhibit 4 of 5
Source: Interviews; bank and annual reports; McKinsey analysis
Equity
Integrated
Debt 1 Project lending Participates in project finance purely as a lender, with access
largely limited to interest income
2 Balance-sheet-heavy
lead arranger
2A Mandated lead arranger (MLA) provides primarily lending,
syndication capabilities
2B MLA provides significant transaction banking cross-sell capabilities
3 Balance-sheet-light
lead arranger
3A Primarily offers debt capital markets, structuring, and advisory skills
3B Focuses on fee-based income from debt syndication, advisory,
structuring and placement, and transaction banking
4 Advisory Primarily offers investment banking products, including
debt and equity syndication
5 Advisory with equity
investment
Provides equity advisory, syndication, and strong placement
capability and participates in project equity
6 Equity fund management Manages own or third-party equity funds, with access to
fund-management fee as well as performance fee
7 Debt-led integrated model Offers products across the project-finance value chain, leveraging
strong balance-sheet and lending capabilities
8 Equity-led integrated model Offers products across the project-finance value chain, with
emphasis on equity-investment and fund-management ability
6Asia’s $1 trillion infrastructure opportunity
be insufficiently capitalized to support debt-led
models. Domestic and regional banks, by contrast,
typically use their strong local balance sheets
to engage in debt financing.
In recent years, savvy financial institutions
with a well-rounded suite of financial services
have begun adopting integrated models for
infrastructure investment. For example, besides
funding the construction of an airport, an inte-
grated player might also offer transaction banking
services and insurance to the airport operator.
Such cross-selling can deliver significant value, as
our research suggests an estimated 40 percent
of potential revenues from infrastructure projects
come from nonlending sources (Exhibit 5).
Even better, this extra value opportunity comes
with relatively little additional risk—after all,
Exhibit 5
Revenue pools generated, 2010–141
Product
category
As % of
total pool
Revenue pools, $ million Comments
Approximately 40% of the potential revenues from infrastructure
projects come from nonlending sources.
MoCIB 11 2010
Asian infrastructure
Exhibit 5 of 5
1 Includes power, ports, roads, railways, airports, storage, gas, and water sectors.
Source: Interviews; Planning Commission; McKinsey analysis
Total 11,925
Advisory 148
• Preproject advisory and project appraisals
are offered by most players at a low price
to get a foothold into the deal
Lending 7,103
• Interest rates have been below prime, yielding
net interest income of 200–250 basis points
• Maturities are 12–15 years
59
Transaction
banking 3,180
• Bank guarantees are used extensively
during construction
• Trust and retention accounts and collection
services are used during regular operation
27
Debt
fund-raising 190
• Syndication is the prominent (90%)
debt-raising tool
• A few big developers also carry out debt
arranging by themselves
2
Equity
fund-raising 94
• Penetration of public and private equity
varies significantly across sectors, depending
on promoter profiles and ticket sizes
1
Equity fund
management 774
• Private-equity players will hold 10–30% of
equity across sectors, and the majority
of the equity will earn both management and
performance fees
6
4General insurance 536
• Infrastructure is a significant piece of
the general insurance pie
7 March 2011
the operation of an airport, or indeed a power
plant, once up and running, is relatively
straightforward compared with getting it built in
the first place.
It is critical, however, to note that infrastructure
investment requires significant dedication of time,
organizational resources, and management
focus. The example of Macquarie Group provides
a good illustration of how a global infrastructure-
investment business can be built. Macquarie
first developed its expertise in infrastructure by
capitalizing on the wave of Australian privatization
of national infrastructure in the 1990s. Armed
with the knowledge built up, Macquarie then
launched its international expansion. Despite its
expertise, however, it still took Macquarie
more than six years for infrastructure to become
a significant international platform. Along the
way, it has developed sophisticated risk-
management techniques to oversee activities in
disparate markets.
Despite the challenges and risks, Asia’s infra-
structure growth over the next ten years
is an attractive opportunity for global investors
and financial institutions. There will be more
than $1 trillion of infrastructure projects open to
foreign investment, and further value can
be captured by offering a full range of associated
financial services besides lending. To tap
into this growth, global capital players must select
the appropriate participation model and
dedicate sufficient resources to build up their
expertise and familiarity with Asian infra-
structure markets.
Naveen Tahilyani is a principal in McKinsey’s Mumbai office, where Toshan Tamhane is an associate principal;
Jessica Tan is a principal in the Singapore office. Copyright © 2011 McKinsey & Company. All rights reserved.