The HKMA Infrastructure Financing Facilitation Office (IFFO) has been established for nine months. As IFFO has organised the Debt Financing and Investors’ Roundtables recently, I have taken this opportunity to review with my colleagues the work we have done so far. Our view is that the groundwork of IFFO has been laid successfully and we are optimistic about the long-term outlook of infrastructure investment and financing.
IFFO’s mission is to facilitate infrastructure investment and financing by working with key stakeholders. At present, infrastructure investment and financing is not yet a popular asset class in Hong Kong. Indeed, the development of Hong Kong into an infrastructure investment and financing centre takes time and requires a great deal of hard work and patience during the early stages. Some of the important first steps that we are undertaking include building up the capacity of the industry in infrastructure investment and financing, and bringing in more investment opportunities in infrastructure.
Regarding capacity building, IFFO has, since its establishment, built an extensive network comprising 63 prominent partners. These include financial intermediaries such as multilateral organisations, institutional investors and banks, infrastructure project developers and operators and various professional service firms. IFFO has organised and participated in 13 large-scale conferences, seminars and workshops on infrastructure investment and financing, including a seminar entitled “President Jin Liqun on Asian Infrastructure Investment Banks’ Operations and Projects”. We have signed memorandums of understanding with China Development Bank and The Export-Import Bank of China respectively, to support and encourage them to use Hong Kong’s platform to “go global”. At the Asian Financial Forum held in January this year, we also invited representatives from Bangladesh, Hungary, Iran, Kazakhstan and Turkey to share with us the investment environment updates and upcoming opportunities in infrastructure investment and financing in these countries.
As previously mentioned, IFFO has organised the inaugural Debt Financing and Investors’ Roundtables recently. The event attracted about 100 senior executives from various infrastructure investment and financing organisations, including sovereign wealth funds and pension investors from Australia, Canada, China, South Korea, the Netherlands, Singapore and the United Arab Emirates, with total assets under management reaching US$4 trillion. Attendees also include infrastructure project developers and operators such as China Hua Neng Group, China Three Gorges Corporation, General Electric and CLP Group. The Roundtables discussed emerging market infrastructure investment and financing opportunities, and covered how infrastructure projects could be made more bankable and investable through different risk mitigation measures.
One reason for the huge funding gap in infrastructure investment and financing1 is the difference in the expectations of investors/financiers and operators. For example, some investors perceive emerging markets as risky and therefore require relatively high returns from infrastructure projects in those markets before agreeing to invest. On the other hand, infrastructure operators may not understand that investors place great emphasis on various factors, such as corporate governance, environmental protection and social responsibility. As a result, interested capital and investable projects can be searching for but missing each other at times.
A key objective of the IFFO Roundtables was to develop a reference term sheet for infrastructure investment, which sought to come up with a set of common language that can be understood and accepted by the investing/financing and operating sides, thereby narrowing the gap in their expectations and bringing them closer for doing deals. The term sheet set out various factors to be considered for investment, with ”project stage” being one example. As investors tend to be more interested in less-risky brownfield projects, the attractiveness of greenfield projects can be increased by securing land acquisition and approval documentation, or by bundling with brownfield projects, etc. Since institutional investors also attach great importance to governance, infrastructure project operators should put in place proper procurement systems, effective anti-corruption codes, etc. These are the areas that infrastructure project operators should pay attention to.
The term sheet also included risk mitigation measures regarding various potential risks associated with infrastructure projects, including financial risk (e.g. exchange rate fluctuation), business risk (e.g. counterparty delinquency or default), construction risk and regulatory risk. Effective risk mitigation measures can help investors strike a reasonable balance between risks and returns.
We hope the term sheet will enable infrastructure project developers with financing needs to better understand issues that may deter potential investors, while strengthening the confidence of investors looking for long-term stable return for investing in emerging markets. It should help promote smoother, more effective communication and co-operation between both sides.
IFFO will continue to organise and participate in various international and local events to promote information exchange among stakeholders and build capacity in infrastructure investment and financing. The next step will be to encourage investors/financiers, such as institutional investors and banks, to identify potential emerging market infrastructure projects for investment and financing through the IFFO platform, and to facilitate market participants to develop specialised risk management products. Hopefully, successful cases will have a demonstration effect, attracting more funds into emerging market infrastructure projects. I will provide an update on the latest development in due course. Meanwhile, information about upcoming IFFO events will be disseminated on the IFFO website.
The initial groundwork and early exchanges outlined above constitute small pieces in the final jigsaw. We set a clear goal at the outset: Riding on the global tide of infrastructure investment and financing, we seek to further diversify Hong Kong's financial industry, thereby promoting the development of our financial intermediaries and related professional service chains and creating more high value-added jobs, which will benefit the community as a whole.
Our hard work over the past few months has already produced a ripple effect. There has been positive feedback from participants in Hong Kong and other parts of the world, with keen interest and great expectations for taking part in the IFFO platform. As they would often say, there are “lots of takeaways”. In the investment world, pragmatism rules, leaving little room for empty talk. Whenever we see a big group of repeat participants as well as many new faces to our events, our conclusion is: this is a promising arena well worth exploring.
Deputy Chief Executive, HKMA and
Director, Infrastructure Financing Facilitation Office
12 April 2017
1 According to the estimates of the Asian Development Bank, funding needs for infrastructure development in Asia would be about US$1.7 trillion per year on average from 2016 to 2030.