Jonathan Garner
5 June 2008
opinion
Johannesburg — AN EMERGING-market infrastructure boom is taking place. From airports to power, ports to railways, real estate, water and beyond, emerging-market governments and private-sector players are deploying enormous amounts of capital to upgrade the emerging world.
The build-out of the developing world, as it closes the infrastructure gap with the developed world, will probably be the most important theme in global investments for the coming decade.
Not only will this transformation significantly change the competitiveness, standard of living and overall prospects for the emerging world, it will continue to have a major effect on global capital markets. Here's how.
n Demand for infrastructure is increasing, and appears likely to continue increasing.
n At the same time, strong economic performance across emerging markets has given emerging-market governments significant capital to dedicate to the building of infrastructure via conventional public sector provision, with or without external project finance support.
n Existing developed-market capital goods providers and contractors are tapping into the opportunity and experiencing a surge in activity, which is expected to be sustained.
n New emerging-market private-sector firms -- many of which are diversifying into infrastructure provision or, in some cases, ownership -- are becoming more meaningful competitors or partners to the developed-market firms.
n Listed emerging-market infrastructure assets, either pooled in fund form or listed as individual entities by entrepreneurs or governments, are appearing in the market in significant size for the first time.
n Meanwhile, many infrastructure assets in the developed world are moving from the public markets into private hands, raising the scarcity premium on longer-duration assets of this nature and giving the emerging-market names a rapidly increasing share of the infrastructure investing universe.
One of the reasons for the massive boom in infrastructure is rapid urbanisation. In many cases, along with job prospects, migrants are finding crowded roadways, overused public transportation systems, inadequate water and sanitation services, and a lack of affordable housing.
About a quarter of the world's population -- 1,6-billion people -- remains without electricity. An estimated 1,1-billion people do not have access to safe drinking water, while 2,6-billion lack basic sanitation, according to the World Bank.
The lack of infrastructure is particularly acute in sub-Saharan Africa.
The strain that urban infrastructure systems are experiencing now is not going away any time soon. In fact, urbanisation is actually accelerating, particularly in the emerging world. United Nations estimates show that the global urban population of 730-million in 1950 had risen by a little more than 2,3-billion people in the 40 years to 1990 and is set to rise to 3,8-billion people in 2015. The dramatic increase in urban populations forecast across the emerging world means continued strong demand for basic infrastructure such as power, electricity, water and related services, as well as transportation networks.
For example, world electricity demand is projected to double by 2030, says the International Energy Agency (IEA), driven mostly by growth in China and India. More than half ($11,3-trillion) of the IEA's forecast energy investment is expected in the power industry. There is no guarantee this investment will occur. As seen in SA with recent power outages, even if an investment need is identified, institutional capacity constraints mean delivery does not always take place on a timely basis.
For the coming decade, Morgan Stanley forecasts $21,7-trillion in infrastructure spending in emerging markets. We expect Asia to dominate, with China expected to make up 43% of spending and India 13%. Russia makes up 10%, with Brazil at 5%, the Middle East 4% and SA 1%.
The forecast $21,7-trillion in emerging market infrastructure spending presents a substantial opportunity for investors. Both emerging- and developed-market companies are likely to benefit from this transformation of infrastructure.
However, while demand for infrastructure spending in emerging markets is strong and funding is plentiful, the potential for profitable involvement as an equity investor is subject to a range of factors, such as contractor capabilities, government red tape, and human capital resource and machinery limitations.
These factors might affect the delivery of infrastructure projects.
This, of course, is crucial in determining future returns, given that cost overruns upfront can have a major effect on returns, given the lengthy payback periods on many infrastructure projects.
Therefore picking the best countries, sectors and stocks within those sectors is of crucial importance.
Garner is global emerging markets strategy head at Morgan Stanley in the UK.
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