The incredible scale of the Belt and Road Initiative is creating opportunities for global investors seeking long-term asset classes in infrastructure and energy in ASEAN. For Macquarie Group, investment also includes a focus on renewables
Macquarie Infrastructure and Real Assets (MIRA), one of the world’s leading infrastructure investors, last year became a 31.7% shareholder of renewable energy producer Energy Development Corporation (EDC), creating a strategic partnership with First Gen Corporation, a local company which holds a majority stake in EDC.
EDC is the world’s largest geothermal company and the largest producer of geothermal energy in the Philippine archipelago. Projects are based in central and southern areas in Bicol region, Leyte province, Negros Island and Kidapawan, Mindalao. It produces around 9% of the nation’s power using thermal heat, wind generation and hydroelectricity.
MIRA Co-head and CEO of Macquarie Group Asia, Ben Way, said the deal is still the largest take-private in the Philippines, thanks to MIRA’s successful privatisation bid for the previously listed company.
Ben Way, Macquarie Infrastructure & Real Assets
“If someone had asked me five years ago whether we would have done a deal with an enterprise value of US$4 billion in the Philippines, in the geothermal sector, my answer would have been no. It shows how quickly the region is evolving, and the scale and increasing maturity of the opportunities. It’s really astounding,” Way said.
The US$1.36 billion deal saw MIRA tap a pool of cash in alternative asset classes, sourced from pension and insurance funds in partnership with Singapore-based Arran Investments (an affiliate of the Singaporean sovereign wealth fund GIC), to create a new consortium, Philippines Renewable Energy Holdings Corporation (PREHC).
ANZ bank handled the project’s underwriting, financial and FX hedging solutions. The transaction also involved three global legal firms, Hogan Lovells, King & Wood Mallesons for MIRA and Allen & Gledhills for the Singaporean partners.
Since privatisation, EDC has displayed a growing ambition to upgrade and expand. In April 2018, it signed a 15-year loan agreement with the International Finance Corporation (IFC) worth US$90 million.
Building Belt and Road relationships
Macquarie Group has built a relationship with the Philippines government over a number of years. During this time, it helped set up a Philippines fund, financed primarily from the national pension fund. Capital from that fund is helping to build local infrastructure, often under a public-private partnership (PPP) framework.
“The Philippines is a good example of an ASEAN country that has a modern PPP framework. It has very good regulation and tender processes, very clear rules of engagement and has freed up local capital and regulations. This has made it attractive for foreign and national institutional capital, and now the Philippines government has made it a destination for infrastructure investors. It’s a real success case among ASEAN nations, and a good example of a country implementing new policies and investment frameworks, leading to success,” Way said.
Strategic steps
Trust and enduring relationships are key to Macquarie Group’s success. According to Way, responsible owner-operators build trust by maintaining high standards while delivering returns to investors. For Way, success comes down to a simple adage “doing well and also doing good”.
To achieve results like EDC, potential investors need to do their homework. While capital raising is required from institutional investors globally, it’s up to the expertise of local teams to build a strategy from the ground up, since they understand local nuances, stakeholders, governments and regulations.
Regional governments also need to do their bit, shouldering their share of risk, while guaranteeing a minimum level of returns, to encourage investors to take the first step in the development of a PPP.
Strategic thinking
MIRA projects in ASEAN focus on two countries; Singapore and the Philippines. Its Singapore partnerships include chemical and oil storage with local strategic partners, supporting trade flows (e.g. shipping) and the movement of commodities.
Way thinks ASEAN nations need to broaden the pools of funds available for infrastructure, where capital held by insurers and pension funds could be repurposed for development and infrastructure.
For example, Thailand still needs regulatory reforms around pension funds and investing, but there are some positive signs this will occur. In the case of Indonesia, Vietnam and Cambodia, he predicts the most successful one will be the nation that follows the Philippines’ path to economic prosperity, welcoming development and enacting regulatory and financial reforms needed in the first phase of a PPP project.
ASEAN nations are central to the growth of the Initiative’s land and sea corridors. As they work towards economic maturity, demand for infrastructure and PPP projects is likely to grow, opening more opportunities for investors.
“The exciting thing about ASEAN is its demographics and scale. Over time, more capital will become interested and comfortable in investing in that part of the world,” Way said.
