Infrastructure has always been one of the most dynamic asset classes in the investment space and has long been identified as having the potential to unleash huge economic development and improve the general welfare of a nation’s population.
Traditionally, when people think of infrastructure, they think of things like roads, bridges, ports and airports. And with the rising general awareness of sustainability, and environmental, social and governance concepts, green infrastructure has also increasingly come into view by investors, as evidenced by the expanding basis of green portfolios in the financial market, as well as the massive deployment around the world of renewables, such as solar panels and wind farms.
Still, there is one kind of infrastructure with relatively less awareness, but of no less importance than that of other types of infrastructure – social infrastructure, that is infrastructure related to education, healthcare and other pro-public interest sectors.
Investors’ interests in social infrastructure can be reflected on the bond market because bonds are the typical instrument used for infrastructure financing in capital markets. Globally, in 2023, green, social, sustainability and sustainability-linked (GSSS) bond issuance, according to recent Credit Agricole CIB data, exceeded US$800 billion, with more than 60% of the bonds labelled as green. The share of social bonds, by comparison, is only around 10%, indicating that projects related to social infrastructure are not yet a mainstream choice for investors.
Social infrastructure is distinct from other infrastructure types in that its success not only depends on the physical capital invested in it, but also the social elements built into it. Think of a school or a hospital, the typical representations of social infrastructure. From the exterior, they are not different from traditional infrastructure consisting of concrete, cement and glass. However, their functionality as social capital depends on what happens inside them. This duality makes social infrastructure operations far more complex than their non-social counterparts.
Traditional infrastructure upon completion normally requires only light supervision by humans, for example, roads and ports start to function as vehicles and goods pass through, and solar panels and wind turbines start to generate electricity. However, with social infrastructure projects, say a school or a hospital, to be successful, they need consistent additional effort from qualified personnels, such as teachers, doctors and nurses, to function successfully. Otherwise, they will lose their purpose and become just hollow buildings.
More importantly, the elements involved in social infrastructure, such as talent, are more immobile than physical capital, such as machines, making them not as easily replaceable or replicable. The scarcity of seasoned teachers or qualified physicians in the market is a good example that showcases the stickiness of social elements, and the variance of the capabilities of these talents is just another example of how uncertain the functioning of a social infrastructure can be.
In an infrastructure lifecycle that spans from constructions through to operations, these and other uncertainties around the social elements make investors, particularly those from the private sector, hold a very cautious attitude to social infrastructure investments.
However, social infrastructure is predictably an option on the investors’ menu that will be increasingly considered in future decades because, as economic and demographic trends suggest, there will be increasing demand for educational and healthcare infrastructure. In turn, the quality of the services from these sectors hinges on the investment made into social infrastructure.
In the Asia-Pacific region, awareness of the need for more social infrastructure projects has been growing in recent years. Asia-Pacific’s social bond issuance grew 43% in 2023, an S&P report points out; and, globally, in 2023, the region issued the highest proportion of social bonds. GSSS bond issuance, the report also notes, is expected to grow to US$1 trillion in 2024.
As an example of a successful social infrastructure bond issuance in the region, the Asian Infrastructure Investment Bank (AIIB) in 2022 approved the Haier Social Infrastructure Leasing project, which provided US$100 million of funding to social bonds issued by Haier Financial Services, a commercial leasing company in China. This was the AIIB’s first approved social infrastructure project in China, and the project’s proceeds were used to promote gender equality, education, food system and healthcare projects, and micro, small and medium-sized companies.
And since the project involved funding from the AIIB, a multilateral development bank, the project enjoyed a high level of transparency. When Haier published its annual social bond impact report a few months ago, it disclosed a series of positive impacts resulting from its social infrastructure investment, among them, an increased number of students, over 36,000, and the creation of new employment opportunities, over 9,000.
