Why private equity can’t fill the funding gaps

THE US has made a mistake in choosing not to participate in China’s initiative to establish an Asian Infrastructure Investment Bank, says US business leader and G20 government advisor Terry McGraw. He sees a funding vacuum for infrastructure in emerging economies. . .

In the lead-up to China hosting next year’s Group of 20 (G20) summit, US business leader, Terry McGraw, has made frequent visits to China for meetings with his Chinese business counterparts and Chinese leaders.
McGraw is an active member of the business coalition known as B-20, which advises G20 governments on policy priorities to enhance and deliver economic growth.
“I went to China this year to see Chinese
Premier Li (Keqiang),”  McGraw told ATI. “I was very taken by him. He is so positive, upbeat, pro-growth, pro-business and pro-opportunity. I could talk to this guy all day long, and our country should be able to work with him.  I think President Xi (Jinping) is in the same category.”
An influential voice of business, McGraw is now Chairman Emeritus of McGraw Hill Financial Inc, the company founded by his great grandfather. He stepped down from the chair in April this year. This gives him more time to champion the cause for freer global trade (see ATI August 2013).
In his view, Chinese leadership is “desperately needed and wanted” in the world
today.  “China is too important and too valuable to the global system, and, from a leadership
position, we need to see China step up.”
On China’s disputes with various of its neighbours over territorial claims in the South China Sea, McGraw says: “When you start putting warships in there, somebody could do something stupid.  You don’t want to be the one putting a match to the fire.”
He also believes the US has made a mistake in choosing not to participate in China’s initiative to establish an Asian Infrastructure Investment Bank (AIIB). “I think the US should have been with AIIB,” he says.
 China’s timing in getting the AIIB off the ground is good, he adds. “We have to focus on investment and on infrastructure. Both are critical for growth.
 “Today, capital demand has increased, but banks are still providing the same amount of capital as in the past, so the questions are: Where is that capital coming from? How do we encourage banks to provide more capital? How can we allocate capital to important projects that will initiate the kind of growth we are looking for?”
 McGraw says there is big demand for funding to build infrastructure, especially in emerging economies. The developing and emerging markets need capital and infrastructure, but their debt levels are too high.
 “In many cases, their sovereign credit rates are below investment grade. They have to pay a lot to borrow, and, in many cases, they are stymied. They have been locked out of the market.  So it is a tough situation.”
In this sense, he says, there is a funding vacuum — and that is because the credit quality (of these economies) is too low to attract investors (and lenders).
To a degree, McGraw says private equity groups, like Blackstone and Blackrock, are filling the funding gap. But these groups are not just giving funding, he adds. They are treating it as an investment in exchange for big returns.
 He acknowledges that global financial markets will not return to the days of easy credit available in the early 2000s.
 “When we talked about the financial market in the early 2000s, everything was so good then. Somebody should have been saying: ‘Take it easy, something is not quite right here.’ But everybody was making a lot of money. Then the downgrades started in 2007, and by
September 2008, it was a meltdown. When you look back, it was just a matter of time before (a crisis) hit.”
 It has taken from 2008 until now, he says, for the US economy to start to come back. The
upshot is that there are now more rules and regulations. “Could such a crisis happen again? My answer is ‘no’. It could not happen again the way it happened in 2008. Could you run into a problem differently? Yes. But we have become more sophisticated.
 “What you are seeing is cautiousness.
People are still feeling their way — which is good. There is a silver lining here that nobody saw. The crisis opened the doors for emerging markets.”  He explains that the emerging economies took off and grew rapidly at a time when the advanced economies were devastated by the financial crisis.
Asked if there has been a realignment of the global
financial structure, with the retreat of large global banks, his answer is tentative. “One could say ‘yes’
because the evidence points to it.  But it is too early to tell, and I would want see more evidence.” He adds: “If you have been hurt significantly and you’ve gone through a great amount of pain, you are reluctant to get back in the game again.”
 Geopolitics and global banking aside, McGraw’s real concern is global trade because of its role in helping generate growth in the world economy. He laments that a successful conclusion to the multilateral trade negotiations, the Doha Development Agenda, remains elusive.
 One of his many hats is as Chair of the Paris-based International Chamber of Commerce, an umbrella group for Chambers from 130 countries.  “You still have too much economic fragmentation between countries,” he says. “Too much disparity in too many countries.  (So) coming up with a comprehensive (global trade)  agreement at this point is still pretty difficult.”
 However, he praises the WTO Director
General, Roberto Azevedo, for adopting a new approach to get some key elements of the Doha Round across the line. Azevedo has broken up the list of subjects into components.
 “By breaking it up, you could talk about the importance of each component. As an example, we are talking about an international trade agreement on services, which is terrific.  It is the first time that the services sector has had any attention.” McGraw is quick to  point to the fact that export of services is growing at a much faster rate than manufactured goods.
 Azevedo is credited with bringing the WTO’s membership around to agree to a Trade Facilitation Agreement (TFA) during the 2012 WTO Ministerial meeting in Bali. This agreement will deliver many practical benefits, especially for exporters, in areas like Customs, and the movement, release and clearance of goods.
 “This is good news,” says McGraw. “We are showing real progress here, and people are
going to benefit from this. But it has to be ratified by individual governments. It needs two-thirds of the 161 WTO members to ratify it
before the Agreement can be implemented.”
 So far, just eight countries, including China, the US, Japan, Australia, Hong Kong and
Singapore, have ratified, and it is a long way from reaching the 108 ratifications required. “So we need a push from the business community to interface with Governments to get the things done,” says McGraw.
 On the Trans Pacific Partnership (TPP), McGraw told ATI that US Trade Representative Mike Froman has done “an unbelievable job” to bring the regional trade agreement among 12 countries closer to reality. “The good news is: it will be done — and soon,” says McGraw.
 “The next question is: If you have the TFA and the TPP, does that open any more doors?  Does this mean we can see renewed
energy or enthusiasm behind the Transatlantic negotiations (Transatlantic Trade and Investment Partnership)? Personally, I get a little sceptical because of the economic fragmentation of Europe, but if the TPP is completed, I think it will put serious wind at the back for TTIP, and that would be ideal.”
 While bilateral or regional free trade agreements are all good, he says every country in the world will benefit only when the Doha Round is successfully concluded. Those outside the TPP might start to realise that they are missing out on the benefits of the trade agreement, prompting them to refocus on the Doha Round.
 Always an optimist — and even though he accepts that the timing for a Doha agreement is “off”  — he remains convinced that “Doha will work”. “If these blocs — the TPP and the TTIP — can be done, then you are sneaking up on Doha. I am a firm believer that Doha will get done. I don’t know if it will get done that soon, but a lot more energy will be put behind it.”