History Lessons

What is driving Asian investment in infrastructure today and how have governments in the region responded?
There is currently a huge infrastructure deficit in Asia caused by decades of significant underinvestment in strategically important sectors such as roads, airports, ports et cetera. Indeed, the Asian Development Bank (ADB) produced an estimate in 2009 that indicated that Asia would need to invest around $8trn between 2010 and 2020 to overcome this deficit. Unfortunately to date, the actual annual total regional investment in infrastructure is a mere fraction of this amount.  

However, governments around Asia are increasingly beginning to realise that this infrastructure deficit is causing economic bottlenecks that will likely limit GDP growth moving forward. Therefore, governments from Mongolia down to the Philippines are beginning to look at ways in which they can increase their stock of critical infrastructure and, of course, one option is to procure this infrastructure through PPPs. Indeed, many countries have already introduced various enabling legislation to allow the development of PPPs and several have also established dedicated PPP units. For example, the Philippines established a PPP Centre in 2010, which has recently been very successful in procuring and awarding several PPP projects across a number of sectors including roads, rail and schools.

How would you describe the PPP market at the moment in Asia?
It is probably fair to say that there is broadly a twin track PPP market in Asia at the moment.

One track essentially consists of those, mostly developed, economies which have been relatively successful in developing and implementing PPP projects over a long period (Japan, Korea, Hong Kong, Singapore), while the other track consists of those countries where there has generally been more mixed results in procuring PPPs (such as the Philippines, Indonesia, Vietnam). 

The two big economies in the region (outside Japan) are of course China and India, and while India has historically been the largest market for PPP projects in Asia in terms of volumes (particularly in the road, airport and power sectors), it has had very mixed results in terms of implementation and operation of the projects once awarded. Over-optimistic traffic forecasts for roads and changing policies for the power sector have had adverse impacts on many of the road and power projects procured through the PPP mechanism. 

As for China, although the concept of PPPs has existed there for many years, it has only been recently that the Chinese government has started to actively promote and support PPPs, with the National Reform and Development Commission recently listing over 1,000 projects to be procured on a PPP basis. These include rail, water, roads, schools and hospital projects. 

However, in the past, many PPP projects have either not been successfully tendered or, if tendered and awarded, have typically been awarded to state-owned enterprises (SOEs), which fundamentally weakens the whole concept and purpose of PPPs.

Whether this will change in the future will very much depend on the Chinese government continuing with its policy of trying to reduce the levels of spending and debt incurred by local authorities and SOEs. However, if this is the case, the next question is who will take up these PPPs, as on the one hand the private sector in China is typically very risk averse and mainly comprises small and medium sized firms who do not have the experience or financial muscle to bid for the large PPP projects, while on the other hand, off shore investors may not find the PPP market in China very attractive from a number of perspectives including legal, regulatory and land.

What are the issues that are constraining or limiting the successful development of PPP projects in Asia?
There are a number of reasons that are limiting the successful development of PPPs in Asia, including bureaucracy, conflicts between ministries, corruption, lack of capacity and understanding of PPPs on the government side, legal and regulatory issues, land issues, unfair allocation of risk and lack of standardised documents.

However, there is a more fundamental issue: the widely held belief that PPPs are actually a financing option rather than a procurement option. Unfortunately, this fundamental error in approach is then often exacerbated through ignoring the partnership aspect of the deal when structuring the deal and negotiating the concession contract. Given that this partnership element in a PPP is critical, it is therefore important to not only structure the concession contract in a way that allocates risks to the party best able to manage them, but also builds certain flexibility into the contract upfront, to reflect the fact that various events may occur over the lifecycle of the project which could adversely impact the project and its economics. 

Unfortunately in Asia, there is a tendency for governments to try to automatically procure most infrastructure projects on a PPP basis without undertaking the necessary analysis and evaluation to determine whether a PPP is actually the best method of procurement.

Many governments then compound the problem during the tendering phase by typically measuring the success of the tendering process by how much risk can be passed onto the private sector and, by doing so, fail to recognise the potential knock-on effects. These are that private sector bidders may i) eventually decide not to bid for the project (because the risks are too high) or ii) build a large cushion into the bid to protect themselves against the risks that are being unfairly transferred to them (which either reduces or negates the project’s value-for-money) or, more typically in the Asian context where many of the sponsors are relatively inexperienced, iii) submit a bid for the project without fully taking into account the risks involved.

What is being done to overcome these constraints and encourage the development of a successful PPP market in Asia?
Many governments are learning from their past mistakes and proactively introducing legislation, regulatory measures and other policy initiatives to try and encourage the successful procurement of PPP projects.

For example, in Indonesia there are often problems for private sector counterparties in acquiring the land they need for the PPP project. Therefore, in 2012, the Indonesian government introduced a Land Acquisition Law related to compulsory land acquisition and, more recently, it has amended the PPP law such that the responsibility for procuring the land for PPP projects now lies with the public sector rather than the private sector. In addition, several institutions that originally had separate responsibilities for procuring infrastructure projects are now being integrated into one of the existing organisations (PT Sarana Multi Infrastruktur) to help streamline the decision-making and approval processes.

The multilaterals are also increasing their level of engagement and involvement in helping to create the right enabling environment for the successful development of PPPs in Asia, including the provision of legal, technical and regulatory support. Although the World Bank and Asian Development Bank have been helping to build PPP capacity in developing Asia for many years, they have recently significantly increased the amount of resources (both financial and human) being applied to help build capacity, particularly with respect to the processes by which governments evaluate and determine whether a particular project should be procured through a PPP route.

For example, the ADB has established the Office of Public Private Partnerships and the World Bank has recently established the Global Infrastructure Facility. The purpose of both is to better facilitate the preparation and structuring of complex infrastructure projects so as to secure greater private sector investment.

Given the above, I am fairly hopeful that with the active and positive engagement of all stakeholders in the PPP community, combined with a better understanding on the government side of what a PPP is and how best to successfully procure a project, there will be an increasing number of PPPs being successfully procured across Asia within the next few years.

What are your views on the Global Infrastructure Hub (GIH) and its likely impact on the region’s infrastructure investment?
The more institutions who are willing to help build the much needed capacity and understanding of PPPs in Asia the better. Therefore, once the GIH is fully operational, it will be a much welcomed addition to the PPP community. Given that Australia has by far the most successful PPP market in the Australasia region, it has been able to build up a tremendous pool of experienced PPP practitioners. In that context, it therefore makes a lot of sense to establish the hub in Australia and leverage off that knowledge and experience and try to successfully apply it to the rest of Asia. 

The views and opinions expressed in this article are solely those of the author and do not necessarily reflect those of SMBC or any other institutions that the author has worked at previously