Hand in hand

Asean’s ability to improve procedures for infrastructure projects is crucial to attract much-needed private capital

September 3, 2014
Hand in hand

Asean’s ability to improve procedures for infrastructure projects is crucial to attract much-needed private capital

By Jennifer Meszaros
There is no doubt about it: Southeast Asia has an enormous appetite for infrastructure investments. The region’s infrastructure projects will require annual investments of about $60 billion from 2010 to 2020, according to the Asean Infrastructure Fund.
While most projects have traditionally been financed through national budgets, governments are unable to meet the financial requirements through public funding alone. Against this background, Asean nations have to break the mould and create an environment conducive to private-sector participation.

construction worker jakarta
Mind the gap: an Indonesian labourer works on the Setiabudi Sky Garden construction site in Jakarta

Public-private partnership (PPP) is the magic term, which describes a relationship between a private-sector company and a government agency in order to build projects that will serve the public, such as roads, bridges and airports. The private enterprise then funds the construction in exchange for the operating profits once the project is complete.
“PPPs can play a strong role in mobilising private-sector capital and expertise for costly infrastructure investments,” the Asian Development Bank (ADB) said in a report on this type of funding. Indeed, PPPs have been used extensively throughout the world for a long time.
Asean is no exception. Each nation boasts at least a few projects, with Malaysia tipping the scale at more than 500 PPPs awarded since 1983. Thailand has had a series of successful PPPs in the power, ports and transport sectors since 1992.
While some nations’ track records are impressive, only a few Asean nations are meeting their potential. “The number of PPP transactions beyond the energy sector has been limited, indicating that the business environment in Southeast Asia has not been conducive for PPPs,” the ADB said.
“Weaknesses are exacerbated by the lack of supportive policy, legal and regulatory frameworks for PPPs, and the lack of government capacity to manage […] processes and information.”
A prerequisite to push such projects forward is an enabling environment, said Scott Jazynka, a senior infrastructure advisor at Development Alternatives Incorporated, a project consultancy in Washington. “An enabling environment means to have PPP laws in place.
Trust in the legal system is critical,” he said. “Not only do the PPP laws have to be in place with all the regulations and guidelines, but there has to be rule of law within the country. That’s something investors are going to look at.”
And what certainly matters is profitability. “Many governments are often poorly prepared to tap into private financing due to unclear allocation of risk and returns between the public and the private sector,” the CIMB research institute noted.
Cambodia is an example of how the absence of efficient laws has limited growth. While the Kingdom has managed to attract a number of partnerships, “the projects being proposed are often quite small and emerge on an ad hoc basis”, the ADB said.
“The legal, regulatory and governance environment has constrained the development of transparent and effective PPPs [and] weaknesses in the business climate continue to be a significant problem.” Although the government has made some attempts to improve the regulatory environment, the private sector cites corruption and political instability as the most important business climate constraints.
Shaking hands
Photo: EPA / Mast Irham

Cambodia’s outlook is not particularly bright. According to the ADB, “it will take time for the government to develop all of the necessary institutions and financial arrangements for a PPP program”. Many other lesser-developed Asean nations face the same problems – only Singapore has a well-regulated procurement system and efficient laws governing enforcement and accountability.
“Lack of transparency in Indonesia, the prevalence of corruption in the Philippines and populist changes to policy all present serious challenges,” Kroll, a corporate investigations and risk consulting firm, wrote in a fraud report.
While the investment climate appears bleak across the region, there is also a silver lining on the horizon. “Despite inconsistencies in execution, improvements in the business and regulatory environment are reducing barriers to entry. Legislative reforms passed or slated in Indonesia, Thailand, the Philippines and Myanmar have coupled with relatively favourable concessions offered to foreign investors by governments looking to attract infrastructure investment,” Kroll said.
An increasing number of countries are recognising the benefits of a well-regulated system. The Philippines is a case in point: The government has made considerable efforts to revamp its PPP policies in recent years.
Before the reforms, projects were poorly regulated and followed “a dominant deal-based approach – cherry picking of PPPs by government contracting agencies, state-owned enterprises or the private sector”, and failed to generate the desired annual investment of 2% of the country’s gross domestic product, the World Economic Forum (WEF) said recently.
“It’s critical that the procurement or tendering is done fully open [with] absolutely the fairest competition that you can possibly have,” said Jayznka. “This is very important because [countries] are basically awarding the PPP to a monopoly.”
In 2010, the Philippines reworked its PPP strategy and launched two government agencies. Nonetheless, progress remains limited. Today, only seven PPPs worth $1.4 billion have been awarded despite a pipeline of more than 40 projects, including contracts for toll roads, school projects and an airport terminal.
Still, it’s a step in the right direction. “A robust pipeline of high-quality PPP projects has emerged, raising the likelihood that the country’s PPP program will be sustainable,” the WEF said.
Other Asean countries should take note. Indonesia needs an estimated $210 billion in infrastructure investment over a 15-year period to 2025, of which $105 billion is expected to come from projects with private sector participation. Vietnam is in need of $170 billion over the decade to 2020 – almost a third of the sum will be sourced through the partnership model.
While public-private partnerships might not be the panacea for infrastructure needs, they offer a way to bridge the funding gap. But the region has to get the numerous constraints out of the way to avoid a major bottleneck for development.

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