Why PPPs have yet to really take off in Asia

Public-private partnerships can be an efficient way to develop infrastructure. But private investors need to be careful when selecting projects.

Public-private partnerships (PPP) have long been touted as the best way to bring private investment into infrastructure projects. However, not all projects are equal from an investor’s point of view, not least in Asia where the infrastructure funding challenge is arguably greatest.

At the heart of China’s Belt and Road Initiative lies the age-old problem of who is going to end up paying the bill. As the $900 billion project has grown larger, so the question of who will pay has got louder.

Convincing private money to invest in infrastructure projects in Asia has so far proven to be more problematic than in the more developed ecosystems of Europe and North America.

“There’s plenty of financing out there but what we are missing [are] projects that make commercial sense,” Bill Banks, global infrastructure leader for Ernst & Young, said during a panel discussion at an industry summit in Hong Kong this week.

To illustrate the point the panel highlighted one successful PPP in the Philippines.

The PPP for School Infrastructure Project (PSIP) is a $185 million initiative to build over 9,000 one- and two-storey classrooms in rural Philippines on a Build-Lease-and-Transfer (BLT) contract. The agreement was signed in September 2012 after an open tender process, with two private companies winning the bid.

It took slightly more than three years for the project to be completed in December 2015, a relatively short period of time that underscores the extent to which partnerships between private enterprises and public entities can, in practice as well as in theory, deliver optimal outcomes.

Generally speaking, a shorter project period makes more commercial sense because they can start operations and generate revenue earlier. Infrastructure projects that drag on at the development stage incur more risks around overall costs, financing, as well as the potential environmental impact.

Having a transparent tender process -- in the case of PSIP, one regulated by the government-led Public-Private Partnership Center -- also helped to reduce the potential for corruption, historically an obstacle to infrastructure development in some emerging markets.

“[PSIP] is a fantastic example of how PPPs can work out for everyone and provide a win-win situation,” Banks said. “It was driven by the commitment to education from the previous government and was the first major investment by the Philippines government in education across the whole country, impacting over 150,000 children.”

To be sure, that success was in the “soft” infrastructure sector rather than the “hard” sector of mega projects that the Belt and Road Initiative is more renowned for. It was fully supported by successive governments too, unlike, say, the now-suspended and non-PPP funded $18 billion East Coast Railway Line in Malaysia. 

REGULATORY FRAMEWORK

That distinction in project type and consensual political support were just two factors cited by panellists at the conference organised by the Asian Infrastructure Investment Bank and Financial Times as key if more private capital is to help fund infrastructure projects along the Belt and Road.

Also crucial for investors is the existence of a solid legal and regulatory framework for infrastructure development, including details around planning, financing and execution.

When asked where, theoretically, they would build a 100km toll road in the Asia-Pacific region today, the panelists gave some insight into the current mindset of infrastructure investors and why, perhaps, PPPs are not more prevalent currently.

“Right now, most developers would choose Australia,” Banks said.

“The regulatory regime is there, the land acquisition problem is solved via the government’s compulsory purchase mechanism, and the financiers are there. Even though it’s the most competitive market in the region, it is still the market that investors flock to,” Banks said.

“It’s quite incredible given the [ample] opportunities elsewhere in the region,” he added.

Land acquisition hold-ups have dogged projects across the region and have delayed projects by years in some cases.

“Securing land without the benefit of a compulsory purchase law such as Australia’s continues to be a major headache for investors in the region,” according Frederic Pergay, vice president of Asia-Pacific infrastructure development for Bouygues Travaux Publics, a France-based construction company specialising in PPPs and sustainable construction.

And banks will be unlikely to offer financing before the land has been secured, according to a presentation from the United Nations Economic and Social Commission for Asia and the Pacific.  

¬ Haymarket Media Limited. All rights reserved.

Article limit is reached.

Hello! You have used up all of your free articles on FinanceAsia.

To obtain unlimited access to our award-winning exclusive news and analysis, we offer subscription packages, including single user, team subscription (2-5 users), or office-wide licences. To help you and your colleagues access our proprietary content, please contact us at [email protected], or +(852) 2122 5222