Southeast Asian countries grew much faster than most other economies of the world in 2017. However, infrastructure development has been trailing behind in the growing economies of the region, resulting in a huge need for infrastructure investments. All economies in the region have been focusing their efforts on increasing investments in infrastructure, a significant share of which is expected to come from private players. Estimates by the Asian Development Bank (ADB) predict a requirement of $2.8 trillion in infrastructure investments from 2016 to 2030 in the region, implying an annual investment need of $184 billion each year.
The region’s gross domestic product (GDP) surged to $2.79 trillion in 2017 from $1.19 trillion, registering a compound annual growth rate (CAGR) of 5.13 per cent. The above-average GDP growth rate in the region in the last two decades has presented several opportunities for investors to participate in the continuous growth. However, this has not been tapped to its full potential.
Countries in the region view public-private partnerships (PPP) as an alternative mode to finance infrastructure development. The countries in the region have been developing their national PPP policies either through the establishment of new guidelines or through amendments of their PPP laws and regulations. In the case of countries with a mature PPP policy, PPP is viewed as a contemporary solution to bridge the financing gap that hampers infrastructure development with the added benefit of allowing for the greater efficiency that characterises the private sector. With a number of countries in the region where PPP is either in the initial or established phase, the PPP model is primarily driven by the need to expand infrastructure and to ease public sector funding constraints.
The confidence of the private sector in PPPs in the emerging economies of the region has also been growing with the increasing number of successful and sustainable projects. Most countries have rolled out ambitious infrastructure development plans, supported by reforms in the legal and institutional frameworks, and have made the system more transparent.
Private participation experience
The region has had a positive experience with private participation in infrastructure development, largely in energy and transport. As per the latest World Development Indicators (April 2018) from the World Bank, the region has received over $236 billion in investments through private participation in infrastructure so far. Of this, almost a quarter was invested during 2008-14.
Sector-wise experience reflects that on an average, the energy sector has received the maximum investments, followed by the transport sector. In fact, these sectors together account for more than 90 per cent of the investments tracked by the World Bank. The share of transport has been low (about 20 per cent); however, the expenditure for this sector is set to rise, as most of the PPP projects planned for the region in the coming years are in this sector. The water and sanitation sector attracted private investment as early as in 1987 amounting to $44 million in Malaysia and has thus far attracted $21.67 billion. According to the figures, information and communication technology (ICT) has attracted only one investment ($204 million) in 2016 (in Indonesia). Historically, the Philippines and Indonesia have been the most successful in attracting private sector participation, followed closely by Malaysia and Thailand. Combined, these countries account for more than 80 per cent of infrastructure investment through private participation.
Key experiences in the region
While World Bank data suggests that on an average private investments have increasingly been flowing into the region, PPPs have been used as a mechanism to build and upgrade infrastructure in the developing countries of Southeast Asia for several decades. However, country-specific strategies to fund infrastructure projects have changed over the years. To this end, the countries have experimented with several PPP formats.
Philippines: The Philippines government has earmarked PhP 8.4 trillion towards infrastructure development between 2017 and 2022 in its “Build, Build, Build” agenda, which will raise the share of infrastructure spending in the GDP from 5.4 per cent in 2017 to 7.1 per cent in 2022. The government is financing its massive infrastructure programme through a mix of soft loans, grants, official development assistance (ODA) and PPPs. Recently, there has been a shift away from PPPs towards ODA, primarily due to the delays and lengthy processes associated with the former. In fact, ODA appears to be at the forefront of the Philippines government’s infrastructure plan, financing about 48 of the 75 flagship infrastructure projects including those that were previously structured as PPP projects. However, even with the shift to ODA, the role of the private sector continues to remain important with the government’s scheme of “hybrid PPP”, where the private sector inherits a constructed facility and undertakes its operations and maintenance. The government initiated the bidding for the first project (Clark International Airport New Passenger Terminal Building Project) under the new scheme in July 2017. The engineering, procurement and construction contract for the project was awarded to a consortium of the GMR Group and Megawide Corporation. This new arrangement will expedite the implementation of projects because of the government’s ability to borrow at lower rates through grants and concessional loans. Private sector expertise can then be harnessed later for the operations and maintenance of the facilities.
Indonesia: The Indonesian government has shown strong commitment towards the involvement of the private sector in infrastructure investment. The country’s experience with the private sector and public infrastructure dates back to the early 1990s. By the end of 1997 (start of the Asian financial crisis), the country had attracted over $20 billion in investment, dominated by electricity, telecommunications and transport (mainly highways). The first PPP project in Indonesia was the Kebon Jeruk-Tangerang toll road undertaken in 1993. To regulate the market, the earliest major regulations and PPP plans were initiated in the late 1990s, which were, however, halted by the Asian crisis. After the crisis was over, the second round of PPP regulations was introduced in 2005, and many regulations have been passed thereafter. As per the country’s PPP book, there are eight PPP projects that have already been bid out, one that is ready to be offered, and 14 that are under preparation.
Malaysia: PPP was adopted as a development approach in the country in 1983. Apart from budgetary considerations, the model is seen as an avenue to benefit from private sector innovation and efficiency. Till date, starting from 1990, Malaysia has attracted about $46.4 billion (99 projects) for PPP infrastructure projects, of which 75 projects are either operational or under construction ($33.45 billion).
Thailand: Historically, PPP has been used in a broad sense to incorporate concession-based private investment in public infrastructure based on a traditional project finance structure. In 1992, the first PPP law was enacted to guide PPP and investment; this was replaced by another in 2013. As per the Global Competitiveness Report 2017-18, Thailand’s infrastructure is ranked 43rd out of 137 countries, indicating that infrastructure is developing but there remains immense scope for improvement.
Myanmar: PPPs are relatively new to Myanmar. One of the major thrust areas in the country has been connectivity and transport. Within the roads sector, PPP projects have been non-existent as under the prevalent build-operate-transfer (BOT) contracts used for road projects, the contractor is required to maintain the road for the entire contract term, and to widen the road again in case traffic reaches certain thresholds. However, as per estimates of ADB, the profitability for contractors for most roads is very low. The projects are not economically viable, which is probably the main reason for the lack of investments. However, to provide a push to PPP projects, the Ministry of Construction, Myanmar, invited expressions of interests for the construction of the Yangon ring road. It is the first greenfield road PPP project in Myanmar. The project is among several other transport infrastructure projects included under the Yangon Urban Transport Development Plan and aims to alleviate traffic congestion in the region.
Singapore: Like Myanmar, Singapore is a relatively new entrant to PPPs. Traditionally, it was felt that the Singapore government did not need private funds to improve its infrastructure primarily due to availability of large reserves and budget surpluses. The concept of PPP in infrastructure was introduced around 2003. Since then, the Singapore government has explored various projects to be implemented as PPPs. Some have met with success while others have been either abandoned or have been awarded under traditional procurement methods.
Going forward
Up until recently, Southeast Asia’s PPP experience has been somewhat mixed, despite the increasing demand for infrastructure development and efforts to attract private players. However, there has been a pick-up recently in countries modifying their policies and regulations to become competitive destinations for private investment. For instance, the Philippines has introduced a new hybrid PPP model wherein the government constructs the infrastructure project and hands it to the private sector for operations and maintenance.
Going forward, the region has a number of infrastructure projects on the anvil across sectors like roads, railways, energy, etc. With a significant pipeline of infrastructure projects to implement, many economies in the region intend to leverage PPP to complement their fiscal resources as well as to leverage private sector expertise and efficiencies.
