In order to meet the rising ambitions of billions of people worldwide and to combat climate change, it is essential to build modern, sustainable, and reliable infrastructure. Investment in infrastructure encourages the investment of human capital, creates new economic opportunities, and helps increase economic growth rates. Public-private partnerships (PPPs) can be a mechanism for providing high quality infrastructure services. PPPs have the potential to improve the sustainability and efficiency of the delivery of public services like energy, transport, telecommunications, water, healthcare, and education when properly planned and put into practice.
PPPs may also enable more effective risk distribution between public and private enterprises. The importance of PPPs has varied among the countries in the Southeast Asia (SEA) region. It has had less impact on infrastructure development in countries like Singapore and Brunei Darussalam where public institutions are very strong but have been important in countries like Thailand, Vietnam, Indonesia, Malaysia, and the Philippines. In general, the role of PPP financing in SEA is still at a nascent stage. Southeast Asia Infrastructure takes a look at some of the PPP projects across the SEA region and the challenges associated with applying PPP on a large scale…
Vietnam
The law on PPPs was enacted almost two years ago in Vietnam. The law is designed to attract private investment, especially in the transport sector. The government has come up with new PPP projects to develop infrastructure in the country. In a recent development, Deo ca Group Joint Stock Company signed a joint venture (JV) agreement with Petroleum Trading Lao (PetroTrade) to build the Laos-Vietnam railway, linking Vientiane and Vung Ang port. The partners are expected to invest around $1.2 billion to complete works on the 103 km long section from Vung Ang to Quang Binh province. The section will be developed under a PPP model.
The Laos-Vietnam Railway Project (LVRP) is a planned 555 km cross-border rail line that will be connected to the existing Laos-China railway. The project is expected to entail an estimated investment of $6.3 billion. In an effort to attract more private investment, the Government of Vietnam has mandated a thorough review of its PPP policies. It has asked ministries, industries and municipalities across the country to create workable solutions to remove obstacles for projects carried out in the PPP mode. The goal is to align the country’s efforts to attract private capital into PPP projects with best practices from around the world.
To encourage foreign capital sources and international financial funds to participate in PPP projects in Vietnam, ministries and localities must work on a credible funding plan for each project and a consistent infrastructure funding policy, with PPP being a component. This task has been assigned by the government of Vietnam to the ministries and authorities and is expected to be completed by the third quarter of 2023. The Ministry of Finance has been asked by the Government to work with other relevant ministries to review and identify obstacles in the implementation of relevant legal frameworks regarding the financial management of PPP projects and the use of public resources to compensate investors in projects built using the build-operate contracting model. According to Fitch Solutions, the law on PPP investment aims to step up infrastructure development in Vietnam. It forecasts the growth of infrastructure to be 6.8 per cent a year on average from 2021 to 2029.
Philippines
The Philippine government is focusing on PPPs for infrastructure development. This is expected to boost the country’s economy and accelerate job creation. The Philippine Development Plan [PDP] 2023-2028 will be implemented under the direction of the National Economic and Development Authority (NEDA), which plans to advocate changes and track the achievement of the plan’s goals. It will also start the programming of national projects through an Investment Coordination Committee (ICC) appraisal and finalise the Regional Development Plan. Apart from these, NEDA will also finalise the Public Investment Programme (PIP) for 2023-28 and the three-year Rolling Infrastructure Plan for 2024-2026.
In February 2023, NEDA approved the construction of the University of the Philippines-Philippine General Hospital (UP-PGH) Cancer Centre. This centre is expected to offer comprehensive, high quality and affordable oncology care services. The centre will have 300 beds. Once completed, it would be one of the largest cancer centres in Asia in terms of bed capacity. It is being funded under the Marcos administration and entails an investment of PhP 6 billion. It is based on the build-operate-transfer (BOT) model. The Department of Transportation (DoTr) will develop four major airports in the Philippines under the PPP model. Private companies have been invited to participate in the development, operations, and maintenance of the New Bohol, Davao, Iloilo and Kalibo airports. Some of the companies that have expressed interest in the privatisation of airports are the Aboitiz Group, Philippine Airport Ground Support Solutions Incorporated, Chelsea Logistics and Infrastructure Holdings Corporation, Mega7 Construction Corporation, Prime Asset Ventures Incorporate and Udenna Infrastructure Corporation.
The DOTr is also considering launching bids for the development and rehabilitation of the Ninoy Aquino International Airport (NAIA). The PhP 102 billion airport rehabilitation project will aim to relieve air traffic congestion at the main gateway and resolve capacity constraints. The agency has received proposals from Megawide Construction Corporation and GMR Infrastructure Limited to upgrade NAIA under a $3 billion contract valid for a period of 18 years. Some of the major projects being undertaken as PPPs include the $1 billion Metro Cebu Expressway, Phase II of the Central Luzon Link Expressway, the 190 km long Dingalan-Capas-Botolan Expressway and the 180 km long Pangasinan-Nueva Ecija Expressway. Other priority PPP projects include a 15 km long floating bridge, the 226.5 km long Pacific-Eastern Seaboard Expressway and Phase II of the 91 km North Luzon Expressway East. Major transport infrastructure works in the Philippines will cut chronic congestion.
The Cebu Bridge project is one of the country’s most important infrastructure works at present. The Japan International Cooperation Agency (JICA) has been supporting the promotion of PPP projects involving Philippine and Japanese firms, mostly in sectors like agriculture, wastewater, energy, and natural disasters, using frontier technologies like artificial intelligence (AI). The Philippine government is working towards a harmonised approach in infrastructure development. It wants to prioritise PPP projects in the country and invest in diligent project studies to establish technical, financial, economic, and operational viability. It plans to build a reasonable risk sharing mechanism for PPP projects. With PPP in place, the government is also planning to tap the private sector’s technological expertise.
The Philippine government wants to prioritise PPP projects and build a reasonable risk sharing mechanism under PPP projects.
As of February 2023, the PPP Centre of the Philippines had 87 projects in the pipeline (ongoing projects) worth PhP 2.96 trillion. The Philippine government is also planning to pass a PPP Act, which would address the bottlenecks, challenges and ambiguities in the existing BOT model. It also aims to create a more competitive and enabling environment for the private sector.
Indonesia
Despite Covid-19 setbacks, the Indonesian government is still committed to continuing with infrastructure projects, including through the PPP mode. Currently, there are 34 projects in Indonesia being implemented on a PPP basis with other projects still under the consideration of the government. Some of these projects include the construction of Singkawang airport, the development of Baubau port, the MakassarMaros-Sungguminasa-Takalar toll road project, the construction of the Badung Southern Ring Road, the construction of the Batam-Bintan Bridge, the construction of the Merangin Dam, the construction of the Jatigede and Pantura regional water supply systems, and the construction of waste-toenergy facilities in South Tangerang and the Jatibarang energy facility, and the Piyungan waste treatment plant.
One of the most important PPP projects in Indonesia is the next high speed line connecting Bandung and Surabaya. It will involve partnerships between state-owned companies and both domestic Indonesian and overseas companies.The extension of the Jakarta Bandung high speed line to Surabaya will be through Kertajati, Purwokerto, Yogyakarta, Solo and Madiun. This fast train will be connected to several transport nodes, like Kertajati airport, in the future. The Indonesian government also plans to create metro and light rail routes based on the PPP model in cities including Surabaya, Bandung, Medan, Makassar, Semarang, and Bali. These will be in addition to its high speed projects and a semi-fast link from Surabaya to the north.
The government intends to conduct research with the help of outside consultants and international financial organisations like the World Bank, Asian Development Bank (ADB), and JICA. As one of the top goals of its 2022 G20 presidency, Indonesia has supported a number of cutting-edge PPP funding approaches for crucial digital infrastructure projects, including data centres, undersea cables, and satellites. In recent years, data centres have become a priority for Indonesia, creating commercial prospects for both domestic and foreign firms. The data centre business is a new source of foreign exchange earnings, especially given that Singapore has imposed a moratorium on the development of large scale data centres. Taking advantage of this situation, the Indonesian government has loosened investment barriers and provided incentives to attract investors. Data centres with an investment of more than $34 million are expected to receive tax exemption of up to 100 per cent.
As one of the top goals of its 2022 G20 presidency, Indonesia has supported a number of cutting-edge PPP funding approached for crucial infrastructure projects.
The Ministry of Public Works and Public Housing of Indonesia is open to exploring potential collaboration with Brunei Darussalam for PPP projects, both government initiated and non-government initiated. This is expected to bring in cooperation in infrastructure development at the new Indonesian capital (IKN) Nusantara in East Kalimantan province. This would include the application of new technological innovations to support environmental sustainability during the construction of Indonesia’s future capital. The ministry started the construction of basic infrastructure at IKN, including toll roads, national roads, raw water supply facilities, as well as houses for IKN construction workers in early September 2022.
Thailand
In 2019, the PPP Act governing PPP projects was enacted by the Thai government to provide a transparent framework for the development and delivery of such projects. The PPP Act applies to infrastructure projects that require private sector funding, are valued at over THB 5 billion and fall within one of the following sectors – roads, rail, airways, ports, water management, energy, communication, public health, education and housing. The Act largely follows international best practices, providing a structure within which PPP projects can be developed by a government entity. It also provides a process to guide PPP projects from conception through to delivery. It aims to facilitate domestic and international investments, streamline the review and approvals processes, and increase transparency.
With the implementation of the PPP Act, the Thai government has been carrying out various PPP projects. In a recent development, the GMR Group, Thai AirAsia, and other stakeholders are participating in the $8.82 billion development of the U-Tapao International Airport and Eastern Airport City. UTapao airport will be Thailand’s third main international airport, and it is expected to support the development of the Eastern Economic Corridor (EEC) expansion. This PPP project is expected to boost the country’s aviation industry and create more than 15,000 jobs in the coming years. The EEC Office is set to implement a PPP deal for seawater desalination projects at Map Ta Phut and Pattaya worth THB 7.7 billion. The joint investment project at Map Ta Phut will be handled by the EEC Office and the Industrial Estate Authority of Thailand (IEAT), while the Pattaya project will be jointly implemented by the EEC Office and the Pattaya Municipality. These PPP desalination projects are expected to help supply 200,000 cubic metres of water per day to the EEC in 2027; the supply is expected to rise to 300,000 cubic metres per day by 2037.
Further, as of January 2023, the tender process for a 4 km PPP expressway project in Phuket, Thailand, is under way. This new road link will feature twin lanes for powered two-wheelers as well as twin lanes for cars, vans and trucks in either direction. The project is expected to entail an estimated investment of $421 million and will link Kathu with Patong. The implementation agency for the project is the Expressway Authority of Thailand. The concession package will include design, construction and operation for a 35-year period. The construction is expected to commence in 2024 and be completed by 2027.
Challenges and the way forward
PPP is a complex system that involves in depth understanding of financing structures, risk distribution, contract administration, and dispute resolution. Additionally, the transaction process typically takes a long time to complete. These factors make PPP difficult to implement on a large scale. Governance models, PPP laws and policies, and sovereign risk ratings shape the success of PPPs in a country. Typically, infrastructure expenditures are sizeable and yield stable but low returns. Investors dealing with governments in developing nations with less developed PPP policies have a higher risk of legislation changing or being governed by ambiguous rules. Investors invest months and millions of dollars to win a contract, yet the government has the right to revoke or postpone the bidding procedure without providing valid justification. This causes many infrastructure projects to have significant sunk costs.
The other major challenge includes an underdeveloped financial market. Emerging economies in SEA are yet to utilise funds that need capital market mechanisms to channel them. Potential institutional investors like pension funds and insurance firms find it difficult to invest in infrastructure projects. Given the complexity and connections to other economic sectors, improving capital markets in emerging nations needs long-term and persistent work. In PPP, risk management is the most crucial aspect. Large-scale and long-lasting consequences could result from poor risk management.
The ability of governments to select the best trade-offs from among potential schemes to maximise benefits and minimise hazards, as well as to predict future risks associated with a chosen scheme, is a crucial component of risk management. Governments frequently make risk-averse decisions, which puts the private sector in a precarious situation and may bring a stop to negotiations. On the other hand, certain initiatives result in the government taking on enormous obligations, which leads officials to act in a risk-averse manner when making decisions. PPPs in emerging regions like SEA are less likely to bring great innovation and sophisticated financial engineering. However, PPPs help develop infrastructure and fill gaps in the funding of projects. Governments in the SEA region need to set realistic expectations on their PPP targets while pushing forward their system improvements and capacities.
