1

PPP for infrastructure in ASEAN member states: How do

developing countries utilize and get benefit from the scheme?

Fauziah Zen, Economic Research Institute for ASEAN and East Asia (ERIA),

fauziah.zen@eria.org

Abstract

Infrastructure has been worldwide perceived as key of development; such concept is

not an exception for ASEAN member states. While infrastructure typically falls into

non-commercially viable project, thus requires sovereign financing- the governments

usually face lacking fiscal capacity to finance the demand for infrastructure. In

recent years, Public-Private Partnership (PPP) has been increasingly gained

popularity as alternative to financing modality in infrastructure development. In fact,

there is overwhelming expectation on PPP to solve infrastructure problems.

Misperception of PPP often becomes backlash to the utilization of PPP; its

overestimated expectation brings unexpected responses that potentially ruin the

project. Apart from that, differences in economic stage across ASEAN member states

should not be ignored, and consequently should be reflected in pertinent advices and

actions on handling PPP. The paper reviewed the current situation of PPP in broad

terms, or more precisely is “Private Sector Participation” (PSP) in ASEAN

countries and provided the economies’ key characteristics. It also discussed the

challenges to use the scheme to develop infrastructure especially in the least

developed countries. Finally the paper suggested how ASEAN leaders should

perceive PPP as one of financing modalities and what the way forward and direction

in ASEAN development.

Keywords: PPP, financing infrastructure, ASEAN Connectivity

1. Introduction

ASEAN Member States (AMS) have been agreeing to achieve ASEAN Community

by 2015 which can be structured into ASEAN Political-Security Community,

ASEAN Economic Community, and ASEAN Socio-Cultural Community. The

ASEAN has developed a Master Plan on ASEAN Connectivity (MPAC) “as a key

step towards realising the ASEAN Community of continued economic growth,

reduced development gap and improved connectivity among Member States and

between Member States and the rest of the world by enhancing regional and national

physical, institutional and people-to-people linkages”. 1 The MPAC consists of three

pillars of connectivity: institutional, physical, and people-to-people and interact one

another as we can see in Figure 1.

1 Master Plan on ASEAN Connectivity, 2011, ASEAN Secretariat, Jakarta.

2

Figure 1. ASEAN Community Building

To support a well-connected ASEAN, physical connectivity requires sufficient

domestic infrastructure within member states that is interconnected across the region.

Thus having sufficient infrastructure is vital. Infrastructure serves at least three

functions, namely: (i) to provide basic human needs, (ii) to support people and goods

mobility, and (iii) to support productivity.

Unfortunately, the quantity and quality of infrastructure in AMS in general is far

below that in advanced economies. The most lacking ones are transportation,

electrification, and access to clean water. World Economic Forum in its Global

Competitiveness Report 2012-2013 indicated that in average, the quality of ASEAN

infrastructure is only half of that in Japan and US.

Table 1 Global Comparison in Infrastructure Coverage (2008)

Region

Roads

(km) Rail (km)

Phones

(number) Electrification

Clean

Water

per 1,000 people Percentage

ASEAN 10.51 0.27 3.53 71.69 86.39

Asia 12.83 0.53 3.47 77.72 87.72

OECD 211.68 5.21 13.87 99.80 99.63

Latin

America 14.32 2.48 6.11 92.70 91.37

Africa n.a. 0.95 1.42 28.50 58.36

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Note: km=kilometer, OECD = Organization for Economic Co-operation and

Development.

Source: ADB, UNDP and UNESCAP, 2010

On the estimation of infrastructure demand, some assessments come up within the

range of $6 to $8 trillion for a decade. Asian Development Bank (ADB) projected

that ASEAN economies need to invest over $ 60 billion a year in infrastructure until

2020 to support and maintain the region’s high economic growth. It requires about 7

to 8 percent of GDP while current spending level is at 3 to 4 percent of GDP. The

shortage funds call for bigger role of private sector, hence PPP has becoming hot

issue recently.

4.1

2.5

1.1

0.4 8.1

Energy Transport Telecom WaterandSanita on Total

Figure 2 Investment needs for Asia's identified and pipeline infrastructure

projects, 2010-2020, $ trillion

Source: ADB, Clean Edge, WB PFI Database (McKinsey Analysis)

2. Private sector participation in ASEAN Member States

ASEAN member states have different stages of infrastructure policy, financing

method, and financial capacity. Singapore and Brunei have abundant domestic

financial resources to build their infrastructure. PPP has been adopted in these

countries mainly for the reason of improving public sector efficiency (in Singapore)

and utilizing private sector competence (in Brunei). Malaysia, Indonesia, Thailand,

and Philippines have been adopting PPP quite progressively to fill financing gap and

tap private sector’s competence.

In Cambodia and Vietnam, private sector participation becomes increasingly

important in infrastructure development. However, there are limited numbers of PPP

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projects in these countries, mainly supported by international organizations such as

ADB and the World Bank.

Meanwhile, Laos and Myanmar are still facing multiple challenges, especially:

lacking fiscal resources, low capacity, lacking regulatory framework, and

challenging fiscal sustainability. PPP requires mature private sector and sufficient

access to capital market; the condition that is unfortunately uncommon in half of

AMS as shown in Table 2.

Table 2 Factors affected financing modalities

Notes:

= in good state

= in good direction

= need more attention/stagnant

*Fiscal situation: use S&P, Moody’s and Fitch credit ratings as proxy

Source: Zen and Regan (ERIA, 2013)

3. PPP as financing modality

Apart from its advantages to bring private sector’s competence into a better public

service delivery, PPP can be viewed –and this is the most popular view- as one of

purchasing methods in delivery public services. An international standard PPP

requires a complex system to ensure the objectives of PPP can be achieved. PPP is

not a method suitable for all types of infrastructures.

Recalling the various ways to finance infrastructure, as shown in figure 3, PPP is a

procurement method to expand private sector’s involvement into developing non-

commercially viable projects. The most possible ones are the projects that fall into

economically viable category. As for nonviable projects, when they are schemed into

PPP, public sources have to finance most of the costs, or the government should

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increase the creditworthiness of the projects to transform the projects to financially

viable ones.

Even though financing infrastructure can be done through various methods, PPP

should not be viewed as additional money to build infrastructure. It actually

restructures the financing through contract arrangement between public and private

entities. Private entities finance some of (or full) total costs of construction but

expect profits in return. Thus someone has to pay, either through tax and subsidy or

through user charges. This nature unfortunately has not been well understood by

some governments, leading to the attempt to shift all risks and most financial burden

to private entities. The “different languages” spoken by government versus private

entities made prolonged or even failed project negotiation.

FinancingInfrastructure

CommerciallyViableProject

EconomicallyViableProject

NonviableProject

PrivateSector

Government ODA/OOF

PPPContract

SPV

Contractors

Lenders/Sponsors

GovContrac ngAgency

Private Sector

Public Sector

Construction-Operation

Financing

Guarantee

O akerorUser

Loan/TA

Awarded

Form

Form

Pay Pay

Fiscal Support

Traditional Procurement PPP Scheme

Figure 3 Financing Infrastructure

Source: ERIA (2012)

The problem is rooted in lacking understanding of how financing and funding should

work in PPP. Many decision makers are confused with these two terms, leading to

the unsustainable project. Financing refers to the construction or initial project costs.

That can be come from public sector directly (all from government budget) or

indirectly (usually combination of budget and private sector debt and equity). The

later financing means require that repayment should be performed. Meanwhile,

funding is the main source of payment to sustain the project. The sources usually

come either from government, means taxpayers’ money, or user charges.

In the situation where both public and private sectors have sufficient capabilities to

run a PPP project, the number of procurements made through traditional way is

outnumbered PPP projects. Typical PPP project requires higher efforts – budget-wise

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and time-wise, hence a small size project usually is not recommended for PPP2.

Another reason is the flexibility to structure the funds through syndicated debt over a

number of financial institutions and structured in several tranches denominated in

different currencies, interest rates, maturities and security ranking (Zen and Regan,

2013).

The case for medium size projects, say minimum at USD25 million, implemented in

PPP scheme has evidence as well. Philippines PPP Centre runs some small size

projects especially in social infrastructure including schools and hospitals, some of

them are brownfield projects. Small size projects can still get benefits from PPP

especially in securing deliverables, standardized and stable output, as well as

efficient management. What we need to consider is the trade-off between costly

process and desirable outputs. This calls for a simpler PPP or “lite PPP”. Since lite

PPP does not consist of complex financing or management structures, or complex

design and construction, it is suitable for the projects with state availability payment

and do not involve currency mismatch risk (Zen and Regan, 2013).

Despite its costly and longer process, PPP has several advantages compared to

traditional procurement. Australian experience showed that in total PPP projects have

lower cost overruns than traditional projects. Further, albeit initial cost estimated for

PPPs is far higher than that of traditional procurements, its final actual cost turned

out to be lower (see table 3).

Table 3: Cost Comparisons of PPP and Traditional Projects (in AUD million)

Initial Cost

Estimates

Contractual

Commitments

Cost

Overruns

Final Actual

Cost

Traditional

Projects

3082.0 4532.6 672.5 5205.1

PPPs 4484.4 4946.1 57.6 5003.7

Source: Infrastructure Partnership Australia, 2007.

The projects that free from difficult risks (e.g. currency mismatch, demand risks)

have a big chance to be successfully offered as PPP. Independent Power Producer

(IPP) is typical easy PPP project, because the off taker is well defined thus no

demand risk. Negotiation on water projects is often more complicated since they

usually belong to subnational governments and can involve more than one

jurisdiction. Difficulties are higher for the nonviable projects such as non-toll roads.

When no fee can be charged, the government should find a way to make the project

feasible for PPP.

There are some ways to increase the creditworthiness of the projects. One way is

government acts as the off-taker. In case of non-toll road, government can set in the

2 Some institutions suggest that only projects with size at least USD100 million will

be efficient for PPP.

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contract that it will pay a certain fee for every vehicle passing the road. When it is

possible to impose a user charge, this is considered better than full subsidy.

However, some rural roads may not be feasible to become toll road, but they are

important to support economic growth. This is similar with the case of PPP in social

infrastructure such as schools.

Another way to make the project attractive is to enlarge the scope of initial project. A

non-toll road –or road with under cost revenue, can be wrapped with commercial

license in some parts of it, for example commercial properties (resort, hotel,

amusement park, tourism complex, etc.). The package will improve financial cash

flows of the project and allow cross-subsidy from one business unit to another one

within this project. Huge project can also be unbundled to provide some flexibilities

and modifications in certain blocks of the project.

In the above cases, the benefits from adopting PPP scheme instead of traditional

procurement are: i) securing reliable public services, ii) reducing overall cost because

of using life-cycle horizon rather than short term period, iii) shifting fiscal burden

from upfront large funds to periodically disbursement, and iv) improve public sector

efficiency by deterring from non-core public sector’s tasks.

4. Challenges

Despite good practices and lessons from PPP project failures are abundant for public

access, misperception of PPP is still common. Many people think PPP as panacea for

infrastructure problems. Many also think that PPP will lift the government burden in

infrastructure provision. In parallel, many still confuse between PPP and traditional

procurements. However, increasing interests on adopting PPP should be viewed

positively and used as means to bring PPP into good practices.

The basic problems for most developing economies to adopt PPP are (i) insufficient

regulatory framework, (ii) lacking capacity, and (iii) lacking fiscal resources.

Regulatory framework can be approached differently from country to country, but

the ultimate goal is similar: to provide private sector confidence to involve in PPP

projects. Some countries may need specific PPP regulation while some others may

not need it. The capacity problems are not monopolized by public sector; in new

emerging countries such as Cambodia, Lao PDR, Myanmar and Vietnam, (and

Brunei) private sector development is still at early stage and need to be nurtured

properly. The situation is usually coupled with the issues of lacking access to capital

market and limited fiscal space in government budget. PPP still requires fiscal

contribution from government budget, directly or indirectly, current or later. Lao

PDR, Myanmar and Vietnam are facing the problems of macroeconomic instability

as well as limited fiscal space, induce to decreasing options of loans from

international institutions or bilateral resources.

Meanwhile, lacking funds to finance infrastructure is not the main problem per se. In

fact there are massive supplies of surplus capital –global savings currently amount to

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US $17 trillion– with investors looking for long-term stable returns: this is the

'infrastructure paradox'. A similar paradox exists in ASEAN countries, too, where

both savings rates and foreign reserves are high (Shishido, Sugiyama, and Zen,

2013). Interviews with long-term funds management have confirmed that supply

does exist but it cannot be fully utilized because of lacking appropriate channels3.

Additionally, the supply can grow more than existing amount if the options for

investing in long-term portfolios are expanding as well.

The problems of only fewer numbers of PPP are mainly caused by two conditions,

namely: lacking investor friendly environment and lacking properly prepared

projects. Many countries cannot provide supportive business environment granting

sufficient regulatory framework, legal certainty, and appropriate incentives.

Meanwhile, to be able to offer attractive projects, government should make efforts to

prepare the projects, meaning it has to have competent human resources, sufficient

allocated fund for Project Development Facility (PDF), and proper communication

with international community.

At regional level, there are a number of efforts provided by international

organizations to support PPP implementation. The supports come in various ways:

capacity building, technical assistance, co-financing, etc. however, within ASEAN

scope, there is no centralized and integrated coordination for PPP support.

Again, all benefits from PPP can only be obtained if the project is well structured and

well planned. The government’s credibility is vital; private sector holds that the

business certainty is key to determine its involvement.

5. Way forward

Current situation of implementing PPP has provided us with several challenges to be

addressed. The solution definitely is not a one-time action but continuous and

systemized efforts. Capacity building is a long-term process and potentially could

fall into inefficient work.

Building a solid regulatory framework requires many years and high commitment

from many stakeholders, thus it is a long-term solution. While the reform should be

done when needed, the ad hoc approach may be used as pragmatic and short-term

solution. The approach of “sterilized regulation” to secure the contract can be used as

long as it complies with standardized legal framework.

Regional cooperation should be enhanced to transform existing efforts into synergy

and to realize ASEAN Connectivity. Some actions include providing suitable PPP

Guidelines for ASEAN Member States, establishing PPP Forum, and continuing

systemized capacity building program as well as offering technical assistance.

3 Sources: Mr. Donald Kanak (Prudential Asia Corp.): Sep 20th, 2013 and Dr. Leonnie Lethbridge (ANZ Indonesia): July 24th, 2013. pers. comm.

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Reference:

Asian Development Bank. 2009. Infrastructure for Seamless Asia. Manila: ADB.

Economic Research Institute for ASEAN and East Asia (ERIA). 2012. Phnom Penh

Initiatives for Narrowing Development Gaps, Jakarta: ERIA.

Infrastructure Partnership Australia. 2007. Performance of PPPs and Traditional

Procurement in Australia. Sydney: Infrastructure Partnership Australia.

Schwab, Klaus (ed.). 2012. The Global Competitiveness Report 2012-2013. Geneva:

World Economic Forum.

Shishido, Hisanobu, Shintaro Sugiyama, and Fauziah Zen. 2013. Moving MPAC

Forward: Strengthening Public-Private Partnership, Improving Project

Portfolio and in Search of Practical Financing Schemes. Jakarta: ERIA.

Zen, Fauziah and Michael Regan (eds.). 2013. Financing ASEAN Infrastructure,

Economic Research Institute for ASEAN and East Asia (ERIA). Jakarta: ERIA.

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Annex

Summary of PPP Implementation in ASEAN Member States

Country Public Body

Responsible for

Implementation

Type of

Private

Sector

Participation

Projects/Sector Background/

Progress

Brunei Department of

Economic

Planning and

Development

Not yet

determined

Housing Just started in

2010. No specific

regulation for PPP.

Cambodia Not determined Concessions,

BOT

(although

there are no

regulations)

Power, and

limited projects in

water and

transport

Concessions Law

issued in 2007.

Still no

implementing

regulations

Indonesia Line Ministries,

Planning

Development

Agency, MOF

All types of

PPP schemes

Transportation,

roads, irrigation,

drinking water,

wastewater, ICT,

power, oil and

gas.

Under the new

regulation

(President

Regulation 2011):

One IPP project

waiting for

financial closing, 9

other projects in

the pipeline.

Lao PDR Line ministries,

subnational

government

Concessions Targets: energy,

air transport,

telecom, roads,

railways, other

designated

activities (water,

waste

management,

insurance,

banking)

No specific law.

Limited, projects

include energy,

transportation, and

community

market.

Malaysia UKAS (PPP

Unit)

All types of

PPP schemes

Any sector

fulfilling the

criteria

Privatisation

Masterplan and

PPP Guidelines

513 projects

during 1983-2010

period

Myanmar Line Ministries

with approval

from Parliament

Traditional

Procurement,

concession

Transportation,

energy, water,

seaport services

No specific law.

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(port

handling)

Philippines PPP Center.

Approving

bodies depend on

size of projects

and authority

level (national or

subnational)

Various BOT

and contracts,

joint venture,

concession,

lease.

All types

including social

sectors

BOT Law

Many projects.

Singapore Ministry of

Finance

Variations of

DBFO and

DBO

Various, including

social

infrastructure

Introduced since

2004 under Best

Sourcing

Framework, 8

projects awarded

Thailand Line ministries

submit

application to

NESDB and

MOF then to

Council of

Ministers will

be centralized

through SEPO

Concessions,

service and

lease contracts

Various

infrastructure

types

(New) Act on PPP

(BE 2556) private

sector participation

shall be centralized

in State Enterprise

Policy Office

(SEPO) since

October 2013.

BTS, Motorway,

Tollway

Vietnam The Ministry of

Planning and

Investment

(MPI) establishes

interdepartmental

working group

PPP as special

case of BOT

and BTO

Roads, railway,

urban transport,

ports, water

supply, hospitals,

waste treatment,

power, and others

decided by the

Prime Minister

Regulation on PPP

has been issued in

2011.

Source: Shishido, Sugiyama, and Zen (2013) updated