Discussions I’ve had around public-private partnerships (PPPs) in Asia have typically focused on India and the PRC because of their strong deal volumes. Having listened to and interacted with agencies in several ASEAN countries, I believe ASEAN is at an inflection point that could soon make it the bustling PPP market ADB has long been working toward. Here are three reasons why I’m excited about ASEAN:
1. New regulatory frameworks. New PPP laws are being approved in countries with lots of potential for PPPs. Thailand enacted its Private Investment in State Undertaking Act in 2013, and followed it up by creating a dedicated PPP unit and a PPP strategic plan. Viet Nam’s PPP Decree was issued in February 2015 and targets key issues including dispute resolution and foreign currency guarantees. Myanmar is a unique example where the absence of a legacy framework could actually expedite development of a modern PPP framework. One reason these reforms are particularly exciting is that they incorporate market feedback with the aim to open up the PPP markets.
2. International interest. The last two years have seen increasing international interest in ASEAN projects. The Nam Ngiep hydropower project in the Lao PDR, the Sarulla geothermal project in Indonesia, the Mactan Cebu airport rehabilitation in the Philippines, and others are not only landmark deals, but are significant because of the increasing interest from international sponsors and financiers.
3. The Philippines. ASEAN has a healthy PPP ecosystem in the Philippines. From just 11 projects in 2010, the Philippines now has 61 potential PPPs – 9 of which already have been awarded, valued at about $3 billion or just over 1% of GDP. Larger projects are in the pipeline, for example the North–South Rail Project, as well as projects in social sectors such as health and education.
To maintain this momentum for regional PPP development, the following are needed.
1. Project preparation funds. Several countries such as the Philippines, Indonesia, and Thailand already have project development facilities. Others, like Viet Nam, are setting them up. The feedback from agencies is that more is needed, often in the form of technical assistance from multilaterals to support project preparation, feasibility studies, and transaction advisory. To serve this need, ADB and donors have created technical assistance facilities, for example the ASEAN Infrastructure Center of Excellence, which can help public sector clients accelerate project development through hiring world-class consultants.
2. Patient advisors with policy experience. Unlike in developed markets such as Canada and the UK, a formulaic approach to transaction advisory will not work in ASEAN. First, templates don’t exist for many sectors in many countries under new PPP frameworks, so the trail has yet to be blazed. Second, since templates don’t exist, situations have arisen where, for example, ADB as advisor had to pause the transaction and work with client agencies to make certain policy changes to ensure bankability. Third, some countries still don’t have adequate capacity for PPPs in their agencies. Here it is important for the advisor to be an entity which has commercial acumen, but also has deep policy expertise and the client’s trust.
3. Viability gap funding (VGF) for transport projects. Changing income levels combined with less-than-robust population data increases uncertainty in projecting a project’s financials over a long concession period. Thus, project bankability often cannot rely solely on user fees and requires VGF and/or availability payment structures supported by the sovereign’s credit quality. Multilaterals can help by structuring sovereign lending and credit enhancement products to support VGF or periodic availability payments.
4. Deeper capital markets. Local and regional capital markets need to be deeper and broader to channel Asia’s large savings into infrastructure investment and to increase domestic liquidity. In addition to developing the capacity of banks for project finance, a project bond market will help to (i) provide an alternative source of funding for large deals which cannot be supported through bank debt alone, (ii) reduce refinancing risk through the issuance of bonds with longer tenors, and (iii) create opportunities for institutional investors in infrastructure. As cross-border bond investors typically seek investment-grade credits which most ASEAN countries cannot achieve due to sovereign rating caps, credit enhancement is necessary. To support this, ADB invested in the ASEAN-focused Credit Guarantee and Investment Facility which provides bond wraps similar to a monoline insurer, and is exploring credit enhancements on project bonds through its private sector operations department.
5. Deal pipelines. Investor and lender feedback shows they are more likely to draw comfort if a country is committed to a PPP program, rather than a one-off transaction. Here, neighboring countries can take a cue from the Philippines, whose large and publicly viewable pipeline signals a clear long-term commitment to its PPP program. The Philippine Investment Alliance for Infrastructure, an infrastructure-focused private equity fund developed jointly by ADB, Macquarie, and the Philippines’ Government Services Insurance System, was partly justified by the country’s strong PPP deal pipeline. Similarly, Indonesia has announced a pipeline including 43 deals worth $52 billion in total.
ADB has supported progress across the spectrum, ranging from capacity development to project development and financing, and is helping countries draft PPP laws, train government officials, and develop capital markets. In response to clients’ need for specialized advice on landmark projects, ADB now provides transaction advisory services through its newly established Office of Public–Private Partnership, and is in the process of establishing the Asia Pacific Project Preparation Facility to accelerate PPP project preparation.