How PPP projects in Asia offer obstacles to investors

Institutional investors are often optimistic about diving into the infrastructure asset class through public-private partnerships (PPPs). But their sanguinity has yet to materialise in much of emerging Asia, due to a lack of local governmental support for the infrastructure vehicles.

These observations came after a White & Case survey that showed over a third of participants see a lack of government strength and support for PPPs in Asia- Pacific as two of the key obstacles. At the same time, 71% believe PPPs will be the preferred method to deliver infrastructure projects over the next year.

“We seem to be losing the political will for the support of PPP projects in their more pure form,” said Matthew Osborne, a partner at the law firm.

PPPs are a funding model that allow private sector companies and investors to help construct, maintain and operate public infrastructure projects, and are often looked to as a means of helping governments in less developed nations meet their infrastructure needs.

There are various types of partnerships available. A common example is a build-operate-transfer (BOT) contract, in which a private company finances and operates an infrastructure project before transferring back to the public sector after a lengthy period (it can last anywhere between five and 30 years).

Institutional investors sometimes get involved in PPP deals, as parts of consortia or as purchasers of the debt the contract holders issue to fund the projects. 

One example is Hostplus, an A$33 billion ($23.14 billion) superannuation fund. It has participated in a PPP investment in the International Convention Centre Sydney, which has been operational for almost three years, Jordan Kraiten, head of infrastructure for the fund, told AsianInvestor. 

TIME CONSUMING 

The trouble in some emerging Asia countries is that PPPs can be inefficient and time-consuming. Osborne pointed to the Philippines as one example. The government has begun to deviate BOT projects from the original law, after reportedly finding the process of multiple bid phases to be lengthy, laborious and costly. 

One way it has done so has been to break up the projects into various phases, such implementing a traditional construction model that's funded directly by overseas developmental assistance. As a result, the concessionaire under a PPP model is not asked to perform the construction phase. 

Osborne noted that some governments are not willing to provide financial security to the private sponsors of the PPP projects, which can greatly add to the risk of a commitment that can span decades. 

“They [the private companies and investor looking at the PPPs] want to ensure there is political and legal stability for that period. And if there's not, they want to make sure that they are secure from a financial perspective,” he said.

With the lack of financial protection, the appeal of the delivery of a project under a PPP model can be diluted, said Osborne.

What complicates the issue further is the relative inexperience of some governments in Asia over the fundamentals of PPP projects. Osborne noted that some of these government might not have the expertise to regulate the assets.

His views echo with that of AIIB's principal economist Thia Jang-Ping, who said that even though PPP projects in Asia are well articulated, the issue is always about how they are regulated.

But Thia was optimistic about PPP models in Asia. “I do notice that the PPP framework have over time improved in Asia a lot,” he said.

Thia added that although the market structure for PPP projects in China is not quite the same as those in Australia or the UK. The majority of the so-called private sector companies participating in PPP projects are state-owned companies. As a result there is a genuine policy interest in the country to bring more real private companies into infrastructure projects. 

MDBs AS AN ANCHOR

The hurdles to PPPs mean multilateral development banks such as AIIB play an essential role in assisting governments in Asia to structure their PPP models said Osborne.

“The likes of IFC [International Finance Corporation] and ADB [Asian Development Bank] are doing a wonderful job of creating a platform to assist and educate governments and government officials on the delivery of the projects under a PPP model,” he added.

And more are likely to take place, with the support of the MDBs. While it takes time for governments to familiarise themselves with the PPP framework, “there's a lot of will from the (MDBs and investor) industry in helping them get there,” he said.

IFC, for example, has helped with more than 70 active PPP projects and facilitated $22 billion of private capital in these projects in the last decade.

ADB has also called for PPP-related reforms in Asia, such as enacting PPP laws and streamlining PPP procurement and bidding processes to make infrastructure more appealing to private investors.