Closing the infrastructure gap

To realise its full potential for economic growth, Asia needs to overcome the fundamental barrier of poor infrastructure, says Bambang Susantono, vice-president for knowledge management and sustainable development, Asian Development Bank.

With the world looking to Asia to drive economic growth, it’s time to remove a major roadblock to the region’s prosperity — subpar infrastructure. We need to close the infrastructure gap, and we can do it by engaging the private sector.

Public-Private Partnerships (PPPs) are contractual arrangements between a government and a private partner to deliver infrastructure services. They can be simple contracts for private sector-run services, or complex agreements where private firms finance, build and operate big infrastructure projects, before handing them back to the government.

In Indonesia, Southeast Asia’s biggest economy, there has been good progress on a PPP-friendly legal and regulatory framework, and on a range of enabling instruments including a project development facility. But momentum has been hobbled by a lack of champions and of capacity to push through precedent-setting projects.

PPPs are not a silver bullet, but should form a core component of plans to overhaul national infrastructure. Quality infrastructure is key to economic growth and prosperity in developing countries. 
But the quality of Indonesia’s infrastructure is ranked far below that of neighboring Malaysia and Thailand.

It’s a region-wide problem. Nearly US$1 trillion a year is needed by 2020 to bring Asia and the Pacific’s infrastructure up to scratch. Governments can only supply about 60 percent of this amount, so private sector financing of infrastructure and related services is essential.

There are some encouraging signs. Papua New Guinea and Vietnam are implementing PPP frameworks. China now has a $27 billion fund for PPPs. The Philippines has awarded 12 projects worth the equivalent of $4.8 billion and Mongolia recently awarded its first PPP — a $1.3 billion combined heat and power plant.

But overall, PPPs are not gaining enough traction to deliver world-class infrastructure across the region. There are three critical issues that need to be addressed to get PPPs on track — securing the right knowledge and skills; improving the investment climate; and better project preparation.

On the first point, we can take some license with the acronym to define PPP as “Procuring Professional People”.

These might be public officials who are confident leaders with the vision and political will to lay the groundwork for PPPs. Or they might be technical experts who make the projects happen on the ground.

The expertise to appraise, manage and deliver successful PPPs is crucial. Thankfully, moves are afoot to up skill people involved in PPPs.

Nearly US$1 trillion a year is needed by 2020 to bring Asia and the Pacific’s infrastructure up to scratch. Governments can only supply about 60 percent of this amount, so private sector financing of infrastructure and related services is essential.

The Asian Development Bank (ADB) and other multilateral agencies will soon launch a global PPP skills accreditation program to foster a benchmark of expertise and knowledge. Proficiency tests for PPP practitioners will be offered by global accreditation services company APMG International.

This is an important initiative, and more such measures are needed to fill the gaping demand for PPP-related skills. To grasp the extent of that demand, consider that a webpage of PPP guidance and basic concepts launched recently by ADB’s country office in Beijing often gets 10,000 hits a day.

The second challenge — enhancing the investment climate — requires bold action by policymakers based on a thorough evaluation of their country’s strengths and weaknesses. Governments should minimize risks for private investors by addressing policy, institutional and regulatory barriers to investment. They should fix governance problems, implement transparent procurement systems, and establish viability funding gap mechanisms to mobilize public funding for investments that private sector firms cannot undertake.

There is a tool that can help governments evaluate their PPP enabling environment. The Infrascope, a methodology developed in 2009 by the Inter-American Development Bank (ADB), ADB and the Economist Intelligence Unit (EIU), gives insightful snapshots of regulatory framework quality, government institutional set-up, as well as the investment climate and financial markets of 75 countries.

The EIU is expected to update the Infrascope later this year, a process that Indonesia and the rest of Asia should follow closely.

Finally, and to take yet more license with the acronym, PPP could also stand for “Properly Prepared Projects”.

Overall, Asia lacks a pipeline of bankable, sustainable deals, largely due to the deficits in skills and investment climates outlined earlier. This is the biggest hurdle to attracting more private investment in infrastructure.

For guidance on how to resolve this problem, look no further than the Philippines. Its PPP Center is the government’s lead agency for facilitating PPP projects and encompasses a Project Development and Monitoring Facility to prepare and monitor transactions. From just 11 projects in 2010, the Philippines now has 51 projects at various stages of its PPP pipeline.

Another positive step is the Asia Pacific Project Preparation Facility, the result of a partnership between Japan, Canada and Australia. This facility will help developing country governments to obtain the strong technical, financial and legal advice need to prepare and structure PPPs.

Indonesia’s infrastructure challenges are also opportunities. With better skills, more investment and strong project preparation, it can build the infrastructure it needs to drive growth.

Bambang Susantono is vice president, knowledge management and sustainable development at ADB, Manila. This article was first published by the Asian Development Bank.

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