old paper but still relevant

1. 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.

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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 Water and Sanita 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.
Financing Infrastructure
Commercially
Viable Project
Economically Viable
Project
Nonviable Project
Private Sector
Government ODA/OOF
PPP
Contract
SPV
Contractors
Lenders/Sponsors
Gov Contrac ng
Agency
Private Sector
Public Sector
Construction-Operation
Financing
Guarantee
O aker or User
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.

10. 10
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