PPPs can help close Asia’s infrastructure gap

High-quality infrastructure—from reliable power and water supplies to well-built roads and airports—is central to a country’s development. It is also essential for everyday life, along with access to education, health services and jobs. In my travels around Asia, I am regularly reminded that there is a serious lack of infrastructure. Research by the Asian Development Bank in 2010 put the region’s infrastructure investment needs at $8 trillion through to 2020.

Governments must increase public infrastructure investment by mobilizing more tax revenues backed by strong enforcement.

Borrowing from international financial institutions such as ADB and bilateral partners would help. In addition, tapping private-sector resources locally and abroad is crucial. In particular, public-private partnerships (PPPs) can be an effective tool to narrow the region’s infrastructure gap.

PPPs are contractual arrangements where a government partners with the private sector to deliver infrastructure services. They can take several forms, from simple contracts for private-sector-run garbage services to more complex build-operate-transfer (BOT) agreements. Under BOT, private parties finance and build infrastructure, then operate it over a fixed period to generate returns before transferring ownership to the government.

PPPs are not just about financing projects. Drawing on private-sector expertise and skills, they can deliver a high quality of construction, operational performance and risk-sharing. But PPPs are not a panacea. If designed and implemented improperly, they can require even more tax resources to cover losses. In the worst cases, the projects themselves could be abandoned.

When designed and executed well, PPPs can provide good infrastructure services where they are most needed. This is certainly so in the Philippines, where insufficient infrastructure has been a major constraint on investment, productivity and growth. The government has made some headway by increasing its infrastructure budget from less than 1 percent of GDP in 2010, when President Aquino took office, to 2.5 percent in 2013; it is targeting 5 percent by 2016.

The Philippines has had a long experience with PPPs since the BOT Law was introduced in 1991. If you have driven the North Luzon Expressway—one of the best roads in the country—you have used a BOT road completed on time and within the projected cost.

Another successful initiative under PPP is a water services project in Metro Manila, which provided round-the-clock water supplies to millions of households. Some projects had problems. The original contract to deliver Ninoy Aquino International Airport Terminal 3 was hobbled by more than a decade of legal disputes.

Today, PPPs are well-established in the Philippines. The PPP Center, supported by ADB, is now the government’s lead agency for facilitating PPP projects. It has a project development and monitoring facility to prepare and monitor transactions. From just 11 projects in 2010, the Philippines now has 61 potential PPPs—nine of which have been awarded, valued at about $3 billion or just over 1 percent of GDP. The 61 projects include highways, national railways, urban light rail transits, classrooms and hospitals.

Recently I visited one of the newly-awarded projects, an upgrading and expansion of terminals at Mactan Cebu Airport. I was impressed by the strong partnership between the Department of Transportation and Communications, the PPP Center, a local construction company, a foreign airport services provider, and many local banks. ADB also helped finance the project. When completed, the facility will boost tourism, investment and industrial development in the Visayas.

PPPs are gaining a solid foothold, not just in the Philippines but throughout developing Asia. Further action in three key areas will make them even more effective.

First, better regulatory environments can help ensure smooth project implementation. Good coordination among government agencies is key to attract private investors.

Effective mechanisms for land acquisition, resettlement and compensation will help minimize delays to approvals and implementation.

Second, more PPPs can be implemented if governments deepen their knowledge and capacity, particularly in project preparation. It is important to select the right projects to pursue, and to manage fair and transparent bidding.

Third, local and regional capital markets need to be deeper and broader to channel Asia’s large savings to infrastructure investment. It is also essential to strengthen expertise of local banks in project finance.

ADB has supported progress on all three fronts, in addition to financing PPPs. It is helping to draft PPP laws, build the skills of government officials, and promote financial sector development. ADB now provides transaction advisory services through its newly established Office of PPP, and will soon set up an Asia-Pacific project preparation facility assisted by several donor countries.

Governments across developing Asia should continue to show strong political commitment to PPPs. This will build trust with private-sector partners, who will feel assured that their investments are safe regardless of changes of administration or personnel. Governments, private firms, banks and international institutions like ADB should continue to make the most and best use of PPPs to close Asia’s infrastructure gap—sooner rather than later.

Takehiko Nakao is president of the Asian Development Bank.