Mekong governments need to create an enabling environment for public-private partnerships in infrastructure. Here are 4 ways to get the job done.
I was recently asked to speak about ADB’s experience in mobilizing private sector investment for infrastructure through public-private partnerships (PPPs) at the Greater Mekong Subregion (GMS) Economic Corridors Forum in Ha Noi, Viet Nam.
The discussions at the minister-level conference focused equally on the potential for PPP’s to bring private investment to public sector infrastructure projects, and the complexities and challenges of implementing these arrangements. The consensus was that governments need to commit and coordinate to create an enabling environment for PPPs.
Below are 4 takeaways from the conversations in Ha Noi.
1. The need for infrastructure financing is significant.
The GMS Regional Investment Framework 2022 estimates a regional project pipeline requiring $63.5 billion in infrastructure financing needs, the majority in transport. Because resources are limited, a mechanism needs to be in place to prioritize the projects.
Moreover, regional coordination—for example through the GMS Regional Investment Framework—identifies projects that are medium-term priorities for the six GMS countries: Cambodia, the People’s Republic of China, Myanmar, Lao People’s Democratic Republic, Thailand, and Viet Nam.
Rail was highlighted as a leading transport mode for regional connectivity. The Greater Mekong Railway Association (GMRA) is already taking the lead supported by ADB technical assistance, but a rail network will need to be financed through careful combination of government funding, official development assistance (ODA), and private sector investment.
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2. The private sector alone cannot plug the infrastructure financing gap.
PPPs are often viewed erroneously as a panacea, but not all infrastructure projects are viable as PPPs. For instance, rail, particularly long-haul rail, is hard to finance from user fees alone.
Otherwise unbankable projects can be made attractive for bidders through large availability payments (periodic payments made by the grantor of a concession to the concessionaire for operations and maintenance services provided) or government subsidies. But agencies should be asking whether the project—under a certain payment structure and risk allocation—still generates value for money for the government to be developed as a PPP, rather than through traditional procurement.
3. ODA can be a catalyst to crowd in private finance.
Recent limits on public debt and borrowing for ODA in some GMS countries are prompting decisions on which projects to prioritize and increased scrutiny over the use of ODA. While we see government ministries and agencies trying to decide which projects to do via ODA versus PPP, using ODA to leverage private investment may be a more effective use of the funds.
For example, a road project may not generate a sufficient equity return for investors based on the user fees alone. But if a portion of capital expenditure is paid down through an ODA loan, thus reducing the outlay from the concessionaire, the project may become bankable. If we can think about ODA as an enabler of private sector investment, more can be achieved with less.
4. Agencies must coordinate and commit for projects of national importance.
Though national projects can be (and have been) implemented without a central PPP agency in place, a well-implemented coordinating unit can centralize the project prioritization and pipelining process, and provide capacity and coordination for line ministries on important projects. This is also a signal to the market that the country is committed to implementing PPPs.
Several GMS countries have made progress on this front. Viet Nam with its PPP unit and Myanmar’s efforts to develop one with ADB’s assistance are two good examples. However, it’s not enough to implement a PPP unit by name only.
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In our experience, the success of such units is driven by the individual who leads it. That person needs to have a commercial mindset as well as empathy for government processes while having the influence to adapt them to the needs of PPP, and above all be committed to driving change and adequately empowered with sufficient seniority.
Events such as the GMS Economic Corridors Forum generate significant momentum to push the regional connectivity agenda. The GMS Regional Investment Framework 2022, endorsed by the GMS Ministers in September, provides a starting point with a prioritized list of projects for regional connectivity.
The next step is to assess the bankability of these projects. Bankable, commercially viable projects can be considered for private sector investment, while bankable but non-commercially viable projects can be unlocked/accelerated through a blend of ODA and PPP structuring.
ADB is working with the GMS countries on upstream support, including PPP regulatory frameworks, institution development, and capacity building, and downstream support through project preparation and transaction advisory assistance.
If you’re interested in my presentation at the forum, you can check it out here.