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Rajat Nag — Need to get ‘enabling environment’ right.
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ADB to kick-start PPPs
Florence Chong, Editor, ASIA TODAY INTERNATIONAL
25-06-2008
MADRID – The Manila-based Asian Development Bank plans to provide a catalyst to kick-start private sector involvement in the financing of Asia’s massive infrastructure needs. The ADB estimates Asia-Pacific will require some US$300 billion each year over the next decade to build infrastructure necessary to maintain economic growth.
ADB Managing Director-General, Rajat Nag, told ATI the public sector – whether through governments, multilateral agencies or bilateral aid – will not be able to bear infrastructure costs without private sector investment.
But Nag says the crucial factor is to get the "enabling environment right" before a trilateral approach to infrastructure can be implemented.
The actual financial arrangement in public-private partnerships (PPPs) ultimately is between the Government and the private sector consortium. The ADB's role will be at the front end, Nag says, making sure that the legal and regulatory framework is in place –and that a project is "bankable".
The ADB has already begun work on a range of projects. "We are going to put aside some funds to prepare projects to bankable standards," Nag says. “Private investors have often asked where the projects are, where the designs are, and so on." Working with various governments, the ADB will take on board potential projects, including an assessment of social and environmental impact studies.
While he is not offering details on where these projects will be located, they are in "major Asia metropolis" and located throughout the region, from the most populous nations – India, China, Indonesia and Vietnam – to the smallest countries, like Cambodia and Laos.
Broadly, the projects are in transportation, (such as Metro light rails), waste water management, and power. Governments in the region will present their lists to private sector investors over the next couple of years. The countries involved will have available detailed specifications of projects, together with social and economic impact analyses.
Nag says ADB involvement means that investors will have another layer of security. "We might put our own money in through the bank's private sector window – and we can provide guarantees for partial risk or political risk,” he says. “This is a service we (already) provide to private sector investors, who are basically buying insurance. We say to investors: We will provide guarantees that your payments will be made, subject to certain conditions."
With the ADB putting its money on the table, investors can be assured that the Bank will carry out due diligence and make sure that safeguard policies are in place, Nag says.
"We will not be able to be involved in all projects, but we hope to be involved in enough to give confidence to other private sector investors to go in on their own with the public sector participation of Government, even though we are not there,” he told ATI. "After a while, private sector consortia may have enough confidence not to need our presence, and the country and the private sector will undertake projects bilaterally."
Nag suggests that the two focal points for private investors are the ADB’s private sector department and the office of co-financing in the Bank's head office in Manila. He nominates, as a key contact, the Private Sector Division’s Director General, Seethapathy Chander (email schander@adb.org , tel (632) 632-6475).
"The third point of contact is our resident missions in each of these countries,” he says. “This is high priority for the Bank. We are very keen to talk to private sector investors. Our long-term strategy calls for 50 per cent of operations to be in private sector development and private sector operations, meaning PPPs."
Asia has been rather slow to embrace public private partnership projects, which have become well established in the UK, Australia and Canada (see ATI, February 2008).
"Today, there is a huge supply of private capital in Asia – a large part of it is Asia's own huge reserve of more than US$2 trillion. We feel that private capital is not investing in the region – and certainly not in infrastructure – to the extent needed, because there are still some major gaps in Governance structure, legal frameworks, dispute settlement mechanisms and risk-sharing mechanisms."
As a development partner, Nag says the ADB will bring in outside experts in finance and other areas to help a Government establish a framework. He adds: "We can bring best practice to the table, and we will talk to the Government on what those systems have to be. Our regional department has to be involved on governance, dispute resolution and in helping the country set up the right framework." He says the ADB can bring in both private and public sector competency to help facilitate private capital in infrastructure development.
Nag says the "built-operate-own-transfer" (BOOT) model would likely work in most countries, but he reserves judgement on the preferred option. "One size does not fit all," he says. The ultimate objective is to get PPPs into every country, if for no other reason than that there are not enough resources in the public sector to take on all the infrastructure needed.
He says much will depend on individual countries. In India, for example, PPPs may be more ready to go ahead than in some of the smaller countries, where there might have to be greater involvement of the public sector in providing infrastructure.
India's Commerce and Industry Minister, Kamal Nath, told ATI during a visit to Australia in May, that he supports the idea (see page 19).
Similarly, US Assistant Treasury Secretary, Clay Lowery, told ATI that the US (the ADB's largest shareholder) sees a role for the ADB to create the right type of climate to encourage private sector involvement and to help create a "robust private sector” in the region.
Asian governments have previously dabbled in a range of PPP concepts, such as BOTs (built-operate-transfer) and BOOT (build-own-operate-transfer). Nag says these have worked "reasonably well" in toll roads in the Philippines, Indonesia and Vietnam "when everything is going well". "The biggest problem is the dispute resolution mechanism. It is so important that, when things are not going well, there is a mechanism through which the foreign private sector consortium and the Government can resolve their differences before they escalate into serious problems,” Nag says.
"We are very much focussed on dispute resolution. We want to make sure that the legal framework is right, and that institutional mechanisms – the courts, tribunals, arbitration – are in place for those disputes to be taken to.
The emphasis on private sector involvement has attracted criticism from non-government organisations (NGOs) who are concerned that PPPs would hurt the poor – whose needs are greatest. The NGOs insist that the ADB should not be instrumental in helping multinationals make profits out of basic needs.
Says Nag: "Our fundamental objective is to fight poverty in Asia Pacific. The best way and the only way to fight poverty is by economic growth. This has to be inclusive. It has to include all segments of society. Economic growth needs infrastructure.
"There is no country in the world, developed or developing, able to grow without infrastructure. You just have to look at India and China. They have done well because they have the infrastructure. You need money and investment – a huge amount of money – to build infrastructure, and the money will not come from the public sector alone.
"Of course, the private sector is driven by profit maximisation. There is nothing wrong with that; the private sector should make a profit. It is a question of how the projects are structured and created for public good.
"If a country asks for a waste water project, of course the private sector will want to make a profit on it and they should, but the waste water project will provide benefits to the people – poor and rich. A water generation project would be the best poverty reduction measure that we can have. There are many cities in Asia where the poor pays 10 times more per litre of water if they have to buy from a water vendor compared to what they would pay for piped water brought to them by the private sector.
"It is the wrong argument to say that to bring in private sector is to be anti-poor. It is very anti-poor not to have services.
"Quite frankly, I would argue that the funding should not come from the public sector, because the limited resources there should be used for health, education and rural development – not for building expressways and power stations, where the private sector can come in. We are going for growth with infrastructure.”
Nag says PPPs are not fail-safe. Their brief history is littered with troubled projects, requiring expensive bail-outs by governments.
"I cannot pre-judge the results, but it is true that some PPP projects have fallen over,” Nag told ATI. “That is where we must learn from experience, and determine why they have fallen. That is why we need to have dispute resolution." He adds that bail-outs are a risk the ADB and its partners must be willing to take.
Asia Today International June/July 2008 |
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