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Economy

Nash and Banks: Quality infrastructure requires sound planning

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Models of high-speed trains are displayed at the Fast Track exhibition in Jakarta on Aug. 13, 2015.   © Reuters

Infrastructure is the key to Asia's future: energy systems to provide consistent, affordable power to factories, sprawling urban centers and flickering countryside villages; better schools to educate children and young adults; wider roads that lead commuters to shiny new office buildings; and better ports to move manufactured goods across borders.

     The International Energy Agency estimates the population of the Association of Southeast Asian Nations will expand by nearly 100 million by 2040 and the bloc's share of global gross domestic product will increase to 7.7% from 5.9% in 2013. These factors, combined with increased access to energy services, will result in an 80% rise in energy demand. By 2050, Southeast Asia could become the world's fourth-largest regional economy behind North America, the European Union and China, according to global consultancy McKinsey & Co.

     The Asian Development Bank estimates infrastructure investment needs in Southeast Asia will approach $1 trillion over the next 10 years. The energy sector alone will need $2.5 trillion of investment in supply infrastructure by 2040, according to the IEA, including the construction of 400 gigawatts of generating capacity -- roughly the combined installed capacity of Japan and South Korea today.

     While the sum required may seem utterly out of reach, Japan, China, India and others have come forward with hundreds of billions of dollars' worth of commitments to support domestic and regional infrastructure development. Although Asian governments provide a significant funding base, public-sector capital will not be sufficient to fill Asia's infrastructure gap.

     Many factors contribute to the success of infrastructure development, including a government with the capacity to monitor corruption and evaluate the achievement of project milestones, and the frameworks to invest in and manage infrastructure assets.

CLEANER BUILDING   These factors can have a real impact. A 2014 World Bank working paper suggested that "firms confronted with demands for bribes take approximately 1.5-1.8 times longer to get a construction permit, and 1.5-1.6 times longer to get an operating license or electrical connection than firms that did not have to pay a bribe." In 2008, the daily global rental rate for a single crane hit $80,000, so a 50-80% delay in both permitting and licensing can have significant project-cost impacts for governments and taxpayers.

     The effective use and management of government capital is, of course, not only critical to the success of individual infrastructure projects and regional integration efforts but also for the trust and credibility of Asian leaders. It is difficult, if not impossible, to completely escape corruption in infrastructure projects, but Asian governments and institutions funding and guaranteeing these projects must ask themselves how much corruption is tolerable. As Southeast Asian incomes rise -- the IEA anticipates an increase in per capita income from $10,000 to $27,000 by 2040 -- and taxpayers become savvier and more demanding, they will expect more transparency and accountability.

     Public-private partnerships have been deployed to share risk, inject private-sector best practices and raise accountability. The Philippines has been one of Asia's most prolific PPP users. The Aquino administration has used PPPs for a range of products, from the construction of thousands of badly needed classrooms to elevated expressways in metro Manila. Several projects have shown very good results, but a tender on March 28 for a $2.7 billion expressway and dike fell flat, with no bids offered.

     The concern is with policy continuity. As the Aquino administration comes to an end in June, bidders seem hesitant to enter new transactions, given uncertainty about the next government and how it will support PPP contracts. There seem to be doubts about the government's capacity to manage new PPPs.

     Policy environments change with nearly every new administration in every country, but the long-term nature of infrastructure investment demands that investors and operators take a much harder look at political risk. A PPP is not just a contract or a transaction structure. It is a complex arrangement to award, execute, manage and sometimes operate an infrastructure asset. This requires high levels of coordination and alignment between the government and the private sector.

     Problems experienced with the privatization of water services in Manila and Jakarta highlight the risks. Manila's system was split in 1997 between two concessionaires who took on commitments to vastly increase water and sewage connections while keeping charges low. The business plan quickly came apart amid the Asian financial crisis, and one operator went bankrupt. Both companies later recovered their footing, but continue to battle in court with the government over how much they can charge customers. Sewage connections also lag far behind original targets.

     A year ago, the Central Jakarta District Court overturned the early 1990s privatization of water services in Jakarta to two private companies, one part-owned by France's Engie, in response to a lawsuit filed by a citizen's group. The group argued in part that the arrangement had failed to ensure an adequate supply of clean water to residents. The ruling was overturned by the Jakarta High Court on appeal in February, but uncertainty remains as the citizen's group has said it will appeal to the Supreme Court.

COMPLEX OPERATION   The needs of the public and private sectors must be balanced with the needs and expectations of the people, and this makes PPPs incredibly complex. The Public-Private Partnership Center of the Philippines was set up in 2010 to manage these initiatives more smoothly.

     Despite institutional dedication and expertise, some road, railway and hospital projects have been stalled over regulatory, cross-project coordination, privatization, legal and contracting issues. The incidence of project delays and misaligned interests under PPPs is rising, especially as the capital base for these investments grows. Inexperienced or capacity-poor governments and operators are entering into these complex alternative structures without sufficient awareness or planning.

     Last year, Thailand and Indonesia each awarded Chinese companies a high-profile high-speed rail project, both of which were subsequently delayed. The 150km Jakarta-Bandung project is a $5.5 billion joint venture between Chinese and Indonesian state-owned companies. When ground was broken in January, the initial construction permit covered only the first 5km of the project. In March, the authorities finally granted the full project permit, with a 50-year operating license for the joint venture.

     But problems persist. The Indonesian government has required that the project be fully built within three years. Chinese experts are now concerned about environmental and land acquisition regulations, particularly given the fact that Jakarta has been working on land reform for the last decade. The land purchase concerns alone are consequential.

     Of course, project delays are nothing new in Southeast Asia, but governments need to address this. Administrative and political impediments to infrastructure investment must be addressed if economic growth and poverty eradication goals are to be achieved. Certainly, broader objectives for ASEAN economic integration are unlikely to be achieved without improvements in local governance and administrative capabilities that would give investors more confidence.

     While Asian governments will remain supportive of civil works projects, private-sector funds, which are desperately needed, are looking for a return and an investment friendly environment -- one with reasonable political and regulatory risk and greater certainty in judicial outcomes.

Tony Nash is chief economist at Complete Intelligence, an economics, risk and industry advisory company in Singapore, and chairman of the International Council for Capital Formation. George David Banks is executive vice president of the American Council for Capital Formation in Washington.

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