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Southeast Asia attempts to tap private funds for public works

People wait for the train at a station in Metro Manila, where it sometimes takes more than 30 minutes just to get to the platform. (Photo by Keiichiro Asahara)

MANILA   Economic development has brought big changes to the Philippine capital -- or at least to its skyline. But while Manila now boasts a number of shiny new high-rises, the city's outmoded rail system is showing its age, with secondhand trains from Japan trundling along weed-choked single tracks.

     Established in 1892, the Philippine National Railways used to operate a network of routes totaling more than 1,000km. But political and economic turmoil made maintenance increasingly difficult, and that figure has fallen to less than half its peak. Today, PNR has only one route in Manila in daily operation, served by trains with just three to five cars. With the rail system overflowing, many commuters have no choice but to drive, take the bus or find some other way to get to work, aggravating the capital's already heavy traffic congestion.

     This epitome of inadequate infrastructure may finally be in for some much-needed improvements. The government, which has kept railway projects on the back burner due to budget constraints, plans to invest $3.8 billion through public-private partnerships to extend the rail network's total length to 653km.

     Handling this investment is the Public-Private Partnership Center of the Philippines, a government body established in 2010. So far, it has chosen 50 projects to pursue, including the extension of elevated railroad lines and construction of airports, and awarded 12 of these to the private sector. Aware that inadequate infrastructure hampers economic growth, the PPP Center is now hoping to move more quickly in the coming months.

     "We want to find contractors for at least 10 more projects by the time President Benigno Aquino leaves office at the end of June," Executive Director Andre Palacios said at a seminar on March 15 in Makati.

HELP WANTED   Many Asian countries are pinning their hopes on such partnerships. The Philippines is keenest, but Thailand is also eager to join hands with the private sector. Somkid Jatusripitak, deputy prime minister in charge of economic affairs, has indicated that the government wants to use PPP programs to build expressways and railway networks to kick-start the stagnant economy.

     Frustrated by the way discussions on infrastructure projects were becoming bogged down by the involvement of multiple ministries, the Thai government decided to streamline things. In 2013, it introduced a law giving the Public-Private Partnership Committee sole discretion in discussing and planning projects, drastically cutting the time needed for drafting outlines.

     The government is prioritizing three urban railroad projects and two expressway projects, valued at a total of 330 billion baht ($9.39 billion). Whether private companies will be keen to participate, however, is another matter.

     For the railroad projects, for example, the government will be responsible for expropriating land. But trouble with land acquisition is common in developing countries and often leads to construction delays. There is also the risk of losses if the number of passengers turns out to be lower than expected.

     The private sector has been burned in such deals before. The Bangkok subway, one of the country's first PPP projects, began operating in 2004 and has yet to turn a profit.

     Making matters worse, the government is often reluctant to shoulder its share of the risks in such projects, leading some in Thailand to quip that PPP stands for "purely private project." The government is risk-shy for two reasons. First, it does not want to face public criticism if project costs balloon as a result of construction delays. Second, it lacks the capacity to evaluate the risks such projects entail.

     The situation is much the same in the Philippines. The Laguna Lakeshore Expressway Dike project in southern Manila was hyped as the PPP Center's biggest undertaking. But bidding for the project failed, as none of the three qualified groups made an offer by the March 28 deadline.

     "Frankly, from an economic viability perspective and risk allocation perspective, we found that the government would not provide [a] concession agreement that addressed all these concerns of the private sector," said Roman Azanza, first vice president for business development at Aboitiz Equity Ventures, one of the member companies of a consortium that was expected to enter a bid. The government, whose bonds have finally regained investment-grade status, is reluctant to take risks that could require massive public spending.

EXAMPLE TO FOLLOW   Some countries, such as Australia, have shown that PPP programs can be a success. Construction of a light rail transit line is due to start in Canberra in mid-2016. The 12km line will have 13 stations, and the private sector will be in charge of operations and maintenance for 20 years. A consortium made up of companies from Japan, Britain, Australia and elsewhere won preferential negotiating rights in February.

     Why do projects tend to go smoothly in Australia? "Australian governments use PPPs to secure better value for money from projects that will be paid for by the government, whereas PPPs in Southeast Asian countries are more often paid for through user charges with the intention of reducing the need for funding from the government budget," Richard Foster, an expert on such programs, told the Nikkei Asian Review.

     If a government initiative focuses too much on saving money and avoiding risks, then it is unlikely to attract private money.

     Still, for many Asian nations public-private collaboration remains one of the few viable solutions to an urgent problem. Increasingly, multilateral development institutions are offering to help with more than just money. The Asian Development Bank, for instance, is involved in projects from the formation phase. The ADB launched the Asia Pacific Project Preparation Facility in January and set up a foundation to cover initial costs for PPP project formation.

     Efforts are also being made to attract investors. The Credit Guarantee and Investment Facility, created by the Association of Southeast Asian Nations, Japan, China, South Korea and the ADB, has started providing guarantees for project bonds issued by companies. The CGIF's high credit rating is attractive to investors and gives companies financing options beyond bank loans.

     As Asian economies grow, so, too, will demand for infrastructure. Advanced economies have shown that public-private collaboration can be used effectively to supply high-quality infrastructure. The problem for Southeast Asian countries is to learn how to do the same. 

Nikkei staff writers Tamaki Kyozuka in Bangkok and Mikhail Flores in Manila contributed to this story.

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