September 2012, Financier Worldwide Part 1, Part 2
by Julien Reidy
In the last 12 months the PPP market in South East Asia has slowly picked up pace, after a dry period in the years following the Lehman collapse. Dependent on the availability of long term debt, which was either unavailable or only available at a price that rendered underlying projects untenable, some projects that were put on hold or cancelled have been reactivated as activity has picked up.
The closing of the Sports Hub PPP in Singapore at the back end of 2010 was a key PPP milestone regionally, and the Central Java Power Project (CJPP) in Indonesia also recently achieved commercial close, with a strong group of international banks now looking to participate in the financing. CJPP provided a particularly promising market sign as it was procured under the recently amended PPP regulations in Indonesia and is also supported in part by a guarantee from the Indonesian Infrastructure Guarantee Fund (IIGF). In addition, the Philippines, through its PPP Centre, has also earmarked a pipeline of key PPP projects planned to be procured shortly.
Opportunities and benefits
Economic infrastructure PPPs are the norm in Asia, covering a broad range of projects such as energy and power, utilities and waste, as well as roads and ports. There does not, however, appear to be much of the regional push towards social infrastructure PPPs seen in more mature PPP markets such as the UK, Europe and Australia. An interesting regional development has seen governments look to update their domestic PPP regulatory regimes to help promote PPPs generally and promote private sector involvement in infrastructure. In the last couple of years, new PPP laws have been enacted in countries including Indonesia, Vietnam, Mongolia and Thailand. To help attract international investors in particular, governments have come to appreciate the fact that their regulatory regimes need to be bolstered. This development is a good sign for future PPP opportunities.
As the largest region in the world, in terms of population and size, much of Asia’s infrastructure is world class, however, generally speaking it is considered below the global average and growth has continued to put a strain on existing infrastructure. A recent report by the Asia Development Bank estimates that in the decade up to 2020, Asia will need to invest $8 trillion overall in national infrastructure. This is an approximate figure; however, it is clear that whatever the true figure is, it will be large. It is also clear that the development of infrastructure is fundamental, and that national governments will not be able to fund all infrastructure utilising traditional procurement methods. To meet their requirements governments will need to attract national and international sponsors, contractors and funders. PPPs offer the public sector another means by which infrastructure projects can be procured. If structured appropriately PPPs can help mobilise private sector funding and to an extent PPPs can enhance private sector innovation in delivery of assets and services.
Challenges and considerations
From a private sector viewpoint, prior to involvement in negotiating any specific contracts and projects investment decisions must often be made for each specific country or region. PPP investors often assess the following: (i) whether there is a pipeline of projects in a country or region; (ii) if there is a fair equity return for risks taken; (iii) any level of development of debt capital markets, and whether parties can manage construction and operation risks; (iv) whether there is any central government PPP body; and (v) whether there is sanctity of contract/rule of law and a workable regulatory regime.
In Asia, addressing viability gaps and dealing with the level of ‘political risk’ are also common issues which must be overcome. In the emerging PPP markets of Asia in particular, reliance is often placed on the involvement of supporting multilaterals to alleviate political risk. We are also seeing the emergence of government backed guarantee funds – such as IIGF in Indonesia – in PPP structures, especially for projects being procured at a sub-sovereign level.
Allocating risk and creating value
The age old maxim that “risks ought to lie with the party best able to manage them” still ought to apply to PPPs in Asia, however the common misconception that PPP means all risks must be passed to the private sector remains, at least from a public sector point of view. Regional projects have failed as there have been unrealistic expectations at government level which can lead to unbankable risk allocation frameworks being proposed for particular projects. A ‘stop start’ approach to infrastructure usually scares investors away from applicable countries, especially in Asia where there remain alternative opportunities for investors.
Rather than looking at considerations for allocating risks at specific project level, at country and regional level in Asia it would be preferable to promote adequate legal frameworks / regulatory regimes, to promote proper feasibility / financial analysis on projects before going to the market and developing resources and capacity within centralised government PPP units. Taking such steps ought to ultimately help promote bankability in projects being brought to the market.
While PPPs in Asia are different from equivalent projects being procured in more mature PPP jurisdictions, investors can, of course, improve their chances of creating value and generating expected returns. The overall risks, however, are also usually greater. International investors in particular will struggle if they take on a project on the basis that their involvement will have the same sort of risk profile as that found elsewhere in the world. This is not to say that the risks are insurmountable. Some investors have been able to successfully utilise multilateral type support which can sometimes alleviate some elements of political risk and improve overall chances of success.
Expectations
The PPP market in Asia is progressing, though at this stage it has not returned to the levels seen prior to 2008. Economic infrastructure PPPs will continue to be the norm in South East Asia. Countries are attempting to bolster their PPP regulatory frameworks and pipeline of projects in order to better attract foreign investment and countries regionally will continue examining the possibility of government back guarantee funds for PPPs, particularly where relevant projects are being procured at a sub sovereign level. Investors regionally ought to be cognisant of the fact that the risk profile for their projects will not be the same as equivalent projects in some more developed markets. There are, however, still potential rewards for private sector participants in the case of well-structured and viable PPP projects.
Julien Reidy is an of counsel in Hogan Lovells’ Singapore office and is part of the infrastructure and project finance practice. He has extensive experience advising both public sector procuring bodies and private sector sponsors and lenders on infrastructure, PPP, utility and energy projects in South East Asia, the Middle East and Europe. Mr Reidy can be contacted on +65 6302 2555 or by email: julien.reidy@hoganlovells.com.
