Infrastructure problems: A lack of preparations

Vincent Lingga, The Jakarta Post, Baku | Opinion | Wed, May 06 2015, 7:01 AM
Infrastructure was one of the topics in the series of seminars held here on the sidelines of the Asian Development Bank (ADB) annual meeting on May 2 to 5 because investment in infrastructure has increasingly been recognized as critical for economic growth and welfare. 

Indeed, infrastructure investment has the potential for increasing efficiency and competitiveness, promoting both international linkages and domestic integration and raising output in the short term by boosting demand and in the long term by raising the economy’s productive capacity.

But the initiative of China, the world’s second-largest economy, to set up the Asian Infrastructure Investment Bank (AIIB) that so far has attracted almost 60 developed and developing countries as the founding shareholders, has turned into an issue of geopolitics involving Japan and the United States. 

The ADB apparently tried to avoid protracted geopolitical issues by setting “Preparing bankable projects and removing impediments to private financing” as the central theme of a seminar on Saturday that presented six panelists consisting of bankers, investors and Azerbaijan’s Finance Minister Samir Sharifov.

The panelists agreed that the existence of large infrastructure gaps across a large and varied set of countries reflects a combination of institutional and financial constraints, as well as pressure from rising demand and the best way to speed up infrastructure development is through public-private partnership (PPP) programs because of the limited financing resources of governments. 

But despite the potentially large pool of long-term savings available, securing the necessary financing on adequate terms is often a challenge, reflecting in part issues related to the appropriability of the returns on infrastructure investment, regulatory risks and long gestation periods. 

A key issue in confronting these difficulties is how to define the roles of the private and public sectors in such a way that infrastructure gaps can be closed while good service delivery is ensured and both investors’ and taxpayers’ interests are protected. 

As Gordon Bajnai, chief operating officer of the Paris-based Meridiam Group, a leading global infrastructure company, says, PPPs are a good concept because the government still owns the project or facility. But the project should not be politically motivated, but be based on really essential needs and should be managed by highly competent officials in view of the complex supply chains involved.

Koray Arikan, senior executive of the Dogus Group, one of Turkey’s largest conglomerates, which also is active in the construction business, observes that the problem is not the lack of financing but the dearth of financially viable and well-designed projects supported with credible overall risk analyses.

Jose Isidro Camacho, managing director of Credit Suisse Asia Pacific, says the prerequisites are a strong regulatory framework, a strong legal system and the long-term credibility of the project because investors look for economic predictability, not for economic certainty.

Camacho and Arundhati Bhattacharya, the CEO of the State Bank of India, share the view that there is sufficient capital available in Asia and long term funds from pension and insurance firms like infrastructure that secures a long-term, stable stream of revenues.

Returns from debts secured against real assets are also high because financial instruments linked to infrastructure are typically hedged against inflation and offer stable returns, with low volatility and little correlation with other asset classes. The long life of these assets is a perfect match for the long-term liabilities of a pension fund. 

But the acute lack of project preparation and development seems quite obvious in Indonesia, which has since 2005 been offering hundreds of projects under the PPP program, but very few of them gained investor interest because the government did not or hesitated to allocate adequate budgets for hiring professional consulting firms and advisors to undertake preparatory work.

Whereas the upfront cost of preliminary project development more than offsets the comparative cost of delay or failure to realize important public services and infrastructure, or the increased costs private investors must charge to overcome unmitigated risks.

 The panelists see project development as an important tool for catalyzing professional development of complex infrastructure and services and a key contributor to realizing investable, bankable projects.

It is apparently because of this wide gap of project preparation that ADB last September set up the Office of PPP (OPPP) to enhance its role in supporting and enabling governments of developing countries to secure larger private investments in infrastructure development. 

An ADB study last year found that lack of project preparation is a key contributor to the failure of projects with private sector participation. Too often projects are put out to competitive bidding lacking proper contracts, appropriate risk allocation, a sustainable revenue model, government support, key project inputs such as international-standard studies for feasibility, environmental or social safeguards, uncertain resource assessments and properly-secured land.

The OPPP provides assistance to developing members to set up their regulatory frameworks and transaction advisory services (TAS) to developing member countries to deliver bankable PPP projects and coordinate and support PPP-related programs. TAS are fee-based advisory services provided by the ADB over the entire range of activities associated with the development and implementation of PPP projects.

The OPPP helps developing members prepare a pipeline of ready-to-finance infrastructure investments by assisting with due diligence and helping to address impediments to investment decisions, supporting project design, preparations and structuring.

The ADB further expanded its capacity to design and structure bankable infrastructure projects by signing a PPP co-advisory agreement with eight global commercial banks from Japan and France on the sidelines of the ADB annual meeting here. 

Under the agreement, the ADB and the eight banks can work together to provide independent advice to governments in developing Asia on how best to structure PPPs to make them attractive to the private sector and to manage the subsequent PPP bidding process. The governments will, however, make the final choice of the PPP winning bidders.
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The author is senior editor at The Jakarta Post.