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Mr Mathieu Verougstraete Economic Affairs Officer, UNESCAP Financing Sources for Public-Private Partnerships (PPPs) Sub-Regional Expert Group Meeting (EGM) for South-East Asian Countries 24-25 November 2015, Kuala Lumpur, Malaysia

Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

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Page 1: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Mr Mathieu Verougstraete

Economic Affairs Officer, UNESCAP

Financing Sources for

Public-Private Partnerships (PPPs)

Sub-Regional Expert Group Meeting (EGM) for South-East Asian Countries

24-25 November 2015, Kuala Lumpur, Malaysia

Page 2: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

1. Are PPPs needed?

2. Track record and current initiatives

3. Financing sources

4. Conclusions

Page 3: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Infrastructure under pressure Booming demand for infrastructure services

Urban population growth in South-East Asia:

2-5%

100,000 people / week

of Asian GDP congestion costs

Airport: Passengers in South-East Asia since 2005 x2.5 some countries by 4 (e.g. Lao PDR and Cambodia)

Ports: flow of containers since 2000 x3 (Indonesia, Malaysia, Philippines, Thailand and Viet Nam / source: WBI)

Source: South-East Asia Energy Outlook (IEA-ERIA)

Electricity generation has risen by since 1990 and is expected to grow by 4.2% per year on average till 2035

4.5 times

Page 4: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

The quality of infrastructure Current Perception

1

2

3

4

5

6

7

Myanmar138

Vietnam112

Cambodia,109

Philippines95

Thailand76

Indonesia72

Lao PDR66

Malaysia20

Singapore5

2006 2014

[7 = extensive and efficient / among the best in the world]

[1 = extremely underdeveloped / among the worst in the world]

World Ranking (2014):

World Average

Source: World Economic Forum (global-competitiveness-report-2014-2015)

Despite improvements, ranking remains low

Among top performers

How would you assess general infrastructure (e.g., transport, telephony, and energy) in your country?

Around the world average

Page 5: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

17 13 9 18

12 12

26

10 10

13

7

7 4

20 14

9 10 4 11

6

13 31

19 19 18 13

6

13

0

10

20

30

40

50

60

70

80

Singapore Malaysia Thailand Viet Nam Philippines Indonesia* GlobalBenchmark

Water Telecom Power Transport

Infrastructure stock…

…below developed countries benchmark

Infrastructure Stock (% of GDP, 2012) (source McKinsey Global Institute)

*Transport infrastructure for Indonesia is underestimated, as expenditure for rail, ports and airports is not available

Page 6: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Huge investments needed

… to reach world-class infrastructure

Investment needs in South-East Asia (2014-2030) (source McKinsey Global Institute) $ trillion

Transport

0.6

0.6

1

1.2

0

0.5

1

1.5

2

2.5

3

3.5

4

1

Power

Water

Telecom

2 to 6 times

Estimates > $ 200 billion

per year for South-East Asian region

annual amount spent

historically in these countries

Public Sector unlikely to cover

all the needs

Page 7: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

1. Are PPPs needed?

2. Track record and current initiatives

3. Financing sources

4. Conclusions

Page 8: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Private Participation in Infrastructure… … in South-East Asia

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

Energy Transport Water and sewerageSource: World Bank Group Data (Private Participation in Infrastructure Projects Database) NB: Singapore and Brunei are not included

Cambodia 2%

Indonesia 17%

Lao PDR 6%

Malaysia 27% Myanmar

0%

Philippines 25%

Thailand 16%

Vietnam 7%

Around $10 billion per year

Largely in the energy sector (75%)

Page 9: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Selected landmark deals Existing and Future

Intl. airport concession agreements

signed in 2014 (Mandalay and

Yangon)

Five projects on fast-track for a combined

value $9.32 bn (Urban Rail and Motorways)

Long Thanh Airport approved for PPP dvlpt (1st phase about $5bn)

Ten projects awarded since the PPP Center

was established in 2010, such as CALAX

expressway ($ 1.2 bn) and LRT1 extension

(1.4 billion)

Hydro-Power Plant (HPP) project such as Nam Ngiep

($0.9 bn) closed in 2014

Concessions for 3 airports

Singapore Sports Hub (approx. $1 bn)

inaugurated in 2014

KL-Singapore High Speed Rail project

(about $9 bn) RFI launched

Central Java Power Plant Project (approx. $4bn) closing in 2016?

Page 10: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Governments can tackle some limitations…

Creating an enabling environment for PPPs

PPP Enabling

Environment

Policy Formulation

• Stable long-term vision

• High level politicians championing PPP

• Track record building

Legal and Regulatory

Frameworks

• Clear legal basis (competent authorities,…)

• Adapted procurement rules

• Effective dispute resolution mechanisms

Institutional Capacity

• Clear process (who’s approving what and when)

• In-house expertise (PPP Units)

• Guidance materials (model contracts,…)

Financial Support

• Project Development Fund

• Capital Grants (VGF,…)

• Guarantees

Page 11: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Initiatives in the region Enabling Environment in the different countries

Legal and Regulatory

Frameworks

• PPP Decree in Viet Nam (2015)

• Indonesia - Presidential Regulation No. 38 (2015)

• PPP Act in Thailand (2013)

• Draft PPP Decree in Laos – Amendment to the Concession Law in Cambodia

Institutional Capacity

• Indonesia: Committee for Acceleration of Prioritized Infrastructure Development (KPPIP) in Indonesia + PPP Unit in MOF (2014)

• Capacity building activities launched (ESCAP E-learning series, World Bank 4-week course in June 2015, national workshops,…)

• Guidance materials (reference guide 2.0, procurement rules,…)

Financial Support

• Guarantees (IIGF in Indonesia against political risks, possibility of minimum revenue guarantees in Viet Nam)

• Capital Grants / VGF (Facilitation Fund in Malaysia, VGF in Indonesia, co-financing grant in Thailand)

• Project development fund (e.g. Philippines, Indonesia, Thailand, Viet Nam + possibly in Cambodia and Lao PDR in the future)

Page 12: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

1. Are PPPs needed?

2. Track record and current initiatives

3. Financing sources

4. Conclusions

Page 13: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Financing Sources for PPP Project

PPP PROJECT

PUBLIC SUPPORT

CAPITAL GRANT VIABILITY GAP FUNDING

GUARANTEES CORPORATE FINANCE PROJECT FINANCE

PRIVATE FINANCE

Financing only relies on projected cash flows of

the project

Financing relies on the quality of the sponsor (i.e. its balance sheet)

What are the main possibilities?

Page 14: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Why Public Support?

CAPITAL GRANT VIABILITY GAP FUNDING

GUARANTEES

To make project “bankable”

Amortization of Civil Works

Amortization of Electrical and Mechanical systems

Source: adapted from Infrascope (IFC)

O&M costs Socially acceptable & competitive fare

Advertising & small shops

SUBSIDIES NEEEDED !

User fees might not be enough to make the project financially viable

Not all risks can/should be transferred to the private sector CONTIGENT

LIABILITIES !

- Demand Risk (e.g. availability payment)

- Political Risk (e.g. IIGF)

- Land Risk (e.g. Land Capping Fund)

- Currency Risk

(e.g. Contingent Fund in the Philippines)

Page 15: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Private Finance Mainly through the banking sector

• Banks might not be able to provide the financing required or they might reach their maximum exposure limits

Availability

• Tenors might be shorter than the project duration refinancing risks Maturity

• Loans might not be available in local currency or too expensive currency risks Currency

Domestic banks, international banks, multilateral & bilateral development banks, Export Credit Agencies,…

What could be the issues?

Page 16: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Currency mismatch Why domestic financing is critical for PPP programmes sustainability?

User Loan ($)

User Fees (local currency)

Currency conversion

Loan repayment ($)

Project Company

Currency devaluation

Page 17: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

What can be done?

Increasing Lending Capacity

Finding Alternatives to the Banking Sector

De

velo

pin

g Risk M

itigation

Me

chan

isms

• Developing local banking sector (e.g. foreign licenses in Myanmar)

• Establishing public institutions (e.g. PT SMI and Indonesia Infrastructure Finance (IIF) in Indonesia)

• Freeing up capital via takeout financing mechanisms or through the securitization of infrastructure assets

• Setting-up Infrastructure Funds (e.g. ASEAN Infrastructure Fund, PINAI)

• Developing capital market products for infrastructure financing (e.g. Project Bonds, green bonds)

• Mobilizing Institutional Investors’ resources

Page 18: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Mobilizing Institutional Investors’ resources What’s the potential?

Assets under management as of 2013: $70 trillion

Source: Oliver Wyman Global Asset Model from Direct Investing by Institutional Investors (WEF 2014)

Increasing allocation by

1% means $700 billion

more for infrastructure

Insurance, pensions, sovereign wealth funds, etc.

Page 19: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Institutional Investors How to channel these resources to privately financed project?

Direct investments

Institutional Investors

Infra Project

Infra Company

Funds

Capital Markets

Unlisted equity fund (e.g. PINAI in the Philippines)

Corporate Bonds Equity,…

Project Bonds,…

Page 20: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Debt Markets in the region A trillion dollar market in the following countries

2.2

41.5

5.8

32.4 17.4

0.3

0

20

40

60

80

100

120

Indonesia Malaysia Philippines Singapore Thailand Viet Nam

Government Corporate

Size and Composition of LCY Bond Markets

Source: ADB – Asian Bond Monitor (September 2015)

0

200

400

600

800

1000

1200

2006 2015

Status as of 2Q 2015 (% of GDP) Trends from 2006 to 2015

(billion dollars)

Corporate bond market quickly growing in some countries

Page 21: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

International investors Interest might depend of risk ratings

Country Rating

Singapore AAA

Malaysia A-

Thailand BBB+

Philippines BBB / BBB-

Indonesia BBB- / BB+

Viet Nam BB- / B+

Cambodia B

Investment Grade

Non-Investment Grade

Source: http://www.tradingeconomics.com/country-list/rating

Country ratings act as caps to structured finance products

Local institutional investors might follow different approaches

Credit enhancement mechanisms

Page 22: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

1. Are PPPs needed?

2. Track record and current initiatives

3. Financing sources

4. Conclusions

Page 23: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

Conclusion

Adequate financing is not always available (e.g. tenor and maturity)

Huge infrastructure needs in the region public sector alone won’t be able to cover all these needs

Governments haven taken measures to enhance their regulatory and institutional frameworks for PPP

Risk mitigation and allocation is central to PPP development a revised approach with regard to risk might be required

Pipeline of PPP projects are being developed

Alternatives to bank lending do exist but haven’t used much so far

Page 24: Financing Sources for Public-Private Partnerships (PPPs) - ESCAP - Infra needs and private...Conclusion Adequate financing is not always available (e.g. tenor and maturity) Huge infrastructure

-

Th nk you

Info.: [email protected]

@

website: www.unescap.org/our-work/transport