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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
1. Are PPPs needed?
2. Track record and current initiatives
3. Financing sources
4. Conclusions
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
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
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
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
1. Are PPPs needed?
2. Track record and current initiatives
3. Financing sources
4. Conclusions
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%)
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?
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
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)
1. Are PPPs needed?
2. Track record and current initiatives
3. Financing sources
4. Conclusions
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?
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)
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?
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
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
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.
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,…
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
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
1. Are PPPs needed?
2. Track record and current initiatives
3. Financing sources
4. Conclusions
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