Further, some ASEAN countries have launched portfolios of Public-Private Partnership
(PPP) projects to tap into private financing, including Thailand, Indonesia and Philippines.
As an example, Indonesia estimates that only 15 per cent of their required investment can
be financed by the public sector; the remaining will need to rely on PPPs. To encourage
investor participation in a range of water, ports and airport projects, Jakarta is embarking
on a European road show to market these projects to potential investors. In another
example, the Philippines has prepared over 16 PPP projects worth more than US$ 4
billion, but has only successfully bid out two.
The lower than expected success rate for PPPs across ASEAN can be attributed to a wide
variety of factors including poor project selection, lack of sufficient preparation for the
private sector to adequately assess the viability of the project and disagreement over the
allocation of risk and returns between the public and private sectors.
Globally, many poorly conceived projects have been approved “because benefit-cost
ratios presented to investors and legislators were hugely inflated, deliberately or not,”
according to Bent Flyvbjerg, professor and chair of major programme management
at Oxford University. “Competition between projects and authorities creates … an
incentive structure that makes it rational for project promoters to emphasize benefits
and de-emphasise costs and risks,” Flyvbjerg notes. McKinsey’s experience in helping
governments rationalise infrastructure project portfolios confirms the need for projects
to be more clearly linked to national priorities and more accurately evaluated in terms
of their system-wide costs and benefits. Some of the root causes of poor planning and
decision making include the failure to link infrastructure planning to broader social and
economic goals, routine under-estimation of costs and over-statement of benefits, the
pressure to allocate resources to cater to narrow political interests, and, in the most
extreme cases, the damaging impact of corruption on the selection of projects.
Often PPP projects which are offered to private sector investors do not come with
the necessary level of information that is required for the investors to make a fair and
accurate assessment of the project’s viability. For example, Independent Power Products
(IPPs) in Indonesia are often required to identify the land upon which the plant will be
built and conduct extensive due diligence such as site surveys, soil investigation and
environmental impact assessments in order to arrive at a cost estimate. This often results
in investors pricing in high risk premiums due to the lack of information, a duplication of
efforts across bidders or a long drawn out tender and negotiation process. Best practice
PPPs typically have clearly defined scope and boundaries (such as the site identified
and ideally already purchased) and provide the private sector with sufficient level of
information in a comprehensive information memorandum to allow them to competitively
price their offers – ultimately reducing the price tag to the public sector and consumers.
Another cause of PPP failure is the inability of the public and private sector to agree on
the allocation of roles and responsibilities (and hence risk and returns). Lack of clarity
on policies around market structure, pricing and subsidies and ownership and finance
can lead to delays in implementation as the private sector are unable to accept the
initial terms laid out for PPP projects. For example, the Indonesian government, under
pressure from investors, ultimately introduced a series of implicit and explicit financial
guarantee packages for IPP projects in order to ensure that the projects can successfully
achieve financial closure. In another example, Malaysian toll road PPPs evolved over time
transitioning from explicit revenue guarantees (on traffic volume and price) to price
guarantees for later concessions, making the terms less attractive for investors. This
negotiation of assigning risk and returns across the public and private sectors is critical
because the terms that are agreed on upfront need to be upheld over the life of the PPP
concession which can last decades.