Going round the region and engaging with government departments, this is often raised as a significant impediment. Many governments in South-East Asia are faced with overwhelming socio-economic needs and it is a relatively easy exercise to establish huge lists of projects that are extremely desirable to develop, but the economic reality is that many are unaffordable or, due to a number of practical reasons, undeliverable.
Faced with limited resources, governments must get comfortable that the few projects they can bring to market offer the greatest impact in terms of the policies they are trying to follow. Rather than go through the hard yards of detailed master planning and economic analysis, some layer new government departments upon existing departments (all tasked with prioritisation!) and all that results is market strangulation.
Rather than have a constant flow of politically expedient announcements of large lists of projects to bring to market, it would be good to see certain governments concentrate all their resources on delivering a small list of say four projects per annum, as opposed to raising unrealistic market expectations that produce nothing other than investor fatigue.
We see a clear link between master planning, micro- and macro-economic analysis and initial bankability to assist our government clients prioritise projects. Some of the new city projects we have worked on in India, for example, have successfully helped focus delivery on small numbers of key utility projects without which a new city cannot function.
Again, this subject area is on the radar of organisations such as the World Bank and the Asian Development Bank (ADB) and they are channelling development funding to help countries prioritise projects.
The ADB has sponsored an exercise to identify the top six or so projects to deliver since the country does not have the resources to develop the long list of projects; so better to prioritise those that can be delivered within their means that can have the greatest impact.
In current markets, for well-developed projects it is a relatively straight-forward exercise to finance a scheme. Debt and equity markets have good liquidity, and many observers take the view that market development is being slowed by the lack of assets coming to market rather than the ability of the market to finance them.
However, what we mean by funding is how a government will pay for a project through its lifetime. This can take the form of availability payments for social infrastructure, subsidies to top up fare box or toll proceeds for economic transportation projects, power capacity payments and contributions to feed-in tariffs for renewable energy projects.
Often, projects need more funding than the actual end-users of the infrastructure are able or willing to pay. For many governments in South-East Asia with limited tax receipts, this funding gap (or viability gap as it is often called) is a very significant ask.
This is, of course, a major issue for all countries, developed and developing. However, in an environment of weak country credit ratings and poor tax receipts, insufficient funding is stopping much needed projects from being developed.
What options are available to help a government in a developing country to ease the affordability of the essential infrastructure it needs to deliver? We believe there are three workable options, with which we are currently assisting clients on all.
First, we see value capture as an incredibly important means for governments to pay for infrastructure. A good example of this is a situation where a new city metro or rail system is created where each of the new stations has a direct economic impact in each location by an immediate uplift in value of the surrounding commercial properties.
This increased value is therefore captured by either a one-off payment or an ongoing levy from the property owners. This approach has been successfully used in the UK, Hong Kong and Japan. The political argument often centres on why property owners should hold all the economic benefit from taxpayers’ investment. We have been involved in a number of these schemes around the world and “value capture” can often be a solution to what appears in the first instance to be unviable projects.
Second, we see asset-backed partnerships as a way forward. This refers to scenarios where government clients do not have access to adequate funding for projects but have significant asset bases such as land or natural resources.
We see some good examples of governments partnering with the private sector where the government contributes land into an urban development project and the private sector then finances the development and both sides share the economic benefit. We have also seen situations where government clients will use reserves of natural resources to secure funding for vital infrastructure. This is a viable approach for many clients in South-East Asia.
Third, if a funding or viability gap has been clearly identified as prerequisite for a critically important project to proceed and a host government does not have adequate resources, who is best placed to bridge this gap?
It would be good to see Multilateral Agencies (MLAs) or ECAs step into this area a bit more creatively. It is not inconceivable that in return for a facility covering a funding gap, some creative tax legislation could be deployed to refund the facility over the long term. Some financiers take the view that MLAs “crowd out” finance available in the market, they would argue that the MLAs’ resources should focus on enabling the projects to get to market in the first place.
Last, we cannot leave this subject area without a reference to the newly created Asia Infrastructure Investment Bank (AIIB). This has obviously been the subject of much speculation throughout the coffee shops of South-East Asia in terms of its role, focus and attention. Personally, I take the view that the clue is in the title “investment bank”, ie not “development bank”. Its success will be measured by the level of investment it is able to execute and it will therefore be dependent on the ability of MLAs to develop projects sufficiently in the first place. We see the AIIB as being a force for good in quickening the pace and quality of project development.
Business case development
As can be seen from above, given the acute pressure on funding and the need for governments to be very precise in this area, you would think that it would be prudent to ensure that business cases be developed in as much detail and to as high a standard as possible. Sadly, this is often not the case.
When MLAs come to market for consultants to assist with business case development, they often do so with what can be very inflexible and counter-intuitive tender conditions that may not produce the intended results despite the best of intentions. MLAs will often be forced to take the cheapest tender and, as with anything else in life, sadly you pay for what you get.
Other tender requirements are draconian; for example, insisting that top level consultant staff have to be “in country” for the duration of engagements that can last for two years. With the best will in the world, this is not feasible and whether they are “in country” or not will not detract from the quality of the work.
The effect of poorly thought through and ineffective business cases is profound. It compounds all the issues raised above and can result in investors, developers and institutions losing confidence in a government’s ability to be an effective business partner. It therefore seems illogical that some governments in South-East Asia appear reluctant or unwilling to undertake quality upfront investment in business case development when the stakes are so high.
In summary, for all the problems highlighted above, there are still many positives to highlight in South-East Asia, such as the advent of the AIIB, the formation of the Asean Economic Community and upcoming mega projects such as the Malaysia to Singapore High-Speed Rail. If you measure a market by enthusiasm and engagement, then many countries in South-East Asia will not fail to make a positive impression
