Standard Chartered predicts public-private partnerships (PPPs) are the way forward for Belt and Road-related investment in the ASEAN region
Given the ambitious scope of the land and sea trade corridors proposed under the Belt and Road Initiative, ASEAN countries wishing to participate in the plan will need more than their local banks’ balance sheets to support infrastructure development.
Tapping the wealth of Chinese financial institutions and multilaterals, such as the Asian Infrastructure Investment Bank (AIIB), investment cooperation funds (e.g. the Silk Road Fund) and global commercial banks, is all part of the Belt and Road Initiative game plan, but even they won’t be enough to see all these projects through. There is a growing consensus that private investors must come to table.
However, this is easier said than done. Most nations within ASEAN are today focused on upgrading or creating new infrastructure with roughly 40% allocated to power and railways. Naturally sizeable projects come with wide-ranging risks. Whether it is a change in government to minor irritations such as noise compensations claims – the costs and barriers to success inevitably stack up.
One way to bring in private capital is to package risk in a way that offers suitable incentives and safeguards. Peter Burnett, Managing Director and Regional Head of Corporate Finance, Greater China and North Asia at Standard Chartered Bank, believes public-private partnerships (PPPs) hold the key to unlocking this potential.
Peter Burnett, Standard Chartered
“If you invest in infrastructure, you magnetise the economy and you get all the spin-off benefits but you have to make sure they are commercially viable. There has to be a purpose to these projects,” Burnett said. “PPPs are the way to go.”
PPP deals involve private investors joining with government agencies in large-scale projects such as port infrastructure, toll roads, bridges and railways with returns benefitting local communities, shareholders and investors. Their long-term nature suits sovereign wealth, insurance and pension funds. Hong Kong’s free flow of capital, banking, legal and regulatory bodies and international reputation as a centre for arbitration makes it ideally suited to support those wishing to invest in PPPs associated with Belt and Road projects.
PPP must haves
For those seeking PPPs in ASEAN, Burnett’s advice is to make sure concession agreements are bankable, warning that allocating risk to the wrong party increases the likelihood the project will fail.
Individual ASEAN nations vary considerably in their ability to work with PPPs. Thailand, for example, has a long record of PPP toll roads and its government understands the importance of having a bankable and workable concession agreement in which risks are allocated correctly.
“With tariff risk, for example, it’s no good saying it’s the responsibility of the operator when they have no control over tariffs,” said Burnett. “That’s subject to the regulator or the government authority that sets tariffs. Equally, you can’t go to the government and say it’s responsible for the construction risk. They may have some control in some circumstances but they’ve passed that to the contractor who is running the project.”
Proceed with caution
Issues affecting PPPs mainly revolve around risk, standards, transparency and foreign ownership. The Chinese mainland, for example, recently cancelled approvals for thousands of local PPPs. Such a crackdown just four years after it gave the green light to PPPs highlights a need for caution and clear standards.
Despite this setback, Burnett said he sees an interesting trend in Hong Kong, where mainland operators, who originally set up regional treasury centres in the city for trade, are increasingly using these treasuries to raise capital for Belt and Road projects.
More to do
Without centralised data, potential ASEAN investors find it hard to get detailed information and access to local knowledge.
“Trying to prioritise, say a rail project in Indonesia over a power project in the Philippines, is very hard. How do you assess one against the other, in terms of viability, and see a commercial return? This frustrates Chinese authorities as well. They want a plan,” Burnett said.
But right now, the Initiative’s ASEAN focus is on infrastructure. In the next five to ten years, large infrastructure projects are scheduled for Thailand, with similar ones in Indonesia. Power and metro deals in the Philippines are moving ahead and new toll roads will help improve Vietnam’s transport links. Many of these sizeable constructions will be aligned with PPPs.
Hong Kong opportunities
With high-quality professional services able to support PPP development, regulated banking, strong governance and internationally-recognised legal and taxation systems, Hong Kong is strategically placed to take advantage of the outflow of capital from the Chinese mainland for Belt and Road projects in ASEAN.
“The Belt and Road Initiative presents an opportunity to participate in greater wealth and prosperity that infrastructure brings, but the projects must be commercially viable,” Burnett concluded.
