CENTER FOR STRATEGIC STUDIES SAM REVIEW Volume 17, December
PUBLIC PRIVATE PARTNERSHIP Asian Perspectives Recommendations for Azerbaijan
Mahir Humbatov and Nikita Singla
BAKU-2016 SAM REVIEW
VOLUME 17, DECEMBER 2016 1 © 2016 SAM - Center for Strategic Studies. All rights reserved.
The views represented here are the authors’ own and do not necessarily reflect the views of SAM, its staff, or its trustees. Note: The authors agreed on the final version of the report.
Disclaimer: The contents of this publication are the authors’ sole responsibility. They do not necessarily represent the views of the Center for Strategic Studies or of the organization for which the authors work. This publication may be reproduced in whole or in part in any form for educational or non-profit purposes without special permission from the copyright holder, as long as provided acknowl- edgement of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from Center for Stra- tegic Studies. Please direct inquiries to: SAM - Center for Strategic Studies Mirza Ibrahimov 8, Baku, Azerbaijan, AZ1005 Tel: (+99412) 5968236 Fax: (+99412) 4373458 E-mail: [email protected]
Cover and Page design: Intigam Mehemmedli
ISSN: 2218-8436
About Center for Strategic Studies under the President of the Republic of Azerbaijan The Center for Strategic Studies (www.sam.az) is Azerbaijan’s first government- funded, non-profit and academically independent think tank, known as Strateji Araşdırmalar Mərkəzi (SAM) in Azerbaijani. The mission of SAM is to promote collaborative research and enhance the strategic debate as well as providing decision-makers with high quality analysis and innovative proposals for action. Through publications, brainstorming meetings, conferences as well as policy recommendations, SAM conducts rigorous research guided by a forward-looking policy orientation, thus bringing new perspectives to academic research in international level.
PUBLIC PRIVATE PARTNERSHIP 2 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN CONTENTS
1.0. Infrastructure Financing and Public Private Partnerships...... 15 1.1 Global Infrastructure: Overview...... 15 1.2 Infrastructure Financing: Need for PPPs...... 17 1.3 Foreign Investment and Infrastructure Privatization: Recent Global Trends...... 20 1.3.1 Foreign Investment Flows...... 20 1.3.2 Ongoing Liberalization...... 22 1.3.3 Global PPP Market...... 24 1.3.4 Private Participation in Infrastructure: Low and Middle Income Countries...... 27 2.0. Structuring a Public Private Partnership...... 31 2.1 Entry into PPP: Available Options...... 31 2.2 Launching a new PPP: Key Areas for Consideration - Commercial, Economic, Technical, Legal, Environmental and Social Aspects...... 33 2.2.1 Commercial, Financial and Economic Aspects...... 34 2.2.2 Technical Aspect: Resolving Constraints and Setting Standards...... 34 2.2.3 Legal, Regulatory and Policy Aspects...... 35 2.2.4 Environmental and Social Aspects: Benefit for All?...... 35 2.3 Ongoing PPPs: Risk Mitigation and Performance Evaluation...... 36 2.3.1 Treatment of Risks in PPP Projects...... 36 2.3.2 Evaluation of Ongoing PPPs...... 37 3.0. Public Private Partnerships: Trends across Asia...... 39 3.1 Regional Trends...... 39 3.2 Case Studies...... 40 3.2.1 Case of Australia...... 40 3.2.2 Case of China...... 49 3.2.3 Case of India...... 57
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VOLUME 17, DECEMBER 2016 3 3.2.3.1 Public Private Partnership Market in India...... 57 3.2.3.2 Evolution of PPPs in India...... 57 3.2.3.3 Current Status of PPPs in India...... 58 3.2.3.4 Key Sectors for PPP...... 60 3.2.3.5 Challenges and Enablers in Implementing PPPs in India...... 66 3.2.3.6 Government Initiatives...... 68 3.2.4 Case of Indonesia...... 72 3.2.5 Case of Japan...... 75 3.2.6 Case of Korea...... 82 3.2.7 Case of Malaysia...... 86 3.2.8 Case of Singapore...... 91 3.2.9 Case of Thailand...... 98 4.0. Case of Azerbaijan...... 102 4.1 Country Assessment...... 102 4.2 Legislative and Regulatory Framework...... 103 4.3 Institutional Set-Up...... 105 4.4 Initiatives Taken...... 107 4.5 Available Case Studies...... 108 4.6 Prospective Fields of PPP Development: Sector Assessment...... 110 4.7 Role of Multilateral Institutes...... 116
PUBLIC PRIVATE PARTNERSHIP 4 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN LIST OF ACRONYMS
ADB Asian Development Bank AERA Airport Economic Regulatory Authority AIC Azerbaijan Investment Company AICTA Azerbaijan ICT Association Agreement between New Zealand and Singapore on a Closer Economic Part- ANZSCEP nership ASAN Azerbaijan Service and Assessment Network AZPROMO Azerbaijan Export and Investments Promotion Foundation BAPPENAS Indonesian Ministry of National Development Planning BCAO Business Continuity Advancement Organization BERTS Bangkok Elevated Road and Train System BLO Build, Lease and Own BLT Build Lease Transfer BMCL Bangkok Metro Company Limited BOO Build, Own and Operate BOOT Build, Own, Operate and Transfer BOT Build, Operate and Transfer BP British Petroleum BTO Build Transfer Operate BTS Sky Train System BTSC Bangkok Transit System Corporation CHT Cross Harbor Tunnel CITIC China International Trust And Investment Company CNY Chinese Yuan COAG Council of Australian Governments CSR Corporate Social Responsibility DBFO Design, Build, Finance, Operate DBO Design, Build, Operate DP Dubai Ports DSTA Defence, Science and Technology Agency EBRD European Bank for Reconstruction and Development ECB External Commercial Borrowings EDB Economic/ Export Development Board EFSE European Fund for Southeast Europe EFTA European Free Trade Association
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VOLUME 17, DECEMBER 2016 5 EHC Eastern Harbor Crossing ERLSB Express Rail Link Sdn Bhd ESFTA EFTA Singapore Free Trade Agreement FDI Foreign Direct Investment FF Facilitation Fund FFG Facilitation Fund Guidelines FY Financial Year FYP Five Year Plan GPA Government Procurement Agreement GSP Generalized System of Preferences GTZ German Technical Cooperation GW Giga Watts HDPE High Density Polyethylene HFA Housing for All HSR High Speed Railway HVHR High Value High Risk ICT Information Communication Technology/ Integrated Container Terminal IDFC Infrastructure Development Finance Company IFC International Finance Corporation/ Infrastructure Finance Companies IFRC International Federation of Red Cross and Red Crescent Societies IGA Istanbul Grand Airport IIGF Indonesia Infrastructure Guarantee Fund IIPDF India Infrastructure Project Development Fund IMA Indian Maritime Agenda INR Indian Rupee IPAT Infrastructure PPP Adjudicatory Tribunal IPP Independent Power Producers IPRC Infrastructure Project Review Committee JNPT Jawaharlal Nehru Port Trust JNR Japanese National Railways JPY Japanese Yen JR Group Japan Railways Group JSEPA Agreement between Japan and Singapore for a New Age Economic Partnership JV Joint Venture KL Kuala Lumpur KLCAT Kuala Lumpur City Air Terminal KLIA Kuala Lumpur International Airport
PUBLIC PRIVATE PARTNERSHIP 6 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN KPPLP Committee for Acceleration of Priority Infrastructure Delivery KRW South Korean Won LPTC Land Public Transport Commission LRT Light Rapid Transport MARA Majilis Amanah Rakyat (English: Council of Trust for the Indigenous People) MCA Model Concession Agreement MCHT Ministry of Communications and High Technologies MCT Ministry of Communications and High Technologies MDB Multilateral Development Banks MINDEF Ministry of Defence Singapore MLITT Ministry of Land, Infrastructure, Transport and Tourism (Japan) MOF Ministry of Finance MoU Memorandum of Understanding MRT Mass Rapid Transit MRTS Mass Rapid Transit Systems MSE Micro and Small Enterprises MSME Micro Small and Medium Enterprises MSSC Malaysia- Singapore Second Crossing MYR Malaysian Ringgit NBFC Non-Banking Financial Company NDRC National Development and Reform Commission NEA National Environment Agency NHAI National Highways Authority of India NITI National Institution for Transforming India NMDP National Maritime Development Program NPM Principles of New Public Management NPV Net Present Value NSE North-South Expressway NSECL Expressway Ling Karan Tengah NSW New South Wales NUS National University of Singapore OECD Organization for Economic Cooperation and Development PFI Private Finance Initiative PFIPCJ Private Finance Initiative Promotion Corporation of Japan PISU Private Investment in State Undertaking PIU Project Implementation Unit PP Polypropylene
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VOLUME 17, DECEMBER 2016 7 PPI Private Participation in Infrastructure PPP Public-Private Partnership PPPAC Public Private Partnership Appraisal Committee PPPP People Public-Private Partnership PPSU Private Participation in State Undertakings PSA Production Sharing Agreement/ Port of Singapore Authority PSC Public Sector Comparator PSU Public Sector Undertaking PUB Public Utilities Board PV Photovoltaic QLD Queensland RBI Reserve Bank of India RBM Roll Back Malaria RCCAP Rail Connectivity and Capacity Augmentation Projects R3 CPS Route 3 Country Park Section R3i Railways’ Infrastructure for Industry Initiative RLRT Rehabilitate, Lease/Rent and Transfer ROI Return on Investment ROT Rehabilitate, Operate and Transfer RTS Refuse Transfer Station SA South Australia SAFTA Singapore-Australia Free Trade Agreement SC State Council SCIP Sumgayit Chemical Industrial Park SCORE Sarawak Corridor of Renewable Energy SEAC State-level Export Appraisal Committee SEDB Singapore Economic Development Board SEPO State Enterprise Policy Office SEZ Special Economic Zone SGD Singapore Dollar SMART Tunnel Storm water Management Tunnel SOCAR State Oil Company of the Azerbaijan Republic SOE State Owned Enterprises SOFAZ State Oil Fund of Azerbaijan SPV Special Purpose Vehicle SSC Singapore Sports Council TAFE Technical and Further Education
PUBLIC PRIVATE PARTNERSHIP 8 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN TAMP Tariff Authority for Major Ports TCT Tate’s Cairn Tunnel THB Thailand Baht UiTM Universiti Teknologi MARA Unit Kerjasama Awam Swasta – translated from Malaysian – Public Private UKAS Partnership Unit (3PU) UN United Nations UNCTAD United Nations Conference on Trade and Development UNECE United Nations Economic Commission for Europe UNICEF United Nations Children’s Fund USSFTA United States-Singapore Free Trade Agreement VFM Value for Money VGF Viability Gap Funding WEF World Economic Forum WHC Western Harbor Crossing WHO World Health Organization WPI Wholesale Price Index
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VOLUME 17, DECEMBER 2016 9 List of Charts
Chart 1 Global Infrastructure Needs Chart 2 Global Infrastructure Investment Gap, till 2030 Chart 3 Global Infrastructure Investment Gap, by Region Chart 4 Public Sector Inefficiencies in the Early 1990s, Annual Average Chart 5 FDI Inflows: Top 10 Host economies, 2014, 2013 (USD billions) Chart 6 FDI Inflows to Asia, 2014 (USD billions) Chart 7 Changes in National Investment Policies, 2000-2014 Chart 8 Number of PPP Projects, by region Chart 9 Number of PPP Projects in Asia, by sector Chart 10 Total Investment and % of GDP Chart 11 Total Investment in Energy, Transport and Water, By Sector Chart 12 Total Investment in Energy, By Source, 2015 Chart 13 Completed Infrastructural Deals in Q1 2016, By Industry Chart 14 PPP Projects in India by Sector, Till July 2016 Chart 15 Action plan for fundamental reforms of PPPs/PFIs, Japan Chart 16 BTO Projects, Korea Chart 17 BTL Projects, Korea Chart 18 Project Pipeline (66), Thailand
List of Figures
Figure 1 PPP’s Effect on Economic Growth Figure 2 Public Private Partnerships, By Sector, 1990-2015 Figure 3 Public Private Partnerships - Project Sequence Figure 4 Critical Success Factors in Public-Private Partnerships Figure 5 Potential Enablers to Effectuate Public-Private Partnerships Figure 6 Policy Framework for all Victorian PPP projects Figure 7 Process Flow Chart Figure 8 Compliance by Country to PPP Legal Framework Figure 9 Azerbaijan’s Compliance to PPP Legal Framework Figure 10 Azerbaijan’s Compliance to PPP Legal Framework
PUBLIC PRIVATE PARTNERSHIP 10 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN List of Tables
Table 1 Reforms initiated through Private Finance 2 (PF2) Table 2 Characteristics of Main Types of Public Private Partnerships Table 3 2nd Generation Australian PPP Projects Table 4 Development of Australian PPP Market Table 5 Projects in Early Period of PPPs in Australia Table 6 Range of Partnerships Victoria Models Table 7 Projects undertaken during the 2009-2010, Australia Table 8 Policies for promotion of PPP in China throughout the last decade Table 9 Recent official documents promoting the development of PPPs, China Table 10 Systematic and Project Specific Risk Factors Table 11 Major BOT road tunnels in Hong Kong Table 12 PPP Projects in India (by sector and value) Table 13 Partnerships between Private Sector and Indian Railways Table 14 Public Private Partnerships in Indian Education Sector Table 15 Sector Specific Enablers in the Transport Sector in India Table 16 Risk Allocation Matrix (Indonesia) Table 17 History of Private Finance Investment (PFI) Projects Table 18 Expansion of Infrastructure Stock Level (Korea) Table 19 Early major projects in Malaysia Table 20 Recent and Upcoming PPP Projects, Malaysia Table 21 PPP Projects in Singapore (as of October, 2009)
List of Boxes
Box 1 Major Private Investment in Infrastructure Deals, 2015 Box 2 Major Challenges in PPP Implementation Box 3 Funding share of equity by the ABN AMRO/Leighton Contractors consortium
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VOLUME 17, DECEMBER 2016 11 AUTHORS
MAHIR HUMBATOV
Research Fellow/Analyst at the Center for Strategic Studies under the President of the Republic of Azerbaijan. He holds BA and MA degrees with distinction from Baku State University (together with Dokuz Eylul University in Turkey and Cairo University in Egypt), a second BA degree from Azerbaijan State Economic University, a BSc degree from the Psychology and Sociology Institute of Baku, an MSc degree received jointly from the School of Government and International Affairs & Durham University Business School in the UK. He is currently a PhD candidate in Economics at SOAS University in London, where his area of focus is privatization, infrastructure financing and PPPs. He has authored 4 books and numerous articles on international organizations, international economic relations, public private partnerships, investments, Islamic finance, economics an law, theology, ethics, intra-trade between Muslim countries, competitiveness, sustainability, human development, green economy and other areas. He has given interviews to Forbes, Bloomberg, Reuters, Al-Jazeera, Al-Joumhouriyye, Global Islamic Finance Magazine, The Islamic Globe and other international newspapers/journals. He has extensive experience working in several government institutions and the private sector. He has given lectures on different topics at Baku State University, Azerbaijan State Economic University, Azerbaijan University, the London School of Economics and Political Science, Durham University, Oxford University, and is regularly invited to speak at the UN, UNECE, UNDP, UNESCAP, WB, IMF, JVI, WIEF, IDB, ADB, EBRD and other institutions. He speaks 7 languages and has working/study experience in countries such as the UK, the USA, Malaysia, South Korea, Thailand, Russia, Turkey, Saudi Arabia, Egypt, and various Central Asian countries. For more information you can see his public LinkedIn profile: uk.linkedin.com/pub/mahir-humbatov/18/350/4ab/en
NIKITA SINGLA
Nikita Singla is an International Affairs Consultant from India, currently based in Paris, France. Her engagements span Regional Cooperation, International Trade, Economic Integration and Overseas Development Assistance with a focus on South Asia. She is an Engineer from Indian Institute of Technology (IIT Delhi) and Masters in International Economic Policy (major in South and Central Asia) from Sciences Po Paris School of International Affairs. She has an array of consulting experience – worked as Research Engineer with Lafarge in Lyon, France, as Strategy Consultant with Booz & Company, and as International Affairs Consultant on projects with the World Bank and the French Development Agency (AFD). She was a Visiting Research Fellow at the Centre for Strategic Studies under the President of Azerbaijan, a program funded by Azerbaijan International Development Agency, Ministry of Foreign Affairs of Azerbaijan. She has written for various Indian and international newspapers and journals on different economic and socio-political issues including Regional Cooperation in South Asia, Multilateral Governance, South Asia trade, Role of Public Private Partnership, Sufism and Politics, Economics of Women Talent, Gender Violence, and other infrastructure, trade, investment, and gender issues. She speaks 5 languages and has worked/lived/travelled across more than 30 countries. She blogs@ www.nikitasingla.wordpress.com
PUBLIC PRIVATE PARTNERSHIP 12 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN ACKNOWLEDGEMENT
The idea of writing a book on Public Private Partnerships existed for some time given the fact that Azerbaijan invests billions of dollars into its hard as well as soft infrastructure. After considering different authors across regions, an Indian co-author for this book got accepted to a Visiting Research Fellowship Program hosted by the Center for Strategic Studies under the President of Azerbaijan. The book was initially designed based on the research conducted during this program considering several Asian countries and developed further in a collaborative manner covering several other countries which are well-known for their Public Private Partnership related activities. However, other regions need to be considered as well in terms of how PPPs are being defined, analysed, implemented, supervised and monitored in different environments. Besides, there is need for an in-depth analysis of state vs. market, role of public vs. private players in infrastructure development, private sector involvement in public infrastructure, private provision of public services, and role of PPPs in Azerbaijan. This remains a target study topic for future research in this area. We would like to express sincere thanks to Center for Strategic Studies under the President of Azerbaijan and Ministry of Foreign Affairs of Azerbaijan to fund and facilitate the fellowship program as well as becoming the primary research and logistics partner for the book. Besides, we express our sincere gratitude to Embassy of Azerbaijan in India and Embassy of India in Azerbaijan to support this visiting research program. As a part of the research, interviews were conducted with key public and private actors along with multilateral institutes. We are grateful to Elmir Valizadeh - Deputy Minister, Ministry of Communications and High Technologies; Communications and External Affairs Team of British Petroleum; Olaf Heidelbach - Program manager, Delegation of European Union to Azerbaijan; Nicola Saporiti - Senior Investment Officer, International Finance Corporation; Nail Valiyev - Senior Economic Officer, Asian Development Bank’s Baku office; Fuad Huseynov - Senior specialist, Islamic Development Bank; Imanverdi Hasanov - Deputy General Manager, Baku Shipyard LLC; Rovshan Najaf - Executive Director, Azerbaijan Investment Company; Ilham Mehraliyev - Senior Assistant to GD, Baku International Sea Trade Port; Vugar Aliyev - Director of Education Center, Azerishiq OJSC; Jeyhun Yusifov - Director of PIU 4, AzerAutoYol OJSC; Rashad Mustafayev - Azerigas Production Union; and Fateh Israfilzade - Entrepreneurship Department, Ministry of Economy for their time and for providing us with extensive inputs in their respective sectors. We would also like to express our thanks to Elvir Mammadov, Shahin Hasanli, Kenan Baghirli, Sabina Mammadova and Ulker Gasimova in conducting the relevant interviews, translating the meetings and gathering the research data and information for case study countries from databases of World Bank, International Finance Corporation, European Bank for Reconstruction and Development, European Investment Bank, Asian Development Bank, Economist Intelligence Unit, McKinsey, Booz & Company, Ernst & Young, KPMG etc. Our special thanks to the SOAS University of London team - Professors Ben Fine and Christopher Cramer, Dr Elisa Van Waeyenberge, PhD candidates Shadwa Zaher, Fadime Shahin, Ehui Adovor, Fatma Moosa, Sabina Ciorasteanu and Yigit Zarbun for all their moral support during the comple- tion of this book. Finally, we would like to express gratitude to our friends and family for support- ing us throughout our journeys.
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VOLUME 17, DECEMBER 2016 13 EXECUTIVE SUMMARY As the world makes great strides on the path to development, the gap between infrastructure needs and the resources governments possess to meet those needs is ever growing on account of governments’ razor thin budgets, rapid urbanization and population growth. Asia’s overall infrastructure investment needs are estimated at USD 9 trillion till 2030, 68% of which is for new capacity and 32% for maintaining and replacing existing infrastructure. The average annual infrastructure investment during this period is about USD 750 billion. As countries move up the value chain and urban populations expand, demand for transport, logistics and utilities will only continue to grow, increasing the burden on public funds. If cash-flushed investors have an appetite for Asia’s infrastructure projects, what is keeping them at bay? For infrastructure development, statistics show that Asian nations have been turning to Public Private Partnerships (PPP), which seemed to be one of the main tools to attract financing and keep pace with rapid growth. Although the PPP models are established in several Asian countries, such as Singapore, South Korea and Japan, others are relatively immature. Indonesia, China and India, in particular, have announced ambitious infrastructure programs with governments developing mechanisms to encourage PPP investment and address barriers to PPP development. The new game-changers of the 21st century – India and China are showing aggressive signs of opening their domestic markets to international investors. While PPPs hold significant potential for Asia, they also present formidable challenges. Case studies of PPP markets in Australia, China, India, Indonesia, Japan, Korea, Malaysia, Singapore and Thailand provide an Asian perspective enabling recommendations for Azerbaijan. The Azerbaijani government has achieved great progress over the last decade in integrating the country into the global economic marketplace and increasing foreign investment mainly due to its oil resources. Now, the government’s focus is on diversifying the economy outside the oil sector. Azerbaijan is facing increasing demand for investment in infrastructure development, overstretching the government’s budget. There is need for not only private sector investment but also private sector knowledge and expertise. The traditional approach of the government for infrastructure development of any kind has been to use the state’s own budget or privatization. The first is markedly insufficient to meet the country’s needs while the latter only works in a sound legal and financial framework and is not appropriate for all public service delivery projects. So there is a need to see if the time is ripe for public private partnerships. PPPs may not be the ultimate solution, but they can help address many of the issues systemic to the region in the field of infrastructure development. All it needs is a systematic approach undertaken through joint efforts of private and public sectors.
PUBLIC PRIVATE PARTNERSHIP 14 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN 1.0. Infrastructure Financing and Public Private Partnerships
1.1 Global Infrastructure: Overview Physical infrastructure has a direct impact on the growth and overall development of an economy. Transportation, energy, water and other infrastructure are essential to the growth and survival of a nation. When it is planned, funded, and maintained well, infrastructure plays a vital role in supporting a high standard of living and facilitating commerce and trade, thereby extending a nation’s global reach. Despite the well-documented link between high-caliber infrastructure and economic expansion, many developing countries across the globe, have congested roads, bridges in need of repair, poorly maintained transit systems, deteriorated hospitals, schools, and waste treatment facilities, all in urgent need of rehabilitation and repair. Over the recent years, the infrastructure deficit has become the most glaring deficit that governments around the world have to deal with. As the world makes great strides on the path to development, the gap between infrastructure needs and the resources governments possess to meet those needs is ever growing. Governments, more often than not, operate on razor-thin budgets, especially in countries experiencing rapid population growth and urbanization, and may not be equipped to make the necessary investments. When it comes to infrastructure, the world is divided into two groups. Thedeveloped world is highly saturated with infrastructure; therefore its focus remains on maintaining and modernizing the existing facilities. Developing countries, on the other hand, continue to struggle with satisfying basic human needs, and what is in the center of their attention is constructing brand new public works. Despite what the main goal is – to maintain or to construct – infrastructure demands constant and heavy investment. According to McKinsey Global Institute1, the world will need to spend almost USD 57 trillion on infrastructure over the next 15 years, from now till 2030. Chart 1: Global Infrastructure Needs
Source: McKinsey Global Institute. (2015, June). Making the most of a wealth of infrastructure finance. U.S.
1 McKinsey Global Institute. (2015, June). Making the most of a wealth of infrastructure finance. U.S.
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VOLUME 17, DECEMBER 2016 15 Does big investment gap imply big opportunities? The numbers below reveal the gap by sector and by region. It reveals that bigger portion relays for roads, power, water, and telecom, with rail, ports and airports behind in the queue. Chart 2: Global Infrastructure Investment Gap, till 2030
Source: Jennings, G. (2015, October 13). Eyeing Up the Infrastructure Investment Opportunity. UK
Chart 3 shows that big portion of these investments should be made in Europe, where quite a few states face budget constraints. It also stands testimony to the fact that as countries get more developed, they attempt to spend more on their infrastructure needs. But interestingly, in reality, the need for infrastructure development is higher in Africa, though the research puts it behind the developed world. Chart 3: Global Infrastructure Investment Gap, by Region
Source: Hart et al. (2015, November). Infrastructure development: ambition versus reality. Retrieved from ODI Shaping Policy for Development
PUBLIC PRIVATE PARTNERSHIP 16 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN This translates into an annual gap of about USD 500 billion2 between investment needs and available public funds. The end result is a massive infrastructure investment shortfall. Reasons for the continuously growing infrastructure investment gap include: . repercussions of the financial crisis . demographic changes (mainly ageing population) . urbanization . migration . environmental issues, such as climate change What is needed are novel ways of financing new and existing infrastructure, where private funding could be one option. Many government organizations are tapping the private sector for capital, technology, and expertise to finance, develop, and manage public-sector infrastructure projects. Policymakers are also finding that, when coupled with the right set of policies and institutional environments, these instruments which are called public–private partnerships can also become catalysts for economic growth. The opportunity to drive economic growth with infrastructure public private partnerships is particularly rich in the developing world.
1.2 Infrastructure Financing: Need for PPPs The World Bank estimates that in the early 1990s annual losses due to inefficiency and unsustainable pricing policies were nearly equal to the annual investment in infrastructure in developing countries. Chart 4: Public Sector Inefficiencies in the Early 1990s, Annual Average
Source: Booz&Company. (2008). Public–Private Partnerships A New Catalyst for Economic Growth. U.S.
2 Jennings, G. (2015, October 13). Eyeing Up the Infrastructure Investment Opportunity. United Kingdom.
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VOLUME 17, DECEMBER 2016 17 In response, public-private cooperation on the level of project finance, and provision of large- scale infrastructure projects, is increasing on the global level. A move towards corporatization, privatization, deregulation and decentralization, has had a profound impact on the modes of interaction between public and private actors, leading to re-orientation of the position of government as the sole provider and financier of infrastructure. Investment commitments to private infrastructure projects in low and middle income countries totalled USD 111.6 billion in 2015 of which transport investment stood at USD 69.9 billion, energy at USD 37.6 billion, and water at USD 4.1 billion3. The private sector is often considered to provide greater efficiency than the public sector in managing infrastructure projects and delivering infrastructure services. Involvement of the private sector holds the potential to increase operating efficiency by making investments in new technologies and bringing innovative solutions. This often results in better governance and improved transparency, competition, accountability, and value for money. PPPs can bring significant benefits for government in the delivery of public services in case of being designed and used properly. Benefits4 of involving the private sector in the delivery of infrastructure include the following: . Efficient use of resources: A well-managed PPP contract with optimal allocation of risks between the private and public sectors enables more efficient use of resources over the life of an asset. . Improved asset and service quality: On account of external funding of PPP projects from lenders and equity investors, these projects face increased scrutiny by parties external to the government. Since a significant amount of capital is at risk, these external parties normally undertake much greater due diligence and quality assurance than the standard public procurement process. . Improved public sector management and procurement: PPP can be a tool for increasing competition or reforming procurement and public service delivery. A PPP is more than a one-off financial transaction with the private sector. Sophisticated private sector partners look for firm policy foundations, a long-term political commitment, and a sound legal and regulatory environment. . Overall Economic Growth: Although PPPs can free up government resources for other public priorities, they will not necessarily influence the economy without the right blend of factors like capacity and commitment of public and private sector, comprehensive planning, clear contractual rules, competitive procurement, appropriate risk sharing and credible contract enforcement. The number, value, and type of PPPs, combined with supportive policies, power economic growth.
3 Chao, J., & Kasper, H. (2015). 2015 Global PPI Update. Public Private Partnership Group, The World Bank 4 Asian Development Bank. (2012). Public–Private Partnership Operational Plan 2012-2020. Philippines.
PUBLIC PRIVATE PARTNERSHIP 18 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Figure 1: PPP’s Effect on Economic Growth
Source: Booz&Company. (2008). Public–Private Partnerships A New Catalyst for Economic Growth. U.S. The new game-changers of the 21st century – India and China are successfully making the leap from emerging markets towards being called developed markets. China is showing signs of opening its domestic market to international investors and has published a pipeline of more than 2,000 Public-Private Partnership projects5. And India, following the election of Narendra Modi, is not far behind in having its strong foothold in the global infrastructure market. Massive investments are underway, either through concession, Greenfield projects, divesture or management and lease contracts. Box 1: Major Private Investment in Infrastructure Deals, 2015
. Dubai Ports (DP) World to invest as much as USD 2 billion in Russian Ports6 . U.S. ports and their private sector partners to spend a whopping USD 154.8 billion on port related freight and passenger infrastructure in 2016-20207 . Indian Railways to invest USD 142 billion from 2016-20208 . China’s China International Trust And Investment Company (CITIC) to invest USD 113 billion for Silk Road – One Belt One Road initiative9 . Investment of USD 35.5 billion into Istanbul Grand Airport (IGA)10
5 KPMG . (2016). Foresight - A global infrastructure perspective. 6 Clark, S. (2016, January 21). DP World to Invest as Much as USD2 Billion in Russian Ports. The Wall Street Journal. 7 American Association of Port Authorities. (2016, April 6). Survey Shows U.S. Ports Plan Big Investments In Capital Projects. Alexandria, VA, U.S. 8 Business Standard. (2016, January 18). Indian Railways plans to invest USD 142 billion in five years: Suresh Prabhu. New Delhi, India. 9 Reuters. (2015, June 24). China’s CITIC to invest USD113 billion for “Silk Road” investments. 10 Chao, J., & Kasper, H. (2015). 2015 Global PPI Update. Public Private Partnership Group, The World Bank.
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VOLUME 17, DECEMBER 2016 19 Not all infrastructure projects are suitable for PPPs. PPPs cannot replace public sector spending in infrastructure and service delivery. It can only complement the public sector. Even in a mature market like the United Kingdom, PPPs11 play a small but important role in the government’s investment in public services and represent about 10%–15%12 of overall public sector procurement.
1.3 Foreign Investment and Infrastructure Privatization: Recent Global Trends
1.3.1 Foreign Investment Flows The global FDI decline masks regional variations. While developed countries and economies in transition saw a significant decrease, inflows to developing economies remained at historically high levels. FDI flows to Asia grew by 9% to USD 465 billion in 2014 - East Asia, South-East Asia and South Asia all saw increased inflows. FDI in China amounted to USD 129 billion, up 4% from 2013, mainly because of an increase in FDI in the services sector, particularly retail, transport and finance. India experienced a significant increase of 22% to USD 34 billion. FDI inflows were on an increase for Hong Kong and Singapore as well.13 Chart 5: FDI Inflows: Top 10 Host economies, 2014, 2013 (USD billions)
Source: UNCTAD. (2015). World Investment Report 2015. Geneva.
11 The United Kingdom uses the term ‘Private Finance Initiative’. 12 Asian Development Bank. (2012). Public–Private Partnership Operational Plan 2012-2020. Philippines. 13 UNCTAD. (2015). World Investment Report 2015. Geneva.
PUBLIC PRIVATE PARTNERSHIP 20 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Despite the global FDI decline, FDI inflows to the Asian region remained resilient. Intraregional FDI was a major driving force for infrastructure investment. A growing part of investment in infrastructure originated from within the region, with Hong Kong, China, Japan, Malaysia and Singapore among the most important sources of both investment and operations. Traditionally, Hong Kong and Singapore have been the important investors in infrastructure industries. According to the Infrastructure Pillar of the Global Competitiveness Index 2016- 201714, Hong Kong is ranked 1, Singapore 2, Japan 5, Korea 10, Australia 17, Malaysia 24, China 42, Thailand 49, Azerbaijan 55, Indonesia 60, and India 68. During the past few years, Chinese companies have invested heavily in transport and energy (including electricity generation and transmission, and pipelines) in countries such as Indonesia, Myanmar, the Philippines and Vietnam. In transport, Chinese investment is expected to increase in railways, including in the Lao People’s Democratic Republic and Myanmar. China and Thailand recently signed an agreement for the development of a high-speed rail line in Thailand with an estimated investment of USD 23 billion – part of a planned regional network of high-speed railways linking Kunming (China) and Singapore. A number of South Asian countries saw rising FDI from China.
Chart 6: FDI Inflows to Asia, 2014 (USD billions)
Source: UNCTAD. (2015). World Investment Report 2015. Geneva.
14 Schwab, K. (2016-17). The Global Competitiveness Report 2016-2017. World Economic Forum.
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VOLUME 17, DECEMBER 2016 21 1.3.2 Ongoing Liberalization
Investment policy measures across countries continue to be predominantly directed towards liberalization, promotion and facilitation of investment. In 2014, according to UNCTAD’s count, 37 countries adopted 63 policy measures affecting foreign investment. Of these measures, 47 related to liberalization, promotion and facilitation of investment, while 9 introduced new restrictions or regulations on investment. The share of liberalization and promotion increased significantly, from 73% in 2013 to 84% in 201415.
Chart 7: Changes in National Investment Policies, 2000-2014
Source: UNCTAD. (2015). World Investment Report 2015. Geneva
A number of countries introduced or amended their investment laws and guidelines to grant new investment incentives and facilitate investment procedures, ongoing FDI liberalization most active in Asian emerging economies. Several countries liberalized entry and establishment conditions16 for foreign investors. In most cases, they relaxed restrictions on foreign ownership limitations or opened up new business activities to foreign investment. As in previous years, countries in Asia were most active, in particular China, India and Indonesia – the three largest emerging economies in Asia:
15 UNCTAD. (2015). World Investment Report 2015. Geneva. 16 UNCTAD. (2015). World Investment Report 2015. Geneva.
PUBLIC PRIVATE PARTNERSHIP 22 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN . India liberalized foreign investment in railway infrastructure, allowing 100% FDI under automatic route for construction, operation and maintenance of suburban corridor projects through PPP17. FDI cap in the defence and insurance sector was raised from 26% to 49%. FDI up to 26% is allowed in pension funds under the automatic route. Also, FDI in medical devices is now exempt from the rules applicable to the pharmaceutical industry, and 100% FDI is permitted under the automatic route. . China revised its Catalogue for the Guidance of Foreign Investment Industries. It stipulates in which industry sectors foreign investment is encouraged, restricted or prohibited. The revised catalogue lifts restrictions on foreign inward investment by reclassifying individual sectors, in particular in the manufacturing sector. China amended the Company Law. It applies to Chinese joint ventures with foreign investors. It removes the requirement that the contribution in cash by all shareholders be not less than 30% of the registered capital of the company. . Indonesia increased the foreign investment cap in several industries, including for pharmaceuticals from 75% to 85%, for venture capital operations from 80% to 85% and for power plant projects carried out as public-private partnerships from 95% to 100%. . Korea has been working to overhaul regulations that limit foreign investment. A set of measures announced by the government in May 2015 included simplifying required documentation for foreign investors and temporarily removing limits to the number of foreign employees in a foreign-invested firm. . Australia eased some foreign ownership restrictions on the Australian flag carrier Qantas. . Malaysia made paying taxes easier and less costly for companies by making electronic filing mandatory and reducing the property tax rate. At the same time, it also increased the capital gains tax18. . Japan cut down its corporation tax from more than 32% to less than 30% and visa rules have been relaxed to encourage highly skilled immigrants into the country. New corporate governance rules introducing Western-style independent directors to the boards of Japanese corporates have been put in place. A series of measures have been undertaken to deregulate various industries including agriculture, medicine and energy, so that foreign companies may expedite the process of starting a business in Japan19. . Singapore continues to be ranked No. 1 in terms of ease of doing business indicator of World Bank especially for the parameters – dealing with construction permits, protecting minority investors and contract enforcement20. The liberalizing investment climate across countries perhaps reflects an inclination also towards public-private partnerships.
17 Retrieved August 7, 2016, from http://www.makeinindia.com/sector/railways 18 The World Bank. (2016). Doing Business. Retrieved September 11, 2016, from http://www.doingbusiness.org/rankings 19 White & Case LLP. (2016, September 9). On the Rise. Japan. 20 The World Bank. (2016). Doing Business. Retrieved September 11, 2016, from http://www.doingbusiness.org/rankings
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VOLUME 17, DECEMBER 2016 23 1.3.3 Global PPP Market
Globally, the PPP model is at a pivotal junction. Countries with established and mature PPP markets have seen them shaken by the shift in financial climate. In some places, the model and its core principles have encountered profound challenges. In other countries, where PPPs have traditionally played no or only a small role in meeting the infrastructure deficit, governments are exploring the potential of the model and taking concrete steps to establish policies and partnerships with the private sector.
Chart 8: Number of PPP Projects (by region)
Source: Ernst & Young. (2015). Public-Private Partnerships and the Global Infrastructure Challenge.
. The UK, the elder statesman of PPPs21, has subjected the Private Finance Initiative (PFI) model to deep and forensic review in recent years, resulting in the improved Private Finance 2 (PF2), launched in December 2012. Many of the concepts developed in the original PFI model in the UK were adopted in other countries as they developed their own PPP programs, so a major change to the UK model is likely to be of wide interest to market players and practitioners globally as well as those proposing to invest in such schemes in the UK. PF2 is a new approach to public private partnerships, and follows the reform of the PFI. PF2 reaffirms the government’s commitment to private sector involvement in
21 Ernst & Young. (2015). Public-Private Partnerships and the Global Infrastructure Challenge.
PUBLIC PRIVATE PARTNERSHIP 24 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN infrastructure and services, while recognizing recent changes to the economic context. Table 1: Reforms initiated through Private Finance 2 (PF2)
Issue Perceived Problem Key Proposals Insufficient Public-Private col- Government to take an equity stake on all laboration projects Equity Finance Excessive gains by equity provid- Part of equity to be subject to a funding ers competition Lack of transparency and ac- Broadened regarding obligations, includ- Transparency countability ing levels 4 equity return Procurement to be routed through new Skills deficit in local procurement centralized procurement units Procurement Ensuring greater preparedness before Procurement timetables too long launching tender and introduction of an 18 month cut-off “Soft” services (cleaning, catering etc.) to Service Provision Lack of flexibility be removed and ”call-of” provisions intro- duced or minor maintenance etc. Take certain risks back to public sector to Risk Allocation Inefficient risk transfer avoid private sector pricing inefficiently for these Implementation of various measures to Lack of competitive long-term increase the credit rating of the project to Debt Finance debt finance encourage institutional investors/pension funds to participate Implementation of periodic reviews and Value for Money Perceived inefficiency in the PFI requirement to tender proposals for con- and Efficiency model tinuous improvement Source: Buisson, A. (2013). From PF1 to PF2: the reform of the Public Private Partnership model in the UK
. In continental Europe, the most noteworthy development has been recent initiatives targeting stronger investment grade ratings to diversify the pool of investors beyond banks and to attract institutional investors. These initiatives include government-sponsored credit enhancements that have instigated a noticeable trend toward longer-term debt solutions22.
. Canada continues to be a model for steady deal flow, with an active financial market and a track record of on-budget and on-time delivery. Key to Canada’s success has been unapologetic government support at all levels, including providing dedicated funding and financial mechanisms, pioneering standardization and undertaking efficient collaborative procurement23.
22 Ernst & Young. (2015). Public-Private Partnerships and the Global Infrastructure Challenge. 23 Ernst & Young. (2015). Public-Private Partnerships and the Global Infrastructure Challenge.
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VOLUME 17, DECEMBER 2016 25 . The US has much potential, but its market is impeded by variable uptake, continued resistance to using PPP for social infrastructure projects, and the slow development of institutional frameworks and standard processes. When PPPs do emerge, mainly in the transportation sector, they benefit from a deep financing market supported by tax concessions and government programs that, although not replicable in many other markets, provide valuable lessons24. . Asia is expected to be one of the largest markets for infrastructure development over the next decade25 as nations turn to PPPs to help keep pace with rapid growth. But start-up has been slow, and many countries in the region look to multilateral agencies such as the Asian Development Bank to support their PPPs.
Chart 9: Number of PPP Projects in Asia, by sector
Source: Ernst & Young. (2015). Public-Private Partnerships and the Global Infrastructure Challenge. Indonesia, China and India, in particular, have announced ambitious infrastructure programs, with PPPs intended to play an important role. The challenges and opportunities for PPPs are by no means homogenous and differ greatly across the region. Although the PPP model is established in Singapore, South Korea and Japan, most markets in Central and Southeast Asia are relatively immature. Asia has seen significant growth in specialist infrastructure funds — a trend that is expected to continue as large institutional investors look to invest in the region, providing significant financial resources for PPP investment. Governments are also developing mechanisms to encourage PPP investment and address
24 Ibid. 25 Ibid.
PUBLIC PRIVATE PARTNERSHIP 26 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN barriers to PPP development. One example is the Indonesia Infrastructure Guarantee Fund, which supports private sector PPP investment through a government guarantee.
1.3.4 Private Participation in Infrastructure: Low and Middle Income Countries
Investment commitments to private infrastructure projects totalled USD 111.6 billion in 2015, on par with 2014 but 10% lower than the last five-year average. A large part of the commitments was a single project, i.e., Turkey’s IGA (Istanbul Grand Airport), without which global investment commitments would have been USD 82.5 billion or 26% lower than in 2014. But even with the airport, investment as a per cent of GDP declined, with the average PPI in 2015 at 0.4%, a 20% drop from the previous five years26.
Chart 10: Total Investment and per cent of GDP
Source: Chao, J., & Kasper, H. (2015). 2015 Global PPI Update. Public Private Partnership Group, The World Bank The largest number of projects comprised energy (205), followed by transport (55), and finally water and sewerage (40). The transport sector, though with only 55 transactions, achieved the highest commitment of USD 69.9 billion, or 63% of global investment. Energy encompassed over two-thirds of all transactions at 34%, while water accounted for the remaining 4%27.
26 Chao, J., & Kasper, H. (2015). 2015 Global PPI Update. Public Private Partnership Group, The World Bank. 27 Ibid.
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VOLUME 17, DECEMBER 2016 27 Chart 11: Total Investment in Energy, Transport and Water (by sector)
Source: Chao, J., & Kasper, H. (2015). 2015 Global PPI Update. Public Private Partnership Group, The World Bank Transport investment stood at USD 69.9 billion, 29% above the previous year (USD 54.3 billion), largely because of major airport projects. This investment is also 53% above the five- year average (USD 45.6 billion per year) and 86% above the 10-year average (USD 37.6 billion). Turkey led the way for notable transport deals, with Istanbul’s USD 35.6 billion IGA Airport and the USD 6.4 billion Gebze-Izmir Motorway28. In 2015, investment in the energy sector took a downward swing to USD 37.6 billion year over year, below the previous year’s USD 53.5 billion. Electricity generation projects continued to diminish in both number and investment, with USD 33.6 billion in 2015 - 43% lower than the five-year annual average (USD 59.0 billion), and with 191 projects - 32% below the five- year average (279 deals per year). Nonetheless, electricity generation appropriated 93% of the energy projects, while 67 of these or 88% came from renewable energy sources, the most prominent of which were solar photovoltaic (PV) and onshore wind technologies29. Renewable energy continues to make inroads in the energy mix of many developing countries. Solar energy commitments in particular have seen solid gains. At USD 9.4 billion, commitments in solar energy in 2015 were 72% higher than the five-year average of USD 5.5 billion (2010−2014). South Africa alone secured USD 2.4 billion in solar deals, while Morocco, Chile, and China closed an additional USD 4.1 billion combined. While solar comprised one- quarter of all energy investments, renewables made up 63% of all energy commitments in 2015, exceeding the five-year average of 45% and ten-year average of 39%. This indicates a move toward wind (USD 9.4 billion), hydro (USD 2.9 billion), and geothermal (USD 1.3 billion) power30.
28 Ibid. 29 Ibid. 30 Ibid.
PUBLIC PRIVATE PARTNERSHIP 28 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Chart 12: Total Investment in Energy (by source, 2015)
Source: Chao, J., & Kasper, H. (2015). 2015 Global PPI Update. Public Private Partnership Group, The WB
The infrastructural deals completed in 2016 continue to weigh heavy on the side of renewable energy, as can be seen below:
Chart 13: Completed Infrastructural Deals in Q1 2016, By Industry
Source: Lejczak, B. (2016, May 19). Airport Anyone? Investing In Infrastructure.
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VOLUME 17, DECEMBER 2016 29 At USD 4.1 billion, investment in water was 8% above the 5-year average of USD 3.8 billion per year and 17% above the 10-year average of USD 3.5 billion per year. In 2015, 40 transactions reached financial closure—mostly in China (17) and Brazil (15). However, the largest deal was the USD 1.2 billion Volgograd Water Communal Infrastructure Concession in Russia. Although 18 of the 40 deals were in sewerage treatment plants, this took only USD 391 million of the total. The remainder was spread across five other segments31. World Bank’s Public-Private Partnerships Group has a Private Participation in Infrastructure (PPI) database whose purpose is to identify and disseminate information on private participation in infrastructure projects in low- and middle-income countries. The database highlights the contractual arrangements used to attract private investment, the sources and destination of investment flows, and information on the main investors. The site currently provides information on more than 8,000 infrastructure projects dating from 1990 to 2015, as seen below: Figure 2: Public Private Partnerships (by sector, 1990-2015)
Source: The World Bank. (2016). Private Participation in Infrastructure Database. Retrieved July 13, 2016, from http://ppi.worldbank.org/
31 Ibid.
PUBLIC PRIVATE PARTNERSHIP 30 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Institutional investors such as insurers and pension funds with long-term liabilities, encouraged by the low interest rates, are enriching their portfolios with infrastructure assets32. The long life of these assets is a good match for their long-term liabilities. And what makes investing in infrastructure attractive are relatively stable cash flows, protection against inflation, low volatility and returns which are generally not correlated with other assets. For new projects, the obvious risk is that projects are either not finished or have significant delays and cost overruns. What all investors need to keep in mind are political risks, environmental issues, and the threat from newer technology. Despite the risks, an increased private sector involvement in developing infrastructure seems inevitable. Firstly, it is an attractive option for investors looking for long-term assets. Secondly, due to the growing infrastructure financing gap, these investors can usually count on the support of governments and supranational authorities.
2.0. Structuring a Public Private Partnership
2.1 Entry into PPP: Available Options
Public private partnership is a globally accepted public sector procurement mechanism whereby the government engages commitment from the private sector and transfers a certain level of responsibilities to the private sector in providing public facilities or services. The fundamental justifications for adopting PPP would significantly reduce the upfront costs for the government in providing and maintaining public facilities and that it allows for improvement in the public facilities and services because PPP encourages innovation by the private sector. The Public-Private Partnerships enable government to build relationships with the private sector bodies and use their finance and expertise to reach the public needs of infrastructure and services. Public-Private Partnerships can be characterized into different types based on the mode of entry, and the public and private obligations concerning
. operation and maintenance responsibility . investments . ownership . average years of duration of different PPP models
32 Lejczak, B. (2016, May 19). Airport Anyone? Investing In Infrastructure.
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VOLUME 17, DECEMBER 2016 31 Table 2: Characteristics of Main Types of Public Private Partnerships
Operation Mode of Invest- Ultimate Duration Types of PPPs and Main- Entry ment Ownership (years) tenance Management Contract Contract Private Public Public 3-5 Leasing Contract Private Public Public 8-15 Rehabilitate, Operate and Transfer (ROT) Concession Private Private Public 20-30 Rehabilitate, Lease/Rent and Transfer Concession Private Private Public 20-30 (RLRT) Merchant Greenfield Private Private Public 20-30 Build, Rehabilitate, Operate and Transfer Concession Private Private Public 20-30 Build, Operate and Transfer (BOT) Greenfield Private Private Semi-Private 20-30 Build, Own, Operate and Transfer (BOOT) Greenfield Private Private Semi-Private 30+ Build, Lease and Own (BLO) Greenfield Private Private Private 30+ Build, Own and Operate (BOO) Greenfield Private Private Private 30+ Partial Privatization Divesture Private Private Private 30+ Privatization Divesture Private Private Private Indefinite Source: Hammami et al. (2006, April). Determinants of Public-Private Partnerships in Infrastructure. International Monetary Fund , WP/06/99.
In another type of PPP Model, the private finance initiative (PFI)33 model, the private sector remains responsible for the design, construction and operation of an infrastructure facility. In some cases, the public sector may relinquish the right of ownership of assets to the private sector. In this model, the public sector purchases infrastructure services from the private sector through a long-term agreement. PFI projects, therefore, bear direct financial obligations to the government. A PFI project can be structured on minimum payment by the government over a fixed contract tenure, or minimum contract tenure for a fixed annual payment, or a combination of both payment and tenure. In the PFI model, asset ownership at the end of the contract period is generally transferred to the public sector. Setting up of a Special Purpose Vehicle (SPV) may not be always necessary. A PFI contract may be awarded to an existing company. For the purpose of financing, the lenders may, however, require the establishment of an SPV. In a PFI project, as the same entity builds and operates the services, and is paid for the successful supply of services at a pre-defined standard, the SPV/private company has no incentive to reduce the quality or quantity of services. This form of contractual agreement reduces the risks of cost overruns during the design and construction phases or of choosing an inefficient technology, since the operator’s future earnings depend on controlling the costs. The public sector’s main advantages lie in the relief from bearing the costs of design and construction, the transfer of certain risks to the private sector and the promise of better project design, construction and operation.
33 United Nations ESCAP. (2011). A Guidebook on Public-Private Partnership in Infrastructure. Bangkok.
PUBLIC PRIVATE PARTNERSHIP 32 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN The question – ‘which model to select?’ has no one answer. It needs careful assessment of many things. The type of PPP contract is the element that has the greatest influence on economic growth. This is because the nature of the PPP contract will determine the level of private- sector involvement. As private-sector involvement in a PPP increases, so too does the quality of the project and the transfer of knowledge and resources. The application of private-sector management principles, combined with investment in state-of-the-art technology and methods, leads to more cost-effective administration and greater access to services. This, in turn, attracts more private investment into the economy and raises the overall standard of living.
2.2 Launching a new PPP: Key Areas for Consideration Commercial, Economic, Technical, Legal, Environmental and Social Aspects PPPs can follow a variety of structures and contractual formats, however, all PPPs incorporate a standard project sequence. Figure 3: Public Private Partnerships - Project Sequence
Source: Skilling, H., & Booth, K. (2007). Structuring a PPP: Selecting the Option. Asian Development Bank.
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VOLUME 17, DECEMBER 2016 33 To be successful, PPPs must be built upon a sector diagnostic that provides a realistic assessment of the current sector constraints. Specifically, the sector diagnostic34 should cover: . commercial, financial, and economic issues . technical issues . legal, regulatory, and policy frameworks . environmental and social assessment
2.2.1 Commercial, Financial and Economic Aspects
As part of the diagnostic assessment, the current commercial, financial, and economic arrangements and outcomes of the sector should be understood and assessed. Commercial considerations relate to the business orientation of the infrastructure service provider which may become a partner in the PPP. In preparation to a PPP, preliminary improvements to the billing system, customer database, the status of receivables and funding arrangements may be necessary. These may be needed to understand fully or to improve the financial position of the service provider prior to entering into a PPP. Financial considerations relate to the design of detailed and realistic pricing (including customer tariffs, off-take agreements, etc.) strategies. The objective is to provide affordable services, encouraging use, while providing the private partner with revenue sufficient for commercially viable operations. Sometimes, the government’s provision of financial support through investment contributions or other forms of viability gap support or even ongoing subsidies can achieve this balance. A key tool to support the analysis is a financial model. To develop a financial model, the modeler has to review available data, ensure that consistent assumptions support all inputs to the model, identify key points of sensitivity, and continually challenges and update critical assumptions and results through ongoing review as the transaction develops.
2.2.2 Technical Aspect: Resolving Constraints and Setting Standards35
Under this stream of analysis, the government should assess current technical constraints in the sector including system efficiency, utility operations, and responsiveness to customers. It should determine the degree to which operational issues are a result of underinvestment, poor investment planning, maintenance, ineffective management, lack of operational expertise, or other issues. Investments underway and investments planned, as well as existing assets, should be catalogued to the degree that this information is relevant to the reform and can be obtained in a cost- effective manner.
34 Asian Development Bank. Public-Private Partnership Handbook. Philippines. 35 Retrieved from http://www.slideshare.net/itsgowri/chapter3-structuring-a-ppp-sector-diagnostic-amp-road-map
PUBLIC PRIVATE PARTNERSHIP 34 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN The analysis needs to take into account connectivity, links, and interdependencies of various infrastructure elements (e.g., electricity generation vs. distribution, connectivity of transport modes, validity of tickets/billing across transport modes, technical standards to be followed, etc.).
2.2.3 Legal, Regulatory and Policy Aspects Enabling legal, regulatory and policy environments are critical to a sustainable PPP. At a baseline level, a legal environment that can support private sector involvement in critical services is needed. The legal environment has to minimize the likelihood of corruption and must be sufficiently reliable as to encourage private participation and investment. To the degree that the legal and judicial environment is not defined, investors and project participants will see the project as unpredictable and highly risky. Equally, possible investors must have confidence that the laws and the contract will be respected and can be enforced in the courts or through arbitration, if necessary. The framework for economic regulation must be equally explicit. This may entail creating an independent regulator, a regulatory unit within a part of government, or another form of regulatory capacity. It can also be effective to embed regulatory principles within the contract. Highly specific contract terms that establish duties, performance targets, customs and tariff structure, rules for changing tariffs, and dispute resolution procedures, allow the private sector to better predict the profitability of the venture and decide what the contract is worth bidding for. The basic principle is that the level of service demanded and the costs of those services must be equitably balanced, while creating incentives for improved efficiencies in the system. In many countries, PPP-specific laws are not strictly required to make PPPs legal, but have been introduced to encourage them as a model for delivering public infrastructure. In South Korea, for example, the PPP Act and the Enforcement Decree regulate the procurement of PPP projects, including a Basic Plan for PPP, which provides a detailed implementation process and defines the roles of associated parties36. In the developing world, there are PPP facilitation centers like Malaysia PPP Unit (Official Portal of Prime Minister’s Department), Japan PFI Promotion Office, Indonesia Infrastructure Guarantee Fund, Philippines PPP Center among others.
2.2.4 Environmental and Social Aspects: Benefit for All? Environmental and social concerns are significant in all infrastructure projects. In most sectors (e.g., toll roads), environmental and social measures tend to be a one-time cost in terms of carrying out construction, rehabilitating displaced personnel, and addressing safeguard issues. For water supply systems, measures relating to effluent treatment, sewage, and drainage are of a continuing nature. The capital cost and ongoing operation and maintenance cost need to be assessed at early stages of project development. Otherwise, the project would prove to be unviable
36 Ernst & Young. (2015). Public-Private Partnerships and the Global Infrastructure Challenge.
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VOLUME 17, DECEMBER 2016 35 and unacceptable in its design parameters. Detailed environmental and social assessment studies are typically undertaken during project development, concurrent with preparation of the detailed feasibility assessment. The typical focus of the studies is to establish the impact of the project on environmental and social parameters and to evolve suitable strategies to minimize any impacts. The suggested measures must be incorporated into legal instruments that govern project implementation. This includes translating the obligations of different stakeholders with respect to environmental and social concerns to legally binding instruments. A major feature relating to the restructuring of PPPs is the requirement of an average low- income consumer. When a primary goal of developing countries is improved access to infrastructure, as a driver of economic growth, and when a predominant characteristic of these countries is a high incidence of poverty, developing strategies that fit the goal of universal service with the reality of poverty is sensible. There is need to target social priorities exclusively within the framework of a PPP transaction. India’s Prime Minister Narendra Modi has proposed to the world to revamp the PPP framework to one that is PPPP37 – People Public Private Partnership. This puts the focus on a major problem. If only the people of the area are taken on board in project planning, much of the opposition and hurdles will disappear. For example, in India, more often than not, land acquisition and compensation payable for it emerge as the biggest problems, invariably leading to public agitations or protest. To close the global infrastructure gap, a more inclusive PPP model is required, which is attractive to the investors and at the same time, not too expensive for the ultimate users of that infrastructure facility.
2.3 Ongoing PPPs: Risk Mitigation and Performance Evaluation 2.3.1 Treatment of Risks in PPP Projects Risks in any transaction cannot be eliminated and exist for all participants in the contract. However, risks can be managed to an acceptable level using the following protocol:38 . Risk Identification: What event or actions would adversely affect the cost, performance, timing, or viability of a project (e.g., what would happen to the project if the rate of inflation were to significantly rise above that projected)? . Risk Severity: What is the specific cost, time delay, or reduction in performance if this happens? . Risk Allocation: Risk should be managed by the participant best able to manage that risk. . Risk Mitigation: Determine what must be done to reduce the likelihood of an adverse event (e.g., construct all structures above the 100-year flood elevation to reduce the likelihood of flood damage). . Risk Pricing: Determine the cost of addressing the risk (e.g., the cost of flood insurance).
37 Narendra Modi. (2013, April 08). Retrieved September 11, 2016, from http://www.narendramodi.in/we-need-to-move-from-ppp-to-pppp- people-public-private-partnership-shri-modi-at-think-india-summit-5220 38 Asian Development Bank. (2012). Public–Private Partnership Operational Plan 2012-2020. Philippines.
PUBLIC PRIVATE PARTNERSHIP 36 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN The main sources of financial risks in major PPP projects are: . construction cost overruns induced by, for instance, government, client, management, contractor, or accident . increased financing costs caused by changes in interest, exchange rates and by delays . lower-than-expected revenues, e.g., produced by changes in traffic volume and in payments per unit of traffic
2.3.2 Evaluation of Ongoing PPPs In PPP Model, some of the critical success factors39 include the concreteness and preciseness of the concession agreement, the ability to appropriately allocate and share risk, the technical feasibility of the project, the commitment made by partners, the attractiveness of the financial package, a clear definition of responsibilities, the presence of a strong private consortium and a realistic cost/benefit assessment. The reason for their importance is their deal-breaking character, which can lead to a total failure of PPP projects during the early stages of project conception. Figure 4: Critical Success Factors in Public-Private Partnerships
Source: Aerts et al. (2014). Public-Private Partnerships for the Provision of Port Infrastructure: An Explorative Multi-Actor Perspective on Critical Success Factors. The Asian Journal of Shipping and Logistics , 273–298.
39 Aerts, G., Grage, T., Dooms, M., & Haezendonck, E. (2014). Public-Private Partnerships for the Provision of Port Infrastructure: An Explorative Multi-Actor Perspective on Critical Success Factors. The Asian Journal of Shipping and Logistics , 273–298.
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VOLUME 17, DECEMBER 2016 37 Of utmost need are balanced risk-sharing, robust dispute re-dressal mechanisms, and adequate exit norms, while balancing: . Stakeholders’ Roles – responsibilities, competencies and commitment of the public sector, private sector, financiers, consultants, end-users, community and civil society . Interaction – financing, revenue generation and risk-sharing among stakeholders . Project Impact – social inclusion and environmental sustainability While PPPs hold significant benefits, they also present formidable challenges, both at earlier and later stages of market development, as countries increasing apply the PPP approach to infrastructure projects across a number of sectors. A big part of moving up the maturity curve entails improving a government’s capacity to execute and manage innovative partnerships. Lessons learned from PPP leaders suggest several strategies for successful execution of PPPs. Box 2: Major Challenges in PPP Implementation
. Lack of Government guidelines and procedures
. Delays in negotiation
. Excessive restrictions on participation
. No clarity over project accountability
. Delays in contract transactions
. Conflicting interest of multiple stakeholders
. Absence of proper project development and risk allocation
. Financing constraints and others
Governments need a clear framework for partnerships that confers adequate attention on all phases of a life-cycle approach and ensures a solid stream of potential projects. This can help avoid problems of a poor PPP framework, lack of clarity about outcomes, inadequate government capacity to manage the process, and an overly narrow transaction focus. Second, a strong understanding of the new innovative PPP models developed to address more complex issues can help governments to achieve the proper allocation of risk—even in conditions of pronounced uncertainty about future needs. This allows governments to better tailor PPP approaches to particular situations and infrastructure sectors. Last, in addition to providing higher-quality infrastructure at lower cost, governments can use PPP transactions to unlock the value from undervalued and underutilized assets, such as land and buildings, and use those funds to help pay for new infrastructure40.
40 Deloitte. (2006). Closing the Infrastructure Gap: The Role of Public Private Partnerships.
PUBLIC PRIVATE PARTNERSHIP 38 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Figure 5: Potential Enablers to Effectuate Public-Private Partnerships
Source: Ernst&Young; FICCI. (2013). Public Private Partnership: The next continuum. India.
3.0. Public Private Partnerships: Trends across Asia 3.1 Regional Trends Asia’s overall national infrastructure investment needs are estimated at USD 8 trillion till 2025, 68% of which is for new capacity and 32% for maintaining and replacing existing infrastructure. The average annual infrastructure investment during this period is about USD 750 billion41. As countries move up the value chain and urban populations expand, demand for transport, logistics and utilities will only continue to grow, increasing the burden on public funds. A question arises that if investors have an appetite for Asia’s infrastructure projects, what is keeping them at bay? Infrastructure development is not a silo initiative. It calls for a coordinated approach involving collaborative governments, multilateral development lenders, commercial banks with well-established global networks and expertise in appropriate risk structuring, viable capital markets and cash-flushed institutional investors42. With the world looking to Asia to drive economic growth, it’s time to remove a major roadblock to the region’s prosperity - subpar infrastructure. This infrastructure gap can be closed by engaging the private sector. The time is ripe to develop infrastructure as an attractive asset class. If infrastructure projects are structured efficiently, and private funds brought in at the optimum time, the region’s infrastructure gap can be narrowed.
41 Asian Development Bank. (2012). Public–Private Partnership Operational Plan 2012-2020. Philippines. 42 Kanwal, A. (2016, April 14). Plugging Asia’s Infrastructure Gap. Bangladesh.
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VOLUME 17, DECEMBER 2016 39 3.2 Case Studies 3.2.1 Case of Australia
The Australian government has started to use the Public-Private Partnership model of cooperation since the 1980s in order to meet public needs in infrastructure and services. It has been used in a varied range of sectors such as roads, railways, airports, hospitals, schools and prisons. The process of PPPs in Australia has not developed in one way and is divided into two phases of generation. The first phase of PPP projects were undertaken through the BOO (build-own-operate) mode, as used in the Sydney Harbor Tunnel project, while the second generation projects have been implemented through modern BOOT mode (build- own-operate-transfer). The Australian government has started to use the second generation PPPs after Partnerships Victoria Policy, which was released in 2000.
Table 3: 2nd generation Australian PPP projects
State Project Industry Type Project Status
Defence Headquarters Joint Operation Command facility Bidding Technol- Bid Phase Commonwealth Customs Coast watch Aerial Surveil- ogy Bid Closed lance
Convention Centre/Water Front Rede- Northern Territory Other Preferred Bidder velopment
- Chatswood Transport Interchange - Cross Sydney Tunnel - Eastern Creek Alternative Waste Bids closed Imple- Transport mentation Technology Facility Transport - Long Bay Prison & Forensic Hos- Waste& Energy Operating pital Bids Closed - Lane Cove Project (Tunnel) Implementation NSW Justice &Health - Mater Hospital, Newcastle−Rede- Transport Health Bids Closed (New South velopment Wales) - New Schools project Buildings Health/ Operational - Newcastle Polyclinic Building Transport Bids Closed - Newcastle Port Multi- Purpose EOI Closed container terminal Transport Trans- Contract signed - Parramatta Transport Interchange port Transport EOI Closed - Rail Corp Rolling Stock Implementation - Western Sydney Orbital (Westlink M7)
PUBLIC PRIVATE PARTNERSHIP 40 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Southbank Education and Training Bids closed Queensland Projects Townsville Industrial Recycling Education Waste Bid Phase Opportunities project
Regional Police Stations & Courts Ad- Bid phase South Australia ministration Authority Facilities Justice Other State Swimming Centre Bid phase
Tasmania Risdon Prison Redevelopment Justice Implementation
Ballarat & Creswick Reclaimed Water Bids closed Oper- Water Health Berwick Community Hospital ating
Echuca/Rochester Wastewater Treat- Water Implementation ment
Emergency Alerting System project Technology Implementation
Enviro Altona Water Implementation
Film & Television Studio Technology Operating
Melbourne Convention Centre Other EOI
Victoria Metropolitan Mobile Radio Technology Implementation
Mitcham−Frankston Freeway Transport Implementation
Mobile Data Network Justice Implementation Partnership Victoria Correctional Facil- Justice Implementation ity Royal Melbourne Show grounds Other Preferred bidder
Royal Women Hospital Redevelopment Health Bids closed
Spencer St. Station Redevelopment Transport Implementation
Victorian County Court Justice Operating
Wodonga Wastewater Treatment Plant Water Operating
Western Australia CBD Courts Project Justice Financial close
Source: Duffield, C. (n.d.).PPPs in Australia. Retrieved from http://www.civil.hku.hk/cicid/3_ events/32/papers/2.pdf
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VOLUME 17, DECEMBER 2016 41 The Partnership Victoria has changed the overall approach to PPPs in Australia with its shift in strategy to involve the private sector to more public infrastructure projects, use its innovative knowledge and resources, and transfer risks on optimal level rather than overwhelming it. A new approach to PPPs has brought a new assessment mechanism for PPP projects that encouraged using private sector more efficiently. This change enhanced the scope of infrastructure and service fields in the country by including more economic and social projects into the PPP policy and guidelines. Table 4: The development of the Australian PPP market
Economic Projects Economic and Social Projects Pre 1990s-1993 1994-1997 1998-2000 2001-2002 2003-2010 Water Water Water Defence Defence Roads Power Power Prisons Hospitals Prisons Rail Hospitals Schools Seaports Airports Seaports Convention Center Airports Courts Roads Roads Schools Water Waste TAFE College Training Housing Ports and Terminal Rolling stock Sports complex Broadband Public Transport Aged care
Source: Japan External Trade Organization (JETRO) . (2010, August). Public Private Partnerships in Australia and Japan. Retrieved from https://www.jetro.go.jp/ext_images/en/ reports/survey/pdf/2010_01_other.pdf
PPPs in Australia have been used mainly by the State Governments, who are in charge for delivering social and economic infrastructure for public use. Although PPPs are used in a variety of fields (hospital, school, prisons etc.), the main areas have been transport-related. But PPPs have not covered the major part of capital expenditure in infrastructure and could only account for around 9% of capital spending in NSW, Victoria, and Queensland territories.
PUBLIC PRIVATE PARTNERSHIP 42 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Australia has well-established rules, policies and laws that support development in PPP implementation and government procurement process. In the Logistics Performance Index 2016, Australia was positioned 19th of 160 states43. Additionally, the development of PPP projects initiated new legislative changes in the country during the 1990s. As a result of privatization, deregulation and the shortage of public funds, there were many law bills that came into force at that time, which allowed the private sector to involve in large scale infrastructure projects for a long period. During the 1990s, many new projects were delivered for public use by implementation of laws such a Roads Act 1993, National Rail Corporation Act 1992, Airport Act 1996, and the Telecommunication Act 1997, which allowed private sector participation44. These acts have brought a new phase in Australian economic sector by making it more flexible and open to non-governmental entities. There were some big PPPs projects such as Sydney Harbor Tunnel and the City Link project that were completed successfully.
Table 5: Projects in early period of PPPs in Australia
Project Mode Construction Concession Contract Current Period Period Value Status
Roads (Sydney BOOT 1987−1992 1992-2022 AUD 479 million Operating Harbor Tunnel)
Roads (The DFBOPT 1996−2000 1996-2030 AUD 2 billion Operating Melbourne CityLink) Source: U.S Department of Transportation The substantial change was made with the Partnerships Victoria Policy Framework in 2000. This policy was aimed to extend the scope of engagement of public and private sector bodies in the PPP through an applicable jurisdiction. It has influenced other Australian States’ approach towards the cooperation with the private sector bodies, and consequently has broadened the legislative basis for recognition of the value of PPPs in delivering public services and infrastructure. The legislative reforms in favour of more private sector participation were argued with the following benefits of PPPs: . Lower cost overruns than compared to traditional procurement . Superior cost efficiency . Accurate risk analysis in project development . Advantages of joint venture in infrastructure and public service deliver . Benefits of use of private sector innovation, knowledge and management skills
43 Retrieved from http://lpi.worldbank.org/international/global 44 Japan External Trade Organization (JETRO) . (2010, August).Public Private Partnerships in Australia and Japan. Retrieved from https://www. jetro.go.jp/ext_images/en/reports/survey/pdf/2010_01_other.pdf
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VOLUME 17, DECEMBER 2016 43 Australian state-level success with high-profile initiatives such as Partnerships Victoria bolstered its sub-national adjustment score. The State of Victoria has a considerable share in the Australian economy, ranking second in terms of highest population. It has started to use PPP model since the 1980s, when the governments tried to reduce their expenditure and transfer risks to private sector. The government of Victoria performed the best practice of PPP with the successful City Link toll road project under the Kennet government. During the next cabinet under the Labour party, the government introduced the Partnerships Victoria, which aimed to improve the PPP policy and optimization of risk transfer, maximizing efficiency and minimizing whole-life cost. This Partnership policy framework provides a guideline for partnerships between public and private sector bodies to deliver infrastructure and services.
Table 6: Range of Partnerships Victoria models
Increasing role of private sector
Private Infrastructure Infrastructure and Infrastructure and partial pri- Infrastructure and ser- party role services only ancillary services vate-to public service delivery vice delivery to users Govern- All public-to- Delivery of core Delivery of core public services No operational ment role public services public services Role Non-core hospital Community facilities linked to Roads, rail, port facili- Example Public buildings services, non-judi- educational facilities (e.g. after- ties, car parks cial court services hours usage) Source: The Secretary Department of Treasury and Finance/ State of Victoria. (2011, June).
Partnerships Victoria seeks to reduce costs, increase efficiency and benefits of partnerships with private sector and determine how a PPP may be useful and applicable for a certain project. The main features of Partnership Victoria include: . Retention of responsibility by the Government to deliver core services . Focus on public interest considerations . Optimal risk allocation and value for money . Diverse partnership models In addition, Partnerships Victoria has initiated the second generation of PPPs in Australia with reforms in PPP model in Victoria by adding new mechanisms and flexibility. The areas of changes were: . Use of Public Sector Comparator (PSC) to test Value for Money (VfM) and scope ladder . A new modified financing structure with specific circumstance to each project . Include more services to PPP model that was previously delivered by public body . Increase tender process efficiency and reduce bid cost . Continuing modernization of PPP model without return to tradition procurement method
PUBLIC PRIVATE PARTNERSHIP 44 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN These reforms provided a framework to integrate the private investment into public infrastructure, achieve value for money in the public interest, and transfer optimal risks to the private sector, which were included into the Partnerships Victoria requirements. These requirements comply with the National PPP Policy and Guideline and specific Victorian requirements for the State along with complementing the High Value High Risk (HVHR) guidelines and other necessary rules for investment as described below.
Figure 6: Policy Framework for all Victorian PPP projects
Source: The Secretary Department of Treasury and Finance, Australia The annual investment share of the Partnerships Victoria (PV) in public assets accounts for about 10% since 2002-200345 and is used mostly for complex projects with innovative and risk transfer scope, excluding core services. Therefore, the PV model is not applicable for all infrastructure and service delivery projects and is used for projects with measurable output, long- term period and more capital investment. Around 24 PPP projects were contracted with Partnerships Victoria with the amount of AUD 12.4 billion in capital investment46. The Partnerships Victoria has started to be a nationwide standard after the introduction of Infrastructure Australia by the Council of Australian Governments (COAG) in 2008, which is an advisory council and is in charge of allocation of federal infrastructure funding to national
45 Retrieved from http://www.dtf.vic.gov.au/Infrastructure-Delivery/Public-private-partnerships 46 Retrieved from http://www.dtf.vic.gov.au/Infrastructure-Delivery/Public-private- partnerships/Projects
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VOLUME 17, DECEMBER 2016 45 priority projects, and conduct an accurate assessment of those projects. It is administrated by a national Minister for infrastructure, who is responsible for the Australian federal market and administrates the infrastructure policy, procedure and priorities.
Table 7: Projects undertaken during the 2009-2010, Australia
Projects Investment
Project Investment Regional Rail Express (Vic) AUD3,225million East West Rail Tunnel- preconstruction work (Vic) AUD 40 million
Gold Coast light rail (Qld) AUD 365 million
Gawler rail line modernization (SA) AUD 294 million
Noarlunga to Seaford rail extension (SA) AUD 291 million
Hunter Expressway (NSW) AUD 1,451 million
Pacific Highway–Kempsey Bypass (NSW) AUD 618 million
Source: Australian Government. (2016). Retrieved from Infrastructure Australia: http:// infrastructureaustralia.gov.au/
The COAG endorsed the “The National Public Private Partnership Policy” to replace the previous regulation of PPPs. In the aftermath of new policy introduction, all Australian State governments (State & Territory) started to apply the National PPP Policy and Guidelines, which are very broad and contain many spheres for joint implementation of infrastructural projects between public and private sectors. According to the national PPP policy and guidelines, the State governments should carry out a mandatory analysis of procurement options via Value for Money (VfM) basis for projects with a capital cost over AUD 50 million in order to determine whether PPP is the most feasible delivery method for public needs or not47. In addition to that, for being undertaken, PPP has to meet the categories of large scale, long term, risk transfer, innovation, asset utilization, efficiency (better operational requirements, design etc.) and cost reduction. The minimum capital value of PPPs starts from AUD 50 million for small infrastructure projects and goes up to AUD 4 billion for large economic infrastructure projects. In Australia, PPPs are commonly implemented in the form of DBFO (design, build, finance and operate) for infrastructure facility for 25-30 years. The public sector agencies work with the Special Purpose Vehicle (SPV), and other subcontracts through the channel of SPV. The risk subsequently is transferred to agencies from public bodies to specialist subcontractors.
47 Economist Intelligence Unit. (2011). Evaluating the environment for public-private partnerships in Asia-Pacific The 2011 Infrascope. p. 13
PUBLIC PRIVATE PARTNERSHIP 46 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Most of PPP projects have been undertaken in economic and social infrastructure, while few of them were dedicated to the energy sector. According to the Asia index of 2011, Australia ranks the first with 92.2 score out of 100, based on six categories for an ideal environment for PPP projects48. These categories include legal and institutional framework, operational maturity, investment climate and financial facilities, where Australia performs impressive records. Australia has cohesive national framework with open and competitive bidding, which provides check and balance mechanism in project- implementation and approval/monitoring scheme. The National PPP policy empowers the governments on the federal and local level to supervise infrastructure projects based on their policy. Each Australian State has its own infrastructure priorities; therefore they act as an intermediary between the private bodies and the central public body to develop their economic and social conditions through PPP. The State and local governments produce around 90% of PPP projects, which are administrated by the department of Infrastructure, finance, and treasury49. Although the Australian governments have achieved impressive records with PPP model, there are still some problems concerning different aspects of public-private partnerships. These challenges have become open to public and academic debate after some high-profile failures. But there is still room for improvement and adjustment. In order to survive the competition with traditional procurement method it must deliver better value of money than other options. The main challenge of PPPs in Australia concerns the forecasting (insolvency), transaction costs, transparency, and non-flexibility. PPPs with poor forecasts generate lower revenue than expected for a given time, and lead to insolvency of the SPV. But it is controversial to consider the insolvency of the SPV as a failure of PPP. The Cross City Tunnel may be a good example for such case. After a year of completion of 2.1 km tunnel that cost AUD 1 billion, the SPV (Korda Mentha) announced its insolvency with AUD 0.56 billion debt. Despite the erupted financial problems, the road remained open to public users for no higher price than it was initially agreed in the contract. Instead, the SPV reduced the tolls below the permitted price in order to encourage more people to use the road. But the tunnel could only attract 30,000 cars a day, which was inconsistent with the revenue forecasts. Therefore, it was sold to Leighton Contractors and ABN AMRO for AUD 0.7 billion to cover the insolvency of previous operator with debts50. Consequently, the tunnel remained operational and will be returned to public ownership in 2030 and the government did not have to use public funds to bail out the project. But the equity investors and the lenders faced the financial loss. From the government’s perspective, the project was successful and cost below the alternative public funding51.
48 Economist Intelligence Unit. (2011). Evaluating the environment for public-private partnerships in Asia-Pacific The 2011 Infrascope. p. 12 49 Economist Intelligence Unit. (2011). Evaluating the environment for public-private partnerships in Asia-Pacific The 2011 Infrascope. p. 19 50 Retrieved from http://www.omegacentre.bartlett.ucl.ac.uk/wp-content/uploads/2014/12/AUS_SYDNEY_PROFILE.pdf, page 16 51 Retrieved from https://www.claytonutz.com/ArticleDocuments/178/Clayton-Utz-Improving-The-Outcomes-Of-Public-Private-Partner- ships-2013.pdf.aspx?Embed=Y, p. 9
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VOLUME 17, DECEMBER 2016 47 Box 3: Funding share of equity by the ABN AMRO/Leighton Contractors consortium
. ABN AMRO Diversified Infrastructure Trust (47%)
. ABN AMRO Global Infrastructure Fund in the UK (47%)
. Leighton Contractors (6%)
Source: Australian Government. (2016). Retrieved from Infrastructure Australia: http:// infrastructureaustralia.gov.au/ Another criticized factor in PPPs model is the risk transfer and mismanagement, which occurred in some projects in Australia, where governments have decided to take control back to public authority and intervene into the process to provide addition resources and support to private sector. The Metropolitan Women’s Correctional Centre was example for such case, while the Victorian government took control back to its hands in 2000, due to the failure of private sector to provide appropriate services. Another example is the NSW government that announced to buy back the Port Macquarie Base Hospital because of poor services provided by the private sector52. Although the failures were seen as an underestimation of the cost of service duty by the private sector, the public authority has an obligation to study the private sector bodies’ capacity and forecast certain risks in advance. There are some occasions, where governments decide to share some of the risks by providing additional support as it was in February 2012, when the NSW government provided conditional deferred equity of AUD 175 million to the PPP project of Waratah train53. The Waratah train Rail Corp ended up with a loss of AUD 440 million by Downer EDI. Similarly, there were other PPP projects which failed in accurate forecasting and estimating their financial and management capacity. The long-term character, risk-sharing feature and financing structure make the PPP projects’ transaction cost higher than traditional procurement. The tendering, contracting and monitoring processes for long-term period cost more than traditional short-term projects54. In addition to that, negotiation period is also considered to be costly, because of the high cost of advisory services, assessment process and renegotiation which sometimes occur in some PPPs. Apart from the pre-PPP phase, private asset ownership needs higher monitoring costs by public authority in order to ensure the compliance with the contract provisions. PPPs have received many complaints due to the lack of transparency over revenues of investors and taxpayers’ liabilities. Australian PPPs have not been criticized much on this matter. There are rare occurrences for excessive profits and windfall gains to equity investors on Australian PPPs. But still there are a number of initiatives for improving transparency such as getting a seat on the SPV’s board of directors by government or being an observer, requiring proper
52 Retrieved from https://www.claytonutz.com/ArticleDocuments/178/Clayton-Utz-Improving-The-Outcomes-Of-Public-Private-Partner- ships-2013.pdf.aspx?Embed=Y, p. 10 53 Retrieved from https://www.claytonutz.com/ArticleDocuments/178/Clayton-Utz-Improving-The-Outcomes-Of-Public-Private-Partner- ships-2013.pdf.aspx?Embed=Y, p. 10 54 Dudkin, G., & Valila, T. (2005). Transaction Costs in Public Private Partnerships: A First Look at the Evidence. European Investment Bank.
PUBLIC PRIVATE PARTNERSHIP 48 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN information on equity returns and having an open book approach to maintenance reserves. Some points of these approaches may generate conflict of interests within the government. A long-term character of PPPs generates another problem of additional costs for variations during the project-implementation. Government should reimburse the SPV for all additional net costs incurred by government because of any requirement to vary conditions during the contract term. This flexibility for variation of the PPPs infrastructure and services is arranged by the provisions of the PPP contracts that enable government to direct the SPV. Additional costs for variations in PPPs are more for government than traditional procurement model. However, a traditionally procured infrastructure requires only the additional costs incurred by the construction contractor, while the SPV will expect an additional payment on the top of the costs in result of a government-initiated variation. A margin on the top of the costs is starting to being agreed during the bidding process. But challenges still exit for government when it decides to vary a PPP project fundamentally. An example for this case is the Sydney light rail project. The project was procured under BOOT model, which was signed in 1994 with the NSW government. The NSW Government tried to make amendments in the PPP contract with a proposal for extension of the light rail network55.The negotiations were deadlocked and led to an agreement on purchasing the SPV from the equity investors.
3.2.2 Case of China
China56 has started to use the Public Private Partnerships since 1980s, which was driven by the high level of local governments’ debt and a need for rapid development in infrastructure. One of the first generation PPP projects was the Shajiao B power plant, which was implemented through BOT mode with Hong Kong Company in 1988. The success of this BOT project generated similar projects across the provinces of China in energy, water and transportation sectors. In 1990s, several PPP/BOT projects such as Laibin B power, Chengdu No.6 water projects were employed57. Consequently, the involvement of private sector infrastructure development has skyrocketed until the end of 1990s, when the Asian financial crisis occurred. This led to the direct engagement of the central authorities in infrastructure and public services and fading away of first phase of private investment. The first stage of PPPs in China was characterized by considerable empowerment of sub-national governments, the high level of debt among local governments and no centralized or consistent monitoring on PPP projects58. A lack of comprehensive legal framework and institutional regulations generated sporadic PPP projects carried out by local governments and departments. The first wave of PPPs in
55 Retrieved from https://www.claytonutz.com/ArticleDocuments/178/Clayton-Utz-Improving-The-Outcomes-Of-Public-Private-Partner- ships-2013.pdf.aspx?Embed=Y, p. 11 56 In the Logistics Performance Index 2016, China was positioned 27th of 160 states. 57 Thieriot, H., & Dominguez, C. (2015). Public-Private Partnerships in China. International Institute for Sustainable Development. p. 2 58 Thieriot, H., & Dominguez, C. (2015). Public-Private Partnerships in China. International Institute for Sustainable Development. p. 4
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VOLUME 17, DECEMBER 2016 49 China was implemented with BOT mode during the 1980s and 1990s. Since the end of 1990s, the central government has started to initiate and establish a broad legal framework and procedure in order to regulate and stimulate the PPPs market in the country for improving the infrastructural capacity. Meanwhile, the government was eliminating all unofficial PPPs that were carried out by the local level of state offices. According to 2011 statistics of the National Audit Office of the People’s Republic of China, local governments owed CNY 10.7 trillion, which reached to one-third of China’s GDP in 2013. These debts include responsibilities for debt, contingent liabilities and guaranteed credits. In order to prevent the same situation in the future, the central government made amendment to the National Budget Law in 2014 with a special clause on restricting the local governments with State Council approval for raising funds59. This change in budget law strengthened the legal instruments of central government to control on the local level to prevent adverse effects of PPPs emerged during the first generation. The second stage of PPPs development in China started in early 2000s with an involvement of the central government to provide more opportunities for infrastructure projects and ensure appropriate legislation and policies. Two major policies of government in favour of PPP development were “The method of Managing Urban Public Utility Concessions (2004)and The Decision on reforming investment scheme (2004)”, which created fertile legal and procedural environment for urban infrastructure and private investment60. The new phase of PPPs has given a chance for the use of PPPs/BOT in big infrastructure projects. Compared to the first wave of PPPs, the second one has more complex and comprehensive areas of activity and broad strategy. In the current stage, China’s government created new opportunities for private sector and allowed them to enter into the power, communications, railways, airlines, and energy sectors. In 2005, the Central Party Committee and the State Council issued the Opinion, which emphasized the importance of the private sector and supported its participation in public infrastructure projects. The second stage has been stimulated and boosted by the following policies and rules that have made a great leap in PPPs:
Table 8: Policies for promotion of PPP in China throughout the last decade
Circular of Committee of Planning concerning This policy recognized the right of domestic private sector promotion and instruction of private investment to invest in sectors in which foreign investors do. (Committee of Planning, 2001)
Directory of foreign investment in China industry The Directory shows the list of industries where foreign (National Development and Reform Commission, investors can invest with, limited liability or forbidden at 2004) all. The list includes the most of infrastructure industries
59 Thieriot, H., & Dominguez, C. (2015). Public-Private Partnerships in China. International Institute for Sustainable Development. 60 Cheng, C., & Wang, Z. (2009, December). Public Private Partnerships in China: Making Progress in a Weak Governance Environment. Not- tingham: The University of Nottingham.
PUBLIC PRIVATE PARTNERSHIP 50 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN The method of managing the urban public utility The policy set up the framework and period of concession concession (Department of Construction, 2004) and conditions for bidders.
The decision encourages the private sector to involve in in- Decision on reforming the investment scheme frastructure, public facilities, and other sectors allowed by law (2004) through own investment, joint venture and project finance.
According to this policy, the central government allows The Opinion of the State Council regarding en- the private sector to participate in power, communications, couraging and supporting development of non- railways, airline, and petroleum areas as well as empha- state-owned economy (private- owned economy) sizes the improvement of legislative basis for further entry of private investment in public infrastructure.
Source: Cheng, C., & Wang, Z. (2009, December). Public Private Partnerships in China: Making Progress in a Weak Governance Environment. Nottingham: The University of Nottingham.
The China’s regulatory framework and legal basis for PPPs is complex, unsteady and incoherent. There are only opinions, decisions and guidelines issued by the State Council, MOF and NDRC, who take only their own sphere of activity and responsibility into account. Therefore, the legal system lacks centralized rules and procedures, which may constraint the political party’s interventions and predominance, and also prevent windfall benefits for private entities. Without a consistent mechanism that may guarantee and regulate the system completely, China will lack a substantial development of PPPs market. Currently there is no accurate model for value for money assessment and decision-making process to evaluate the appropriateness of a PPP project. The decision concerning PPPs is made in a sporadic environment without any formal process for deciding the type and extent of public support to PPPs. It is made by government officials based on their own preferences regarding importance and necessity of a PPP project. As long as the decision-making process is conducted by a narrow circle of government officials based on their judgment, there will have no influence on that. Although the regulatory system has considerable problems and obstacles in PPPs market, there are some improvements made by the Chinese authorities to boost the infrastructure and public service sector economy.
Table 9: Recent official documents promoting the development of PPPs, China
DATE ISSUING BODY AND TITLE REFERENCE May 18, 2014 National Development and Reform Com- NDRC, 2014c mission (NDRC), Notice to encourage private capital to invest in first infrastructure projects
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VOLUME 17, DECEMBER 2016 51 September 21, 2014 State Council, Opinions of the State Council State Council, 2014c on strengthening the management of local government debt
September 23, 2014 MOF, Notice on questions relating to ex- MOF, 2014c panding the use of PPPs
November 16, 2014 State Council, Guiding opinions on the innova- State Council, 2014a tive investment mechanism and encouraging social investment in key sectors
November 29, 2014 MOF, Guide on operation of public- private MOF, 2014a partnership projects (interim)
December 2, 2014 NDRC, Guidelines on development of public- NDRC, 2014a private partnership projects
Source: Thieriot, H., & Dominguez, C. (2015).Public-Private Partnerships in China. International Institute for Sustainable Development.
The need for change in PPP market was driven by the new plan for urbanization with a rate of 60% by 2020, which covers approximately 100 million new urban residents. In order to cover the expenditure of the plan, the government started to seek new funding for public infrastructure and services, which cost around CNY 42 trillion. The Ministry of Finance supports the development of PPPs in China and aims to use the private capital in providing those public infrastructure and services. The Chinese authorities (NDRC, SC, MOF) have made a certain direction through the official documents issued in recent years in order to create a fitting environment for private actors’ involvement and encourage them to participate into public infrastructure more actively. This will increase the role of private actors in the economy and may also increase efficiency. The Notice by NDRC invited the private entities to participate in 80 projects, where they are required to engage in all its phases. The projects include transportation, energy, information infrastructure and fossil fuels sectors. The SC released the document to ease the market access for private sector in a bid and stimulated investment flow with innovative financing mechanism. This regulation will reduce market barriers; eliminate industrial monopolies and lower access thresholds for private actors. In addition to these, the private sector participants will be provided with financial incentives such as subsidies and loans. The guidelines issued by NDRC and MOF indicate rules for local governments and private sector to share a risk efficiently for both parties. The NDRC’s document favours different modes of PPPs and encourages innovation in addition to franchise, BOT and BOOT agreements. The guideline of NDRC emphasized the need for joint review and cooperation for better track and implementation of PPPs. The MOF provided with a particular format, which will enable them to monitor PPPs in all stages.
PUBLIC PRIVATE PARTNERSHIP 52 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Figure 7: Process Flow Chart
Source: Thieriot, H., & Dominguez, C. (2015).Public-Private Partnerships in China. International Institute for Sustainable Development. p. 6
Furthermore, the MOF established a center for PPPs which was driven by a PPP-leading group founded by the same ministry in May 2014. This center conducts appropriate research, training and statistics to create a suitable environment and set standards and norms in order to increase confidence and management quality. Along with the regulatory reforms, the MOF ran 30 pilot PPP projects accounting for CNY 180 billion of investment. These projects concern wastewater treatment, water and heat supply, waste management, transport, environmental protection, pipe network and health. These initiatives taken by the Chinese authorities are expected to have an impact on the PPP market in terms of an increase in efficiency. Back in 2007-2008, China experienced a shift in procurement approaches toward the private sector entities. This was as a consequence of insufficient maintenance and unfulfilled expectations of major transportation projects and resulted in transferring of PPPs to SOEs. The private sector is mostly involved in Greenfield projects through BOT model. The BOT remains the most favoured model for public-private partnerships in China and helps local governments to reduce their debts by price transferring and long-term revenue. One of the big PPP projects was the Beijing Metro Line 4, which is 28.65 km in length with 24 stations and accounts for CNY 15.3 billion. The need for this PPP project arose from the uncompetitive subway transportation subsidized by Beijing municipal government. Due to
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VOLUME 17, DECEMBER 2016 53 the poor management and innovation of public agency, the Beijing government decided to fund the project up to 70% of the capital investment and transfer its utilization to the private sector61. Therefore, the PPP project was employed with a mixed financing structure divided into two parts. The Part A was about the civil works and facilities (tunnels, tracks, stations, lifts) and also land acquisition and relocation of residents. The private entity was responsible for rolling stock, traffic control system and power supply facilities. The part B was granted to the private entity for 30 years concession. The concession winning consortium was comprised of Hong Kong Mass Transit Railway Corporation, Beijing Capital Group, and Beijing Infrastructure Investment Co. Ltd. The implementation of the contract was transferred to Beijing Jinggang Subway Co. Ltd with a capital of roughly CNY 1.5 billion62. The project company will use the ticket returns to recover its capital and earn profit from the PPP. A guarantee for the minimum traffic flow was confirmed by Beijing municipal government, who will make up the difference if it is less and take the excess if it is higher. The project had many advantages for both parts, though they have different durations of concession contracts due to the nature of their services. The government-supported company, Beijing Metro Line 4 Investment Co. has no clearly defined concession period for part A and surplus revenues may be paid to that company, while the private entity enjoys tax benefits. As a result of this project, the Beijing Municipal Government recovered financial shortage and boosted the development of urban infrastructure. Although there were advantages for the private sector, the predominant role of the government in the decision-making process of pricing, investment and line extension caused a problem with the second largest shareholder, Ren Zhiqiang, complained about the investor’s guarantee. In the long run, the Metro Line 4 project has played a key role for future PPPs by motivating further use of private sector in similar projects as it has been done for Beijing Metro Line 14. During the 1990s, the central government of China has experienced fiscal constraints, which affected the role of the state in providing public infrastructure and services. In order to keep the upward line of infrastructure development and reduce the public expenditure, the central government has started to use PPPs/BOT through central and local offices. In consequence of the 1994 tax reform, local governments have become more stimulated for partnerships with the private sector by ensuring the rate of return and giving certain guarantees. These policies of local governments were aimed to reduce responsibilities put on their shoulder by the central government and attract private investment to meet the public needs. Although, the second stage of PPPs has changed the market for good, there are still several factors that impede implementation of joint infrastructure and public service projects. These factors are reflected in the forms of uncertainties, risk assessment, predominant government role, weak legislative and regulatory system, and limited government capacity. In addition to that there are limited funding sources, which impede the development of PPPs on a large scale in China. The piecemeal documents issued by the Chinese authorities are of concern and
61 Akintoye, A., & Beck, M. (2008). Policy, Management and Finance of Public-Private Partnerships. Wiley-Blackwell. P. 181-197 62 Akintoye, A., & Beck, M. (2008). Policy, Management and Finance of Public-Private Partnerships. Wiley-Blackwell. P. 181-197
PUBLIC PRIVATE PARTNERSHIP 54 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN can cause conflicts within the State offices on central and local level. The conflicting aspects concern the risk allocation, guarantees and discontinuity of policies between central and local governments. Additionally, a weak government capacity includes poor government effectiveness, corruption and lack of trust. All these factors increase the risk of project failure. Improper evaluation and inefficient allocation of risks prevent the full utilization of PPPs in China. To avoid this, a public agency should engage in optimum allocation of risks and efficient assessment in terms of VFM. Table 10: Systematic and Project Specific Risk Factors
Risk Category Description
Government corruption, government intervention, nation- Political alization/expropriation, public credit, poor public decision- making process
Interest rate fluctuation, foreign exchange fluctuation, Economic inflation, financing risk
Legislation change, imperfect law and supervision system, Legal change in tax regulation
Systematic Social Political or public opposition
Force majeure, unforeseen weather or geotechnical condi- Natural tions, environmental risk
Completion risk, non-availability of material or labour, Construction unproven engineering techniques
Project or operational changes, operational cost overrun, Operation price change, expense payment risk
Market Market competition, change in market demand Project Third-party delay or violation, organization and coordina- Specific Relationship tion risk, inability of the Concessionaire
Land acquisition, delay in project approvals and permits, Other conflicting or imperfect contracts, lack of supporting infra- structure, residual risk, inadequate competition for tender
Source: Thieriot, H., & Dominguez, C. (2015).Public-Private Partnerships in China. International Institute for Sustainable Development.
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VOLUME 17, DECEMBER 2016 55 Public-Private Partnerships in Hong Kong PPPs have been started to be widely used in Hong-Kong for many years with BOT mode for major road tunnels, and DBO mode for solid waste management facilities. Since early 2000s, the Hong Kong government began to stimulate economic development and increase quality and competitiveness of public services by initiating certain institutional and legal frameworks. The government set the policy principles for the Private Sector Involvement Program under the title of ‘Serving the Community by using the Private Sector’ in June 2001. The government also released ‘An Introductory Guide to Public Private Partnership in Hong Kong’ in August 200363. Through these guidelines, many public works and services, including prisons, sewage treatment services and international exhibition centers were proposed to be delivered through PPPs.
The Hong Kong government has implemented many infrastructure projects through PPPs during the last 35 years, which covered road tunnels, ports, railways, waste management, highway and bridge maintenance, tourism projects, Asia World-Expo and Cyber port.
Table 11: Major BOT road tunnels in Hong Kong
Project CHT EHC TCT WHC R3 (CPS)
Tunnel length (m) 1582 2255 4000 2000 3800 Immersed tube length (m) 1064 1860 1360 Number of lanes Dual 2 Dual 2+2 tracks Dual 2 Dual 3 Dual 3 Traffic design capacity (v/d) 90,000 90,000 90,000 135,000 135,000 Planned construction period (month) 47 42 37 48 38 Actual construction period (month) 36 37.5 34 44 38 Concession period (years) 30 30 30 30 30 Construction Start date 09/69 07/08/86 11/07/88 02/08/93 31/05/95 Opening Date 07/72 21/09/89 01/06/91 01/04/97 30/07/98 Approx. cost, HkD (million) 320 4400 2150 7500 7250 Approximate cost, HkD (million) 56 564 277 969 936 Source: Akintoye, A., & Beck, M. (2008). Policy, Management and Finance of Public-Private Partnerships. Wiley-Blackwell.
Hong Kong government had two main objectives to introduce PPPs: . Attract private funds to infrastructure projects
63 Akintoye, A., & Beck, M. (2008). Policy, Management and Finance of Public-Private Partnerships. Wiley-Blackwell. P. 436-456
PUBLIC PRIVATE PARTNERSHIP 56 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN . Ensure that the projects are developed efficiently and provide acceptable public service The substantial change in public-private relationships caused a public debate vis-à-vis the accountability, transparency, efficiency and cost effectiveness of PPPs. There were many concerns from both sides; however, a risk that the private sector can gain windfall profits without any reasonable substance caused social, political and economic unrest, while the private sector feared receiving all risks and obligations of the project. In order to witness effective PPPs, the Hong Kong government needs to set win-win regulatory rules and procedures. The length of the concession period should be set appropriately for determining the rights and obligations between public and private sectors.
3.2.3 Case of India 3.2.3.1 Public Private Partnership Market in India The creation of world class infrastructure requires large investments in addressing the deficit in quality and quantity. Therefore, it was necessary to explore the scope for plugging this deficit in India through Public Private Partnerships (PPPs) in all areas especially infrastructure like roads, ports, energy, etc. The XII Five Year Plan (2012-2017) has an ambitious target of infrastructure investment and is envisaged at USD 1 trillion. This projected investment is about twice the investment envisaged in the XI Plan and 27% of the gross domestic savings. Given the enormity of the investment requirement and the limited availability of public resources for investment in physical infrastructure, it is imperative to explore other avenues for increasing investment in infrastructure. The promising prospects of private investment in infrastructure are encouraging the government to go for a more ambitious infrastructure creation drive through greater emphasis on PPP modes of execution. The private sector is expected to contribute at least half of the over USD 1 trillion investment planned in infrastructure in the XII plan (2012-17)64.
3.2.3.2 Evolution of PPPs in India A new wave PPP movement started in India in the early 1990s. A policy of opening electricity generation to private participation was announced by the central government in 1991, which set up the structure of independent power producers (IPPs). The National Highways Act, 1956, was amended65 in 1995 to encourage private participation. In 1994, through a competitive bidding process, licenses were granted to eight cellular mobile telephone service operators in four metro cities and 14 operators in 18 state circles66.
64 Ministry of Finance, Government of India. (2016). Public Private Partnerships in India. Retrieved 2016, from http://www.pppinindia.com/ overview.php 65 Amendment stating power of Central Government to enter into an agreement with any person in relation to the development and mainte- nance of the whole or any part of a national highway 66 Chatterjee, V. (2012, May 14). PPP in India: The story so far. Business Standard.
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VOLUME 17, DECEMBER 2016 57 But a clear historic shift came on January 30, 1997, when the Infrastructure Development Finance Company was incorporated in Chennai under the initiative of the then Finance Minister Palaniappan Chidambaram. The idea was that this would signal the government’s seriousness in channelling private sector capital, expertise and management in the nation’s infrastructural development. In the late eighties, the state ran close to 100% of public utilities and core infrastructure in India. Today, while China’s economy (USD 10.8 trillion67) may be 5 times larger than India’s (USD 2 trillion68), India’s PPP market (USD 114 billion69) is 15 times larger than that of China’s (USD 7 billion70). In fact, India is today easily the world’s largest PPP market.
3.2.3.3 Current Status of PPPs in India Public-private partnership model is often said to have failed in India. While that is the case in some power and metro rail projects, there have been significant successes in roads, ports and airports. India has had 1256 PPP projects worth more than USD 114 billion. As per PPP India database accessed on 31 July 201671, the following is the break-up of PPP projects in India by sector: Chart 14: PPP Projects in India by Sector
Source: Department of Economic Affairs, Government of India. (2016). Database of Infrastructure Projects in India. Retrieved July 31, 2016, from InfrastructureIndia.gov.in: https://infrastructureindia.gov.in/sector-wise
67 World Bank Data, GDP 2015 68 Ibid. 69 Department of Economic Affairs, Government of India. (2016). Database of Infrastructure Projects in India. Retrieved July 31, 2016, from InfrastructureIndia.gov.in: https://infrastructureindia.gov.in/sector-wise 70 Thieriot, H., & Dominguez, C. (2015). Public-Private Partnerships in China. International Institute for Sustainable Development. 71 Department of Economic Affairs, Government of India. (2016). Database of Infrastructure Projects in India. Retrieved July 31, 2016, from InfrastructureIndia.gov.in: https://infrastructureindia.gov.in/sector-wise
PUBLIC PRIVATE PARTNERSHIP 58 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN . Transport dominates the PPP scenario in India, accounting for 66% of all PPP projects. . There is a need for mainstream PPPs in several areas, such as power transmission and distribution, water supply and sewerage, and railways. These are sectors where there are significant resource shortfalls, and a need for efficient delivery of services. . There is also a need to focus on social sectors, especially health and education, which currently accounts for only 1.6% of PPP projects in India.
Table 12: PPP Projects in India (by sector and value)
Sector Number of Projects Total Project Cost (USD billion)
Energy 204 12.11 Electricity generation (grid) 9 1.30 Electricity transmission 26 2.86 Oil/ Gas/ LNG Storage 1 0.22 Renewable energy (grid) 168 7.72 Social and Commercial Infrastructure 112 5.75 Cold Chain 19 0.28 Common infrastructure for industrial parks, 33 4.53 SEZ Education 11 0.04 Health Care 10 0.14 Tourism 39 0.75 Transport 835 93.82 Airports 11 4.80 Ports (excluding captive) 105 17.67 Railway track, tunnel, viaducts, bridges 8 0.83 Roads and bridges 654 64.86 Urban public transport (except rolling stock) 57 5.65 Water Sanitation 105 2.33 Sewage collection, treatment and disposal 22 0.27 system Solid waste management 52 1.07 Water supply pipeline 24 0.78 Water treatment plants 7 0.20 Total 1256 114.03 Source: Department of Economic Affairs, Government of India. (2016). Database of Infrastructure Projects in India. Retrieved July 31, 2016, from InfrastructureIndia.gov.in: https://infrastructureindia.gov.in/sector-wise
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VOLUME 17, DECEMBER 2016 59 3.2.3.4 Key Sectors for PPP Roads, railways, ports and airports are the key infrastructure sectors for PPP in India. As on July 2016, these four sectors constituted 62% (778 projects) of the total PPP projects in India. Among the four sectors, roads top the list with a share of approximately 84%, followed by ports (13.4%), railways (1%) and airports (1.5%).
A. Roads The government earmarked an investment of USD 32.4 billion during the twelfth Five Year Plan for the development of roads in the period 2012-17. 15 road projects identified for FY 2015-16 were bid under the PPP model with an investment of USD 1.9 billion. NITI Aayog (Policy and Planning Think tank of the Government of India) has allocated about 20% of the total investment of USD 1 trillion envisaged during the twelfth Five Year Plan (2012-17) to develop roads. The target is to achieve 85,000 km road network from 79,116 km in FY 2012-13 by the end of plan period. The government announced plans for completion of 100,000 km of roads under construction and further approved 100,000 km to connect remote locations. The aim is to build 30 km of road stretch per day from 201672. The government has announced several incentives73 to promote private investment in roads: . Providing 100% tax exemptions in any consecutive 10 years out of 20 years . Duty free imports of certain identified equipment for construction plants . FDI of up to 100% and increased concession periods of up to 30 years . Granted the right to collect and retain toll — the tolls are indexed to a formula linked with the wholesale price index Case study 174: The Delhi–Gurgaon Expressway Project was built in the BOT model in 2008 for a 20-year concession period. The expressway is plagued by heavy traffic jams, particularly at toll plazas. Key challenges faced in the project are: . Outdated traffic forecast: The traffic study was conducted in 1998 at the time of the project planning. This has resulted in gross underestimation of traffic projection from the very beginning of commercial operations, which was initiated 10 years after the completion of the study. . Time and cost overruns: The project was originally planned to be completed by July 2005 at an estimated cost of INR 5.5 billion (USD 82 million). Factors, such as delays in land acquisition, regulatory approval from multiple agencies and frequent changes in scope resulted in significant time and cost overruns. The expressway finally commenced operation in January 2008 at an actual cost of INR 11.75 billion (USD 175 million). Majority of the escalated cost was borne by the private player.
72 KPMG. (2016). India soars high. India. 73 KPMG. (2016). India soars high. India. 74 Ernst&Young; FICCI. (2013). Public Private Partnership: The next continuum. India.
PUBLIC PRIVATE PARTNERSHIP 60 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN . Traffic management and other challenges: The project is facing severe challenges in managing traffic at toll gate, securitization of revenues and accidents management, etc. Case study 275: Tuni Anakapalli Road Project was signed as BOT between National Highways Authority of India and GMR Group, United Engineers Malaysia (UEM) Berhad Group in 2001 for a concession period of 17.5 years. The concessionaire for the Tuni Anakapalli Road project, during its operations stage, raised debt at very low interest rates by securitizing the annuity payments receivable from NHAI. This mode of funding enabled the concessionaire to repay the term loan taken for the project development by accessing to relatively lower cost funding. Hence the Financing Risk, Default Risk, Performance Risk were successfully addressed.
B. Railways The railway ministry has earmarked an investment of USD 133.5 billion76 toward development of the railways sector over the next 5 years ending 2019. The government is working towards redeveloping/modernizing 400 railway stations in FY 2016-17 through PPP model expected to be one of the largest PPP railway projects in the world77.
Table 13: Partnerships between Private Sector and Indian Railways
Project Status . The government has signed MoUs with China, France, Czech Republic and Republic Technology of Korea for technology transfer and technical cooperation in High Speed Rail, modernization of infrastructure and maintenance Transfer . Japan is expected to sign an MoU to develop 400 stations and assist in zero- accident mission of the Indian Government . Indian railways awarded a 10-year contract to GE and Alstom for diesel and electric locomotive factories, respectively, in Bihar, at a cost of about USD 6.2 billion (to Locomotive and manufacture 1,000 diesel locomotives and 800 electric locomotives over the next decade). The Indian Railways would have a 24% stake, while the companies would wagon own 74% in each of the plants. manufacturing . The Indian railways also signed agreements worth USD 400 million for the SAIL– RITES Bengal Wagon Industry JV (SRBWIPL) to supply 1,200 stainless steel wagons and refurbish the existing 300 wagons over the next 10 years. . Canada’s Bombardier has been awarded a USD 1.2 billion contract for vehicles and Metro rail signalling network. The company won a contract of supplying 162 additional metro projects cars in 2015. . Alstom would supply about 20 Metropolis train sets, each comprising 4 metro cars. Project Nilgiri . Indian railways has partnered with Google to set-up Wi-Fi hotspots in 400 stations (Wi-Fi services at in its first phase, while the second phase would involve providing Wi-Fi connection stations) on running trains. Source: KPMG. (2016). India soars high. India.
75 Ministry of Finance, Government of India. (2015). Public Private Partnership Projects in India: Compendium of Case Studies. New Delhi: PPP Cell, Department of Economic Affairs. 76 KPMG. (2016). India soars high. India. 77 Details at http://www.thehindu.com/business/budget/railway-budget-2016-publicprivate-partnerships-to-fuel-future-growth-of-indian- railways/article8281399.ece
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VOLUME 17, DECEMBER 2016 61 The government has announced a few incentives to promote private investment in railways:
. The sector allows for 100% FDI under the automatic route. This includes construction, operation and maintenance of suburban corridor projects, high-speed train projects, dedicated freight lines, railway electrification and signalling systems, freight and passenger terminals and Mass Rapid Transit Systems (MRTS). . New policy78 to speed up the PPP process in order to address the key bottlenecks in the earlier Railways’ Infrastructure for Industry Initiative (R3i) policy regarding two of its aspects — change in participative models and faster decision making. The new policy that came into effect from 10 December 2012 is called “Policy for participative Models in Rail Connectivity and Capacity Augmentation Projects.” The policy has identified various models for private investment in PPP, and also aims to empower state governments to increase their role in the development of rail projects. . Some of the key favourable measures under new policy include: In the joint venture model (JV), the cap of 14% ROI has been eliminated for first and last mile connectivity. Capping of returns and minimum traffic guarantee required from private players were the key deterrents for private investments; the minimum concession period has been extended from 25 to 35 years. . According to the new customer-funded model, till the project beneficiary recovers the investment along with interest at a rate equivalent to the prevailing dividend rate payable by the railways (to the general exchequer at the time of signing the agreement), the railways will pay up to 7% of the amount invested through freight rebates. Earlier, the railways paid 10%–12% of the amount, only on incremental outward traffic.
C. Ports India’s 12 major ports and 200 minor ports handle 90% of the country’s external trade by volume and 70% by value79. In these ports, PPP has been primarily observed in segments, such as operation and management of ports, construction of deep water ports, container terminals, shipping yards and bulk ports. The Planning Commission estimates the cargo traffic to reach 1.8 billion ton by 2017 — an increase of almost 50% during the Twelfth Five year plan80. India needs increased private sector investment to augment the total capacity in order to adequately manage the growth in cargo traffic. Private sector participation will also increase efficiencies in ports by introducing latest technology and better management practices. India’s ‘Maritime Agenda 2010-2020,’ which replaced the National Maritime Development Program (NMDP), targets to grow India’s port handling capacity to 3.1 billion ton by 202081.
78 Ernst&Young; FICCI. (2013). Public Private Partnership: The next continuum. India. 79 Ernst&Young; FICCI. (2013). Public Private Partnership: The next continuum. India. 80 Ibid. 81 Ibid.
PUBLIC PRIVATE PARTNERSHIP 62 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN The private sector is expected to play a key role in achieving this ambitious target. The Government of India has taken several key policy decisions82 to boost private investment in the port sector and make it attractive to private terminal operators:
. New guidelines for security clearances: Security clearances granted for port projects will be valid for a period of three years. The new norms will apply to port projects being developed by coastal states as well as private ports. Earlier, these clearances used to be granted on a project-to-project basis. . Abolition of tariff rate fixation regulation: The Government has agreed to abolish the regulation that allows the Tariff Authority for Major Ports to fix tariff rates for port operators. The tariffs for new port projects will be determined by market forces, which may be a key factor in attracting private investment. . Approval of land licenses for PPP in ports: The Government has approved a proposal to allow land to be licensed to concessionaires for major ports developed under the PPP scheme. . New land policy proposed for major ports: The Shipping Ministry is preparing a new land policy for major ports. The new policy is aimed at boosting regulatory transparency in the ports sub-sectors.
Additionally, Government of India’s Sagarmala Initiative aims at transforming the existing ports and creating new ones with world-class technology and infrastructure. This project is also expected to integrate them with industrial clusters and the hinterland through rail, road, inland and coastal waterways. An estimated USD 10.9 billion shall be required for the development of 12 major ports. While a major part of the investment would be made by the government, some projects would be developed through the PPP model. The master plan of the Jawaharlal Nehru Port Trust Special Economic Zone (JNPT SEZ) of approximately 275 hectares had been sent for approval to the Ministry of Shipping, and its construction was expected to commence in early 2016. The government expects to attract an investment of USD 500 million from Indian and global industrialists. The Port Trust would invest USD 73 million83. The government is expected to carry out an extensive study for thorough and integrated planning for Sagarmala. Case Study 184: Nhava Sheva Integrated Container Terminal was signed as BOT between Jawaharlal Nehru Port Trust and P&O Australia Ports Pty Limited, Konsortium Perkapalan Berhad and Trans Impex Private Limited (P&O Ports subsequently taken over by Dubai Ports World Limited (DP World)) in 1997 for a concession period of 30 years. In the Nhava Sheva Integrated Container Terminal project, the lack of clarity in the concession agreement on whether the royalty payment was to be considered as a part of cost or a share in the profit
82 Ibid. 83 KPMG. (2016). India soars high. India. 84 Ministry of Finance, Government of India. (2015). Public Private Partnership Projects in India: Compendium of Case Studies. New Delhi: PPP Cell, Department of Economic Affairs.
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VOLUME 17, DECEMBER 2016 63 in the SPV’s accounts while determining the port tariff, became a serious issue between the public and the private sector. Measures were adopted to address these inconsistencies but with limited success. Additionally, the bid evaluation criterion of the highest NPV of royalty payment was simple but insufficient. The lack of a methodology to assess the royalty pay-out to the licensor and the problems arising from the interaction of the royalty with the tariff level created a number of issues in the subsequent operations phase.
D. Housing Launched in June 2015, Housing for All by 2022 (HFA) aims at providing a home for all Indian families by 2022, by promoting affordable housing for the weaker sections through credit- linked subsidy and providing affordable housing through public and private stakeholder collaborations. It also seeks to provide subsidy for beneficiary-led individual house construction or betterment. By 2050, the urban population is set to reach more than 814 million, an increase of about 400 million from the current level. Hence, the government aims at constructing 20 million houses in the next 6 years by 2022 to counter the shortage. The plan shall be implemented in 3 phases – Phase I (April 2015 to March 2017) to cover 100 cities, Phase II (April 2017 to March 2019) to cover additional 200 cities and Phase III (April 2019 to March 2022) to cover the remaining cities85.
E. Food Processing Food processing sector in India ranks fifth globally in terms of exports, production and consumption at USD 13.2 billion in FY 2012-13, accounting for 9.8% of the GDP86. The government allows 100% FDI through the automatic approval route for most food products. It plans to set up 42 mega food parks87 through PPP model with an investment of USD 1.5 billion.
F. Smart Cities Mission The Smart Cities initiative will help create cities which optimally tap into digital and information technologies, urban planning best practices, public-private partnerships, and positive policy changes. The Smart Cities Mission is to be implemented as a centrally sponsored scheme with central government providing financial support to the extent of approximately USD 7.2 billion over 5 years, which would be matched up by respective states and Urban Local Bodies. In addition, it is expected that funding shall come from PPP, commercial/multinational bodies. The private sector would have a role to play — by taking up projects in PPP mode or work as contractors, consultants, etc.88
85 KPMG. (2016). India soars high. India. 86 KPMG. (2016). India soars high. India. 87 Details at http://articles.economictimes.indiatimes.com/2015-12-20/news/69186493_1_food-parks-harsimrat-kaur-badal-farmers 88 KPMG. (2016). India soars high. India.
PUBLIC PRIVATE PARTNERSHIP 64 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN G. Healthcare Infrastructure does not just improve standard of living and provide prospects for higher economic growth; sometimes it is a matter of life and death, like in the heath-care industry. India is using Public-Private Partnerships to expand its health-care industry, an example of which is PPP for the development and operation of a statewide network of advanced diagnostic facilities, including fully equipped and staffed radiology and pathology laboratories in the Indian state of Jharkhand89. There are other PPP projects in the healthcare sector such as establishment of a Cardiac Care Unit at Coronational Hospital in Dehradun, Green Field Super Speciality Hospital in Punjab among other projects90.
H. Education In Education sector, the primary purpose of a PPP is not merely to use the private party as a source of funds, but to seek a collaborative arrangement strengthening the very core of the sector – learning outcomes for students across all schools. PPP is still not a developed phenomenon in India in this sector, yet there have been example setting cases:
Table 14: Public Private Partnerships in Indian Education Sector
Focus of PPP Arrangement Example
Management Services Educomp entered into an agreement with the Government of Punjab in running 5 Senior Secondary schools in Punjab state under PPP Model Philanthropic initiatives India’s Bharti Foundation committed USD 50 million to the creation of strictly non-profit, private schools in the nation’s poor rural areas. Professional services Government of Gujarat puts tenders to private operators to assist in the delivery of a number of projects focusing exclusively on improving the quality of education and/or building capacity of teachers and educa- tional personnel. Support services IT services are being provided in several government schools in several States like Tamil Nadu, Karnataka and Andhra Pradesh by private part- ners who set up the entire hardware infrastructure along with facility management Source: Luthra, M., & Mahajan, S. (2013). Role of Public Private Partnership in School Education in India. Global Journal of Management and Business Studies , Volume 3, Number 7 (2013), pp. 801-810.
89 Sinha, P. (2016, January 7). How India is using public-private partnerships to expand healthcare. Retrieved August 05, 2016, from World Economic Forum: https://www.weforum.org/agenda/2016/01/how-india-is-using-public-private-partnerships-to-expand-healthcare/ 90 Details at https://infrastructureindia.gov.in/sector-wise
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VOLUME 17, DECEMBER 2016 65 I. Renewable Energy India has announced plans to have 100 GW solar power and 60 GW wind energy capacity operational by March 2022. The current combined wind and solar power capacity installed in India is less than 30 GW. Aggressive participation of private sector companies will be essential for achieving the seemingly impossible capacity addition targets set by the Indian government. A number of states announced their respective renewable energy capacity addition targets with special emphasis on solar power. Large-scale solar power project auctions have taken place attracting several international companies. Private sector companies have also played an important role in expanding India’s wind energy capacity. Suzlon Energy has already invested millions to set up a project in western India, while several other companies are expected to participate in the first-ever auction of offshore wind energy projects in India. India’s conducive wind energy market attracted international companies including Vestas and Gamesa91.
J. Digital India Government of India has launched a Digital India campaign with the notion that broadband highways are as important as national highways. Digitally empowering 1.2 billion people is not a game of one sector alone. PPPs have the opportunity to forge blueprints, policies, and practices, and tap the area of Open Data - key to the success of country digitization initiatives. As an example, the Chicago open data portal has nearly 600 data sets at this point ranging from information about the city’s annual budget, to information about the age of the physical assets in the city. These data sets are helping the government better prioritize their investments92.
K. Tourism Tourism can be boosted through Public Private Partnership. Goa in India has been a trend setter in this sector. Government of Goa has set up a special cell called Public Private Partnership cell in the Secretariat of Goa. Some prestigious projects undertaken by the PPP cell include Greenfield Mopa Airport, International Convention Centre, Oceanarium and Marinas93.
3.2.3.5 Challenges and Enablers in Implementing PPPs in India India is ranked 35th in the Logistics Performance Index 201694 and is one of the largest recipients of private investment in infrastructure. Yet the PPP ecosystem in India is mired by challenges at various stages of project development. Private companies are being seen walking out of big
91 Mittal, S. (2016, January 3). Charting India’s Renewable Energy Future Through Public-Private Partnership. 92 Malkani, D. (2015, August 2). How to Create a Digital India through Public Private Partnrships. Retrieved September 11, 2016, from CISCO: http://www.cisco.com/web/IN/about/leadership/digital_india_partnerships.html 93 Government of Goa. (2016). Retrieved September 11, 2016, from Public Private Partnership Cell: http://www.pppcell.goa.gov.in/index.html 94 Retrieved from http://lpi.worldbank.org/international/global
PUBLIC PRIVATE PARTNERSHIP 66 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN projects and some others have been demanding renegotiation or are under arbitration. Some of the major factors95 affecting these partnerships are: . Stakeholder Management: The key issue that must be addressed is an approach to satisfy the conflicting interests of multiple stakeholders (governments – both at national and state levels, private players, users, financial institutions, etc.). . Project Structuring: Concession authorities in India do not give due importance to project development activities, such as detailed feasibility study, risk allocation and concession agreements. Risk allocation between the sponsoring agency and the developer is not appropriate, which makes it difficult to attract developers for bidding. . Lack of Information: There is no comprehensive database of the projects to be awarded under PPP. An online database, comprising feasibility reports, policy documents, concession agreements, status of different clearances and land acquisitions can assist bidders looking towards Indian market. . Land Acquisition: Land acquisition is a major roadblock in development of infrastructure projects under PPP. Several projects have been stalled or delayed due to land acquisition issues, primarily due to resistance from local communities. . Environmental Clearances: Several highways and ports projects have been delayed in recent years due to lack of environmental and forest clearances. While the concerned Ministry states that the delays are primarily due to non-compliance with the environmental procedures and circulars issued, private developers feel that terms of compliance are complex and time consuming. Delays in conducting environment appraisal meetings and in constituting State- level Expert Appraisal Committees (SEACs) slow down the project approval process. . Financing Constraints: PPP projects are capital-intensive in nature and have a long gestation period. The private sector depends on commercial banks and equity markets to raise financing for PPP projects. With commercial banks reaching sectoral exposure limits, and large Indian infrastructure companies being highly leveraged, funding the PPP projects is becoming difficult. Equity markets are also not favourable for financing projects because of uncertainties in the global economy and due to long regulatory requirements that limit exit options. Of utmost need are balanced risk-sharing, robust dispute re-dressal mechanisms, and adequate exit norms, while balancing: . Stakeholders’ Roles – responsibilities, competencies and commitment of the public sector, private sector, financiers, consultants, end-users, community and civil society . Interaction – financing, revenue generation and risk-sharing among stakeholders . Project Impact – social inclusion and environmental sustainability. The Central Government has already tasked the Kelkar Committee96 to review the policy in order to revitalize infrastructure development, to analyze the risks involved for PPPs in
95 Ernst&Young; FICCI. (2013). Public Private Partnership: The next continuum. India. 96 Committee on Revisiting and Revitalizing Public Private Partnership Model of Infrastructure under the Department of Economic Affairs, Ministry of Finance, Government of India
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VOLUME 17, DECEMBER 2016 67 different sectors, to suggest an optimal risk-sharing mechanism between private investors and the government, and to suggest steps to improve capacity building in the government to effectively implement projects. The Kelkar Committee report has recommended the creation of multi-disciplinary expert institutions to address the problem of stalled PPP projects and legacy issues plaguing the projects. The report97 says that an Infrastructure PPP Project Review Committee (IPRC) be constituted comprising at least one expert in finance and economics, law, and one or more sectoral experts, preferably engineers with a minimum of 15 years of experience in the industry in question. It also recommends the creation of an Infrastructure PPP Project Adjudication Tribunal (IPAT) which is to be chaired by a former Supreme Court Judge or former High Court Chief Justice, with at least one technical and financial member98.
3.2.3.6 Government Initiatives Significant growth in the number of PPPs in the past 15 years has made India one of the leading PPP markets in the world. As a result, a PPP eco-system has developed, and currently it comprises institutions, developers, financiers, equity providers, policies and procedures. Government of India has been taking continued policy and institutional initiatives99 to further promote its PPP market:
. Setting up of PPP Appraisal Committee to streamline appraisal and approval of projects . Preparation of PPP Toolkit to improve PPP decision making process . Establishment of transparent and competitive bidding processes through model bidding documents . Extending financing support through development funds, VGF, user charge reforms, etc. . National PPP policy (2011) and Draft PPP Rules (2012)
In the light of growing PPP trends and policy/institutional intervention, the Government of India had felt the need to have a broad policy framework in place. The Ministry of Finance drafted a National PPP policy for soliciting suggestions in 2011. Subsequently, it came out with a comprehensive set of draft PPP rules in 2012. The draft policy proposes to focus on assisting Central and State Government agencies and private investors by100:
. Undertaking PPP projects through streamlined processes and principles . Ensuring the adoption of value-for-money approach through optimization of risk-return allocation in project structuring
97 Department of Economic Affairs, Ministry of Finance. (2015). Report of the Committee on Revisiting and Revitalizing Public Private Partner- ship Model of Infrastructure. 98 Raghavan, T. S. (2015, December 29). Kelkar chalks out rules for PPP revival. The Hindu. 99 Ernst&Young; FICCI. (2013). Public Private Partnership: The next continuum. India. 100 Ibid.
PUBLIC PRIVATE PARTNERSHIP 68 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN . Attaining adequate public oversight and monitoring of PPP projects . Developing governance structures to facilitate competitiveness, fairness and transparency
The Public Private Partnership Cell101 is responsible for matters concerning Public Private Partnerships, including policy, schemes, programs and capacity building and all other matters relating to mainstreaming PPPs:
. Matters and proposals relating to clearance by Public Private Partnership Appraisal Committee (PPPAC) . Matters and proposals relating to the Scheme for Financial Support to Public Private Partnerships in Infrastructure - Viability Gap Funding (VGF) Scheme . Matters and proposals relating to the Scheme for India Infrastructure Project Development Fund . Policy matters related to PPPs (including Model Concession Agreement) . Developing multi-pronged and innovative interventions and support mechanisms for facilitating PPPs in the country, including Technical Assistance programs from bilateral and multilateral agencies on mainstreaming PPPs and support to State and local governments . Managing training programs, strategies, exposures for capacity building for PPPs . Subject of advocacy for greater acceptability towards PPPs Institution building for mainstreaming PPPs . Matters relating to management of PPP related information, including www.pppinindia. com and www.InfrastructureIndia.gov.in . The Toolkit for the use by PPP practitioners across India in both the public and private sectors, http://toolkit.pppinindia.com . Other policy/Parliament related matters concerning PPPs.
For the private sector to push infrastructure growth in the Twelfth Five Year Plan (FYP) 2012–2017, the Government of India realized the importance of accelerating infrastructure development through increased private sector participation in order to boost the country’s slowing economy. The Planning Commission projected that investment in infrastructure will almost double to reach USD 1025 billion102 during the Twelfth FYP (2012–2017), as compared to the Eleventh FYP (2007–2012). Out of this total investment, 48%103 is expected to come from the private sector. Huge efforts have been made to create the right enabling environment for PPPs to unfold in India. These relate to enacting new legislation104 - for example, the Electricity Act105, 2003; the amended
101 Ministry of Finance, Government of India. (2016). Public Private Partnerships in India. Retrieved 2016, from http://www.pppinindia.com/ overview.php 102 PWC. (2013). India: A Snapshot. 103 Ernst&Young; FICCI. (2013). Public Private Partnership: The next continuum. India. 104 Chatterjee, V. (2012, May 14). PPP in India: The story so far. Business Standard. 105 Complete delicensing of power generation and distribution (in rural areas) along with other reforms.
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VOLUME 17, DECEMBER 2016 69 National Highways Authority of India Act106, 1995; the Special Economic Zone Act107, 2005; and the Land Acquisition Bill. As also the creation of new institutions like regulatory authorities in telecom, power and airports, implementing authorities like the National Highways Authority of India (NHAI), and financial institutions like the Infrastructure Development Finance Company, the India Infrastructure Finance Company and so on. A slew of model concession agreements across sectors created the template for private participation. Innovative financial interventions like viability gap funding, annuity models and stimulation of debt for infrastructure have also added fiscal punch. Individual states have built capacity to promote PPPs and some sector specific initiatives are in place for transport infrastructure.
Table 15: Sector Specific Enablers in the Transport Sector in India
Roads Ports Railways Airports
. 100% FDI allowed . Draft National Maritime . Railways have . 100% FDI permitted Policy developed with the allowed private for existing airports . Capital Grant of 40% of capital cost aim of for strengthening entry into container with automatic by NHAI to enhance project viability. the sector through rail transport approval up to 74% NHAI also permitted to participate synergies of initiatives services with and FIPB approval into equity of BOT projects at the centre and state licenses issued to beyond 74%. . Institution of Central Road Fund for level and encouraging 14 private parties investment flows and commencing . 100% FDI under assured funding of road development automatic route projects the next round of . Central and State issuing licenses permissible for . Provision of encumbrance free site for Governments have come Greenfield airports. . work by Government out with policies for private Announced a participation in Major and revamped Wagon . Bill for creation of . BOT guidelines for private sector Minor ports respectively Investment Airport Economic participation put in place Scheme for private Regulatory Authority . A comprehensive Model participation in (AERA) currently . Toll / shadow toll / annuity based Concession Agreement rolling stock under consideration concessions to private participants (MCA) has been developed for building and operating . Announced . New model concession agreement major port terminals on a intent to pursue (MCA) finalized. The new agreement BOT basis. The framework PPP framework includes design, build, finance, operate of MCA addresses the for expansion of and transport activities instead of issues important for infrastructure and build, operate and transfer. This limited recourse financing services implies that government, instead of of infrastructure projects owning the asset after the concession and also elaborates on the period, would continue to buy ‘road basis for commercializing services’ from the concessionaire ports in a planned and . Partial traffic risk mitigation phased manner. introduced . Concession mechanisms . Concession period linked to 6-laning have also been of projects developed by some State Governments (Gujarat, . Toll rates indexed to 40% of WPI Andhra Pradesh and Orissa) . Sector has been declared an industry to allow commercial borrowing Source: KPMG. (2006). Public Private Participation in Indian Infrastructure: Poised for Growth.
106 Amendment allowed Central government to enter into an agreement with any person in relation to the development and maintenance of the whole or any part of a national highway. 107 An Act to provide for the establishment, development and management of the Special Economic Zones for the promotion of exports and for matters connected therewith or incidental thereto.
PUBLIC PRIVATE PARTNERSHIP 70 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Recently, legal and regulatory changes have been made to enable PPPs in the infrastructure sector, across power, transport, and urban infrastructure. For example, the Electricity Act allowed for private sector participation in the distribution of electricity in specified areas of the distribution licensees under the role of a franchisee. The recognition of the franchisee role is a significant step towards fostering PPP in the distribution of electricity. In some cases, the impact of private sector involvement in terms of end-user benefits has been felt almost immediately. A case in point is the initial Build-Operate-Transfer (BOT) experience108 at Jawaharlal Nehru Port, where the Minimum Guaranteed Traffic requirement at the end of 15 years, identified as part of the concession agreement, was met in just 2 years. The experiment is being replicated across other major ports as well.
In addition to these, some of the financial initiatives109 include: . Bank loans to earning-based PPP infrastructure projects under concession agreements are to be treated as secured advances. This is expected to boost infrastructure financing, particularly for BOT roads projects and power sector projects. . ECB norms have been relaxed to help infrastructure companies raise more funds from overseas markets . Infrastructure companies are allowed to raise bridge finance from overseas market under the automatic route. Earlier, the companies were required to seek permission from the RBI in order to raise bridge finance. . Infrastructure companies are allowed to raise external commercial borrowings (ECB) for a maximum period of 5 years for importing capital goods. Earlier, the companies could raise ECBs for a period ranging from one year to three years only. . ECB limit has been increased for NBFC-IFCs (non-banking finance companies classified as infrastructure finance companies) under the automatic route from 50% to 75% of their owned funds, and hedging requirement for currency risk has been reduced from 100% of their exposure to 75%.
Besides, India is witnessing increasing transparency of the bidding-out process. Even as India still has a long way to go on the Transparency International list, there has been a sharp fall in crony capitalism in the award of PPP projects. Recent times have seen practically no complaints from the slew of NHAI projects bid out. Power bids have been ferociously fought. And airport bids were examples in ultimate transparency. E-auctions are adding to this credibility. Even as a lot of governance issues still remain in execution and implementation, PPP market in India seems to be on the right track.
108 KPMG. (2006). Public Private Participation in Indian Infrastructure: Poised for Growth. 109 Ernst&Young; FICCI. (2013). Public Private Partnership: The next continuum. India.
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VOLUME 17, DECEMBER 2016 71 3.2.4 Case of Indonesia
The economy of Indonesia was positioned 16th in the world in 2016110 and is expected to stay positive. Indonesia’s GDP grew at 5.02% in 2016 and is expected to keep on improving111 assuming household consumption and investment remain strong. Additionally, export conditions are also predicted to develop. This development, in any case, ought to be underpinned by a more grounded assessment of the worldwide economy and world trade volume. According to the Global Competitiveness Report 2016-2017, Indonesia is ranked 41112. Indonesia lingers behind other states in ASEAN and even the general performance of Indonesia stays uneven. The infrastructure advancement in Indonesia is still generally low. Thus, if one considers that infrastructure improvement has a large multiplier effect on the economy, one may claim that the resulting effect of infrastructure investment on the economy is greater and in case of lack of infrastructure investment, it establishes bottlenecks and high cost of transportation and logistics, which diminishes sustainable growth rate. The proportion of Indonesian logistics expenses to GDP is 27%. In the Logistics Performance Index 2016, Indonesia was positioned 63rd of 160 states113. To date, the aggregate expenditure for infrastructure in the state spending plan added up to 2.6% of GDP. Thus, infrastructure investment is important to maintain development and enhance competitiveness. Infrastructure improvement is crucial to enhance Indonesia’s export performance, uphold economic growth, and lessen the poverty. Therefore, the Government of Indonesia understands the significance of private participation in quickening infrastructure improvement in Indonesia particularly considering constraint of government in subsidizing the infrastructure needs. In view of estimation of infrastructure financing needs in 2015-2019, the government is just ready to fulfil 30% of aggregate infrastructure funding needs114. Private participation is required to fill the funding gap as well as to share knowledge and experience in the advancement, operation, and management of qualified infrastructure services. Hence, the government seeks to increase participation of private enterprises in development and financing of infrastructure. The government set a few fundamental targets identified with enhancing adequacy and productivity in the financing of infrastructure, including infrastructure management effectiveness, enhanced quality of infrastructure services equipped by the government or enterprises, the acceleration of decision-making process and human resources capacity building. The institution for PPP planning and implementation in Indonesia is the Ministry of National Development Planning (BAPPENAS). The Ministry of Finance makes suggestions on financial support for projects. KPPLP (Committee for Acceleration of Priority Infrastructure Delivery)
110 Retrieved from http://statisticstimes.com/economy/projected-world-gdp-ranking.php 111 Retrieved from http://www.tradingeconomics.com/forecast/gdp-annual-growth-rate 112 Schwab, K. (2016-2017). The Global Competitiveness Report 2016-2017. World Economic Forum. 113 Retrieved from http://lpi.worldbank.org/international/global 114 Ministry of National Development Planning. (2015). Public Private Partnerships Infrastructure Projects Plan in Indonesia. Jakarta.
PUBLIC PRIVATE PARTNERSHIP 72 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN is the Project Management Office for priority projects. It has a crucial role to play in the priority projects’ advancement and implementation. Moreover, KPPLP has a focal role in organizing relevant partners in the implementation of priority projects and for disincentives plans to quicken the project realization. Further, the Government of Indonesia created two fiscal instruments. First one gives government guarantees or credit improvements only to PPP projects that are financially feasible. Second instrument works as facilitator and catalyst for infrastructure advancement in Indonesia, including the promotion of public private partnership plan. Investing in most cases confronts with risks. As of late, Indonesia has demonstrated to the world that investing in Indonesia can be exceptionally beneficial. In any case, investing in this country additionally involves a larger number of risks than investing in a developed country since Indonesia contains various country-specific dynamics and characteristics that can disappoint investments and damage the investment. For instance, while looking through the corruption in Indonesia, one may mention that Indonesia has never been impressive in the Annual Corruption Perceptions115. This record shows the level of political corruption in a given nation. At present, Indonesia positions 118 out of 176 countries. However, its performance has demonstrated an unfaltering change since the start of Susilo Bambang Yudhoyono’s administration in 2004. In addition, besides the issue of political corruption, there are other factors that adversely impact the adequacy and performance of governance in Indonesia. Clearly overseeing such an enormous archipelago, containing just about 240 million people with various cultural and religious foundations, does not come without problems. For example, one of the principle deterrents to infrastructure improvement in Indonesia has been the issue of land acquisition. The basic reason behind this circumstance is lawful obstructions to concede to fair compensation for owning land issues in 2010 however its outcomes are yet to be seen. Moreover, earthquakes, tsunamis, volcano eruptions and floods are all phenomena that occasionally make news headlines in Indonesia and take both human lives and harm the infrastructure. It is worth to study several PPP projects in Indonesia. Umbulan Water Supply is one such type of project. The Umbulan Water Supply project focuses on the flow of Umbulan Water, which is one of the world’s finest natural drinking water, through roughly 97 km of transmission line. It is required to deliver 4,000 litres water to about 1.3 million people inside 5 urban communities in East Java through PPP scheme. Started since 1980s, the project has been set to address the need for clean water circulation and enhanced sanitation system in the zone, and in addition productive usage of high quality water resource. Private sector involvement is relied upon to play significant role in giving specialized ability, innovation, sustainable operation, and also capital investment. Umbulan Water Project will be facilitated with a BOT mode of PPPs with 25 years of concession period. Project Company is predicted to build, operate, and keep up the required upstream infrastructures. The concessionaire is then predicted to convey bulk water to provincial-owned water enterprise where the water would then be dispersed to 5
115 Retrieved from https://www.transparency.org/research/cpi/cpi_early/0/
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VOLUME 17, DECEMBER 2016 73 regions. Income stream for the project company will be sourced from provincial-owned water enterprise bulk water payment. Additionally, provincial-owned water enterprise will get payment from five regional state-owned water enterprises, acting as Government Contracting Agency that is East Java Provincial Government that has full obligation to the project116.
Table 16: Risk Allocation Matrix (Indonesia)
Project Risks Contracting Agency Project Company
Damage to Recharge & Catchment Area X Bulk Water Quantity & Quality X Permits Issuance X X Land Acquisition X Financial Close X X Technical Design X Inappropriate Design and Delay in Construction X Testing, Commissioning, and Cost Overrun X Operational &Maintenance (O&M) X Demand Risk X Financing Risk X Regulatory Change X Source: Asia Pacific Economic Cooperation. (2014). Infrastructure Public-Private Partnership Case Studies of APEC Member Economies . 21st Finance Ministers’ Meeting . Beijing. Another project that is worth to study would be Central Java IPP. Interest for electricity in Indonesia has increased rapidly in the most recent decade. Confronting more prominent consumption by industry, expanding residential demand, and a push to bring electricity to rural regions, the government intends to extend power generation and transmission limit. In 2005, a proposed new coal-fired power plant in Central Java was assigned as a top priority and moved to be implemented in new directions involving private investment. A consortium comprising of J-Power, Itochu Corporation and Adaro Power won the bid for a 25-year agreement to build, own, operate and transfer (BOOT) the new facility, which will utilize ultra-super critical technology. A 2,000 MW power plant and transmission facilities, which are predicted to develop access to electricity to 7.5 million people and mobilize USD 3.5 billion in investment, are included in this project. The project was the first to be actualized under the economy’s new PPP and guarantee regulations, where both IIGF and Ministry of Finance were involved in guaranteeing, laying the basis for future private infrastructure projects. The contract for the plant was signed in October 2011. The plant is required to begin operations soon117.
116 Retrieved from http://www.iigf.co.id/en/project/recent-projects/all/all/detail/7 117 Retrieved from http://www.jpower.co.jp/english/news_release/pdf/news160603.pdf
PUBLIC PRIVATE PARTNERSHIP 74 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Government of Indonesia through Ministry of Finance presented fiscal impetuses, for example, Viability Gap Fund (VGF), which expects to enhance financial feasibility while keeping end user tariff low. This motivator is accessible through a project company’s request and acts as the main offering parameter. Another financial instrument is Indonesia Infrastructure Guarantee Fund (IIGF) with an aim to mitigate political risk. Other support includes non-financial fiscal contributions such as land acquisition, new land law issuance, land fund etc. In addition to power sector, telecommunications, water sector, toll roads, ports and social infrastructure such as hospitals and sports facility are currently being prepared by the Government of Indonesia to be procured under PPP regime118. However, one should always remember that PPP process requires extra efforts in balancing the risks and strong commitment to address social issues, environment and people management, to be able to succeed.
3.2.5 Case of Japan There are several industries for Public Private Partnerships in Japan, which are mainly roads and railways, natural disaster management, national airports (mainly through privatisation), water and sewage. Even though the government is mainly funding water and sewage sector itself, it attracts private sector also to filtration of water and its facilitation (providing materials, filtering equipment, other furnishing), sewage recycling and managing119. The government feels that the private sector is more flexible in terms of providing goods and services; therefore it is willing to implement PPPs in Japan. Besides, in some projects due to budget constraint, government attempts involving the private sector not only to provide shared or full financing of some fields and industries but also to invest technical input into the required processes. Another issue is Japan’s natural disasters and seismic zones. The cost to finance the post disaster repair and rehabilitation is dramatically huge. Thus, involving public- private partnership can come to rescue in this case as well. Japan is a country with small territory and a big population, approximately 127 million120, taking 10th place in the world by population. In the Logistics Performance Index 2016, Japan was positioned 12th of 160 states121. Railway transport is one of the major sources of transportation for Japanese population, especially for mass and high speed travelling between cities and for commuter transport in metropolitan areas. It is also used, though relatively less, for freight transport (around 0.84%122 of goods movement). Private railways are working more efficiently and punctually. Involving the private sector in the railway transport has made a significant difference in its operations. The Japan Railways Group (JR Group), is a group of successors of the government-owned
118 Retrieved from https://www.unece.org/fileadmin/DAM/ceci/documents/2016/PPP/Forum_PPP-SDGs/Presentations/Case_16_Indonesia__ Energy_Sector__Sinthya_Roesly.pdf 119 Retrieved from http://www.iflr1000.com/NewsAndAnalysis/Recent-developments-in-public-private-partnerships-PPP-in-Japan/Index/630 120 World Bank Data, http://data.worldbank.org/ 121 Retrieved from http://lpi.worldbank.org/international/global 122 Retrieved from http://www.mlit.go.jp/en/index.html
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VOLUME 17, DECEMBER 2016 75 Japanese National Railways (JNR). The JR Group lies at the heart of Japan’s railway network, operating almost all intercity rail services and a large proportion of commuter rail services. Freight service belongs to Japan Freight Railway Company or JR Freight which operates all freight network previously owned by JNR. Japan also has several competing private railway companies. In post-war Japan, the government was encouraging private corporations to develop their own systems of mass transit in order to recreate town’s transportation systems rapidly. Private railways were encouraged to compete with each other and with national railway lines. Government’s role was limited to regulation of fares. In exchange for developing rail lines, private corporations were given business opportunities to diversify their operations and develop the real estate surrounding their railway networks. There are more than 100123 private companies providing railway transportation in Japan, such as Six Japan Railway Group (JR) regional companies (state owned until 1987), which provide passenger services to most parts of Hokkaido, Honshu, Shikoku and Kyushu, the nationwide JR freight company, 16 major regional companies which provide railway services as part of their corporate operations. There are also dozens of smaller local private railways. There are 27,268 km of rail crisscrossing the country. JR (a group of companies formed after privatization of JNR) controlled 20,135 km of these lines as of March 31, 1996, with the remaining 7,133 km in the hands of private enterprise local railway companies. Japan’s railways carried 7.289 billion passengers (260 billion passenger-km) in the year 2013-14. In comparison, Germany has over 40,000 km of railways, but carries only 2.2 billion passengers per year. Because of the massive use of its railway system, Japan is home to 46 of the world’s 50 busiest stations. Japan pioneered the high-speed shinkansen124 or “bullet train”, which now links Japan’s largest cities at speeds of up to 320 km/h (200 mph) or even higher. However, other trains running on the conventional line or “zairaisen” remain relatively slow, operating at fastest 160 km/h and mostly under 130 km/h. The shinkansen (in translation from Japanese - new trunk line) is a network of high-speed railway lines in Japan operated by five Japan Railways Group companies. Starting with the Tokaido Shinkasen (515.4 km) in 1964, the network has expanded, currently consisting of 2,764.6 km of lines with maximum speeds of 240–320 km/h, 283.5 km of Mini-shinkansen lines with maximum speed of 130 km/h, and 10.3 km of spur lines with shinkansen services. The network presently links most major cities on the islands of Honshu and Kyushu, and Hakodate on northern island of Hokkaido, with an extension to Sapporo under construction and scheduled to commence in March 2031. The year 2014 was marked as the beginning of a new era for public-private partnerships in Japan125. A year before 2014, there were significant movements to improve the legal and regulatory framework of the Japanese PPP and the national government and the local
123 Retrieved from http://www.mlit.go.jp/en/index.html 124 The Shinkansen is a network of high-speed railway lines in Japan operated by five Japan Railways Group companies 125 Retrieved from http://www.iflr1000.com/NewsAndAnalysis/Recent-developments-in-public-private-partnerships-PPP-in-Japan/Index/630
PUBLIC PRIVATE PARTNERSHIP 76 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN governments started studying the possibility of adopting the concession type of PPP to privatize their infrastructure. The Council for the Promotion of Private Finance Initiatives of the Cabinet Office established the ‘Action Plan for Fundamental Reforms of PPPs/PFIs’ in June 2013, aimed to intensively promote PPP/PFI projects to achieve a more efficient operation or renovation of infrastructure, enhance the level of services and reduce government fiscal burdens. The action plan presents specific project types and ambitious size targets, totalling JPY 10-12 trillion (USD 93-112 billion) over the ten years from 2013 to 2022: . Concessions: JPY 2-3 trillion (USD 18.9 billion). Relevant authorities will actively promote PFI Act Concessions in airport, water and sewage projects . Public facilities with income-producing facilities: JPY 3-4 trillion (USD 37.7 billion). PFI projects for the construction, renovation, maintenance or operation of public facilities, which together with income-producing facilities attached to them, may generate sufficient revenues to cover the costs associated with those projects. Relevant authorities studied the use of PPPs for the maintenance and renewal of public facilities such as expressways (especially the Shutoko Metropolitan Expressway, which required major repairs) . PPP projects based on private proposals: JPY 2 trillion (USD 28.3 billion). PPP projects that adopt proposals from the private sector, for example, for the effective utilization of unused or underused public real estate. . Other PPP project types: JPY 3 trillion (USD 18.9 billion126)
Chart 15: Action plan for fundamental reforms of PPPs/PFIs, Japan
Source: IFLR1000. Recent developments in public private partnership in Japan
126 Retrieved from http://www.iflr1000.com/NewsAndAnalysis/Recent-developments-in-public-private-partnerships-PPP-in-Japan/Index/630
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VOLUME 17, DECEMBER 2016 77 It is advised that other traditional types of P3 projects with measures to reduce government fiscal burden must be pursued, such as management fees based on income from the projects (i.e., as opposed to availability-based fee arrangement) or combining the renovation and technical services from multiple facilities. The Private Finance Initiative Promotion Corporation of Japan (PFIPCJ) was incorporated in October 2013 under the 2013 Revised PFI Act. The PFIPCJ is co-sponsored by the national government and private entities such as banks and insurance companies. The PFIPCJ is supposed to financially support PFI projects mainly by mezzanine financing, which will primarily take the form of mezzanine debt or preferred shares in project companies. It should be noted that under the revised law, the PFIPCJ should focus on the user-pay type of PFI projects127. The PFIPCJ is expected to promote equity investments in PFI projects and nurture the infrastructure investment market by using national funds as seed money. User-pay PFI projects are expected to reduce the national deficit and create business opportunities for the private sector. The table below shows the history of PFI projects from 1999 to 2008:
Table 17: History of Private Finance Investment (PFI) Projects
July/1999 Enactment of the “PFI Law” September/1999 Creation of “The Committee for Promotion of PFI” in the Prime Minister’s Office March/2000 Release of “the Basic Policy” January/2001 Release of “Process Guideline” and “Risk Sharing Guideline” July/2001 Release of “VFM Guideline” July/2001 Revision of “PFI Law” June/2003 Release of “Contract Guideline” and “Monitoring Guideline” June/2004 Release of “Interim Report of the Committee for Promotion of PFI” August/2005 Revision of “PFI Law” November/2006 Arrangement Paper of “Directors from PFI Liaison Conference of Relevant Ministers and Agencies” December/2006 Annual Report 2005 (the 1st Annual Report) was issued June/2007 Revision of “VFM Guideline” and “Process Guideline” November/2007 Release of “Report of the Committee for Promotion of PFI” July/2008 Revision of “VFM Guideline”
Before the PFIPCJ was incorporated, the Cabinet Office revised the following PFI guidelines in June 2013: . Guidelines for Concession Right and Operation of Public Facilities (new) (the Concession Guidelines) . Guidelines for the PFI Project Implementation Process (revised) (the PFI Procurement Process Guidelines)
127 Retrieved from http://www8.cao.go.jp/pfi/e/home.html
PUBLIC PRIVATE PARTNERSHIP 78 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN . Guidelines for Contracts – Matters to be Considered in PFI Project Contracts (revised) (the PFI Contract Guidelines) The issuance of the Concession Guidelines, the first detailed guidance on PFI Act Concessions, is a very significant development in the practice of Japanese PFI. Actually, the fact that these guidelines were not in place up to recently could partly explain why no PFI Act Concessions under the 2011 Revised PFI Act closed. Described below are some of the notable provisions of the Concession Guidelines: (a) Expansions, renovation and construction of the facilities - The Concession Guidelines provide the scope of the measures that a Concessionaire is permitted to take in respect of the subject public facilities during the concession period. According to the Concession Guidelines, generally speaking, a Concessionaire may make expansions or renovations that are necessary for the operation of the facilities, but the specific range of permissible expansions or renovations in a specific project must be determined by the relevant Public Authority. In contrast, the construction of new facilities and the complete removal and redevelopment of existing facilities, which are outside the scope of a Concession Right, will be conducted through traditional public works or conventional PFI projects (for example, build-operate- transfer (BOT) with availability payments). (b) Assignment and transfer of Concession Rights - The transfer of a Concession Right, including one following a foreclosure sale, requires the permission of the relevant Public Authority under the PFI Act. The Concession Guidelines suggest that if the transferee is not subject to any ground for disqualification and the transfer of the Concession Right is appropriate under the bid tender documents prepared by the Public Authority, then the Public Authority does not have any discretion and must permit the transfer. Any condition that a Public Authority may impose on the transfer of a Concession Right must be provided in the tender documents. It can be said that the Concession Guidelines have improved the predictability of granting permissions for the transfer of Concession Rights although the above requirement still suggests ambiguity. (c) Rescission of Concession Rights - A Public Authority may rescind a Concession Right if certain events occur with respect to the Concessionaire or if rescission is necessary to protect public interest. The Concession Guidelines suggest that Concessionaires who suffer losses as a result of the rescission of its Concession Right due to public interest will be compensated in accordance with the standards of compensation for business as stipulated in the Standards for Compensation for Land Acquired for Public Use. They further suggest that the Public Authority must refund the portion of the concession fee that corresponds to the remaining project term. As to Revised PFI Contract Guidelines: transfer of shares of Project Company, it is worth noting that in the past PFI projects in Japan, consortium members were required to be shareholders of the project company throughout the project term, and in many cases the transfer of shares of the project company without the approval of the Public Authority was prohibited in the basic agreement between the Public Authority and the consortium members as well as the PFI
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VOLUME 17, DECEMBER 2016 79 project agreements. However, the revised PFI Contract Guidelines clearly acknowledge that the need to restrict share transfers depends on various factors such as the content and phase of the project, and clarify that conditions to the transfer of shares held by a consortium member must be kept to the minimum extent necessary to appropriately implement the project, given the role of each such consortium member in the project. Japan has an experience in privatization of national airports also. The Act for the Operation of Government Controlled Airports by Private Sector Entities (the Airport Concession Act) enacted in 2013 enabled the government and local governments to privatize airports through a PFI Act Concession. Later, in November 2013, the Ministry of Land, Infrastructure, Transport and Tourism (MLITT) promulgated the Basic Policy on the Operation of Government Controlled Airports by Private Sector Entities (the Basic Policy on Airport Concessions), which provides the basic framework for concessions of national airports128. The central government intends to sell 30-50 year Concession Rights for national airports, which it owns and manages, subject to the consent of the local government of the region where the airport is located. With the strong support of the governor of Miyagi Prefecture, the government was preparing the privatization of Sendai Airport as the first case of a national airport concession. The move towards privatization is driven by increased demand for the efficient management of airports: the government needs to maintain airport facilities under severe fiscal conditions, and airlines face a severe competitive environment and are demanding more flexible airport services at lower costs. In addition, in many airports in Japan, the government owns basic aeronautical facilities, such as runways, aprons and aeronautical ground lights, and manages aeronautical operations such as negotiating new routes, number of flights and arrival and departure times with airlines, while private or third sector entities own and manage non- aeronautical facilities such as airport terminals and car parking facilities. That division is believed to hinder Japanese airports from taking strategic approaches, such as offering lower airport charges to airlines by generating income from non-aeronautical operations, to improve airport services and economics. According to the Basic Policy on Airport Concessions, a Concessionaire will manage both aeronautical and non-aeronautical operations by acquiring the ownership of airport terminals and car parking facilities from the existing owners as well as acquiring the Concession Right on basic aeronautical facilities from the government129. Water is another sector that Japan’s government has collaboration with private sector in. In principle, water supply services are provided by municipalities. The water supply section of a municipality is deemed as a Local Public Corporation, which has a separate account from the general account of the municipality. In general, Local Public Corporations for water supply services cover their expenses through water charges. Although many parts of the operation, such as the operation of filtration plants, the check-up of pipes, meter reading and water charge collection, have been separately outsourced to different private companies and some
128 Retrieved from http://www.iflr1000.com/NewsAndAnalysis/Recent-developments-in-public-private-partnerships-PPP-in-Japan/Index/630 129 Retrieved from http://www.iflr1000.com/NewsAndAnalysis/Recent-developments-in-public-private-partnerships-PPP-in-Japan/Index/630
PUBLIC PRIVATE PARTNERSHIP 80 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN PFI projects have been implemented for the construction of filtration plants, there has been no project involving the privatization of the whole local water supply system. The municipalities are facing a decline in water demands in parallel with the decline in population. In addition, the number of public personnel in charge of water supply operations is decreasing due to severe fiscal conditions that local governments are facing. At the same time, demand to renovate aging facilities is rapidly growing. Municipalities need to make their water supply business more efficient by combining their water supply services with those of neighbouring municipalities, and by privatizing through PPPs. These developments have led to some recent notable advances to utilize PPPs in the water sector. Starting April 2014, Kanagawa prefecture commenced outsourcing its entire water supply business in the Northern Hakone region to a private consortium led by JFE Engineering Corporation. This is the first case of a local government outsourcing all of its water supply business to a private entity. In the road sector, in principle, only certain limited entities such as local governments, local road public corporations founded by local governments, and certain highway companies are allowed to manage toll roads and collect tolls under the current laws. Highway companies were incorporated about 10 years ago under laws on highway privatization but they are still owned by the national government and local governments. Unlike airports, water and sewage, new special legislation is necessary to allow private entities to manage toll roads and collect tolls. However, despite such legislative hurdle, severe fiscal conditions are forcing some local governments to consider PPPs for road management and maintenance. For example, Aichi prefecture has been requesting the national government to set up a special reform zone under the Act on Special Zones for Structural Reform and allow the prefecture to use a PFI Act Concession to privatize its roads currently maintained by its local road public corporation. That act allows the government to set Special Reform Zones, which are excluded from the application of certain laws and regulations. As mentioned earlier, Japan promotes PPPs for disaster risk reduction and management. Electricity, gas and telecommunication companies as well as major transportation companies are private companies in Japan. Due to the nature of services and products they provide, they are regarded to be vital players in disaster risk reduction. They are called ‘designated public organs’ in the Disaster Countermeasures Basic Act and are given duties to prioritize emergency response. They are also called ‘Life Line’ companies in Japan and there are public expectations for them to be resistant against various natural disasters. Therefore, they have developed advanced engineering systems for disaster mitigation, emergency response and quick recovery. For example, the major Gas companies in Japan are the ones which have first fully utilized 3D GIS systems for gas pipeline management. Telecommunications companies have developed specialized emergency voice message systems to avoid over congestion of telephone lines130. Significant reforms in regulatory frameworks for PPPs in Japan, particularly in the use of concessions to operate infrastructure facilities, have been put in place in recent years. The government has
130 Retrieved from http://www.adrc.asia/
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VOLUME 17, DECEMBER 2016 81 shown a positive attitude towards PPPs with the hope of reducing its fiscal deficit and stimulating the economy. The introduction of the PFI Act Concession in various infrastructure projects such as airports, roads, and water and sewage systems had been widely discussed. Efforts to enhance investments in infrastructure such as the creation of the PFIPCJ are also being made. These recent trends demonstrate encouraging and exciting times for PPPs and PFIs in Japan.
3.2.6 Case of Korea Korea is the world’s 13th largest by GDP and the 7th largest exporter. It is the largest producer of numerous high tech items, for example, semiconductors, LCDs, and mobile phones. In the Logistics Performance Index 2016, Korea was positioned 24th of 160 states131. Growth has advanced through various stages. To begin with, in the 1960s, the top need was to meet the most critical foundation needs, especially in the transportation and energy sectors. Second, throughout the 1970s and 1980s, pre-emptive and adequate supply of infrastructure was accessible. Third, amidst the 1990s and afterwards, PPPs were generally received to supplement restricted government budgets for infrastructure investment. At the beginning of 1960s, Korea was distinguished with a poor agrarian economy because most of the industrial facilities of the colonial legacy were devastated by the Korean War. In 1962, the military government began the First Five Year Economic Development Plan (1962-67) based on adherence to mechanisms and economic standards, an outward oriented development strategy cultivating export industries and foreign capital induction to cover capital deficiencies. After the successful implementation of the First Five Year Economic Development Plan, in the 1970s, priority in 1980s was given to the expansion of manufacturing facilities. Additionally, in the wake of the oil shocks, energy security issue became the top priority. Throughout the 1980s, infrastructure investment lagged behind the pace of improvement. Consequently, distribution costs and congestion costs expanded enormously. Therefore, the government put a higher priority on expenditure for infrastructure investment and started using private capital through PPP. Korea introduced Public Private Partnership programs with the enactment of the Act on Promotion of Private Capital into Infrastructure Investment in 1994. There are significant elements of PPP that the Korean government expected. First was to be a successful alternative to handle the financial constraints that the government faces. Second was determined to give better and more proficient public services by taking advantage of the private sector’s creativity. Another major function was to establish stable and long term investment opportunities for private investors by equipping safe and reliable places to invest. Initially, Public Private Partnership program was not a success because substantial risks were not mitigated properly. The Private Investment Act of 1999 replaced the Private Capital Inducement Promotion Act of 1994 in order to develop the private investment environment. The main goal of the new
131 Retrieved from http://lpi.worldbank.org/international/global
PUBLIC PRIVATE PARTNERSHIP 82 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN act was to encourage more private participation in all infrastructure sectors such as power, gas, transportation, airports, ports, telecommunications, water and sewage facilities. The new incentives for foreign investors were: . exemption of 10% value-added tax upon completion of target facilities; . a government guarantee of up to 90% of operating revenue; . a bonus for early completion and permission for excess profit resulting from lower than expected construction costs; . compensation for losses due to exchange rates movements; . acceptance of diversified development modes (BOT, BTO, BLT, ROT); . increase of the profit level approved by the government from 10% to 18%. In Korea, the most sought after PPP implementation methods were Build Transfer Operate (BTO) and Build Transfer Lease (BTL). In the beginning, PPP projects were focused on transportation infrastructure using BTO. After the revision of the PPP Act in 2005, the PPP projects also utilized the BTL method to cover social infrastructure projects such as schools, healthcare facilities, culture and sports centers, and public rental housing. In BTO projects, the private partner realized a reasonable return on its investment by charging a user fee, while in BTL projects the private partner recovered its investment through payments made by the central or local government. After the 1990s, the infrastructure facilities in Korea have extended massively. Continued investment in transportation facilities has been made by the government in order to lessen logistics costs. In 2004, road stocks have been increased by 3.8 times, port capacities by 2.6 times and airport by 1.5 times when compared to those of 1990132.
Table 18. Expansion of Infrastructure Stock Level (Korea)
Expanded facilities 1990(A) 2004(B) (B)/(A) Roads of 4 or more lanes (km) 4,823 18,290 3.79 Two way railroads (km) 847 1,079 1.27 Highways (km) 1,559 2,923 1.87 Port capabilities (million ton/year) 190 501 2.64 Airport capabilities (thousand times/year) 1,331 2,012 1.51 Housing (thousand units) 7,357 12,988 1.77 Source: Kim, J.-H. (2005). Effective Implementation of BTL Projects in Korea . Korea Development Institute. In addition, private investment has been consistently expanding since the introduction of the PPP Act and has played a key role in providing infrastructure. The proportion of private
132 Kim, J.-H. (2005). Effective Implementation of BTL Projects in Korea . Korea Development Institute.
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VOLUME 17, DECEMBER 2016 83 investment to public investment in infrastructure increased from 3.9% in 1998 to 15.4% in 2009. By the end of 2009, 461 PPP contracts had been awarded, of which 106 BTO and 145 BTL projects were finished to provide services to the public133. BTO projects are focused on transportation services including roads, railways, and seaports. Road projects represent more than half of all investment, and environmental facilities are on the top of the list for the highest number of projects.
Chart 16: BTO Projects, Korea
Source: Kwon, O. (2011). The Republic of Korea’s Infrastructure Development: Experiences and Some Lessons for Africa’s Developing Economies. Washington DC.
BTL projects, which first started in 2005, have been effectively followed particularly in building and reconstructing old educational facilities like elementary and middle schools, vocational colleges, and university dormitories. Moreover, BTL projects are making an awesome contribution to extending and enhancing sewage systems and military residences, as well as to building new railways. Chart 17: BTL Projects, Korea
Source: Kwon, O. (2011). The Republic of Korea’s Infrastructure Development: Experiences and Some Lessons for Africa’s Developing Economies. Washington DC.
133 Kwon, O. (2011). The Republic of Korea’s Infrastructure Development: Experiences and Some Lessons for Africa’s Developing Economies. Washington DC.
PUBLIC PRIVATE PARTNERSHIP 84 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN As an example, the case of Incheon International Airport Expressway can be demonstrated as a successful project of BTO. Incheon International Airport Expressway was the first BTO road project carried out under the 1994 PPP Act. It initially began as a government financed project but later on, it was transformed into a BTO project to facilitate the fiscal burden. Its early completion has played an important role in the successful operation of Incheon International Airport. And Incheon Bridge is a bridge with the world’s 5th longest primary range, and the first PPP project in Korea led by AMEC, a UK company. The private sector implemented the construction of 12.34 km area of the extension, while the government assumed responsibility of 9.04 km area. The bridge links the Second and Third Kyungin Expressways and Seohaean Expressway, accordingly decreasing the travel time to and from Incheon International Airport and south of Seoul by over 40 minutes.
The project details can be found below: . Total project cost: KRW 1,096 billion . Capital structure: Equity/Debt/Subsidies = 10%/41%/48% . Length: 12.3 km, 6 lanes (21.4 km including access road) . Competent authority: Ministry of Land, Transport, and Maritime Affairs . Construction period: 2005~2009 . Operation period: 30 years . Major shareholder: AMEC and 7 Korean construction companies As to BTL project, one can demonstrate the case of the Chungju Military Apartment Housing as a successful project. The Chungju Military Apartment Housing project was the first BTL project implemented in Korea. The modernization of military residential facilities had been delayed due to insufficient budget. However, it was performed at a quick pace with the introduction of the BTL method. A total of 200 families moved into 12 apartment buildings, with more than 95% of residents expressing satisfaction with the facilities. On the other hand, it needs to be mentioned that PPP projects are not always successful. For instance, the case of Geoga Grand Bridge is considered as a failed project. Geoga Grand Bridge is a bridge-tunnel that links the South Korean city of Busan to Geoje Island. The project cost was estimated to be USD 1.8 billion. The government has provided only one-fourth of the cost but the rest is financed by the consortium to be repaid by tolls during the life of the contract. The goal of the project was to ensure smooth handling of freight traffic between the shipbuilding industrial complex in the Southern coast and the industrial complexes surrounding Busan New Port, in order to stimulate regional and national economies. Specifically, the project was started to drive up the nation’s competitiveness by diminishing costs and time to handle industrial logistics and by building up an infrastructure covering a wide territory extending from the western part of Busan to the southern coastal area of Korea. Geoga Grand Bridge linking Geoje and Busan via bridges and an immersed tunnel was expected to carry tourist
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VOLUME 17, DECEMBER 2016 85 traffic to and from Geoje and to provide better local connections for freight from the Busan New Port and the nearby manufacturing plants. However, the project faced financial troubles as the actual traffic fell. The actual traffic on the bridge was only 70.2% of the projected traffic volume in 2011 and 64.8% in 2012. With the actual traffic volume missing the forecasts, the actual revenue also fell short134. Therefore, the case underwent failure in terms of inaccurate forecasts. At times, the government does not take into account rigorous economic feasibility study and value-for money analysis, leading to consequent failure of the project. In most cases the government considers PPP as an alternative source of funding for a project. However, in order to implement successful project, capacity to carry out the project should also be a precondition.
3.2.7 Case of Malaysia Malaysia135 witnessed speedy growth in Public Private Partnership projects which can be attributed to a few factors of the 1980s including government’s focus on expansion of private sector in country’s development projects. The evolution of PPP in Malaysia began with the Malaysia Incorporated program (Economic Planning Unit, 1981) and was followed by privatization program (Economic Planning Unit, 1985). Under the Economic Planning Unit, the government’s goal of active participation of private sector in government projects was accomplished when Private Finance Initiative program was officially announced (Economic Planning Unit, 2006). Not so long ago, in the 10th plan of Malaysia, continuous efforts of the Malaysian government in terms of attracting and involving the private sector were revealed with the announcement of more development projects to be implemented using PPP scheme (Economic Planning Unit, 2010136). As in many countries, Malaysia was in the need of Public Private Partnership for obvious reasons like budget restraints, non flexible services, paucity in financing among others. There are a number of reasons and challenges which served as a push for attraction and adoption of PPP in Malaysia: . Solve the problem of public sector budget restraint . Provide an integrated solution (for public infrastructure/service) . Reduce public money tied up in capital investment . Facilitate creative and innovative approaches . Reduce the total project cost
134 Asia Pacific Economic Cooperation. (2014). Infrastructure Public-Private Partnership Case Studies of APEC Member Economies 21st. Finance Ministers’ Meeting . Beijing. 135 In the Logistics Performance Index 2016, Malaysia was positioned 32nd of 160 states 136 Ismail, S. (2013). Factors Attracting the Use of Public Private Partnership in Malaysia.Journal of Construction in Developing Countries, 18(1), 95–108.
PUBLIC PRIVATE PARTNERSHIP 86 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN . Save time in delivering the project . Transfer risk to the private sector . Reduce local sector administration costs . Benefit local economic development . Improve buildability . Improve maintainability . Non-recourse or limited recourse to public funding . Accelerate project development Specific surveys were done in determining the factors the most important for attracting PPPs. According to one of the surveys137, “Solve the problem of public sector restraint” is the most important attractive factor as perceived by the overall respondents. PPP is widely adopted by the governments of many countries because it is claimed that having the private sector taking on a significant responsibility to construct, finance, operate and maintain public infrastructure could reduce government allocation for development projects. This is evident in studies by Li et al.138 and Cheung et al.139 who discovered this factor attracting PPP adoption in the UK and Hong Kong, respectively. In the case of Malaysia, the global economic fall in 1980s led the government to decrease its role and input in economy by involving and making the private sector as the important mechanism of Malaysia’s economic policy. As a result of the involvement of private sector in the economy, government enjoyed massive savings in its capital expenditure. The second more attractive factor for PPP involvement in Malaysia perceived by respondents was “Provide an integrated infrastructure/service”. PPP becomes an integrated solution mechanism because it involves a private consortium, which is set up to run the PPP project and consists of several private companies – experts in different fields, which are jointly responsible for projecting, financing, construction, operation and maintenance of projects in specific contract period. It is expected that involvement of several experts in PPP sphere will provide a better productivity and efficiency in construction of public facilities and providing public services. For example, the introduction of Light Rapid Transport (LRT) systems and commuter services in rail services in Malaysia via PPP allows consumers to avoid the heavy traffic and blocks, which significantly reduces the travel time. Likewise, the construction of toll highways, not only reduced the travel time and transport exploits to minimum, but also made a huge impact on the comfort and safety of road users.
137 Ismail, S. (2013). Factors Attracting the Use of Public Private Partnership in Malaysia.Journal of Construction in Developing Countries, 18(1), 95–108. 138 Li, B., Akintoye, A., Edwards, P. J., & Hardcastle, C. (2005). Perceptions of positive and negative factors influencing the attractiveness of PPP/ PFI procurement for construction projects in the UK: Findings from a questionnaire survey. Engineering, Construction and Architectural Management, 12(2): 125–148. 139 Cheung, E., Chan, A. P., & Kajewski, S. (2009). Reasons for implementing public private partnership projects: Perspective from Hong Kong, Australian and British practitioners. Journal of Property Investment and Finance, 27(1): 81–95.
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VOLUME 17, DECEMBER 2016 87 To “Facilitate creative and innovative approaches”, there has been evidence that PPP calls for more innovation and imagination, enhancing the quality of services offered to the public at large. In the context of Malaysian PPP, this is evident in the PPP e-perolehan project (i.e. online public procurement system), which was reported to have improved service delivery because the private sector is perceived as being more innovative and efficient because it operates in a competitive commercial environment where there are incentives and rewards for meeting the needs of the customers. In Malaysia, there is no fundamental PPP law. The PPP projects are set up based on some specific principles in addition to separate sector laws, for example, Supply of Electricity Act, Railways Act, and Federal Roads Act. Those principles provide a base for PPP framework, as well as requirements and selection procedures for public private partnership and project companies, but none of those principles and laws have concrete provisions140. UKAS141 (3PU), the core agency to lead PPP under the Prime Minister’s Department and relevant agencies, have broad discretion with regard to the contents and operation of PPP projects. Below is a summary of the key guidelines:
. Privatization Master Plan: The Privatization Master Plan was developed in 1991 in the form of policy for privatization of public companies . PPP guidelines: The PPP Guidelines were created in the th9 Malaysian plan in 2006-2010 in order to add the Privatization Master Plan. PPP Guidelines provide services to the main PPP in Malaysia, such as correct adoption of PPP project, determining PPP, the difference between government projects and privatization, the main criteria for PPP etc. . Facilitation Fund Guidelines: Government implemented Fund of MYR 20 billion (USD 4.9 billion) as a part of the 1st Malaysia Plan, as a form of support for public projects. The main destiny of this fund was to overcome the viability gap and stimulate the private investments in PPP projects in priority areas such as: infrastructure, education, tourism and health care. The Facilitation Fund Guidelines (FF Guidelines) were first published in 2011, in order to maintain the operations of FF. According to the FF guidelines, financing provided as grant must be used only for development of infrastructure based projects, such as: access roads, bridges and utilities. However, there was no provision regarding the amount of the grant or project eligibility. In 2014, a few reforms were added to the FF guidelines including the exclusion of limitation of usage of grant which is provided by FF itself. Mark Lim, the head of the Finance & Projects Group of Wong & Partners, quoted that “The Facilitation Fund can now be used for, among other things, funding up to 10% of the project cost or MYR 200 million (USD 49 million), whichever is lower, and a grant from the Facilitation Fund will be disbursed to project companies upon the completion of the project”.
140 Retrieved from http://www.inhousecommunity.com/article.php?id=M27RM8D-QQQMHF7-SS476ZB-B28JQ5Z 141 UKAS – Unit Kerjasama Awam Swasta – translated from Malaysian – Public Private Partnership Unit (3PU)
PUBLIC PRIVATE PARTNERSHIP 88 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Table 19: Early major projects in Malaysia
Sector Projects
23 BOT – style projects let between 1985 and 1997, usually Roads with 25-year concessions 2 BOOT – style projects in 1993 and 1995 Ports 2 Lease-sale projects in 1986, 1992 and 1994 3 Corporatizations in 1993 and 1994 19 Airports and 12 short take-off and landing ports under operation and man- Local Airports agement licenses (1992), normally with 30-year concessions International 1 (Kuala Lumpur) under operation and management license (1998), with a 50- Airport year concession
Power 5 BOT-style projects let in 1995 – 1997, with 21-year power purchase agreements
3 BOT-style projects let in 1987 – 1989 Water Supply 2 Corporatizations in 1994 Sewerage 1 BOT-style project (1992)6, with 28-year concession
Rail 3 BOT-style projects (1992 – 1994, 2002) with 60+60 year concessions
Source: Beh, L.-S. (2010). Development and Distortion of Malaysian Public-Private Partnerships – Patronage, Privatised Profits and Pitfalls.Australian Journal of Public Administration, Volume 69, Issue s1, S74–S84.
Table 20: Recent and Upcoming PPP Projects, Malaysia
Sector Recent/Upcoming projects (based on 10th Malaysia Plan)
Seven highway projects amounting to an estimated MYR 19 billion, including: • West Coast Expressway • Guthrie-Damansara Expressway Roads • Sungai Juru Expressway • Paroi-Senawang - KLIA Expressway • Ampang-Cheras-Pandan Elevated Highway
• Integrated Transport Terminal in Gombak, Selangor • Mass Rapid Transit (MRT) project in Greater Kuala Lumpur (MYR 40 billion) Rail & Transport • Kuala Lumpur – Singapore High Speed Rail of 400 km (MYR 18.6 billion) • East Coast Rail Route (MYR 29 billion)
• Two coal electricity generation plants (MYR 7 billion) • 300 megawatt Combined-Cycle Gas Power Plant in Kimanis, Sabah (MYR 1.5 Power billion) • Construction of the liquefied natural gas regasification by Petronas in Melaka (MYR 3 billion)
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VOLUME 17, DECEMBER 2016 89 • Perdana University, a joint venture between Academic Medical Centre Sdn Bhd and John Hopkins. Medicine International as well as Royal College of Surgeons Ireland (MYR 2 billion) Education • Five Universiti Teknologi MARA (UITM) branch campuses • International Islamic University Malaysia Teaching Hospital in Kuantan (MYR 13 million) Port • Privatisation of Penang Port SdnBhd • Development of Malaysian Rubber Board’s 3.300-acre land in Sungai Buloh, Selangor (MYR 10 billion) • Redevelopment of the Angkasapuri Complex Kuala Lumpur as Media City Others • Kuala Lumpur Strategic Development by 1 MDB; Sungai Besi Airport area • KL International Financial District in Kuala Lumpur (MYR 26 billion) • Two aluminium smelters in Sarawak Corridor of Renewable Energy (SCORE) Source: Utusan Online, 2010, retrieved from http://www.utusan.com.my/
PLUS expressway is considered as one of the most successful projects in Malaysia. This project considered building the inter-urban expressways in Peninsular Malaysia, 973 km length, including the North-South Expressway stretching from the border of Thailand to Singapore and others including the Expressway Ling Karan Tengah linking Kuala Lumpur to the Kuala Lumpur International Airport, the Malaysia-Singapore Second Crossing, and the Penang Bridge linking Penang Island to the mainland Peninsular Malaysia. It was the first expressway to be implemented via PPP using the BOT model in Malaysia and was completed in 1988. Another project is Storm Water Management and Road Tunnel (SMART). The project SMART was a government initiative to tackle the flooding problem in Kuala Lumpur city. Moreover, this project also served as traffic dispersal scheme. This project was created through joint venture pact between MMC Corp Berhad and Gamuda Berhad with the Department of Irrigation and Drainage Malaysia and Malaysian Highway as additional executing government agencies. The project was completed in 2007, but the cost of production is estimated to be recovered in 40 years. KLIA Express and KLIA Transit is another successful project. The KLIA Express and Transit is a daily high-speed, non-stop air-rail connection between Kuala Lumpur International Airport (KLIA) and Kuala Lumpur City Air Terminal (KLCAT). The contract (concession agreement) was signed between ERLSB and the Ministry of Transport in August 1997 and the project started its operations in 2002. Under the BOT model, the high-speed rail train is designed, financed, constructed, operated and maintained by Express Rail Link Sdn Bhd (ERLSB) for a concession period of 30 years. There is another project,Kuala Lumpur - Singapore High-Speed Rail Project, which is worth to analyse here. In 2013 Singapore and Malaysia officially announced their plans on development of HSR (High-Speed Railway). Nearly 350 km HSR will connect Jurong East in Singapore with Bandar Malaysia (Kuala Lumpur) with six stops on the way. Services are planned to be started four times per hour altogether with non-stop services from Bandar Malaysia to Singapore. If successful, HSR will be the first ever high-speed railway in South-East Asia.
PUBLIC PRIVATE PARTNERSHIP 90 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN 3.2.8 Case of Singapore The concept of Public Private Partnership (PPP) was introduced in Singapore in 2003 when the first PPP contract was awarded by the Public Utilities Board (PUB) for a desalination plant. In recent times, several projects initially considered for development as PPPs have been procured following the more traditional methods such as design & build. Despite this lukewarm development in PPPs in Singapore, PPPs remains a procurement method that is viable for development of public infrastructure facilities. Subsequently, the Ministry of Finance issued a handbook in 2004 as a guide to the public and private sector for successful structuring and management of PPP projects in Singapore. According to the handbook, the main aims of implementing PPPs in Singapore include: . Allowing the public sector to get better value for money in the delivery of public services; . Offering the private sector more business opportunities and more room to innovate and offer efficient solutions for public services; . Combining the expertise of the government and the private sector to meet the needs of the public effectively and efficiently. In Singapore, the Ministry of Finance142 has defined PPP as: “PPP refers to long-term partnering relationships between the public and private sector to deliver services. It is a new approach that Government is adopting to increase private sector involvement in the delivery of public services.” This does not give any indication as to the real need for the public sector to enter into PPPs. Further, in Singapore, PPP is also seen as a way to bring in specialist private sector expertise to stimulate an exchange of ideas and bring more international players into the domestic market143. PPP was first introduced in Singapore in 2003 under the Best Sourcing Framework whereby the public sector engaged the private sector providers to deliver non-core government services which the private sector could provide more effectively and efficiently. Singapore’s interest in PPP was set out in a consultation document and a subsequent “PPP Handbook” that was published by Ministry of Finance144. This handbook provides a general guidance on PPP procurement, and dictates that all government infrastructure projects in excess of SGD 50 million be actively considered for PPPs. As stated in the handbook, a number of sectors in Singapore have been identified by MOF as suitable for PPPs. These includes sports facilities, incineration plants, water and sewerage treatment works, large IT infrastructure deals, education and healthcare facilities, expressways and government buildings. According to the Department of Treasury and Finance145, by using the joint skills of the public and private sectors, Singapore will be able to:
142 Ministry of Finance (MOF), Singapore . (2004). Public Private Partnership Handbook Version 1. Retrieved from http://app.mof.gov.sg/ppp.aspx 143 KPMG. (2007). Building for Prosperity: Exploring the Prospects for Public Private Partnerships in Asia Pacific. 144 Ministry of Finance (MOF), Singapore . (2004). Public Private Partnership Handbook Version 1. Retrieved from http://app.mof.gov.sg/ppp. aspx 145 Department of Treasury and Finance. (2002). Partnerships for Growth: Policies and Guidelines for Public Private Partnerships in Western Australia. Retrieved from www.dtf.wa.gov.au/cms/uploadedFiles/pub_priv_partners.pdf
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VOLUME 17, DECEMBER 2016 91 . Potentially create new infrastructure which is of a standard beyond that which could be delivered by the public sector alone; . Support the infrastructure with guaranteed services to ensure its continued usefulness, efficiency and longevity; . Take advantage of innovative ideas and technology which have traditionally been fostered in commercial environments, for the benefit of users of public infrastructure; . More effectively manage the risks that naturally come with very large and complex infrastructure projects by allocating risks to the party which is best able to manage them. However, as stated by KPMG146: “Unlike many countries undertaking PPP, the government of Singapore does not need private funds to improve its social and other infrastructure. It has large reserves and typically a budget surplus. Nor would the government necessarily concede that private sector provision of goods and services is more efficient than that of the public sector. The need or ability to raise capital is a less pressing concern in Singapore than it might be in some parts of the region.” Thus, the rationale for introducing PPP into Singapore is mainly focused on the need to achieve value for money in the delivery of public services as stated in the PPP Handbook147. This means that PPP was perceived as a mechanism that could be used for projects to allow optimal balance of benefits and costs on the basis of total cost of ownership, even though it may not be at the lowest price. This could be achieved when synergies are generated through the alignment of design, construction, and maintenance and operation phases, taking into consideration the whole life cycle of the project148. Since the introduction of PPP in 2003, the Singapore government has explored various projects to be implemented as PPPs. Some have met with success, whilst the others have been abandoned, awarded under traditional procurement methods, or still under consideration.
Table 21: PPP Projects in Singapore (as of October, 2009)
No Project description Launched Public Project Status Agency in Charge 1 Desalination Plant – DBOO facility September PUB Tender awarded on 19 Jan to supply desalinated water to the 2001 2003. Project completed and PUB for 20 years in operation since Septem- ber 2005. 2 Ulu Pandan NEWater Plant – DBOO May PUB Tender awarded on 15 Dec project for recycling and supply of 2004 2004. Project completed and waste water to PUB for 20 years in operation since March 2007.
146 KPMG. (2007). Building for Prosperity: Exploring the Prospects for Public Private Partnerships in Asia Pacific. 147 Gunawansa, A. (n.d.). Is There a Need for Public Private Partnership Projects in Singapore? . Singapore: National University of Singapore. 148 Gunawansa, A. (n.d.). Is There a Need for Public Private Partnership Projects in Singapore? . Singapore: National University of Singapore.
PUBLIC PRIVATE PARTNERSHIP 92 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN 3 Fifth Incineration Plant - DBOO May NEA Tender awarded – 14 Nov project to incinerate 800 tons of 2005 2005. Project completed refuse per day for a period of 25 and in operation since the years beginning of 2010 4 TradeXchange – IT PPP project to December Singapore Contract awarded on 8 Dec develop the software for one stop 2005 Customs 2005. Tenure of 10 years integrated logistics information between 2007-2017 port, including the maintenance and operation of the system for 10 years. 5 Basic Wings Course – a 20 year PPP August 2005 Ministry of Tender awarded / Financial to acquire and maintain a fleet of Defence close achieved on 3 Nov trainer aircraft and ground-based (MINDEF)- 2006. Tenure of 20 years training systems to meet the hard- RSAF from 2008- 2028. ware requirements for the Republic of Singapore Air Force’s basic wings flying training. 6 Rotary Winged Course – a 20 year November MINDEF– Tender awarded in Novem- PPP to leverage on commercially 2005 RSAF ber 2005 for duration of 20 available platforms and main- years from 2006-2026 tenance operations to optimise the resource and risk allocation between public sector and private sector in flying training operations. 7 Next Generation National Broad- February 2006 Info-comm Passive Infrastructure Tender band Network - A PPP project for Development awarded in October 2008. the design and construction of the Authority Active Infrastructure: Tender passive infrastructure of the Next (IDA) awarded in April 2009. Generation National Infocomm Estimated completion date Infrastructure which seeks to trans- in 2012. form Singapore into an intelligent nation and global city, powered by infocomm. The project also involves the sale of services to an operating company 8 ITE College West – DBFO project July Institute of Tender awarded/Financial for a period of 27 years Under 2006 Technical close achieved on 11 Aug the PPP, the consortium would Education 2008. Construction phase of which includes the management (ITE) the project is expected to be and coordination of all building- completed in 2010. related and estate management matters, allowing the ITE to focus its resources and attention on the delivery vocational and technical education. 9 Changi NEWater Plant - A DBOO August 2007 PUB Tender awarded in early project for the supply of 50 million 2008. In first phase of com- gallons of NEWater per day to PUB mercial operation since over a period of 25 years. 2009. To be fully completed in mid-2010
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VOLUME 17, DECEMBER 2016 93 10 Sports Hub – A 25 DBFO conces- December Singapore At preferred bidder stage sion for a sports hub. 2005 Sports Coun- since 19th January 2008. cil ( SSC) 11 NUS University Town – PPP for the June National Consortiums were shortlist- development of a 6,200- bed stu- 2007 University of ed in June 2007. Decision to dent housing with ancillary facilities Singapore launch the project as a PPP (NUS) was subsequently terminat- ed in September 2007. 12 Advanced Fighter Winged Course December Defence, Bids submitted for project in - PPP for providing classroom 2008 Science & August 2009. Current status teaching and aircraft simulators for Technol- unknown. Advance Fighter Winged Course. ogy Agency (DSTA) 13 Rifles Range Training Facility – A Unknown DSTA Bids submitted for projects 20 year PPP for the construction, in late August 2009. Cur- maintenance and management of a rently in tender evaluation training ground for small arms. stage. Sources: Gunawansa, A. (n.d.). Is There a Need for Public Private Partnership Projects in Singapore? . Singapore: National University of Singapore.
The projects involving the water and solid waste sector are utility related PPPs. These have been procured by two agencies, National Environment Agency (NEA) and Public Utilities Board. These projects consist of a single demand stream model with little political sensitivity149, thus their procurement should not be considered complicated. Singapore has also sought to procure large-scale social infrastructure projects such as the ITE College West, Sports Hub, and the University Town at Warren. Such projects involve multiple revenue streams and numerous stakeholders, with greater scrutiny of business plans150, thus making them more complicated. The implementation of these projects except for the ITE College West project has not been successful. It should be noted that even in the case of the ITE College West, the procurement process had met with delays in financing as the banks which initially backed the private sector consortium had dropped out as a result of the subprime crisis151. The University Town project was initially earmarked to be financed, designed, constructed and operated by private sector entity for a period of 25 to 30 years. However, according to a government press release in January 2008, it is now owned and funded by the National University of Singapore (NUS), through government grants. This USD 423 million (SGD 500– 600 million) project was expected to be completed before the end of 2010. No clear reason has been disclosed for the shift. However, it is likely that being a social infrastructure development project, the project proponents found it not viable for development as a PPP, given that
149 KPMG. (2007). Building for Prosperity: Exploring the Prospects for Public Private Partnerships in Asia Pacific. 150 KPMG. (2007). Building for Prosperity: Exploring the Prospects for Public Private Partnerships in Asia Pacific. 151 Gunawansa, A. (n.d.). Is There a Need for Public Private Partnership Projects in Singapore? . Singapore: National University of Singapore.
PUBLIC PRIVATE PARTNERSHIP 94 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN administration of the university facilities require active participation of the public sector, whilst, the revenue for the private sector developer has to be sourced from student fees and other sources of revenue to be generated by the facilities within the University Town. Being an educational institution controlled by the public sector, the private developer’s freedom to price the services would have to be highly regulated, a condition that the private sector developer may not have found favourable152. As far as the Sports Hub project which was launched in 2005 is concerned, to date it has not advanced from the preferred bidder stage. The completion date for the project has repeatedly been pushed back. The expectation was that the project would be completed by the end of 2013 or early 2014, provided that there are no further delays. The first delay of the project had occurred due to the addition of a public water sports centre into the original bid requirements, resulting in the process of the submission of the bid proposal and the evaluation period being postponed by about a year. The second delay had occurred as a result of increased construction cost and the recent global financial crisis which made it difficult to raise funds from financial institutions153. Even though there has been considerable interest in the use of PPP as a procurement method, there are a wide range of barriers to using PPPs. In the case of Singapore, it is not difficult to argue that social, political and the legal risks which usually discourage investors from investing in countries are not present in Singapore. Since independence in 1965, Singapore has steadily developed its social, political and legal infrastructure to offer one of the politically steadiest, corruption free and investment friendly environments in the world. In the Logistics Performance Index 2016, Singapore was positioned 5th of 160 states154. Moreover, according to the World Economic Forum’s Global Competitiveness Report for 2016 – 2017155, Singapore is ranked the 2nd most competitive economy in the world. “Its institutions are viewed as the best in the world, while business confidence in the government remains strong despite the global recession. That, along with a highly skilled workforce and sophisticated financial markets…156” As far as the public procurement framework is concerned, it should be stated that Singapore has a well-knit legal framework that provides a sound architecture for efficient and corruption free public procurement. For example, the Singapore Government is bound by certain commitments in the various international agreements on public procurement which the country has entered into, specifically, the 1994 Agreement on Government Procurement under the World Trade Organisation (“GPA”), the Agreement between New Zealand and Singapore on a Closer Economic Partnership (ANZSCEP), the Agreement between Japan and Singapore for a New Age Economic Partnership (JSEPA), EFTA Singapore Free Trade Agreement (ESFTA) and Singapore-Australia Free Trade Agreement (SAFTA), and the United States-Singapore Free Trade Agreement (USSFTA), to name some.
152 Gunawansa, A. (n.d.). Is There a Need for Public Private Partnership Projects in Singapore? . Singapore: National University of Singapore. 153 Gunawansa, A. (n.d.). Is There a Need for Public Private Partnership Projects in Singapore? . Singapore: National University of Singapore. 154 Retrieved from http://lpi.worldbank.org/international/global 155 Schwab, K. (2016-2017). The Global Competitiveness Report 2016-2017. World Economic Forum. 156 Gunawansa, A. (n.d.). Is There a Need for Public Private Partnership Projects in Singapore? . Singapore: National University of Singapore.
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VOLUME 17, DECEMBER 2016 95 In addition, as far as national legislation is concerned, Singapore has enacted the Government Procurement Act No. 14 of 1997 as amended which deals with public procurement. There are also 4 relevant subsidiary legislations, namely Government Procurement (Challenge Proceedings) Regulations, Government Procurement Regulations, Government Procurement (Application) Order and Government Procurement Act (commencement) Notification 2002. In addition, there is a Government Instructions Manual on procurement procedures and this is publicly available. All public contracts awarded by the Singapore government are published on the Government e-Business website. The award notice contains the name of the successful tenderer, contract sum, and a description of the contract along with the name and address of the awarding government procuring entity. A similar disclosure is made by the Ministry of Finance concerning PPP projects. According to the self-assessment made by Singapore in response to the ADB/OECD Anti-Corruption Initiative for Asia and the Pacific, normally, the government procuring entity will at the request of unsuccessful renderers, promptly explain reasons why their bids have not been accepted. Thus, transparency in the process is maintained. As commented by Mr. Kamran Khan, head of the World Bank Office Singapore (East Asia Infrastructure Finance Practice Group), in an interview by The Business Times Singapore in November 2009: “The public entities in Singapore are one of the most efficient in the world. They are professional and act almost like the private sector, but they protect the interest of the public sector, which is a very unique thing.157” Hence, corruption in public procurement as a barrier to PPPs in Singapore could be ruled out. Other problems in successfully implementing PPP projects arise due to public sector’s unfamiliarity with the PPP mechanism, reluctance to share responsibilities with the private sector, problems relating to regulations, lack of commitment towards investor protection, and hesitance to share risks. On the other hand, problems with the private sector in implementing PPPs could arise due to lack of financial and technological capacity, reluctance to work with the public sector, reluctance to deal directly with the end users of utilities and other infrastructure services, inability to be competitive in delivering services to the public, and incapacity to work in a consortium. However, given the success story of Singapore’s economic development and market competitiveness as well as the efficient and transparent public procurement in place, it cannot be denied that there are no obvious problems with the public sector or the private sector in Singapore that prevent PPPs. If so, then what reasons, if any, are there for the limited success of the concept in Singapore since its introduction in 2004? . The public sector entities in Singapore such as the PUB, which is in charge of power and water utilities, Land Transport Authority, which is in charge of the road network, and Housing Development Board, which is in charge of the public housing, to name a few, have been providing efficient services to the public. They have the regulatory and management capacity to take charge of the facilities. They have the necessary funds for development of
157 Gunawansa, A. (n.d.). Is There a Need for Public Private Partnership Projects in Singapore? . Singapore: National University of Singapore.
PUBLIC PRIVATE PARTNERSHIP 96 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN infrastructure through direct contracting. Thus, the need for PPPs is limited. . Singapore government is committed to finance and encourage research and development in various spheres, including in the area of physical and social infrastructure development in the country. As a result, technologies relevant for sustainable development of the nation are financed by the public sector and developed largely in public sector entities such as state universities and research centres set up within universities. Thus, public entities in Singapore which have the money to invest in the advancement of technology might find direct contracting with contractors to build public facilities more appropriate than PPPs. . The absence of a centralized body within the MOF or outside of the MOF to champion the cause of PPP has also worked as a barrier. The PPP Advisory Council that was set up at the time PPP was introduced in Singapore has functioned largely as an entity to promote PPP awareness, help draft relevant policy and provide guidance on PPP matters. What is required is to expand its scope or replace it with an agency that could act as the “one stop shop” between public and private sector entities to facilitate PPPs. . Inadequate focus on project identification and feasibility studies is an apparent weakness in the PPP procurement machinery in Singapore. . The failure to maintain a published pipeline of projects has also worked as a barrier, limiting the scope for public-private engagement to develop projects. If a centralized public sector entity could work with the other government agencies and identify sectors for PPPs and line up possible future projects, then it would provide a more efficient platform for interested private sector entities to engage with the public sector concerning the development of such projects. . However efficient and transparent the current procurement mechanism is, use of open tenders may not always be the best procurement practice for PPP. This is because such procurement practice limits the scope of private sector participation to projects specifically identified by the government. If sectors are identified and a pipeline of possible projects are maintained, that would enable the interested private sector entities to submit early proposals to the government to develop the pipelined projects. This would enable the government to take a decision whether to engage in direct negotiations with the private party that has shown the early interest or to call for competitive tenders. As far as identification of suitable sectors for PPP is concerned, Singapore should concentrate on sectors where there is still room for its financially strong, technologically savvy, and efficient public sector entities to partner with the private sector. Construction of sustainable cities, an area in which Singapore has shown a keen interest and has a good reputation, is an area that has much scope for such partnering. This is because building environmentally sustainable cities require not only the financial capacity to build, but also the technological knowhow in many spheres such as roads, water, electricity, telecommunication, public housing, industrial and office complexes, and social infrastructure facilities. Such projects require expertise in designing and engineering and participation of manufactures of environmentally friendly construction materials and equipment. Piecing together a sustainable city by entering into
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VOLUME 17, DECEMBER 2016 97 thousands of individual contracts would be impractical and difficult compared to a well knitted project development structure in which a few PPPs can work towards developing the project. Singapore offers one of the most reliable and competitive environments for investment. The country has an efficient and corruption free public sector. Further, the people in Singapore have the money and the desire to pay for efficient public services. Furthermore, the local private sector has the capacity to provide the necessary local partnership to foreign investors or, to take the lead in investment projects in the country. In the circumstances, there is no reason for the future of PPP in Singapore to be bleak, if the issues identified above are adequately addressed.
3.2.9 Case of Thailand In the Logistics Performance Index 2016, Thailand was positioned 45th of 160 states.158 And according to the Global Competitiveness Report 2016–2017, Thailand’s infrastructure is ranked 49 out of 144 countries indicating that infrastructure is developing, but that there remains room for improvement159. Thailand has implemented several projects under the Private Participation in State Undertakings (PPSU) Act since its enactment in 1992. Many projects are undertaken in cooperation with government and private organizations in different areas such as electricity, airports, ICT, natural gas, water and sewerage, roads, railways and ports. With the rapid development of the country and limited budget from the public sector, private participation is needed in order to develop infrastructure and satisfy public needs. Thailand is facing tough competition from its strong neighbours, for example, China, Japan, and South Korea. It needs to manage growing urban areas, ensure sufficient basic services for the poor in order to maintain its economic development. The reasons why PPPs are necessary for Thailand are as below160: . The country’s demographic situation. Thailand is distinguished by increasing population growth; . More than the half of its population dwells in urban areas while the level of infrastructure in Thailand is lower than in other Asian countries; . The limited government budget is not able to meet the demands of population; . Decentralization policy since 1990s - the delegation of authority to provincial and local authorities. Insufficient resources of these local administration and heavy bureaucracy outline the need for private sector participation. The first PPP law enacted by the Thailand government to guide PPPs and investment was the
158 Retrieved from http://lpi.worldbank.org/international/global 159 Schwab, K. (2016-2017). The Global Competitiveness Report 2016-2017. World Economic Forum. 160 Kokkaew, N., Sunkpho, J., & Derek , A. (2013). Thailand’s New Public Private Partnership Law: A Cure to the Problem? ResearchGate.
PUBLIC PRIVATE PARTNERSHIP 98 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Private Participation in State Undertaking Act (1992) also known as the PPSU Act. This act was brought in to regulate PPP activities utilizing public assets in projects exceeding THB 1 billion (approximately USD 33.3 million) in value. However, since the main purpose of this PPSU Act was to prevent government corruption in granting rights to private investors for operation or use of state properties, rather than to provide an enabling environment for PPP projects, only certain types of PPP project involving state properties (for example, BOT and BTO schemes) are covered by the Act. Several other types of scheme such as BOO and management contracts are not covered. The projects undertaken before the PPSU include the Don Mueang Tollway, a 21 km toll road from central Bangkok to Don Mueang Airport, the First Expressway System, a 27 km elevated toll road network, and the Second Stage Expressway System, a 38.5 km elevated toll road network. The Second Stage Expressway suffered both from uncompetitive bidding and from expropriation. A number of successful projects were implemented after the enactment of PPSU such as mass rapid transit projects (BTS - sky train and MRT - underground mass rapid transit), express highways, elevated roads, and telecommunication systems (AIS mobile, Telecom Asia, and TT&T). After this enactment, there have been many types of reforms in Thailand that tend to move towards less bureaucracy in developing infrastructure. Principles of New Public Management (NPM) started to be adopted around 1999, as evidenced by the “Regulation of the Office of the Prime Minister on Good Governance” (1999), which was followed by the “Royal Decree on Good Governance,” which the Thaksin Shinawatra government issued in 2003. The NPM can be referred to as a cluster of ideas and practices that use private-sector normative models and business approaches in the public sector. PPSU Act was replaced by Private Investment in State Undertaking Act in 2013 (PISU Act). In addition to the key principles of PPSU Act that aimed at preventing corruption and protecting public interest, PISU Act also targeted to promote the PPP investment in Thailand. The State Enterprise Policy Office (SEPO) is to act as the PPP secretariat office. The SEPO is responsible for preparing a draft national PPP strategic plan for approval by the PPP Policy Committee and the Cabinet respectively. The PPP strategic plan must be set out as a 5-year investment and policy plan, including priority sectors and pilot projects, as well as investment budgets. In Thailand long-term concession agreement between the government authority and an investor is seen as a common feature of almost all project financing. The main structures for project financing in Thailand are BOT, BOO and BTO. In the current draft of Strategic Plan for 2015-2019, it was claimed that 6 projects are going to be conducted as PPPs in the following six fields: telecommunication network, high-speed Internet systems, commercial ports, urban mass rail systems, urban toll roads and high-speed rail systems. For other 15 fields, for example, terminals for transportation, packing, sorting and distribution of goods, airport management, administration, management and maintenance of ticketing systems, private participation is not mandatory, they can decide whether to implement these projects by the use of state budget or conduct them as PPPs161.
161 Economic Research Institute for ASEAN and East Asia. (2015).National Public Private Partnership Frameworks in ASEAN Member Countries.
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VOLUME 17, DECEMBER 2016 99 As per the World Bank Report162, there are 125 PPP projects reaching financial closure in Thailand, the total investment is USD 53,489 and the largest investment share is in electricity sector. Greenfield projects have the largest share in investment and 3 projects that represent 1% of total investment are cancelled or under distress. Top projects include Advanced Information Services, True Corporation Public Company Limited, Total Access Communications, Glow Energy Cogeneration Plant, TT&T Public Company Limited, True Move, Gulf TS1 Co Ltd, Bangkok Transit System Corporation (BTSC), Rayong Electricity Generating Company Ltd, BLCP Power Plant163. Recently, The PPP Policy Committee has been appointed and is currently chaired by Deputy Prime Minister Pridiyathorn Devakula. The areas open to the private sector in the plan will cover not only conventional economic infrastructure such as mass transit, sea ports, airports, water management, but also social infrastructure in the fields of education, public health, science, or technology. An overall national development plan, an 8-year transportation infrastructure programme for 2015–2022, was approved by the Cabinet in October 2014. Total project cost in the programme was THB 3.3 trillion. The private sector was allowed and expected to play a large role in the programme through the new PPP scheme. In addition, there are 5 mega projects worth about THB 200 million (USD 5.5 million) that have been approved by the Government of Thailand from 2015 to 2020164:
. Development of Bangkok’s MRT Pink Line elevated train PPP project which will link Kaerai and Min Buri. The total project investment is estimated at THB 56.7 billion (USD 1.56 billion). . Development of Bangkok’s MRT Yellow Line elevated train PPP project, which will link Lat Phrao and Samrong. The total project investment is estimated at THB 54.7 billion (USD 1.51 billion). . Operation of Blue Line extension PPP project, which will link Bang Sue and Bang Khae. The estimated cost will be approximately THB 82.4 billion (USD 2.27 billion). The line now runs from Hua Lamphong to Bang Sue. The preferred bidder will be responsible for the operation and maintenance of the new extension. . Nonthaburi waste-to-energy PPP project. The total project investment is estimated at THB 4.14 billion (USD 114 million). . Nakhon Ratchasima waste-to-energy PPP project. The total project investment is estimated at THB 2.25 billion (USD 62 million).
162 The World Bank. (2016). Private Participation in Infrastructure Database. Retrieved July 21, 2016, from http://ppi.worldbank.org/ 163 The World Bank. (2016). Private Participation in Infrastructure Database. Retrieved July 21, 2016, from http://ppi.worldbank.org/ 164 Retrieved from http://www.infrapppworld.com/pipeline-html/projects-in-thailand
PUBLIC PRIVATE PARTNERSHIP 100 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Chart 18: Project Pipeline (66), Thailand
Source: State Enterprise Policy Office, Ministry of Finance, Thailand. (2015).Public Private Partnership (PPP) in Thailand. Retrieved from http://www.unescap.org/sites/default/files/ PPP%20Thailand-sent.pdf
The new legislation contains a number of major changes from the PPP Act, including: . the requirement for a 5-year PPP National Strategy, which will serve as a roadmap for the development of PPP projects in Thailand. The PPP National Strategy will specify, among others, the sectors in which PPP projects are contemplated, as well as the priority for development of such PPP projects; . the establishment of a PPP Policy Committee, which will be responsible for the preparation of the PPP National Strategy for approval by Cabinet. The PPP Policy Committee will also be in charge of granting in-principle approvals for PPP projects under the new legislation; . the designation of the State Enterprise Policy Office as the entity responsible for conducting initial reviews of proposed projects and advancing qualifying projects for consideration by the PPP Policy Committee; and . the introduction of provisions specifically addressing amendments to PPP project-related contracts and the necessary actions to be undertaken prior to the expiry of such contracts. The objectives of PPP in Thailand allow access to the substantial financial resources of the private sector, also enabling the public sector to benefit from private sector’s technical expertise, experience and efficiency, and transfer project related risks to the private sector.
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VOLUME 17, DECEMBER 2016 101 4.0. Case of Azerbaijan 4.1 Country Assessment The Azerbaijani government has achieved great progress over the last decade in integrating the country into the global economic marketplace and increasing foreign investment mainly due to its oil resources. Now, the government’s focus is on diversifying the economy outside the oil sector. Azerbaijan is facing increasing demand for investment in infrastructure development, overstretching the government’s budget. Besides, there is need for not only private sector investment but also private sector flexibility, knowledge and expertise. The traditional approach of the government for infrastructure development of any kind has been to use the state’s own budget or privatization. The first is markedly insufficient to meet the country’s needs while the latter only works in a sound legal and financial framework and is not appropriate for all public service delivery projects. So there is a need to see if the time is ripe for public private partnerships165. For countries like Azerbaijan, PPPs serve not just the purpose of attracting capital but also innovation, creativity, flexibility and effective management. In May 2015, during the 48th annual meeting of the governors of the Asian Development Bank, Finance Minister of Azerbaijan Samir Sharifov mentioned that in 2006-15, Azerbaijan invested USD 30 billion in the development of physical infrastructure. Social infrastructure projects were also implemented during this period. In developed countries, it is considered that every 1 dollar invested in realization of a social project ensures the development of country’s GDP by 5-20%. But the financing of an infrastructure project is long-term and very risky which calls into question the interest and desire of private organizations to implement such projects, even if there are sufficient funds in the capital market. A unique model has been created in Azerbaijan, and financing of infrastructure projects is carried out due to funds collected in the State Oil Fund, which finances projects inside and outside the country as well. Some developed countries even established special funds for PPP in the implementation of infrastructure projects, an application Azerbaijan could replicate166. While the 2014 Infrascope167 covers only Armenia, Georgia, Kazakhstan, Kyrgyz Republic, Tajikistan from Central Asia, it reveals several persistent problems facing the region. These include: the lack of a proper legal framework, non-transparent tariff setting mechanisms, low utility bill collection rates, and non-existent or incapable governmental bodies dedicated to PPP promotion. For example, when it comes to PPP environment, Armenia lacks strong safeguards for public and private sector participants, Georgia suffers from inadequate concession law, weak coordination and oversight, and the Kyrgyz Republic possesses limited institutional capacity and an uncertain business climate that lowers the appetite for private sector investment168.
165 UNECE. (2013). Clean Infrastructure Development in Azerbaijan. 166 http://abc.az/eng/news_02_05_2015_88193.html 167 https://www.adb.org/sites/default/files/publication/158409/2014-infrascope.pdf 168 Huseynov, F. (2016, June 17). The Time Is Ripe for Public-Private Partnerships in Central Asia. Harvard Kennedy School Review.
PUBLIC PRIVATE PARTNERSHIP 102 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN 4.2 Legislative and Regulatory Framework There is no particular comprehensive legislation on PPP but a number of laws and normative acts169 regulating the field in Azerbaijan: . State Registration of legal entities . Protection of Foreign Investment . The Tax and Customs Code of the Republic of Azerbaijan . Generalized System of Preferences (GSP) Program in Azerbaijan Azerbaijan also recently adopted a new law170 that introduces options for potential financing of BOT projects. The BOT model is defined in the Law as the payment, in accordance with agreements with the Ministry of Economy, by consumers of goods and services produced by investors (defined as resident and non-resident legal entities, their branches or permanent establishments), or the payment by the Ministry of Economy of investment expenses (including income earned) to investors in respect of certain investment projects listed in the Law. Financing under the BOT model will apply to the construction (including current and capital repair, renovation and restoration), the operation and the transfer, inter alia, of multiple facilities. European Bank for Reconstruction and Development (EBRD) conducted a study171 assessing countries’ compliance with the legal PPP framework. Figure 8: Compliance by Country to PPP Legal Framework
Source: European Bank for Reconstruction and Development. (2012). Concession/ PPP Laws Assessment 2011
169 CAREC. (2014). PPP in Azerbaijan: Current Status and Perspectives. Retrieved September 26, 2016, from Central Asia Regional Eco- nomic Cooperation (CAREC) Program: http://www.carecprogram.org/uploads/events/2014/PPP-Workshop-TOKYO/Country-Presenta- tions/009_106_209_Azerbaijan.pdf 170 http://www.dentons.com/en/insights/articles/2016/april/28/presidential-decree-on-construction-and-infrastructure-projects-in-azerbaijan 171 European Bank for Reconstruction and Development. (2012). Concession/ PPP Laws Assessment 2011.
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VOLUME 17, DECEMBER 2016 103 Armenia, Azerbaijan, Belarus, Georgia, Tajikistan, Turkmenistan and Uzbekistan were seen to fall under the list of Low Compliance countries. However, it needs to be noted that several years have passed from the time this research was conducted and therefore there is a need to do another research to assess legal framework of these countries, especially of Azerbaijan. Azerbaijan was listed among the low compliance countries with compliance across different parameters as follows: Figure 9: Azerbaijan’s Compliance to PPP Legal Framework
Source: European Bank for Reconstruction and Development. (2012). Concession/ PPP Laws Assessment 2011.
Figure 10: Azerbaijan’s Compliance to PPP Legal Framework
Source: European Bank for Reconstruction and Development. (2012). Concession/ PPP Laws Assessment 2011.
PUBLIC PRIVATE PARTNERSHIP 104 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN According to the EBRD assessment172, no general policy framework for improving the legal environment and promoting PPP has been identified in Azerbaijan. There is no general concession law. The Civil Code and the Law on Protection of Foreign Investments recognize concessions, but define the term differently. In the Civil Code, the term is related to the definition of “commission”. The Law on Protection of Foreign Investments contains only one article with relation to concessions and seems to be limited to concessions in respect of natural resources and the concept of concessionaires to foreign investors. The Law on State Purchase dated 2001 sets the basis for public procurement, organization and rules of tenders and other methods of public procurement, selection of the contractor and complaints procedures. The Regulations on transfer of state enterprises (objects) into management on a contractual basis’, dated 1996, regulate the transfer of the right of use of certain public enterprises (infrastructure), based on management contracts, as a preparation for future privatization. Such contracts are awarded on a competitive basis. Sector-specific laws do not regulate specifically concessions. In the absence of a general legal framework for PPP, Azerbaijan has still to adopt a favourable legal basis for PPP.
4.3 Institutional Set-Up Institutional Set-up for Private Sector Infrastructure Procurement exists in the form of Azerbaijan Export and Investments Promotion Foundation (AZPROMO)173 whose main activities are: . Country Promotion . Investment generation and services . Market intelligence and export services . Match making and linkages . Policy advocacy . Cooperation with international trade and investment promotion agencies In an interview with Azerbaijan Investment Company (AIC), Rovshan Najaf, Executive Director, explained how AIC was established to support the development of the non-oil sector of the economy via termed equity injection along with local and foreign co-investors into the Greenfield and Brownfield projects in Azerbaijan. The role of AIC is to share risk, assist in financing, conduct market research, do feasibility studies, and develop profit maximization business concept. When asked about the challenges, private players face while wanting to do business in
172 European Bank for Reconstruction and Development. (2012). Concession/ PPP Laws Assessment 2011. 173 CAREC. (2014). PPP in Azerbaijan: Current Status and Perspectives. Retrieved September 26, 2016, from Central Asia Regional Eco- nomic Cooperation (CAREC) Program: http://www.carecprogram.org/uploads/events/2014/PPP-Workshop-TOKYO/Country-Presenta- tions/009_106_209_Azerbaijan.pdf
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VOLUME 17, DECEMBER 2016 105 Azerbaijan, Rovshan Najaf mentioned about the need to do market research and lack of information in terms of access to statistics and relevant people. About the improvement made to the business climate in Azerbaijan, Rovshan Najaf mentioned that as per the recent change, no authority except for the Tax Authority can make any inspections. Additionally, it was noticed that over the last 3 years, number of inspections have come down from 14,000 to just 17. He added that customs and tax regulations have improved - it is easier to do exports and imports. He mentioned about the jump in rank Azerbaijan had, in the Doing Business Report by the World Bank and the Ministry of Economy, which chairs AIC board, is continuing its efforts working on the Private Sector Policy. AIC remains a minority shareholder and particularly focuses on bringing in partners with best technology with the support of international consulting firms, as required. When asked about their plans to issue bonds, Rovshan Najaf said there is nothing on the plate as of now, but they have no cash restraints. About the failures, Rovshan Najaf mentioned that fortunately there has not been any failure case as such. He attributed this to the fact that before investing, an in-depth market research is conducted, all possible risks are evaluated and risk mitigation strategy is devised. Looking at commercial viability, AIC on an average, invests only in about 15% of the proposals received. AIC is known to give a very clear picture to the investors, because of which at times, some companies back out right in the beginning. On Sangachal Terminal Project (2007-2010), in 2012, private partner said that they have money. AIC sold out its shares. So earlier exit of AIC is an indication of project success, implying that private sector bought back the shares. Talking about the incentives, he mentioned about the Balakhani Industrial Park where an incentive package is given to the residents of the park – they are exempted from land and property tax, and they do not pay Value Added Tax and Import duty for 7 years. Going forward, pharmaceuticals, manufacturing and agriculture will remain the key sectors for AIC. With the financial contribution of the AIC, major PPP projects174 have been undertaken such as: . Baku Shipyard Company – construction of modern shipyard and ship repair facility (AIC 25%, SOCAR 65%, KEPPEL Offshore and Marine 10%) . Holcim OJSC – construction of new cement plant (AIC 10%, Holcim 69,4%, EBRD 10%, local private investors 10,6%) . Sangachal Terminal CSC – construction of new logistics terminal (AIC 25%, Qafqaz Trans Service LLC 75%)
174 CAREC. (2014). PPP in Azerbaijan: Current Status and Perspectives. Retrieved September 26, 2016, from Central Asia Regional Eco- nomic Cooperation (CAREC) Program: http://www.carecprogram.org/uploads/events/2014/PPP-Workshop-TOKYO/Country-Presenta- tions/009_106_209_Azerbaijan.pdf
PUBLIC PRIVATE PARTNERSHIP 106 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN In an interview with Baku Shipyard LLC, Imanverdi Hasanov, Deputy General Manager, was supportive of the role played by the AIC. He remarked that setting up of the AIC demonstrated to foreign investors that the government is supporting non-oil projects. When asked about the Garadagh Industrial Park managed by the Ministry of Economy and listing of Baku Shipyard as the first resident company of this park, Imanverdi Hasanov mentioned about the proposed exemptions from the Value Added Tax and compulsory state social insurance for 5 years. Exemption from customs duties is in the process of finalization. This support from the government’s side is essential to make the yard more competitive. As most of the equipment is bought from abroad, customs duties exemption would play a big role in reducing the cost of imports. He added that these proposals have been made after careful analysis of even other shipyards like Russian Shipyard, Ukrainian Shipyard, Chinese and Turkish Shipyards. It was mentioned how cost of a ship cannot exceed 120% of the foreign cost. If the domestic cost is within 120% of the foreign cost, then the government will buy from domestic producers. This is an initiative to promote local heavy industry. Hence, exemption from customs duties is all the more required to compete in an international price market. On the future plans, Imanverdi Hasanov mentioned about Phase 2 of Baku Shipyard. He did not see any PPP project being signed anytime soon, though the involvement of private players will continue as contractor/vendor/supplier relationship (as in the current case where Finnish and Norwegian companies like Konecranes are involved as vendors-suppliers).
4.4 Initiatives Taken There are some promising developments in the region. For example, Kazakhstan adopted a new PPP law in 2015, which created a common legal framework to regulate PPP projects. Moreover, the country’s PPP Center175 is the only official body in the region that promotes and overlooks PPP projects. Azerbaijan also recently adopted a new law176 that introduces options for potential financing of BOT projects. Building on these small gains is essential for overcoming current hurdles to private investment in infrastructure projects177. About 80% of Azerbaijani economy belongs to the private sector and the Government supports private sector projects, thus there is a history of such type of experience. For example, in the last three years, the Ministry of Transport has been the owner of transport projects using construction firms from the private sector and often private financial institutions too178. In an interview with Entrepreneurship Department, Ministry of Economy, Fateh Israfilzade mentioned how falling in oil prices affected the Azerbaijan economy and forced to think of development in the non-oil sectors of the economy. As a result, several reforms have taken place:
175 http://ppp.worldbank.org/public-private-partnership/overview/international-ppp-units#Europe 176 http://www.dentons.com/en/insights/articles/2016/april/28/presidential-decree-on-construction-and-infrastructure-projects-in-azerbaijan 177 Huseynov, F. (2016, June 17). The Time Is Ripe for Public-Private Partnerships in Central Asia. Harvard Kennedy School Review. 178 Traceca. (2008). Country Report on Infrastructure and Finance Azerbaijan .
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VOLUME 17, DECEMBER 2016 107 . October 2015 – New legislative decision was taken where inspection was stopped for a period of 2 years except for the Tax Inspection. . Number of licences required has been decreased. Earlier 59 activities required licences and now only 27. Government expense was reduced to half and ASAN services were set up by a presidential decree dated July 13, 2012. Even the requirement of permissions has been changed – earlier more than 300 activities required permission and now only 87. Previously there was no single list to get permissions, now there is a Permission Portal which has all the information. . There have been initiatives towards promoting investment, promoting export activities and preferring local purchases. . Other reforms are in place to improve ease of doing business. Reforms are being initiated for both local and foreign entrepreneurs, which reduces the administrative burden, time and financial expense of entrepreneurs. . There has been a direction to improve law on customs and taxes as well. It was also mentioned that several other infrastructure projects have been implemented in the region like railways, roads, airports, industrial parks like Garadagh and Balakhani, industrial towns like Nakhchivan and Masalli with tax and customs exemption. On contracts and funding, when asked about the World Bank and ADB contracts, it was mentioned that it is the prerogative of the Ministry of Finance. He added that for projects under the entrepreneurship policy of Ministry of Economy, the AIC can participate to assist in funding. It was also mentioned that National Fund for Entrepreneurship Support has been designed to give loans to entrepreneurs, where money is earmarked by the government. Several banks are selected for the Fund as participator, all funds are moved to these banks, entrepreneurs apply to the banks to get loans, and the Fund finally gives its approval. Main sectors financed under this scheme were agriculture, production, tourism and others including innovative entrepreneurship. He also mentioned about an e-portal for supporting entrepreneurs detailing all laws and acts with 2000 companies registered. When asked about any PPP initiatives, it was mentioned that this is done only through AIC, and Industrial parks that are under the Ministry of Economy. How these initiatives have manifested themselves into PPP projects can be estimated through some case study analysis.
4.5 Available Case Studies Reversal of Malaria epidemic179 Azerbaijan has reversed an alarming upsurge in malaria cases. During its first year of operation the malaria program, funded by a private sector multinational company and supported by international and other UN agencies, helped reduce malaria cases by over 50%. An alarming upsurge in Malaria
179 New Zealand Digital Library. (n.d.). Public-private partnership in Azerbaijan helps reverse malaria epidemic.
PUBLIC PRIVATE PARTNERSHIP 108 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN cases in Azerbaijan during the mid-1990s was being reversed through the efforts of a PPP brokered in 1998 by the Roll Back Malaria global partnership. A 3-year malaria control program to support the Ministry of Health, in partnership agreement with WHO, was funded by a USD 0.7 million contribution from the Italian oil company Eni. The program aimed to avoid the social and economic impact of the malaria burden. Roll Back Malaria (RBM) partners committed to rolling back malaria in Azerbaijan including the International Federation of Red Cross and Red Crescent Societies (IFRC), Medecins Sans Frontier Belgium, UNICEF, and other UN agencies.
ASAN Service180 ASAN service is the Azerbaijani model of service delivery mechanism to render public and private services from one single space. The acronym of ‘ASAN’ stands for ‘Azerbaijan Service and Assessment Network’. The word ‘asan’ means “easy” in Azerbaijani. ASAN Service has created an innovative model of public service delivery, where numerous services by government agencies and private companies are delivered from single physical locations called ASAN Service centers. ASAN Service centers employ a ‘one-stop-shop’ principle by providing about 270 services ranging from birth registration to license renewal to custom clearance, from 10 state entities and around 25 private companies. Thus, the model embodies the successful example of Public Private Partnership structure.
SOCAR Polymer181 SOCAR Polymer is the first PPP in Azerbaijan’s oil and gas sector. The company is a resident of the Sumgait Chemical Industrial Park (SCIP). The SCIP, 30 km north of the Azerbaijani capital Baku, which began to take shape in 2013 is expected to become a major new petrochemicals hub in Central Asia. SOCAR Polymer, the project of international standing, is the first of its kind and scale in the petrochemical industry of Azerbaijan over the past 40 years. The company’s production facilities consist of Polypropylene (PP) and High Density Polyethylene (HDPE) plants, being built on the site of the SCIP. The main goal of establishment of the SCIP is acceleration of economic development of Azerbaijan, increasing competitiveness in comparison with other countries that are leading in terms of development of innovative industries. SCIP supports innovative industrial initiatives by extensive tax exemptions, and provides full infrastructure support and single point approach on all permitting issues. PP and HDPE plants of SOCAR Polymer will be the first of its kind in Azerbaijan, enabling the country to grow its petrochemical industry through development of production for this segment of plastics market.
180 https://www.angloinfo.com/how-to/azerbaijan/moving/residency/asan-service 181 http://www.socarpolymer.com/
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VOLUME 17, DECEMBER 2016 109 MSME Financing182 The European Fund for Southeast Europe - EFSE (first PPP of its kind and the first privately managed fund in development finance to leverage private funding for MSE finance in the target region) and MuganBank183 OJSC partnered to support the development of micro and small enterprises (MSEs) in the rural regions of Azerbaijan. There are several other projects which need to be considered as a part of the future research.
4.6 Prospective Fields of PPP Development: Sector Assessment Perspective fields of PPP development in Azerbaijan184 could be: . Agriculture (2015 – Year of Agriculture in Azerbaijan) . Alternative Energy . Food Processing and Packaging . IT and Telecommunications (2013 – Year of ICT in Azerbaijan) . Industrial Production (2014 – Year of Industry in Azerbaijan) . Logistics and Transportation . Tourism (2011 – Year of Tourism in Azerbaijan)
Logistics and Transportation Port In an interview with the Port of Baku, Ilham Mehraliyev, Senior Assistant to General Director, explained how Phase 1 – Ferry Rail Terminal has been completed in September 2014 through complete public financing and Phase 2 and 3 could be considered to be done through PPP route. Ilham Mehraliyev mentioned how Baku does not have access to World Ocean, which is why the port needs to be developed as a multi-purpose terminal and not a single container terminal. Hence it is relatively difficult to attract investors. Players like Dubai Ports (DP) and Port of Singapore Authority (PSA) - 80% of their revenue comes from container terminals. For bulk operations at multi-purpose terminal, more infrastructure is required and margins are lower, while in container operations, less infrastructure is required and margins are higher. When contacted for Port of Baku, PSA said that it’s not the scale they are looking at. From a government’s perspective, they do not want to be out of the game completely. So BOT is preferred over a concession agreement.
182 https://www.muganbank.az/en/press/news/1488.htm 183 MuganBank, one of the leading banks of Azerbaijan for more than 22 years 184 CAREC. (2014). PPP in Azerbaijan: Current Status and Perspectives. Retrieved September 26, 2016, from Central Asia Regional Eco- nomic Cooperation (CAREC) Program: http://www.carecprogram.org/uploads/events/2014/PPP-Workshop-TOKYO/Country-Presenta- tions/009_106_209_Azerbaijan.pdf
PUBLIC PRIVATE PARTNERSHIP 110 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN For companies to come and invest at the port, there are several factors: . Are companies coming with a long mind set? . Is current and future scale enough? . If it is a strategic port, will private investment make government lose its control over operations? Talking about investors, it was mentioned how China is changing the whole game – Chinese State Owned Enterprises (SOEs) are active in acquiring assets and they have long-term money from the government. When asked about the focus on transit potential, Ilham Mehraliyev suggested that while it would be explored but that is not the only thing. He explained how the bigger the country, the more it earns from the transit. He gave the example of Kazakhstan where domestic railways would be used for transport from one end to another. He further added that the fundamental principle of logistics is value to weight ratio. Value to weight ratio of the goods defines how far the goods can be transported. For Azerbaijani case, more focus according to him should be on creating free zones – to make more money by adding value. He mentioned that for the case of China, 80% of revenue comes from free zones. There will be two aspects of free zones – one, legislative which is in the process of completion. It will aim at making the zone: . Tax free . Customs free . Access to capital . International arbitration as per English Law Second will be an economic feasibility roadmap which will look into which industries to focus on. Care needs to be taken that there is no re-location of existing companies to free economic zones to avail benefits of tax exemption. Ilham Mehraliyev suggested that one good approach could be to anchor companies from industries and create clusters, like in India. He explained that a funnel approach is used to come down to 5-6 target industries, of which pharmaceutical could be one. The three stages of development could be: . Transit . Distribution Centres . Manufacturing For transit, various models could be looked at for rail and roads like toll roads. He explained how free zones oriented towards exports are more successful than domestic. Given that the purchasing power of Azerbaijan has been going down, export oriented strategy is even more important. He cited the example of Jabel Ali Port in Dubai, through which 60% of UAE exports happen amounting to USD 100 billion of GDP. For the case of Port of Baku, a realistic target
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VOLUME 17, DECEMBER 2016 111 could be 10% exports by 2020, and 5% of GDP equalling to USD 1 billion. It was added that Law on Special Economic Zones has lot of limitations. New separate law is required based on global best standards. When asked about low performance of Azerbaijan in the Logistics Performance Indicator, Ilham Mehraliyev explained how logistics is a network and not an independent entity. As Azerbaijan is surrounded by low developing countries, it has an impact on the Azerbaijan’s indicator. Additionally, there are natural monopolies of logistics providers, and they are not as flexible as private companies. Moreover, Azerbaijan never really saw transit as a source of revenue. He explained that though logistics create revenue, it is not a model of economic growth. Bigger challenge is that Azerbaijan is like land locked. Aim is not to make Port of Baku among top 10 ports, aim is to add economic value, and it could be done via PPP. He also clearly mentioned that they are not trying to re-invent the wheel vis-à-vis PPP Models. Enough has been done across the globe and best practices could be incorporated. What is important is to choose the right partner and the right financing model.
Roads In an interview with AzerAutoYol, Ceyhun Yusifov, Director, Project Implementation Unit No. 4, explained how AzerAutoYol is responsible for maintenance, repair, construction and design of all public roads, bridges and tunnels. They have four different Project Implementation Units (PIU), handling projects financed by Government, World Bank, Private Banks and ADB/ EBRD. Most of the financing comes from international loans or the local budget. All projects are international tenders and the contractor’s obligation is to only finish roads. Contractors are from Italy, Turkey, Slovakia and some are domestic contractors. When asked about the potential of PPP, it was mentioned that so far, a project has never been financed by a contractor. On the issue of toll roads, it was elaborated that Advanced Logistics Group Company made investigation that toll road is not possible in Azerbaijan because of lack of alternative roads. Under ADB–WB financing, Alyat-Astara motorway is being constructed – 30 km is completed and 204 km is under construction. This road is a new road and the existing road will act as an alternative road. Government has intention to make this new road a toll road. Talking about the nature of contracts, he added that typically contracts are 18 months or 36 months contracts. A usual defect liability period would be 2 years. Equipment generally falls under contractor’s obligation as Azerbaijan does not produce any construction equipment. About the potential of PPPs in future, he said: . They never had an experience . They have enough state budget savings . They have enough financing by ADB and World Bank All such decisions are made by the Ministry of Finance who is the contract signing authority
PUBLIC PRIVATE PARTNERSHIP 112 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN from the government’s side. But if private sector offers lower credit lines than ADB and WB, then AzerAutoYol sees no reason why it should not be considered, however AzerAutoYol is only an implementation agency. The decision lies in the hands of the Ministry of Finance.
Information Communication Technology In an interview with Ministry of Communications and High Technologies, Elmir Velizadeh, Deputy Minister, explained that ICT is a high priority sector in the non-oil economy. Since 2014, National Society for Information Development Strategy was formed with Government and Private sector both playing a key role. Elmir Velizadeh mentioned that private sector forms a key part in this sector – holding 70% of the share. Talking about facilitating initiatives, he mentioned that several licences have been abolished beginning 2000 onwards for internet service providers. That is indicative of the opening up policy. There are only 2 public operators; all others are private and around 500 IT companies – all private. Besides, a State Fund for Development of Information Technologies was mentioned which provides financial assistance to MSMEs for the last 3 years. It has 3 branches: . Grants to Start-ups . Loans at low interest rates . Investment into activities Talking about the High Tech Park (Pirallahi Island), he mentioned how resident companies get 7 years of tax exemption. Giving a PPP example, he elaborated on a project by the Ministry of Communications and Ministry of Education called the National Computer Project 2009, offering computers to teachers of secondary schools at lower prices. These were Hewlett-Packard (HP) computers equipped with Microsoft products. This is being extended to all school children, teachers of secondary schools, and workers of universities. The government provides warrantee, HP provides computers, Microsoft provides all licences, and local companies do financing. Also, the government through MCHT provides access to internet and Ministry of Education equips these computers with e-books. MCHT provides delivery services to the region at no additional cost through AzerPost. Till date, 30,000 computers have been already sold. Buyers (mostly teachers from the regions) have access to loans at rates almost 0% as opposed to normal 20%. Additionally, a decrease in piracy levels has been witnessed. Seeing the success of the project, Kazakhstan, Georgia and Russia have tried to do something on similar lines. When asked about the PPP Center with UNECE, it was said that an agreement has not been reached so far, but there are continued negotiations with the UN. About broadband infrastructure, it was mentioned that for expansion of infrastructure, they are open to participation from private players and an example was cited where in Nakhchivan, private company was the operator for the Digital TV Broadcasting Infrastructure. He mentioned of two other associations – Association of Internet Operators and Azerbaijan ICT Association
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VOLUME 17, DECEMBER 2016 113 (AICTA) which facilitate private companies in this sector. The High Tech Park by MCHT is the first business incubator for growth of start-ups. They are assisting universities in setting up business incubator units. Lastly, they are launching Open Government Data which will provide companies access to all government data as required. There is a growing consensus around the idea that government should be transparent, accountable and open to citizen engagement – particularly in achieving development goals. This concept is often referred to as “Open Government” with three core elements of transparency, participation and collaboration with businesses and citizens185. One of the critical aspects of this concept is that of a government that proactively opens up its information to the public. Open Data plays a key role in Open Government, both as an enabler and a as a pre-condition. In 2012 the Government of Azerbaijan joined the Open Government Partnership (OGP) initiative with a view to improve its activities aimed at increasing transparency and promoting Open government; to exchange the international experience; and to contribute to the international efforts in this domain.
Social Projects In an interview with the British Petroleum, Communications and External Affairs team, when asked if BP intends to enter into a PPP agreement in for example Shah Deniz 2 Project, it was explained that PPP model does not really work well in the oil sector because of the magnitude and scale of the projects. Rather, PPP model is something that can be looked at for Social Investment Projects. On Social Projects, it was mentioned how in 2011, the Center for Innovations in Education piloted a community-based preschool project funded by the British Petroleum and the Ministry of Education in one of the rural areas of western Azerbaijan (Shamkir rayon). BP financed building of new kindergarten, developing curriculum and training, and then handed it back to the government. About other projects in the Education sector, it was said that there have been other initiatives in the education sector, like Qafqaz University project where BP invested USD 2.5 million to establish 2 departments and 16 laboratories like for software, hardware, petrochemicals, mechanical engineering for the development of Azerbaijan’s experts in engineering. Additionally, Big Data Center (first of its kind in the Caucasus region) is being set up with ADA University. Besides, there is oil and gas scholarship program for graduate studies in engineering and geosciences at universities in Turkey and Azerbaijan. The BP team also elaborated on their partnership with George Washington University on School of Project Management. In the first phase, 60-70% is funded by the BP and remaining by the participant himself. During the last phase of task implementation, potential lecturers from local students are selected; they then undertake shadow assignments with international tutors. Over the years, more local tutors will bring the total cost of the program down. BP, Statoil, Chevron, and the IFC, partnered by GTZ (German Technical Cooperation), launched a two-year PPP in 2004 to help local businesses benefit from investments in the oil and gas industry. This was to help SMEs develop management and governance to compete for projects in the international oil market. Gap assessment study is conducted vis-à-vis HR,
185 Retrieved from http://www.azerweb.com/ngos/8/events/8361/TOR_consultant_2.pdf
PUBLIC PRIVATE PARTNERSHIP 114 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Ethics Compliance, Management, and Safety and training provided on how to fill these gaps. Thereafter, companies are said to have graduated from this program. When asked about the role of PPP, it was said that public private partnership is possible in the cases like infrastructure development, roads, construction, and tourism. But in the case of oil sector, there are three things: . It is too expensive . It is deep water . Construction of jackets and rigs is a game of billions of dollars The same thing was said when asked about any possible PPP in Shafag-Asiman project 2017 that the project will involve a Production Sharing Agreement (PSA). PPP could be in CSR initiatives.
Utilities – Gas and Electricity In an interview with Azerigas, Rashad Mustafayev explained how Azerigas is mainly responsible only for the distribution of gas. Most of the financing comes from SOFAZ. Private companies work as contractors. It was mentioned that it could be good to have private sector financing for Baku Absheron Gas Pipeline or for Smart Payment System involving purchase of gas smart flow meters from Germany and France. In another interview with Azerishiq, Vugar Aliyev, Director of Education Center, explained that Azerishiq is the electricity distributor in Azerbaijan. Azerbaijan has been ranked 105th in World Bank’s Getting Electricity ranking 2016186. According to this report, it takes 87 days to get an electricity connection and Azerbaijan scores 4 of 8 on supply and transparency. Given what Azerbaijan has, there are continued efforts to make the process easier for private players coming into Azerbaijan. E-government portal has been set up, continued online surveys are being conducted and ASAN service is reducing the bureaucratic challenges. Talking about the role of private sector, it was mentioned that the infrastructure development is done by private sector, mostly domestic though, and foreign companies like Schneider, Siemens and others provide equipment and training. Overall, Azerishiq did not see much of a role of PPP except for the infrastructure development done by the private sector where they have not explored the potential of PPP yet. Azerbaijan Vision 2020 entails a development strategy targeting Public Private Partnerships187. In an interview with Delegation of European Union to Azerbaijan, Olaf Heidelbach, Program Manager, mentioned about 3 areas for potential PPP opportunities:
186 http://www.doingbusiness.org/rankings 187 CAREC. (2014). PPP in Azerbaijan: Current Status and Perspectives. Retrieved September 26, 2016, from Central Asia Regional Eco- nomic Cooperation (CAREC) Program: http://www.carecprogram.org/uploads/events/2014/PPP-Workshop-TOKYO/Country-Presenta- tions/009_106_209_Azerbaijan.pdf
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VOLUME 17, DECEMBER 2016 115 . Port of Alyat (There could be cooperation between Rotterdam and Baku on exchange of PPP approaches) . Vocational training and education . Agriculture and Waste Management
4.7 Role of Multilateral Institutes Multilateral Development Banks (MDBs) need to capitalize on the momentum of regional economic downturn to motivate political will and guide the Central Asian states towards establishing dedicated governmental units for PPPs that include hard targets for infrastructure project financing within annual government spending188. Fuad Huseynov, from Islamic Development Bank added that for PPP-ization of infrastructure projects, multilateral institutions like the WB and the ADB have knowledge but no local counterparts to make progress in this area. PPP units within Ministry of Finance could serve this purpose. Beefing up of existing PPP units should be targeted through knowledge sharing and capacity building. Newly established governmental units would provide an essential counterpart for many international entities dealing with PPPs. In turn, these units could create the institutional capacity and knowledge to be able to justify reforms, identify good projects and conduct cost-benefit analyses for capital investments using public funds. Setting hard targets for PPP projects will enable these newly established units to adopt the necessary policies to attract private investment and steer the government towards more of a profit-generating mindset that still serves the public good189. The Republic of Azerbaijan in 2011 received financing from the WB toward the cost of the Public Investment Capacity Building Project190. The objective of the training program was to introduce basic Public Private Partnership concepts, policies, and strategies; provide the participants with various approaches, methods, and techniques in the development of PPP Projects; with the institutional requirements to promote and guide PPP; with various case studies and lessons learned from other PPP projects and to translate these lessons learnt into the Azerbaijani context. Additionally, ‘Azerbaijan-Central Asia Financial Markets Infrastructure Advisory Services’ Project of International Finance Corporation (IFC) entailed a diagnostic study to define PPP models in Azerbaijan and Uzbekistan. The project worked with the major stakeholders in Azerbaijan and Uzbekistan on determining their strategies for further development of the existing credit information sharing systems. In this respect, in August 2010, a team of internationally recognized experts carried out diagnostic studies of the Centralized Credit Registry, Central Bank of Azerbaijan and the National Institute of Credit Histories, Central
188 Huseynov, F. (2016, June 17). The Time Is Ripe for Public-Private Partnerships in Central Asia. Harvard Kennedy School Review. 189 Huseynov, F. (2016, June 17). The Time Is Ripe for Public-Private Partnerships in Central Asia. Harvard Kennedy School Review. 190 http://www.training.edu.az/index.php?option=com_content&view=article&id=837%3A-doevlt-v-oezl-sektor-arasnda-mkdala-dair-tlim- kursu-maraqlarn-ifadsi-uecuen-dvt&catid=44%3Anews&lang=en
PUBLIC PRIVATE PARTNERSHIP 116 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN Bank of Uzbekistan. The expert team conducted series of meetings with the Central Banks, private banks, non-banking credit institutions, and banking, microfinance and leasing associations191.
In an interview with ADB, it was mentioned about three PPP proposals submitted to the Government of Azerbaijan in the following sectors: . Toll Roads . Ports (Alyat) . Energy (Sumgait Technologies Park) It was further mentioned that these proposals did not see any success specifically because back then, the government had the financial resources, more so liquid money, to invest in these projects and also the budget allocation was already made for all these 3 projects from the government’s side. Additionally, for construction of toll roads, there was a need for alternate roads and that is why it was not the case for Azerbaijan. So it was not considered worthwhile to reinvent the wheel and try to incorporate PPP model for these projects. The experience of Barmek, the Turkish private player was cited in Azerishiq. Despite involving Barmek, government continued to witness the same shortage and issues vis-à-vis electricity because of the cheap equipment installed by the Barmek. Hence, for several years, the notion was set that government should keep investing and building under their control and involve private sector to operate and maintain only. Though the dialogue between ADB and the Government of Azerbaijan (Ministry of Economy) is still weak on the PPP aspect, the ADB is working on a new proposal for a potential PPP project in the Education sector. Based on the conversations between ADB and the Ministry of Education, it was discussed how the state of dormitories in public universities needs substantial improvement. ADB is devising a full-fledged business plan for this project to be submitted to the Ministry of Education. The project - dormitories in public universities is expected to be one of the flagship projects of the PPP team of ADB Azerbaijan. Depending on its success, ADB said that it is ready to provide assistance in development of the law on PPP. USAID and other European institutes have experience working on the PPP law and ADB can build on it. On elaborating on the PPP law, Nail Valiyev mentioned that the biggest barrier to entry for private players is the absence of a separate PPP law in Azerbaijan. It is very difficult to find an investor who is ready to invest in a country with no defined regulatory or legal framework for private investors. Hence, given ADB’s Transaction Advisory Services, the ADB is ready to assist the government in drafting a new PPP law.
191 International Finance Corporation. (2010, August). Azerbaijan - Central Asia Financial Markets Infrastructure Advisory Services Proj- ect. Retrieved September 29, 2016, from International Finance Corporation: http://www.ifc.org/wps/wcm/connect/b8b2f2804b71f- 5688308b36eac26e1c2/ACAFI_Newsletter_Volume2.pdf?MOD=AJPERES
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VOLUME 17, DECEMBER 2016 117 Talking about the impact of devaluation of Azerbaijan’s currency and decrease of oil prices on foreign companies’ choice to come to Azerbaijan, Nail Valiyev mentioned how most of FDI goes to the oil sector. Over the years, private companies have remarked that the business environment is not favourable in Azerbaijan. While as evident in the Ease of Doing Business report of the WB and given the setting up of ASAN Services, Azerbaijan is doing better on the business environment, devaluation has made the local labour cheap. Given that Azerbaijan has both transparency and cheap labour now, it’s time for the government to advertise and attract the private investors. Simultaneously, the government should look at stabilizing the financial sector (closing of banks creates a negative perception of the stability of the banking sector) and on the reduction of custom duties to facilitate imports for these private players. Besides, financial services in Azerbaijan are still concentrated in the capital, Baku, making financial services inaccessible to small enterprises in rural areas. The ADB’s partnership strategy for Azerbaijan has therefore emphasized support for more broad-based growth in the private sector. ADB selected three banks for what was to be its first venture in the country’s private sector. These were Azerigazbank, Bank Respublika, and AccessBank. Nail Valiyev explained that the ADB works in MSME support in agricultural and other areas through financial intermediation. For example, the ADB has given USD 125 million of loan to AccessBank to support rural inclusion and it monitors effective use of funds through the expanding size of rural portfolio of AccessBank. On ADB’s support for other sectors, Nail Valiyev gave the example of water sector that USD 1 billion of investment is being made in the regions of Aghdash, Aghjebedi, Beylagan and Nakhchivan. This ranges from providing clean water and sanitation services to setting up waste water treatment plants. Given that there are multiple financing options available with the government and the pipeline is overloaded, the ADB will only continue with its ongoing portfolio which will end in 2018 and is not considering of any more investments in this sector. ADB helps the government to identify the lowest technically responsive bid. Private companies from all 67 member countries of the ADB are allowed to bid for these projects. The main difference between such projects and PPP is that the risk and guarantee lie with the government in this case while they are on private sector’s shoulders in the case of PPP. The Public Private Partnership Community of Practice, now known as Thematic groups, with ADB’s Regional and Sustainable Development Department as its secretariat contributes to knowledge management and capacity development of ADB staff on PPP approaches and techniques involving sovereign and non-sovereign operations. It coordinates the preparation of PPP training programs together with Human Resources Division; organizes PPP events and conferences; and invites PPP practitioners to share their experiences with policies, transactions, and other PPP-related issues with the ADB staff. Nail Valiyev mentioned that this is being done in Azerbaijan as well with Minister of Economy continuously participating in PPP Workshop in Tokyo and ADB’s Country Director for Azerbaijan participating in the same workshop. Besides, there are trainings for other government officials and ADB staff working on PPP sector.
PUBLIC PRIVATE PARTNERSHIP 118 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN IFC’s PPP Advisory Unit, as explained by Nicola Saporiti, functions as consultants to the government. The team would for example comprise of an engineering consultant, legal firm, environment input to assess the project viability. Additionally, IFC’s global presence helps mobilize investors. PPP Knowledge Lab of the WB is a repository of documents and success stories. When asked if PPP make more room for corruption, it was mentioned that according to the IFC, there is more corruption without PPP as all state controlled entities are run by politicians. PPPs besides the technical know-how and financial resources bring with them transparency, investors, auditors and regulators. On readiness assessment for PPP in Azerbaijan, it was mentioned that it is done by the WB and not by the IFC. IFC engages in this, mostly in the post proposal acceptance stage where it would do due diligence, readiness assessment and look at regulatory framework. To conclude, Azerbaijan has more favourable business environment than ever before. Its time government facilitates the entry of private players. A strong legal and regulatory framework including a separate PPP law is needed. Success of the ADB’s dormitory project and the IFC’s Alyat Port proposal might open several other avenues for collaboration between multilateral institutions and the Government of Azerbaijan to promote PPPs. Going forward, as Nicola Saporiti, IFC, mentioned, many countries privatize without liberalizing the market. However, key is to first liberalize then privatize in order to have appropriate risk transfer mechanism, regulatory framework, transparency, independent regulatory body etc. Fuad Huseynov, Islamic Development Bank, focused on creating the right PPP environment (for example through effective PPP modalities in place to resolve issues arising due to differing interests of various parties) than to jump start on PPPs. Once jump-started, creation of multiple PPP units need to be looked at within institutions aiming to introduce PPPs, such as Ministry of Transport, Ministry of Energy, AzerAutoYol, Azerbaijan Railways, Azersu, Azerishiq and other relevant institutions, that could be regulated by a centralized PPP unit under Ministry of Finance, Ministry of Economy or just a separate independent agency under the President of Azerbaijan, where experience shows that the latter is the most recommended case for Azerbaijan. Besides, the entity to be established would be called as an infrastructure commission or committee dealing with assessment, permission, regulation, recommendation of all infrastructure, hard as well as soft, projects even made without PPP modalities. Given all of this it needs to be understood that PPPs may not be the ultimate solution, but they can help address many of the issues systemic to the region in the field of infrastructure development. All it needs is a systematic approach undertaken through joint efforts of private and public sector.
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VOLUME 17, DECEMBER 2016 119 BIBLIOGRAPHY
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PUBLIC PRIVATE PARTNERSHIP 124 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN (Footnotes) 1 Clark, S. (2016, January 21). DP World to Invest as Much as USD2 Billion in Russian Ports. The Wall Street Journal. 2 American Association of Port Authorities. (2016, April 6). Survey Shows U.S. Ports Plan Big Investments In Capital Projects. Alexandria, VA, U.S. 3 Business Standard. (2016, January 18). Indian Railways plans to invest USD 142 billion in five years: Suresh Prabhu. New Delhi, India. 4 Reuters. (2015, June 24). China’s CITIC to invest USD113 billion for “Silk Road” investments. 5 Chao, J., & Kasper, H. (2015). 2015 Global PPI Update. Public Private Partnership Group, The World Bank. 6 The Sewerage and three rail projects were subsequently re-nationalized
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PUBLIC PRIVATE PARTNERSHIP 126 ASIAN PERSPECTIVES RECOMMENDATIONS FOR AZERBAIJAN
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VOLUME 17, DECEMBER 2016 127 Authors: Mahir Humbatov and Nikita Singla
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