Public-private partnerships in basic infrastructure

Eric Teo Chu Cheow, Singapore

Indonesia achieved an important scoop in organizing the Infrastructure Summit last week, when more than 600 infrastructure bigwigs and local entrepreneurs assembled in Jakarta to hear of a "new partnership" in infrastructure investments, which was proclaimed by President Susilo Bambang Yudhoyono.

Public-Private Partnerships or PPPs in infrastructure are a means of "farming out" public sector goods and services to the private sector to design, build and operate for a specific period of time (normally 25 to 30 years); different from outright privatization, PPPs do not involve the state selling the public assets to private companies, but "leasing" them to the private sector to deliver public services more efficiently, according to their best practices in technology, finance and management.

At the Jakarta Infrastructure Summit, it was hoped that the private sector would massively invest in Indonesia's infrastructure through the PPP scheme; the government would need some US$145 billion for infrastructure development in the next five years.

The first tranche offered consisted of 91 projects worth $22,5 billion, whereas another Summit in November could release another $57.5 billion of projects. In fact, the government hopes to get the private sector financially committed to two-thirds of the country's infrastructure investment needs (for at least $80 billion), leaving depleting public coffers and local financial institutions to support the remaining one-third ($30 billion). Key sectors identified would include power, water and sanitation, oil and gas facilities, information technology, transport and logistics (highways, ports and airports).

Indonesia is in dire need to develop and improve its infrastructure, after years of wanton neglect and political uncertainties. To attract manufacturing and services investments urgently into the country (so as to tap its vast natural resources for growth and development), Indonesia clearly needs good infrastructure to "re-kick-start" foreign direct investment (FDI) and local investments.

In fact, Java is facing severe brown-outs, as electricity production capacity is currently seriously strained; unclean water and ineffective sanitation threaten big cities such as Jakarta or Surabaya, whereas IT limitations could "cringe" future FDIs.

Good infrastructure is the key to development and growth.

Decentralization in Indonesia could however provide both a boon and formidable challenge to PPPs, as local governments and bupati lack both the financial resources and technical expertise to provide basic infrastructure and public services to the people. But to facilitate FDI flows and the massive participation in the private sector, the Government must set a clear, transparent and credible framework for PPPs to be implemented at both the central and local levels; the bureaucracy at central and local levels must be equally trained to handle PPPs honestly. Indonesia's financial plight and huge budget deficit are therefore at the core of its decision to turn to PPPs in infrastructure, but its biggest challenge is in its sound implementation.

But in the region, Singapore, Malaysia and Brunei are also warming up to the PPP approach, although their goals and rationale differ. Indonesia should take cognizance of such regional developments and appreciate their challenges as well, whilst implementing its own infrastructure PPP scheme.

Singapore launched into Public-Private Partnerships (or PPPs) in a big way when the government announced in early October a $1.3 billion package of projects to be "farmed out" to the private sector over the next three to five years. The rationale and goal of the government is to use these PPPs to accompany its creative and entrepreneurial drive in the Republic, thus re- kindling the Singaporean private sector.

Under the Singapore government's PPP scheme, public sector non-core projects worth more than $50 million could be out- sourced to the private sector to operate and maintain for as long as thirty years. Six big projects have since been identified and open tenders would be awarded this year; but in fact, Singapore's first sea-water desalination project was already awarded earlier to home-grown environmental company, Hyflux, and Keppel Engineering clinched the first of four new water plants, both under the PPP in infrastructure scheme too.

Malaysia's interest in PPPs presents another political and economic dimension. Prime Minister Abdullah Badawi has pledged to "put some order back" into the private sector, after charges of cronyism had plagued the last Administration. As part of his electoral pledge, Abdullah Badawi has also stressed the importance of making Malaysia's "delivery system" more efficient and people-friendly. These two political reasons would therefore form the basis of Malaysia's current interest in PPPs; unlike Indonesia's financial and technical reasons, Malaysia's attraction for PPPs appears therefore to be more politically and socially motivated.

A report on privatization was commissioned by the National Economic Action Council (or NEAC) last year to re-examine and re- evaluate Malaysia's privatization process thus far and recommend measures to improve the present system, especially in corporate governance and what is deemed a failure of its public goods and services delivery system.

The balance between financial viability, efficiency and social benefits is being stressed, especially when the Abdullah Administration has to deliver on its electoral promises of cleaning up corporate governance in Malaysia, opening up huge infrastructure tenders publicly and transparently, and drastically cutting down wastes, inefficiencies and moral hazards in both the public and private sectors.

Brunei's greatest problem in adopting PPPs would come from the dearth of its private sector and its growing fears that the economy is being kept turning, only thanks to some 70,000 migrant Indian, Filipino and Indonesian workers, whereas some 8,000 Bruneians are "voluntarily" unemployed.

PPPs in the region's four economies present different rationales, goals and challenges. Singapore's PPPs stress the socio-economic imperative of outsourcing to the private sector, whereas Indonesia needs PPPs for financial and technical reasons. On the other hand, Malaysia has a politico-social imperative of corporate governance and efficient "delivery systems", whereas Brunei's dilemma is undoubtedly social, dovetailing PPPs into its diversification and employment policies. PPPs in infrastructure are hence set to affect regional economies in diverse ways, but challenges remain enormous for their successful implementation in Southeast Asia.

Dr Eric Teo Chu Cheow, a business consultant and strategist, is Council Secretary of the Singapore Institute for International Affairs (SIIA).