China Daily: Spotlight on HK’s private-public funding model

Hong Kong’s approach to building infrastructure by using a combination of private sector incentives and government support could be a useful model for cities globally.
Speaking on Sept 21 at a China Daily Special Forum on how to fund infrastructure building in Asia, Geert Peeters, group director and chief financial officer at CLP Holdings, said popular as they are, however, there are a number of challenges in creating an environment conducive to absorbing more and larger public-private partnerships (PPPs) infrastructure projects.
“As other megacities around the world emerge, more and more are looking at this model,” said Peeters. CLP is a Hong Kong energy provider listed on the Hong Kong stock exchange that has long experience in PPPs.
The China Daily Special Forum was co-hosted by the newspaper and the Asia Society.
Emerging Asian dragons
Massive investments in infrastructure, telecommunications and education are keys to the rapid regional economic growth, said Zhou Li, publisher and editor-in-chief of China Daily Asia Pacific. These investments, combined with proposals for a new Maritime Silk Road put forward by Chinese President Xi Jinping and plans for a new infrastructure investment bank, could drive infrastructure construction in the region.
“All these augur well for the future of emerging Asian dragons,” said Zhou. “This forum may be able to shed some light on how these strategic initiatives can stimulate Asian economic growth, the role that Asian investors play in turning these projects into reality and how Asian countries can cooperate in meeting the challenges and seizing the opportunities that lie ahead.”
A concern in Asia is regulatory uncertainty. Stable regulatory environments help attract investors but the opposite is also true. Hong Kong, with its mixture of strong financial markets and stable regulations, is an ideal venue for partnerships between government and the private sector, said Peeters.
“These days, project financing goes around the world in different formats,” said Peeters, but with PPPs it is important to look not just at individual projects but also about “how they fit with the socio-economic priorities in each economy”.
Investments in infrastructure can be profitable. CLP has seized opportunities in both India and the Chinese mainland.
The number of PPP projects generally dropped in 2013 across the region but the pendulum appears to be moving the other way. On the mainland, for example, infrastructure investment has gone up 25 percent in the first six months of this year. All told, these investments are responsible for around 10 percent of the country’s economic output.
RMB financing access
And the Chinese mainland is a big player in infrastructure investment both at home and abroad. This role is helping popularize the use of the renminbi (RMB) to fund projects. More access to RMB-based financing could help the region tackle its growing infrastructure needs.
Economic growth in Asia is increasingly tied to more efficient and more interconnected infrastructure. South Asia and East Asia, including the Association of Southeast Asian Nations (ASEAN) need more than $800 billion per year in infrastructure investment to meet their needs. Around the world, capital spending on infrastructure could rise by $5 trillion to $9 trillion by 2025, at current rates of growth.
The importance of infrastructure to achieve sustainable economic growth is not in doubt, said Li Yao, chief executive officer at the China-ASEAN Investment Cooperation Fund.
The benefits of a strong infrastructure backbone go well beyond smooth roads and fast ports. Connectivity, the links between people that good infrastructure provides, can make societies more fair and equitable by giving everyone access to the means of production, said Li.
“Infrastructure is so important to Asia,” said Li. “Infrastructure is not (just) luxury goods (and hard infrastructure) only for the rich but also covers soft (infrastructure).”
Hard infrastructure refers to roads, ports, railways and telecommunication networks for facilitating trade and commerce and to make goods more easily accessible to consumers. Soft infrastructure refers to good finance and the stable legal environment for attracting investment and making it possible to turn the hard infrastructure into visible economic gains.
While pointing out that infrastructure is important for economic growth, efficiency and values, Li said one important area that cannot be ignored is the Internet. Connectivity, currently lacking in countries in the region like Myanmar, Laos and Cambodia, can “help people offset the gap between the poor people and the rich countries”, he said. His fund is already supporting the construction of a fiber optic network in Southeast Asia that would help connect more people.
Yet the question of funding remains. And regulatory stability is key to attracting more funding.
As they rely on domestic consumers for a greater portion of the gross domestic products, economies in South and East Asia are increasingly aware of the importance of strong infrastructure. However, the biggest hurdle to developing efficient and cost-effective infrastructure skeletons is finding the capital. Governments want to attract more private capital to cut down on their costs, but private capital wants some guarantees that their investments will generate returns. So the focus of infrastructure financing is, increasingly, on PPPs.
Demand for PPPs
Both governments and investors want to see more PPPs. On the one hand, the private investment helps to lower governments’ financial risks, but on the other, government involvement can help overcome challenges brought about by the developing — and changing — nature of most markets in Asia.
“The reality is that the need is there, the pipeline is there but the project implementation, that is where the need is,” said Cledan Mandri-Perrott, lead finance officer and PPP specialist at the Singapore Infrastructure Hub of the World Bank. “That is one of the biggest challenges that we have in the region, (that is) to be able to push the pipeline … If we want to do PPPs we need to have the right balance.”
Thailand is a case in point. The country is solid from a financial perspective. It is strong enough, for example, to issue bonds for infrastructure investment. And yet, there is a lack of political certainty. And uncertainty is scary to investors.
To attract more projects, governments need to make the returns attractive to private investors.
BRICS banks
New entities like a BRICS bank or the proposed infrastructure investment bank can work with more established players like the Asian Development Bank (ADB) or the World Bank to backstop government obligations and, in turn, offset liquidity concerns.
“(We) need the right mechanism to develop and manage contingent liabilities,” said Mandri-Perrott. “The alternative is to keep doing what we at the World Bank or the ADB have been doing for 50 years, which is to fund public spending.”
“It is not just about building things. It is about making sure that you are building the right things, about achieving the right network effect.”
“If we can use the capital markets to look at projects on their merits, I think that would be a big drive,” said Mandri-Perrott. “The challenge in PPPs, particularly in greenfield projects, is involving the capital markets early on … today they don’t because if you have a bond issuance you want to have a solid capital returns to pay off the bondholders.”
As things stand today, it is not always easy to attract private players. Banks are reluctant to participate because there are concerns in terms of the cash flow and the size of the investment, said Jason Yeung Chi-wai, deputy chief executive at Bank of China (Hong Kong), which is involved in just one PPP project on the mainland.
“When we talk about infrastructure, most people (think) about the bricks and mortar projects,” said Yeung. “For us, as an investment bank, we look at the financial infrastructure. We need to work on a framework that can give confidence for banks.”
The Hong Kong model could prove to be an effective one as it is the clear and effective use of PPPs. For many cities, Hong Kong may offer a useful model thanks to its combination of government involved in the development of the city’s famously good infrastructure and the role of private investors in providing working capital. The model, said Peeters, could be used elsewhere just as easily.
Around the region, even in the face of uncertainty, PPPs have been used well at times, said Peeters.
“China and India are markets that have created opportunities for us and are moving in the area of PPPs,” said Peeters.
http://www.chinadailyasia.com/2014-09/25/content_15170773.html