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Kiichiro Fukasaku Development Centre

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1 Kiichiro Fukasaku Development Centre
Public Private Partnership in Infrastructure Development Kiichiro Fukasaku Development Centre Japan-OECD-Vietnam Public Private Partnership Forum Hanoi  3rd March 2008

2 1 Introduction 2 PPP in Infrastructure 3 Opportunities for Asia 4 Challenges and Best Practice 5 OECD Policy Support

3 Introduction Financing fails to meet infrastructure needs
people lack access to infrastructure worldwide 1 billion people without access to roads 1.2 billion without safe drinking water, 2.3 billion without reliable energy 2.4 billion without sanitation 4 billion without modern communication (Source: Promoting Pro-Poor Growth, OECD 2007)

4 Annual World Infrastructure Expenditure
Outlook: Annual World Infrastructure Expenditure Estimated averages in US$ billion and % % of World GDP Road 220 0.38 245 0.32 292 0.29 Rail 49 0.09 54 0.07 58 0.06 Telecoms1 654 1.14 646 0.85 171 0.17 Electricity2 127 0.22 180 0.24 241 Water1,3 576 1.01 772 1 037 1.03 Total 1 626 2.84 1 897 2.49 1 799 1.79 Estimates apply to the years 2005, 2015 and 2025. Transmission and distribution only. Only OECD countries, Russia, China, India and Brazil are considered here. (Source: Infrastructure to 2030, OECD 2007)

5 Challenges Globalisation and impact on infrastructure Urbanisation
Growing interdependence between infrastructure systems Meeting future financial needs Infrastructure vital for growth and vice versa Globalisation: rapidly rising demand, great losses in case of insufficient infrastructure or interruptions Urbanisation: but also new urban forms – moving to the country-side, creating new remote “villages” (condominiums) Interdependence and convergence: service provided by one infrastructure becomes important input for another; leads to economies of scope but also to increased vulnerability (if one element fails, the entire system fails) Financing: growing demand and maintenance, environmental concerns

6 1 Introduction 2 PPP in Infrastructure 3 Opportunities for Asia 4 Challenges and Best Practice 5 OECD Policy Support

7 Infrastructure How to raise incentives for private sector involvement?
Efficiency vs. equity High up-front costs, late returns on investment High multi-faceted risks and uncertainty Political dimension Public good character Limited access to financial markets How to raise incentives for private sector involvement? Challenges in infrastructure development Political dimension: geopolitics, security, public opinion and political interests Access to financial markets particularly critical in developing countries

8 Investment Commitments 1990 – 2006
PPP in Infrastructure in Developing Countries Investment commitment to PPP infrastructure projects grew for the third consecutive year in 2006 Peak in 1997 followed by sharp decline as Asian financial crisis triggers risk aversion (Source: World Bank PPI Project Database)

9 Investment Commitments by Sector
2006 US$ billions Total Telecoms Transport Energy Water Telecommunications has attracted the most interest from the private sector Greatly needed water and sanitation infrastructure remains at very low level (Source: World Bank PPI Project Database)

10 Investment Commitments by Region
2006 US$ billions (Source: World Bank PPI Project Database)

11 1 Introduction 2 PPP in Infrastructure 3 Opportunities for Asia 4 Challenges and Best Practice 5 OECD Policy Support

12 Global Competitiveness Report
World Economic Forum, Asia lags behind in infrastructure development Growing demand for infrastructure Prerequisite for economic development Needs are not met by governments for financial and capacity constraints Infrastructure development lags behind world standard in quality and quantity. High GDP growth is not sustainable given the infrastructure bottlenecks.  new forms of investment/management to be explored (based on: World Economic Forum, The Global Competitiveness Report )

13 Asia: the Private Sector Re-engaging in Infrastructure Development
2006 US$ billions Private participation in infrastructure development in Asia is on the rise. Putting South Asia and East Asia / Pacific in aggregate, Asia clearly outperforms the other regions considered by the World Bank PPI Project. This trend indicates improvements in PPP management but also hints at the potential to be leveraged – a perfect time to discuss PPP in Asian Infrastructure Development. (Source: World Bank PPI Project Database)

14 Private sector investment in infrastructure Estimated infrastructure needs
Asia 284.0 $ billion - East Asia / Pacific 75.0 cumulative - Southeast Asia 136.6 - South Asia 67.5 - Central Asia 7.5 Asia 248.8 $ billion - East Asia / Pacific 178.9 per year - South Asia 63.1 - Central Asia 6.8 funding challenge! rapid growth of infrastructure needs opposed to limited governmental financing/management capacity Data not perfectly comparable due to different regional aggregation but hints at divergence of needs and capacity East Asia: China alone accounts for almost 80 % of investment needs South Asia: energy sector accounts for nearly one half of investment needs (Source: ADB‘s Infrastructure Operations, ADB 2007)

15 Asia: Regional Imbalance
2006 US$ billions Intra-regional differences, however, are striking. India and China obviously outstrip the rest of the region due to their economic growth potential. Vietnam has performed weakly although counter the trend of the ASEAN-4 in terms of peaks/lows (e.g. 2003) (Source: World Bank PPI Project Database)

16 Asia: Regional Imbalance
East Asia and Pacific South Asia Population In millions 1823 1378 Poverty % living on less than US$ 1/day 15 31 Urbanisation % urban population 43 28 Electricity % with access to electricity 88 Water % access to improved water sources 78 84 Sanitation % access to improved sanitation 49 35 Transport % of rural population living within 2 km of all-season roads 95 65 Communication % fixed/mobile phone subscribers 36 6 Access indicators illustrate large gaps between infrastructure development in East Asia/Pacific and South Asia. Ability of individual countries to mobilise private savings for infrastructure varies Domestic capital markets are at very different stages of development. (Based on: Nataraj, Infrastructure Challenges in South Asia, ADB Institute 2007)

17 Status of infrastructure development ─ ranking among 131 countries
Vietnam Status of infrastructure development ─ ranking among 131 countries 1st (best) 131th Ranking provided by The Global Competitiveness Report Vietnam needs to catch up – ranks among the least performing 50 % in all infrastructure areas – among the least performing 1/3rd (!) for port infrastructure, electricity, roads, and air transportation facilities (based on: World Economic Forum, The Global Competitiveness Report )

18 Vietnam “Vietnam serves as an excellent example of how infrastructure can foster a sharing of the benefits of growth … Economic development has been remarkably pro-poor, lifting around 20 million people out of poverty.” Connecting East Asia, 2005

19 1 Introduction 2 PPP in Infrastructure 3 Opportunities for Asia 4 Challenges and Best Practice 5 OECD Policy Support

20 Challenges Ahead Balance public and private engagement
Double imperative: profitability ↔ social ends Dichotomy of public and private interests Limited institutional capacity Specificity of infrastructure market Commercial risks in developing countries Political dimension

21 Rapid growth yet marked by 1997 crisis
Connecting East Asia A New Framework for Infrastructure – ADB, JBIC, World Bank – 2005 Rapid growth yet marked by 1997 crisis Urbanisation vs. rural development Regional infrastructure linkages Environmental protection Policy, agency & stakeholder coordination Funding challenge Initiative to investigate and promote infrastructure development in East Asia. Strong coordination is a prominent feature of the history of infrastructure development in leading countries like Singapore, Korea, Japan – strong strategic visions were translated into practical sectoral strategies adapted to the state’s capacity – yet these examples were dependent on strong central planning units. Increasing private participation in infrastructure development is paramount.

22 New framework: Inclusive Development
Connecting East Asia New framework: Inclusive Development Poverty Reduction Growth Service Access Growth Determinants Infrastructure Access Determinants Infrastructure helps connect growth to the sharing of benefits (adapted from: ADB/JBIC/World Bank, Connecting East Asia, 2005)

23 India Meeting infrastructure investment needs Government investment in infrastructure 2006: $ 60 billion 2008: est. 130 billion 2006: 4.7 % of GDP ≈ $ 41 billion 2008: 8 % of GDP 100 billion (GDP at current prices, IMF estimates) Government commitment to increasing infrastructure spending will remain far behind estimated investment needs. India depends on private participation in infrastructure development. Government adopted a diversified strategy to attract private investment in infrastructure: [next slide] (Sources: OECD Economic Surveys: India, 2007; IMF World Economic Outlook, 2007; DEA/MoF/ADB, Facilitating Public-Private Partnership, 2006; Rastogi, India Infrastructure Report, 2006)

24 India Viability Gap Funding: funds up to 20% of cost for state projects implemented by private sector developer (competitive bidding) India Infrastructure Finance Company Ltd.: wholly government-owned company to provide long-term finance to infrastructure projects; priority for PPP + strong government commitment to PPP in infrastructure Government of India committed to PPP in infrastructure Viability Gap Funding Scheme supports financial viability of infrastructure projects which are economically justifiable but not viable commercially in the immediate future; administered by the Ministry of Finance with an Empowered Committee which ensures fast processes IIFC will provide refinance to banks/financial institutions for loans of five years or more; borrowings of IIFC are to be guaranteed by the Union government Government commitment: Committee on Infrastructure and wide range of guidelines/action plans promote PPP; focus on capacity building and dissemination on PPP at state and business level  Initiatives have met with broad appraisal among private sector (Sources: OECD Economic Surveys: India, 2007; DEA/MoF/ADB, Facilitating Public-Private Partnership, 2006; Rastogi, India Infrastructure Report, 2006)

25 India: Lessons learnt Government commitment Transparency and communication Innovative financing schemes Capacity building Proper risk allocation (efficiency, capacity) Consideration of alternatives to PPP Continuous private sector consultation

26 1 Introduction 2 PPP in Infrastructure 3 Opportunities for Asia 4 Challenges and Best Practice 5 OECD Policy Support

27 Monitoring OECD country policies in infrastructure development
OECD Contributions Monitoring OECD country policies in infrastructure development Infrastructure to 2030 Economic Surveys International Investment Perspectives Support to public policy-making OECD Principles for Private Sector Participation in Infrastructure Support to donors Promoting Pro-Poor Growth: Four Guiding Principles for Meeting Infrastructure Challenges

28 Government budgets tied to social spending in the future
Infrastructure to 2030 Average annual infrastructure investment requirements to 2030: 3.5 % of World GDP Government budgets tied to social spending in the future New “business models” and innovative financial solutions needed  Analysis by sector Two-year project launched in Spring 2005 on “Global Infrastructure Needs: Prospects and Implications for Public and Private Actors” -- this is an interim report, reflecting findings to date OECD countries only Adopting a long-term perspective on infrastructure: Maintenance and upgrading needs Societal transformation Economic changes Environmental concerns Demography, e.g. for Asia urbanisation, ageing society (Japan) Infrastructure is not just a distinct sector but a series of interdependent systems India: water, sanitation Asia: urbanisation Infrastructure to 2030 discusses business models of infrastructure development

29 Policy Guidance for Governments
OECD Principles for Private Sector Participation in Infrastructure practical implementation tool of 24 principles aimed at governments and private sector actors illustrates how to : Design and manage PPP projects in infrastructure Improve the institutional environment Encourage responsible business conduct

30 OECD Policy Guidance for Donors
Four Guiding Principles for Meeting Infrastructure Challenges Use partner country-led framework for coordinated donor support Enhance infrastructure’s impact on poor people Improved management of infrastructure investment for sustainable outcomes Increased and efficient infrastructure financing (Source: Promoting Pro-Poor Growth: Policy Guidance for Donors, OECD 2007)

31 Kiichiro Fukasaku Development Centre
Thank you! Kiichiro Fukasaku Development Centre


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