Infrastructure financing challenges of Cambodia Gaps, Modalities and Recommendations Shuvojit Banerjee UNESCAP
The Importance of Infrastructure Improving Infrastructure is vital for achieving multiple sustainable development goals SDG 7 Affordable and Clean Energy SDG 8 Decent Work and Economic Growth SDG 9 Industry Innovation and Infrastructure SDG11 Sustainable cities and communities
Infrastructure sectors ICT Energy Transport Water & Urban Infrastructure Social Infrastructure (e.g. schools, hospital)
Infrastructure as a special asset class Particularly high upfront capital costs ** Low financial returns and high social returns*** Special Asset Class Late Cash Flows generation* Highly susceptible to coordination failures****
Infrastructure in Cambodia Country Name Access to electricity (% of population) People using at least basic sanitation services (% of population) People using at least basic drinking water services (% of population) Brunei Darussalam 100,0% 96,3% 99,5% Cambodia 49,8% 48,8% 75,0% Indonesia 97,6% 67,9% 89,5% Lao PDR 87,1% 72,6% 80,4% Malaysia 100,0% 99,6% 96,4% Myanmar 57,0% 64,7% 67,5% Philippines 91,0% 75,0% 90,5% Thailand 100,0% 95,0% 98,2% Vietnam 100,0% 78,2% 91,2% East Asia & Pacific (excluding high income) 96,6% 74,6% 93,5% Least developed countries: UN classification 44,8% 32,2% 61,8% Low income 38,8% 29,1% 56,1% Lower middle income 83,4% 52,9% 85,3% Source: World Bank
Infrastructure in Cambodia Brunei Cambodia Indonesia Lao PDR Malaysia Philippines Thailand Viet Nam Overall 60 106 52 102 22 97 43 79 Quality of air transport infrastructure Quality of electricity supply Quality of overall infrastructure Quality of port infrastructure Quality of railroad infrastructure 63 106 51 101 21 124 39 103 53 106 86 75 36 92 57 90 51 99 68 83 21 113 67 89 74 81 72 127 20 114 63 82 0 94 30 0 14 91 72 59 Quality of roads, 33 99 64 94 23 104 59 92 Available airline seat km/week Fixed telephone lines Mobile telephone subscriptions Trade Infrastructure 99 79 14 113 23 27 15 28 62 115 104 60 71 105 91 96 61 52 18 131 28 88 5 44 89 130 54 91 40 67 41 47 Source: World Economic Forum, World Bank
Closing the Infrastructure Gap Investment Needs (% of GDP) 1.4% 2.3% 1.4% 1.8% 1.2% 1.4% 6.3% 1.8% 1.9% 5.2% 3.6% 3.9% Current Investment in Cambodia Gross Fixed Capital Formation ~ 0,01% with no increasing trends Total government expenditures: 22% of GDP Budget deficit around 3.1 % 4.3% 3.6% 2.9% 5.7% Cambodia Lao Pdr Myanmar Timor Leste Transport Energy ICT WSS Source: Branchoux, Fang & Tateno (2017) Source: IMF, ADB and ESCAP calculations
Source of Infrastructure Finance Infrastructure Finance Public Private Government budget Public borrowing Development Partners Corporate Finance Project Finance
Government Provision Capital Recycling Public Borrowings and Budget Deficits Tax Incomes Revenue for Infrastructure Government Business Enterprises
Public Finance flows in Cambodia 900 800 700 600 500 400 300 200 18 16 14 12 10 8 6 4 Leveraging International Support Green energy Using the project preparation facilities Increase of the number of partners (e.g. AIIB, NDB) 100 2 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0 ODA (current USD millions) Linear (ODA (current USD millions)) Tax revenue (% of GDP) Linear (Tax revenue (% of GDP))
A gap between public and private sector financing Infrastructure investments have traditionally been financed with public funds, given the inherent public good nature of infrastructure Public deficits and increased public debt to GDP ratios have led to reduction in the level of public funds for infrastructure Currently, the public sector funds 70% of infrastructure development in Asia The private sector accounts for 20% of Infrastructure financing As countries develop, official development assistance has less impact Source: ADB Institute The remaining 10% are provided by multilateral agencies Private sector needs to step up To address infrastructure gaps, it is estimated that private investments should increase from around $63 billion a year to as high as $250 billion over 2016-2020
Reasons for low private funding Despite ample available capital... Infrastructure is not attractive in both developed and developing countries Global institutional investors currently manage more than US$50 trillion Infrastructure projects rarely rank as the most attractive option to deploy capital on a risk adjusted basis Too much risk and uncertainty over investment returns. Investors have global alternatives which present higher return in other asset classes for the same level of risk Investments in infrastructure assets, with theoretically stable cash yields over time, can often be attractive even to investors with long-term liabilities 55% to 65% of infrastructure projects in emerging markets are fundamentally not bankable without government or multilateral development bank support*
Banking Sector: Declining Involvement in Infrastructure Finance Banks are challenged by the inherent asset-liability mismatch infrastructure finance generates. Banks typically have substantial short-term liabilities, but infrastructure financing often involves long-term assets Double mismatch Currency mismatch the differences between project revenues generated in local currency for debt payments made in a foreign currency New regulations and Trends Large international commercial banks, which had previously provided a significant portion of infrastructure financing have been deleveraging since the global financial crisis. Provisions in Basel III are limiting the role of Banks in Infrastructure financing. Regulation of banking activities, such as capital requirements or liquidity coverage ratios, significantly affects banking industry s position on project finance
Capital Markets and Institutional Investors Capital markets would reduce the pressure on the banking system while also making available fresh equity to finance / refinance infrastructure projects. Asia is home to diverse financial systems that vary in depth and sophistication, ranging from developed countries with sophisticated financial markets to emerging markets and lowincome economies where markets are still its infancy. Much attention is being focused on the institutional investor, given the long term nature of the liabilities. The long-term nature of infrastructure projects matches the long-term liabilities of institutional investors. Most institutional investors, even those with long-term liabilities such as pension funds, life insurance companies continue to invest in liquid assets, often with a short-term investment horizon. There is a high correlation between the size of the institutional investor base and the size of capital markets.* Underdeveloped equity and bond markets prevent institutional investors to finance infrastructure investment.
Sovereign Credit Rating- 2018
PPP definition "A long-term contract between a private party and a government agency, for providing public services and/or developing public infrastructure, in which the private party bears significant risk and management responsibility, and remuneration is linked to performance " Mobilize resources Long term relationship beyond construction phase Achieving a long term solutions Contract Based Different from privatization Transferring risks to the private sector Source: PPP Reference Guide 2.0
Why use PPP? Access new source of financing for infrastructure Equity and Debt financing provided by private partners Requires strength in risk accounting Risk must be carefully allocated between public and private partners Utilize private sector and international expertise Private partners bring sophisticated technics to the projects. Often times partners are international firms Enables faster infrastructure build out By removing national constraints from infrastructure funding and construction, PPPs enable more projects to be undertaken Forces better project planning Closing a PPP deal requires meticulous Project planning, increasing the probability of success Build out the national private sector PPP projects result in private firms with relatively secure revenues
PPP Limitations Usage fees Must be payed by either tax payers or users to generate revenue Public guarantees Fiscal risk has to be properly assessed and monitored Complex arrangement High transaction costs / internal capacity constraints / not suitable for all projects (limited flexibility) Limited local private sector capacity and competition Possible public resistance
PPP Track record in South-East Asia Country Breakdown Billion Indonesia / the Philippines share the largest share of PPP investment 18 16 14 12 10 8 6 4 2 0 Private Investment (2012 16) as % of GDP Cambodia 0.0% Indonesia 1.8% Lao PDR 59.6% Malaysia 1.2% Myanmar 2.9% Philippines 4.6% Thailand 2.2% 2002-2006 2007-2011 2012-2016 Vietnam 1.4% World Bank PPI Database
PPP Track record in South-East Asia Sectoral breakdown Private investment in infrastructure, 2000 2017 Electricity ICT 2% 2% 1% 4% 6% 4% Natural gas Airport 50% Ports Roads Railways Water & Sewerage 32% Mainly in electricity sector Followed by ICT World Bank PPI Database
PPP track record in South East Asia Private Investment Infrastructure 2000-2017 70,000 Electricity ICT 60,000 Natural gas Airport 50,000 Ports Railways Roads Water & Sewerage US$ millions 40,000 30,000 20,000 10,000 0 Indonesia Philippines Malaysia Thailand Lao PDR Vietnam Cambodia Myanmar World Bank PPI Database
Recent Projects in Cambodia Siem Reap New International Airport Part of the 2012-2020 Tourism Development Strategic Plan Started in 2010, reattributed to Yunnan Investment Holdings Ltd in 2016 Construction in 5 years (end 31/12/2022) Budget: 1 Billion USD Capacity: 10 Million passengers Svay Rieng PV Solar Farm Partnership between Sunseap Group and Electrité Du Cambodge Support by ADB (loan from ADB and CFPS) First competitive bid renewable energy IPP project Construction Budget: 12.5 Million USD Capacity: 10 MW (25% of the provine need)
PPP Legal Framework in South East Asia Countries Preparation score Procurement Contract Management Cambodia 14 13 64 Indonesia 63 74 58 Lao PDR 24 37 26 Malaysia 50 42 33 Myanmar 11 37 27 The Philippines 85 76 88 Singapore 60 76 62 Thailand 27 45 58 Vietnam 77 77 62 Timor-Leste 33 64 45 World Bank Procuring Infrastructure Public Private Partnerships, 2018
Infrastructure Financing and Public Private Partnership Network Experienced PPP Units China PPP Center Philippines PPP Center Kazakhstan PPP Center Development Institutions World Bank Asian Development Bank Institute United Nations ESCAP UN Capital Development Fund
Missions & Activities of the Network Capacity Building Organization of meetings Creation of a knowledge sharing platform Support and link the countries and development partners Development of knowledge products