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24-Aug-2005
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Financing the Greater Mekong Subregion
The countries of the Subregion will have to rely increasingly on private
sector participation in the financing and provision of
infrastructure-related services. George
Abonyi analyses the issue
HE concept of a "Greater Mekong Subregion" (GMS) --
encompassing
the 230 million people of Cambodia, the Chinese province of Yunnan, Laos,
Myanmar, Thailand and Vietnam -- did not exist until very recently. Although
the Mekong Committee was established in 1957 as a United Nations initiative,
it was limited in scope, focusing on the Mekong River, and excluded Burma
(now Myanmar) and China. In the prevailing and subsequent political climate,
economic interaction among the countries of the subregion remained limited.
Recent political and economic developments have created an environment in
the GMS conducive to subregional economic co-operation. The remarkable
economic performance and increasing integration of South-east and East Asia
has expanded the scope for co-operation. Within the GMS, conflict has given
way to peace, and former centrally-planned economies are at various stages
of transition to more open and market-based systems, spurred in part by the
collapse of the former Soviet Bloc and the resulting need to find new
trading and investment partners. Interest in greater
economic co-operation among the GMS countries has emerged as a practical
response to international competitive pressures and opportunities, and to
evolving
domestic priorities.
With technical assistance and co-ordinating support from the Asian
Development Bank, the six GMS countries entered into an extensive programme
of subregional
economic co-operation in 1992. Guided by the pragmatism of enlightened
self-interest, the countries have focused on creating specific linkages of
complementary economic activities across borders. The purpose is to support
the development process beyond the limits of national boundaries, and to
enhance the investment attractiveness of the GMS countries as a group.
Co-operation in the GMS reflects a recognition that
the economic potential of the subregional whole can be greater than the sum
of the individual national parts.
Given the modest level of development of most of the participating
countries, the GMS programme has emphasised concrete projects in common
priority areas, in order to
build and sustain the momentum of co-operation. Supported by the ADB's
technical assistance, close to 100 subregional projects and initiatives have
been endorsed by the GMS governments at the senior Ministerial level, in
seven sectors: transportation, energy, telecommunications, environment,
human resource development, trade and investment, and tourism.
Well-defined projects of joint-priority interest allow the GMS governments
to experiment with subregional co-operation in a tangible way, with clear
expected
benefits, but limiting their overall risk. At the same time, projects can
also be used to address broader issues in economic cooperation. For example,
road projects can be (and indeed are being) used to address fundamental
"software" issues relating to non-physical barriers restricting the movement
of goods and people across borders such as transit, customs and pricing
policies and regulations. In this way, the GMS
co-operation process is building the foundations and confidence for
expanding subregional cooperation beyond individual projects and sectors.
To ensure effective project implemen tation and sustain regional
co-operation, the GMS countries have established a flexible co-ordinating
framework as part of the
ADB-facilitated programme. Senior officials' forums and working groups
oversee project
implementation in specific sectors, and a steering group composed of senior
ministers provides overall policy guidance. The very senior level of
participation also signals (particularly to potential investors) the strong
and sustained commitment
of the participating countries to the subregional co-operation process, as
well as to specific projects.
The key issue facing economic co-operation in the GMS at this stage is the
mobilisation of the extensive resources required for project implementation,
especially
for infrastructure-related projects. For example, financing needed for
priority subregional transport and telecommunications projects alone is
estimated at around US$9 billion. The GMS governments, even supported by
official assistance from bilateral and multilateral donors, have neither the
finances nor the managerial resources to meet these needs. Reflecting
broader trends in Asia, they will have to rely increasingly
on private sector participation in the financing and provision of
infrastructure-related services: this is the central challenge of capital
mobilisation in the GMS.
Given extensive needs and significant investor interest, a number of
innovative financing mechanisms have been put forward for involving the
private sector in infrastructure-related projects, e.g.
build-operate-transfer (BOT). These provide a wider range of options
for both governments and
private investors. Utilising these and similar approaches, many
privately sponsored projects are at
various stages of preparation throughout Asia, including in the GMS.
However, only a small fraction
is under implementation, and an even smaller fraction in operation. A
number of major infrastructure
funds have also been established, but their utilisation also lags
behind their promise. Understanding
this gap between promise and present reality has important
implications for effective capital
mobilisation for the GMS.
Innovative financing mechanisms generally involve the application of
project finance principles, where
expected performance is the key project asset. Project cash flow, or
the revenue generating
potential of the project, is the fundamental basis for financing, with
investors aiming to achieve full
recovery and a reasonable return on their investments.
The perceived benefits of approaches such as BOT for government
include: expanding potential
borrowing capacity, since it apparently provides "off-budget"
financing; off-loading project risks to
the private sector; and bringing private sector efficiency and
commercial discipline to the project
preparation and implementation process. The price includes generally
higher costs, in terms of the
returns on both equity and debt financing demanded by investors, as a
kind of risk premium; a
usually lengthier project development process; constraints on project
sponsors' flexibility; and limits
on the government's ability to change the business environment for the
project (e.g., to effect the
revenue generating capacity of the project).
The central issue is whether or under what conditions a project will
generate a reliable and sustained
cash flow. In this context, many infrastructure-related projects in
the GMS are unlikely to be
implementable at this time on a "purely commercial" basis because of
project economics, or because
of non-commercial project risks. Projects characterised by high
economic returns, but marginal
financial returns, are good for the economy -- but not necessarily
attractive to private investors. As a
consequence, they are likely to require public/private cooperation in
some form, including support
from host governments and/or multilateral institutions.
This is not unique to the GMS. To assure investors a reliable cash
flow, governments often shoulder
certain project risks (e.g., performance guarantees, offtake
agreements); use national resources to
offset private risk (e.g., real estate or resource concessions); or
introduce (or relax) legislative
measures to facilitate project completion or operations. These are, in
effect, forms of public/private
sector cooperation, with an associated distribution of benefits and
costs, obligations and risks to the
participants -- government and private investors.
In fact, in most infrastructure-related projects the central issue is
the allocation of risk between the
government and the private sector. This in turn affects project costs,
and investor returns. If
government accepts more of the risk (e.g., through a "minimum
ridership guarantee" for a toll road;
"take or pay" agreement for power; real estate concessions for a rapid
transit system), the cost -- as
the return on equity and debt demanded by the private sector -- may go
down. If the private sector
has to take more of the risk, the costs increase. In general, the
perception, allocation, and
management of risk affects how a project is designed and managed, its
total cost structure, revenue
generating capacity -- or whether it will be implemented at all.
Ultimately, it is the fundamental responsibility of governments to
ensure that infrastructure-related
services serve the public interest: in this way, they must balance
resource mobilisation needs with
equity considerations. In each instance, governments must weigh the
benefits of private financial
participation against the real costs to the economy of the public
obligations and commitments likely
to be incurred.
GMS projects are further complicated by their subregional nature. If
the success of a project is
dependent on activities in two or more economies, with different
political and legal jurisdictions, the
risks associated with project preparation and implementation may
increase. However, the
subregional nature of projects may also be used to reduce risk (or
increase the potential returns).
For example, it may allow for "internalising" and therefore better
management of some of the usually
external risk factors (e.g., a power or road project in a given
country as part of a subregional,
trans-border network); introduction of more stable rules of the game
(e.g., third country language
and a governing law which is more acceptable to investors than those
of the participating countries);
and reducing the risk profile of particular "high risk" countries
through a kind of subregional "pooling"
of country risks for specific projects.
The challenge of resource mobilisation for the GMS involves (to a
large extent) addressing the issue
of risk management within an explicitly subregional context,
especially to help bring about stable
public/private partnerships in subregional projects. Negotiating
clearly understood, mutually
acceptable, and enduring agreements between government and private
investors on the allocation of
risks and obligations is a key to the successful implementation of
infrastructure-related projects in the
GMS. This will greatly facilitate private capital mobilisation for
subregional projects.
Given these complexities, multilateral institutions such as the ADB,
can play a key role in resource
mobilisation, beyond that of traditional lenders. They can assist in
the preparation of "bankable"
subregional projects that reflect both public policy and commercial
considerations; use their financing
increasingly as a catalyst to leverage private resources to meet the
specific needs of subregional
projects, giving a level of comfort to both participating governments
and private investors; use
guarantees to cover "policy risk" arising from government actions
(especially as related to
subregional projects), thereby stimulating private resource flows; and
build on their impartiality and
technical competence to play a dispute resolution role between
governments and private investors in
a subregional context.
A further key role for multilateral institutions such as the ADB,
involves assisting GMS governments
in formulating effective policies and procedures for facilitating
private investment in
infrastructure-related projects. This is essential to the successful
implementation of subregional
projects since it is governments that set the rules of the game for
the private sector: defining legal,
regulatory, and policy frameworks, including trans-border agreements.
The result can be a convergence of government policies and programmes,
and private sector capital
and technical expertise, with the experience and facilitating role of
multilateral institutions, to provide
an effective framework for resources mobilisation for GMS projects.
Dr George Abonyi is a Senior Visiting Fellow at the Institute of
Southeast Asian Studies, and
a Senior Advisor at the Asian Development Bank.