26 Oct 2017
Belt and Road PPPs: Opportunities and pitfalls
By Craig Sugden, external contributor to Lowy Institute for International Policy
China’s push for the new normal has seen its local governments convert to public-private partnerships (PPPs), long-term contracts between a private party and government to provide a public asset or service. More than 12,000 such projects worth around US$2 trillion have kicked off since public finance reforms were announced in late-2013.
China’s enthusiasm for PPPs has carried through to the Belt and Road initiative (BRI). Under the auspices of the lead planning agency, the National Development and Reform Commission, mechanisms were established in early-2017 to promote infrastructure PPPs for BRI. The promotion is to be through ‘along the way’ and ‘vicinity of the way’ mechanisms.
Others have added their support. Last month more than 130 countries and 70 international organisations, including the UN, the World Bank, and the IMF, attended the BRI Summit in Beijing. Those attending agreed on guiding principles on financing that encourage countries to open public service markets, and to develop PPPs to channel funds while improving the efficiency and quality of infrastructure.
It is easy to see why PPPs are being promoted for BRI. China’s budget is already stretched and it would struggle to directly finance the wide array of major projects envisaged under BRI. Many other participating countries also face tight budgets and PPPs are a way of mobilising alternative sources of finance.
For China, PPPs will alleviate pressure on the government with state-owned enterprises (SOEs) and state banks sharing responsibility for BRI implementation. Under the post-2013 reforms, the government is relying more on the social capital sector, which in China includes state-owned entities and the private sector. Reforms have opened public services to competition and eroded the widespread practice of simply allocating public projects to local SOEs.
But such an active role for these state-owned entities may raise concerns outside China. What will China Inc. hold for BRI countries?
China’s own State Council has expressed concern in its mix of SOEs and PPPs. There were calls last year for better protection of investor rights so the private sector can participate in fair competition with SOEs. There are other features of China’s PPPs to be wary of. Last month, central government agencies had to clamp down on local government's using PPPs as a means of backdoor borrowing. China’s PPPs tend to be relationship-heavy. Key issues - such as the pricing of services - are often not tightly defined up front in the contract process but left to be resolved by partners during implementation. Mixing a relationship-heavy approach to PPPs with the weak governance that is found in some BRI countries would carry obvious risks.
Yet China’s reforms have seen international practices adopted and adapted to fit the institutional setting. These changes were achieved with the help of the UK, where many good PPP practices originated, and international organisations like the World Bank. If Chinese entities work offshore the way they are meant to work onshore, many BRI countries could benefit from better infrastructure.
These observations lead to the identification of a potential role for Australia in BRI focused on PPPs.
Australia is one of the countries that has not signed onto the BRI, along with India, whose government stayed away from the May BRI forum, and Japan and the US, who are not mentioned in the forum’s communique. Australia is also not mentioned in the communique. The highest profile Australian contribution to the forum was a speech by former prime minister Kevin Rudd. Should Australia continue to keep its distance, or engage, as its neighbours Indonesia, New Zealand, and the Fiji Islands have done?
Views are divided. As is the case with many other issues involving China, opinion on BRI is torn between apprehension regarding China’s leading role and appreciation of the huge business opportunities on offer.
What is clear, however, is that PPPs can provide a natural niche for Australia. Australia can contribute to BRI by helping ensure that PPPs live up to their potential to deliver higher quality and lower cost services faster. By promoting good PPP practices, Australia can help avoid a free-for-all of unconstrained strategic or commercial interests.
Australia has one of the world’s best resumes on PPPs. It's a leader in delivering infrastructure and other public services through PPPs, with an enabling environment that defines good practice benchmarks. It has many skilled, experienced service providers, financiers, and advisors that can generate value for money through innovation.
Australia's aid program has helped other countries learn from the Australian experience. Much more can be done though to share Australia’s PPP knowledge of and resources in PPPs which may provide an alternative way of delivering essential public services that developing countries badly need.
The need for development partners to prioritise private sector solutions when deploying scarce public resources, including for infrastructure, was highlighted at the recent World Bank/International Monetary Fund Spring meeting. It is widely accepted that the post-2015 Sustainable Development Goals can only be met if private investment plays a bigger role in development.
Raising Australia’s presence in offshore PPPs would be in the national interest in that it would provide an outlet for particular skills and management practices, and provide new opportunities for Australian capital seeking the long-term investment offered by infrastructure.
If Australian service providers, financiers, and advisors win BRI projects, they will export good PPP practices. Project-level activity can be backed up by knowledge sharing with advocacy on how to do PPPs well. Australia can, for example, play a part in encouraging transparency in BRI projects including open competitive bidding.
Specialised investment funds have been set up by China, such as the Silk Road Fund, with billions of dollars in resources. The World Bank and the Asian Infrastructure Investment Bank are engaged in BRI, along with many other international organisations. So, the potential partners for Australian organisations are in place. Conditions are ready for Australia to take on a thought-leader role.
Australia took a bold step when it joined the Asia Infrastructure Investment Bank without the United States. It could now take another pragmatic step by assertively promoting good PPPs, using BRI as a platform.
The qualifier ‘good’ is an important one. Every country that is serious about PPPs has had some bad outcomes, such as projects that didn’t deliver the promised services, that strained the government’s budget, that cost investors dearly, or earned excessive profits. PPPs, just like conventionally delivered projects, can fail. Those who have been down this road before are well-placed to help others avoid the pitfalls.
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