Publications
Executive Summary
This report examines the prospects for expanding private sector
participation in infrastructure in developing East Asia, particularly since
the Asian financial crisis. Even before the crisis, private investors and some
governments were reassessing their commitment to private infrastructure
participation, due to profitability, risk and cost concerns. With the Asian
crisis, the region has suffered major depreciations, economic slowdown and
massive capital withdrawal by domestic and international financial
institutions, exacerbating pre-existing caution. Many major projects have
stalled or been cancelled, and few new projects were considered in 1998.
The Asian financial crisis increases the urgency for regional governments
to vigorously pursue legal, regulatory, financial market and sectoral
restructuring reforms, regain the momentum of private infrastructure
investment evident in 1996, and sustain it. Private infrastructure investors
will require evidence they can earn appropriate returns for risks borne, and
consumers and governments require tangible benefits, lower prices and/ or
better services, from private sector infrastructure participation. For this to
occur, governments need to improve the project sponsors' operating
environment by reducing sovereign risk and increasing transparency and
certainty in legal environments, bidding processes and regulatory frameworks.
Governments also must ensure privatised infrastructure assets operate in
competitive environments or are properly regulated, and wherever feasible,
private sponsors must bear commercial risks for potentially profitable
projects.
The Financial Crisis and Economic Outlooks of East Asian Economies
The Asian financial crisis is fast becoming the most significant economic
shock to the global economy since World War II, seriously affecting most East
Asian economies and potentially threatening global economic stability.
However, barring further deterioration in non- regional economies, the
immediate financial crisis stage appears to be over for most regional
economies. Currencies are stabilising and current accounts are becoming
positive. Assuming relative stability in the rest of the global economy,
recovery now depends on each economy's commitment to rationalising and
refinancing its banking system, dealing with corporate debt and excess
capacity, maintaining social stability and encouraging the return of foreign
capital.
Progress in these areas varies across the region. Indonesia's economy
still has serious problems with only limited banking system restructuring and
corporate debt resolution. However, the rupiah appreciated significantly in
October and positive economic growth was recorded in the third quarter of
1998, after steep declines in the first half of the year. Nevertheless, full
economic recovery will be slow and difficult. Malaysia's new exchange
controls may further dampen international investor confidence because they may
allow it to avoid essential structural banking and corporate reforms. Both the
Korean and Thai governments are firmly committed to reform. While some local
interests resist change, both governments are significantly rationalising and
re- capitalising their financial systems, tackling other major problems like
corporate debt and regaining foreign investor confidence. The Philippine
economy contracted only modestly in 1998, due to its sounder financial system
and lower exposure to foreign financial flows and Asian trade. It should
resume positive growth during 1999, assuming growth in Europe and the USA
continues. China's economy is slowing but its external position remains
strong. Its exports to non- Asian economies are growing strongly and the
government is committed to stimulating growth via monetary and fiscal
policies. Despite its strong financial position, Singapore entered a technical
recession in mid 1998 which is expected to continue into mid 1999. Its
recovery will depend on its regional trading partners recovering and the US
and European economies remaining strong.
A major key for the region's recovery is Japan, as the prime source of
foreign direct investment and bank lending, and a major import market.
Assuming financial sector restructuring progresses smoothly, Japan may start
to grow in 1999 once fiscal stimulus measures become effective. Regional
economic recovery also hinges on a strong US economy. Depreciation of the US
dollar against the yen in October 1998 eased pressure in the global financial
and trading systems.
Prospects for Asian Growth and Infrastructure Demand
While the severity of the Asian crisis increases uncertainty about future
growth rates and the worst affected economies have suffered serious setbacks,
most economies should recover in the next two to five years. When growth
resumes, East Asian economies are unlikely to return to the 7 to 8 per cent
growth rates they experienced in the mid 1990s, as these were artificially
inflated by short term speculative capital inflows. However, the region is
quite likely to average 5 to 7 per cent growth rates, equal to or somewhat
less than growth in the 1980s.
At these lower growth rates, the World Bank's pre 1997 East Asian
infrastructure demand forecast - $1.5 trillion over the decade to 2004 - is
unlikely to eventuate. However, the region's infrastructure requirements
still should reach from US$1 trillion to $1.2 trillion over the next decade.
China's economy should grow at around 6 to 8 per cent and alone account for
about half of this demand. Indian infrastructure demand could boost Asian
infrastructure demand by a further US$200 million to $300 million.
In the short to medium term, policies to stimulate demand and create
employment in the worst affected economies should boost infrastructure demand.
For example, in early 1998, the Chinese and Malaysian governments announced
major new infrastructure expenditure programs to stimulate their slowing
economies. Infrastructure projects which facilitate increased export activity,
generate significant employment and provide broad welfare benefits should
receive priority, including:
- transport projects such as air and sea ports and road and rail linkages
important for export competitiveness - water, sanitation, rural and urban roads and other smaller
infrastructure projects, particularly in depressed rural and urban areas.
In the long term, regional governments clearly recognise failure to install
adequate infrastructure will reduce potential growth in output and living
standards, and undermine their global competitiveness. This will underpin
strong long term infrastructure demand.
Prospects for Asian Infrastructure Investment
The financial crisis has reduced the fiscal capacity of many regional
governments to finance infrastructure from their own resources. Falling
taxation revenue, new spending demands to refinance failing banking systems
and provide social safety nets increase the attractiveness of private
infrastructure provision.
However, private investors are likely to be very cautious, at least in the
short term. They fear income growth will not reach previously forecast levels,
undermining demand projections and project profitability. Depreciated
currencies also will reduce foreign currency revenue from projects, most of
which generate domestic currency income. The weakening financial viability of
several public infrastructure authorities with high foreign debt levels and
foreign currency take- or- pay contract obligations, and questions over the
ability of some countries to guarantee foreign exchange for remittances
increase sovereign risk perceptions. These factors compound concerns private
investors held before the crisis regarding sovereign risk, inadequate legal
safeguards, poor tendering transparency, weak regulatory policies and
implementation, inappropriate risk allocation and low profitability. The
significant gap between government and private investor expectations about
private infrastructure investment requires regional governments to act
urgently to address investors' legitimate expectations regarding reforms.
International and Domestic Financing
Throughout the 1990s, international flows of private sector limited and
non- recourse finance for infrastructure projects expanded rapidly,
supplementing domestically raised funds and significantly boosting private
sector infrastructure activity. Annual financial closures of private sector
water, transport, telecommunications and energy projects peaked at US$36
billion in the year to August 1996. However, excessive reliance on short term,
foreign currency denominated debt was one key cause of the financial crisis
and, as the crisis progressed, created severe repayment difficulties for
infrastructure projects with revenue in domestic currency. Rapid withdrawal of
portfolio and commercial bank funds is reducing infrastructure project
financial closures. In the year to August 1998, private East Asian
infrastructure activity slumped, reaching only US$14 billion.
Private sector activity in Malaysia and Indonesia is in the greatest
relative decline. The worst affected sectors are telecommunications and
transport, both down by more than 75 per cent on 1996. Surprisingly,
investments in energy are the most resilient in 1998, largely because new
projects in the Philippines, Malaysia and Taiwan came on stream as the crisis
hit, reducing the effect of major declines elsewhere. However, power demand is
highly sensitive to economic growth, and given the current contraction of many
regional economies, the recent surge in installed generating capacity and
higher tariffs stimulating greater conservation, supply growth is likely to
slow over the medium term.
Despite some of the highest savings rates in the world, Asia's domestic
financing of private infrastructure is only modest. During the 1990s, equity
market finance for infrastructure grew rapidly in several regional economies,
reflecting foreign capital inflows, but domestic corporate bond markets are
relatively under- developed, except in Malaysia and Singapore. Mobilisation of
domestic funds through local capital market deepening and reform is essential
to reduce projects' foreign exchange risks and crucial to stimulate private
sector infrastructure activity.
Best Practice Legal and Regulatory Environment
Developed regional economies with British common law- based systems, such
as Singapore, Hong Kong and Australia, provide best practice examples of
transparent and predictable legal systems which provide certainty for private
infrastructure investors. Elsewhere, weak legal, institutional, regulatory and
policy frameworks may dampen the growth of private sector infrastructure.
Poorly developed private property rights and commercial law, the lack of
predictable outcomes from legal proceedings, unclear accounting, environmental
and other standards, and weak and non- transparent bidding and regulatory
regimes create major uncertainties for private investors, increasing the costs
and risks of project development.
To overcome gaps in regulatory and legal environments, several East Asian
economies have introduced specific build, operate, transfer, BOT legislation
to encourage private sector infrastructure development via long term BOT
concessions. For example, Philippine and Chinese BOT laws and model approaches
in key sectors like electricity and water streamline government approval
processes, accelerating absorption of new private sector funds. However, BOT
laws do not automatically overcome legal environment weaknesses or address
investors' concerns as demonstrated by Vietnam. Political will to accept
private sector infrastructure investment and capacity to transparently and
efficiently implement BOT legislation also is necessary.
Competitive Bidding Improves Confidence
Competitive bidding processes increase transparency and certainty. Best
practice bidding procedures include the granting of Manila's water
concessions in 1997 and final evaluation and selection for Melbourne's City
Link project. Negotiated bids often result in less transparent processes,
concealing the best bid. Competitive negotiations, starting with competitive
bids and moving to negotiations with the favoured bidder/s, can combine the
benefits of competitive bidding with the flexibility and creativity of direct
negotiations.
Infrastructure Tariff Reform
Before the financial crisis, several East Asian electricity and
telecommunications authorities introduced economic tariffs for services and
allowed returns to cover capital and operating costs. However, many
electricity, telecommunications, water and rail authorities still operate at a
loss.
Usually tariff reform is fundamental to improve infrastructure utility
efficiency and economic outcomes for the community. By providing economic
returns on investments, tariff reform is a prerequisite for private sector
involvement. Uneconomically low tariffs mainly benefit middle and high income
users, reducing utilities' ability to maintain existing assets and extend
services; poor urban and rural areas usually are the losers. Congestion
charging and two- part tariffs for infrastructure projects can help recover
investment and operating costs and optimise use. Singapore leads Asia in
electronic tolls and time- of- day road pricing.
Financing and Risk Management
Shorter term commercial bank debt finance funds most infrastructure
projects. However, the long term nature of infrastructure financing better
suits institutional investors such as pension funds and life insurance firms,
which prefer to purchase bonds rather than direct debt. Lack of investor
confidence in financial market prudential controls and corporate accounting
practices constrain the development of long term East Asian corporate bond and
equity markets, creating a bias towards short term savings instruments,
particularly bank deposits that carry an implicit or explicit government
guarantee. Government controls preventing institutional investors from holding
corporate bonds also limit the growth of domestic corporate bond markets.
Reliance on short term and foreign sourced financing exposes project sponsors
to commercial, foreign exchange and sovereign risk.
As Singapore and Hong Kong have open and transparent capital markets, a
major foreign financial institution presence and accumulated expertise in risk
structuring and loan syndication, infrastructure financing is centred here.
Before the financial crisis, Malaysia successfully developed its corporate
bond market; some infrastructure projects accessed this. Several
infrastructure enterprises in Malaysia, Indonesia and the Philippines also
listed on local stock exchanges.
However, in 1997 and 1998, the financial crisis paralysed liquidity in
Asian debt markets. New bond issues and initial public offers virtually
ceased. Sharp increases in interest rates and several domestic corporate bond
defaults mean domestic and international investors only consider creditworthy
government guaranteed bonds. Even some of these have slipped below investment
grade.
Allocating Risks
Gaps in perceptions about risks and who should bear them significantly
reduces private infrastructure sponsorship and funding. Increased investor
risk perceptions make it even more imperative for regional governments,
multilateral banks and bilateral donors to continue developing mechanisms to
mitigate and more efficiently allocate risks to parties best able to manage
them. Private sponsors should bear construction, commercial and operational
risks, while governments should bear sovereign risks, guaranteeing that
sponsors will not be adversely affected by government policy changes and
government utilities will meet contractual obligations. Guarantees that
transfer commercial risk away from private sponsors generally are
inappropriate.
The Philippines is one of the most advanced regional economies in
allocating risks to public and private sponsors in an efficient and
transparent manner.
Best Practice in Infrastructure Restructuring
The existence of natural monopoly networks at the core of most
infrastructure sectors means private sector participation cannot proceed
without governments ensuring competition and carefully regulating monopoly
assets to prevent abuse of monopoly power. Natural monopoly networks include
high voltage electricity transmission lines, gas and water pipelines and fixed
wire telephone networks. Private enterprises generally respond to market
signals, and produce goods and services at a lower cost than do public sector
operators. However, if monopoly networks are sold to the private sector
without appropriate government regulation or competitive access regimes,
owners could abuse their monopoly power. Some infrastructure sectors, like
rural and suburban roads, also produce public goods and others, like highways
and railways, have significant spillover effects. Often user charges are
insufficient to cover all the benefits such services generate. These issues
dictate a continuing role for government.
Best practice infrastructure policy and regulation vary depending on
monopoly networks, spillovers and public goods elements in particular
infrastructure sectors, but include:
- vertical unbundling of infrastructure assets, separating competitive
from noncompetitive elements, such as electricity generation from
transmission and distribution networks - geographical or horizontal unbundling of integrated monopolies by
regions, enabling competition by comparison - contracting out or selling unbundled services to competitive suppliers
- leasing public assets to the private sector, creating competition for
the market
via mechanisms such as fixed term concessions, franchises and BOTs where
competition cannot occur in the market
removing artificial constraints to access, such as limits on foreign and
domestic competition, especially where only a few potentially oligopolistic
local firms can achieve the minimum efficient enterprise size
- staging private sector involvement, using management contracts before
implementing concessions or full privatisation, particularly if use is
traditionally free and tariff regimes need reform - creating an independent regulator where monopoly elements remain, to
ensure monopoly assets are operated efficiently and earn only a normal
return or infrastructure markets remain competitive - preventing cross ownership of unbundled assets, like transmission and
generation facilities where this could compromise competition - ensuring competitive suppliers have unrestricted access to residual
monopoly network assets - treating equally state and private firms competing in the same
infrastructure industry.
Different historical, political and social conditions mean the 'best
pragmatic' policies for infrastructure development vary between economies
and sectors. Serious backlogs of unmet infrastructure demand due to poor
planning may necessitate emergency expansion of infrastructure services at
higher cost. Institutional development and regulatory capability, consumer
capacity and willingness to pay for infrastructure services, legal or
constitutional constraints on ownership, social stability concerns, the depth
of domestic capital markets, sovereign credibility with institutional
investors and security problems also affect economies' short term options.
Sectroal Reform
While the same economic principles govern the most efficient way to
introduce competition, actual best practice mechanisms vary across sectors.
Electricity
A best practice approach to electricity reform is exemplified by Victoria,
Australia, where the generation, transmission, distribution and retailing
sections of the industry are unbundled and privatised. In all industry
segments except transmission, many alternative producers operate in
competitive markets. Generators compete to sell power in an independently run
wholesale electricity market. The power is sold to independent retailers who
can compete for customers, with guaranteed access to the line network of the
five privately- owned regional distributors. Transmission network tariffs are
closely regulated with access and cross ownership rules maintaining
competition. Households and businesses benefit from significant real tariff
reductions.
By comparison, a more partial, staged approach to reform is evident in
Thailand, the Philippines, Indonesia and China. They plan to unbundle
generation, transmission and distribution as regulatory structures are
developed. At present most private investment is through independent power
producers, IPPs, which have power purchasing agreements with state- owned
electricity utilities. While IPPs can relieve critical supply shortages, they
do not contribute to more thoroughgoing sectoral reform, as all the risks
ultimately reside with state- owned authorities, many of which are still very
inefficient and heavily overstaffed.
Furthermore, due to depreciations during the Asian currency crisis, IPPs
with US dollar denominated power purchasing agreements have become very
expensive in local currencies. The financial position of several state
electricity utilities is precarious. This situation, combined with constrained
government budgets, and the need to achieve efficiency and cost savings,
increases pressure to fundamentally reform electricity sectors. Unfortunately,
economies with long term power purchasing agreements may find it very costly
to buy out IPPs to establish competitive generation markets.
Water
Organisational restructuring, corporatisation and unbundling of water
sectors should precede commercialisation or full private sector participation.
Resource management functions such as catchment planning and management should
be separated from potentially commercial functions of service delivery.
Government should be responsible for the former; private operators can compete
to provide the latter.
Concessions leave government owning the monopoly water pipe and sewerage
network while private operators lease the long term (20 to 30 years) right to
use these assets and collect revenue from service delivery. Concessionaires
have strong financial incentives to reduce water losses, expand services and
connections, and deliver significant cost savings and service improvements to
customers.
Economies can limit private involvement to management and service contracts
as in Adelaide, South Australia, provide long term concessions as in Manila,
or fully privatise as in the United Kingdom. Two best practice approaches to
private sector water supply in the Asia Pacific are the concessions granted
for east and west Manila's water system and Macau's water concession.
Manila's tendering process was highly competitive and the regulator can
evaluate the two concessionaires' operational efficiency by comparing their
performance. Macau's very efficient private water concession provides a high
quality, reasonably priced service.
Many East Asian economies are considering or implementing water concessions
or BOTs to develop bulk water sources and new water distribution networks.
However, bulk water BOTs with take- or- pay contracts leave commercial and
foreign exchange risks with public water authorities; are expensive to buy
out; and may constrain subsequent progression to more competitive models.
Highways
By contrast, BOTs are the best practice model for private sector
involvement in highways. Private investors in tollroad BOTs theoretically can
collect revenue directly from the public and bear full construction, operation
and demand risk. Competition from alternative routes and transport modes
limits monopoly power. However, tollroad projects often are only marginally
commercially viable, although they have large spillover benefits that tolls
cannot capture. Governments need to minimise revenue guarantees, and encourage
private sponsors to recoup the full capital costs of highway investments by
time of day and congestion charging using electronic tolls, traffic management
and intelligent highway systems.
Some best practice tollroad projects are in Hong Kong, China and Australia,
as commercial operators take full risks, without government guarantees. City
Link in Melbourne and recent Hong Kong expressways also reflect best practice
bidding procedures and transparency.
The major risk associated with tollroad BOTs is the uncertainty of traffic
forecasts, due to traffic leakage to untolled roads and uncertain income
growth. This risk was highlighted in 1997- 98 when many tollroad projects were
postponed as demand projections proved unrealistic and construction costs
increased with currency devaluations. New approaches to tendering tollroads
include the minimum least present value of revenue method used in Hong Kong.
Ports
Except when in unique locations, ports generally have fewer monopoly
attributes, as new wharves can be built by potential new entrants, making it
relatively easy to introduce private competition. The concession model is used
most often, with private sponsors undertaking BOTs for new ports facilities or
taking out long term concessions on existing port assets. Prior to inviting
private participation, governments should unbundle public good aspects of port
operation such as coordinating port planning, maintaining channels and
associated road and rail infrastructure, and possibly monitoring tariffs
charged by monopoly port facilities from potentially competitive activities.
The latter include providing stevedoring services or developing new wharves.
Large ports with many wharves and competing service firms ensure competition
limits any abuse of monopoly power.
Hong Kong is the world's largest privately financed and operated port and
an outstanding best practice example. In recent years, most East Asian
economies have let concessions to private port operators. Initially
governments invited private sponsors to develop and operate container
terminals and bulk handling facilities but now private firms in the
Philippines, Indonesia, Malaysia, Thailand, China and South Asia are
developing general cargo facilities as well.
Railways
New Zealand, Canada, Japan and Britain recently privatised railway
operations, while in the USA most railways have been privately funded and
operated since the 1800s. In the 1980s and 1990s, Latin American economies
successfully implemented many private railway concessions, providing several
best practice examples. Unlike the full transfer of assets to the private
sector, concessions avoid the potential for private railway network owners to
abuse their monopoly power. To date no developing East Asia economy has
privatised its entire rail network, although several have approved BOTs for
new lines.
Unbundling railway services involves separating monopoly elements, such as
railway network ownership and train scheduling, from competitive elements like
rail service operation and rolling stock ownership. Letting concessions for
competitive services and line operation and maintenance saves costs, improves
maintenance and provides better service orientation while reducing government
outlays in a sector traditionally a large drain on public resources.
Telecommunications
Mobile phones, satellites and the Internet increase the scope for new
telecommunications entrants while industry regulators developing competitive
markets must prevent incumbent operators restricting access to the monopoly
fixed line network. Chile's successful telecommunications sector
privatisation gives new operators full freedom of entry and access to the
fixed line telephone network.
Integrated government- owned monopolies dominate East Asian
telecommunications. Governments may permit competition in the cellular and
international markets but only the Philippines, Hong Kong, Japan and Australia
permit domestic competition. Japan, Australia, Singapore, the Republic of
Korea, Indonesia and Malaysia sold minority shares in the major state- owned
telecommunication company through public offerings. However, most regional
economies have yet to undertake comprehensive reform to fully unbundle the
network and service components of the integrated supplier, allow entry of many
competing domestic, international and cellular suppliers, guarantee access to
trunk networks and independently regulate the industry. The Philippines is
closest to this objective with six new entrants in the domestic market, eight
new international and five new cellular operators competing with the dominant
private providers.
Mass Transit
The financial crisis has caused cancellation or postponement of several
mass transit projects in Malaysia, Thailand, the Philippines and Indonesia as
construction costs have blown out, revenue projections proved overly
optimistic and projects, underwritten by property development, became
unviable. Mass transit projects may not be viable without significant public
subsidies. Singapore's well run system demonstrates private operators can
cover operating costs, but recouping capital costs is more difficult.
Government generally will have to contribute to line construction capital
costs or offer other subsidies, like adjacent or right of way land.
Infrastructure Aid
Increased development assistance for economic governance of infrastructure
is vital to support Asia's private sector infrastructure development.
Bilateral and multilateral official development assistance programs can help
develop institutional capacity to attract and effectively use private sector
infrastructure. Well targeted technical assistance and training courses can
increase developing economy governments' ability to:
develop and implement competition policy and appropriate infrastructure
regulatory frameworks
- corporatise and privatise public infrastructure enterprises, including
implementing tariff reform policies and competitive bidding procedures - reform and expand capital markets, including developing local corporate
bond, equity and risk markets - develop and implement commercial law dispute resolution mechanisms and
special purpose BOT laws - mobilise internationally competitive advisers to assist with these
processes.
The World Bank and Asian Development Bank play a leading role in leveraging
private sector funding via guarantees and selected equity stakes in private
infrastructure projects. They also advise developing countries on
infrastructure policy reform, disseminate best practice approaches and provide
training and technical assistance. Bilateral aid agencies also identify and
initiate technical assistance and training for recipient governments, build
key skills in infrastructure sector restructuring and reform, and assist with
financial market development and legal, institutional and regulatory reform.
Australia has considerable public and private sector expertise in many of
these areas; the Australian aid program can access this to assist regional
governments. Institutional and consultancy resources could provide training in
competition policy, infrastructure regulation and financial market reform and
regulation. The Vancouver Framework, agreed at the 1997 APEC Leaders'
Meeting, urges APEC members and multilateral financial institutions to promote
sound frameworks to facilitate private financial flows to infrastructure. APEC
is attempting to encourage greater private sector investment in regional
infrastructure through its infrastructure workshop and sectoral working groups
for energy, transport and telecommunications.
Implications For Business
In the short to medium term, business conditions will be very difficult in
many Asian infrastructure sectors. By late 1999 or early 2000, accelerated
infrastructure reforms, privatisations and stimulatory infrastructure spending
should start to expand business opportunities. However, in the post crisis
environment, funds only will be available for correctly structured projects
with a good balance of risks and rewards and strong internal rates of return,
able to withstand downside foreign exchange and demand growth risks.
Organising limited recourse finance is likely to be difficult in 1998- 99 and
possibly beyond, due to banks' reluctance to extend new credits and uneven
regional progress with financial system reform. Banks could well require
higher debt cover and stricter covenants on default.
Assuming regional governments restructure and privatise monopoly
infrastructure sectors, they will need skilled engineering, legal, treasury,
financial, regulatory and institution building advice, potentially providing
opportunities for many Australian firms and consultants. Increasing
sophistication of project financing structures will generate demand for
Australian financial services. Increased private involvement will stimulate
regional infrastructure investment and provide opportunities for manufacturers
of infrastructure goods, including plant and equipment. Crisisinduced
infrastructure asset sales will provide investment opportunities for
Australian infrastructure investment firms.
Implications For Government
More private infrastructure in the Asia Pacific and opportunities for
Australian providers affects the Australian Government by:
- highlighting the importance of encouraging Australian infrastructure
reforms so experienced local infrastructure enterprises can achieve
commercial advantage in export markets (and to raise domestic
infrastructure efficiency) - ensuring the Australian aid program focuses on fast moving developments
in infrastructure provision, providing governance assistance to encourage
private participation - continuing to support APEC in encouraging private sector infrastructure
provision - continuing high priority for service trade liberalisation negotiations,
including - infrastructure related services
- examining commercial implications for trade promotion through Austrade
- identifying infrastructure investment insurance and credit needs via
Australia's Export Finance and Insurance Corporation, EFIC.
Rigorously applying national competition policies, including restructuring
and unbundling public monopolies where appropriate, encouraging competitive or
contestable infrastructure services, assessing the need for public ownership
and encouraging further new private sector infrastructure investment, all
assist Australian enterprises in gaining infrastructure sector expertise
relevant to winning private infrastructure contracts in Asia. This is
furthered by continuing administrative reforms including rationalising
tariffs, identifying and directly funding community service obligations,
outsourcing non- core services, supporting competition policy through labour
market and tax reforms, and improving infrastructure planning and investment.
Future Prospects
While the current declines in infrastructure investment create severe
difficulties for project sponsors and governments, they also provide
opportunities for reform oriented governments and private infrastructure
businesses. Financing availability, based on the commercial fundamentals of
individual projects rather than the desire of fund managers to balance
portfolios, will determine the financial closure of infrastructure projects
over the medium term. Development of domestic capital markets is essential to
ensure adequate supplies of long term, domestic currency funding, reducing
financing and foreign exchange risks.
To regain private infrastructure investment momentum, regional economies
must:
- undertake competitive infrastructure industry restructuring and reform,
including selling assets within transparent and competitive regulatory and
legal frameworks - achieve financial sector reform and deepening, including permitting
entry of competitive foreign financial institutions - reallocate project risks, so private and public sectors are responsible
for the risks they are best able to manage, and returns better compensate
for risks borne.
Apart from improving infrastructure efficiency and private investment
inflows, these reforms should provide commercial opportunities for Australian
businesses and consultants. The Australian Government should promote and
facilitate such reforms through Australia' s aid program, APEC and services
trade and investment liberalisation negotiations, and assist Australian
business to access these opportunities.