Insight - Reviving the privatisation of infrastructure


  • Economy
  • Tuesday, 30 Jun 2020

HSS Engineeering B. Nitchiananthan: In tough times, government spending and private sector investment will drive the economy. Towards this end, infrastructure projects, where a “business case” exists, must be placed to attract private investment in a meaningful manner to drive the economy.

THE Covid-19 pandemic has placed additional strain on the government’s financial resources. In such times, it is timely to re-look at privatisation of infrastructure projects as it allows for the reallocation of financial resources for the social sector without straining national coffers.

In tough times, government spending and private sector investment will drive the economy.

Towards this end, infrastructure projects, where a “business case” exists, must be placed to attract private investment in a meaningful manner to drive the economy.

For privatisation to happen, there has to be several tenets in place and there has to be a shift in mindset to inculcate the level of trust between the four primary stakeholders involved in any infrastructure projects.

The four parties are the public, lenders, private sector, who would be the concessionaire, and the government.

Planning and recalibration

Firstly, there has to be a policy at federal, state and local government levels for infrastructure planning covering long, medium and short terms. The long term is to look at a 10 to 25-year horizon while the medium should cover between five and 15 years.

Short-term planning for infrastructure should cover between five and 10 years. All documents must be consistent and correlate with one another and with the medium and long term plans being at a macro level whilst a short-term plan should be detailed and more definitive plans of infrastructure plans against a range of parameters that is anticipated to drive demand.

Policies must be put in place to self-adjust the anticipated gaps between demand and supply with the need to recalibrate every five years.

The appointment of consultants to regularly update the above documents is very important to examine actuals versus planned against policies and necessary updates or recalibration.

The ‘ownership’ of these documents can be vested with the different levels of governments. These documents will provide the basis for Malaysia’s five-year development plan with all government agencies providing infrastructure requirements to EPU and MOF leading to the formulation of the said five-year year plan.

A similar approach is to be taken when the mid-term review of the five-year Malaysia Development Plan is carried out with appropriate updates being done on a ‘bottom-up’ approach. It must be recognised that the master infrastructure plans have to be re-calibrated at all levels at specific periods of about two years to ensure the planned demand and planned supply are within acceptable range for all the stakeholders.

The development of scenario planning is important to determine low case, base case and high case scenarios which will affect the strategy and timeline for the implementation of planned supply.

Transparency

Secondly, procurement of infrastructure privatisation projects must be done in a transparent manner and it must be in line with federal, state and local government infrastructure planning for the short, medium and long terms.

These projects must be tendered out by the government with the assistance of external experts or consultants and the bid document must carry the baseline business case for reference to serve the purpose of commercial evaluation by the government.

Further, these government appointed consultants must be retained throughout the concession period, in a limited manner, to maintain the proper check and balance.

This calls for the appointment of independent financial and technical auditors to provide periodic (say quarterly) report that addresses the various aspects of the ongoing concession mainly to describe the “financial health” and “technical health.”

All concession agreements (CA) must be available for ‘public viewing’ post-signing of the CA and any amendments thereof, right throughout the CA period.

Shifting mindset

Thirdly, there are three important stakeholders that must shift and change their mindset to develop trust with the public.

Lenders must adopt a changed mindset moving from a traditional supplier of debt to that of a transitional equity holder especially in the initial years of the concession by reviewing some of the financial covenants.

This will eliminate or reduce the element of ‘pre-borrowing’ just to cover principal and interest payments during the initial years when the inflows are most unpredictable where the business case involves non-guaranteed offtakes.

There has to be a clear segregation of roles in private sector to spell out the ‘arms length’ relationship between the parties involved in the investment, contracting, operations and maintenance (O&M) and supply chain positions.

With proper planning and governance of the concession agreement, starting from procurement to operations, put in place, the government must act as the ‘enabler’ rather than a mere ‘regulator’. Adversarial approach with the private sector must be avoided at all cost.

As an enabler, the government can provide a few measures to encourage and manage privatisation so that it can become an attractive business case. It can be in the form of monetary grants that carry low or zero interest or indirect grant such as subsidising the interest rates on borrowings taken to implement the infrastructure project.

The non-monetary assistance can be in the form of appropriate and timely policies to drive demand and guaranteed off-take clauses in the concession agreement.

The government can also consider imposing cess collection on petrol and diesel to create a dedicated fund specific for National Infrastructure Development.

The government will be able to leverage on the cess accruals and tap the capital markets to fund the construction of privatised infrastructure projects across Malaysia especially for nationally important projects that are partially or bordering viability.

The government may also assist the private developer negotiate loans with more favourable terms from leading financial institutions.

Given the above, the public will start to view privatisation in a more positive light.

Risks

Fourthly, the government must drop the concept of assigning all risks to the private sector. This is because, in reality, it is only a notional transference of risks to the private sector.

Both the government and private sector must acknowledge that risks must be managed by the party that is best placed to do so.

The government must do everything possible to assist private investment in infrastructure to provide acceptable returns if private sector participants “behave” professionally.

The private sector must be allowed to make “decent/ acceptable” profits using the concept of mitigating and managing risks to earn an appropriate reward.’ This must be the case if the private sector has conducted itself adequately and the risks undertaken was assigned in a correct and foreseeable manner.

Business case

Fifthly, using all the above, the continuous process of identification of infrastructure projects to be privatised should be carried out, in stages, considering the range of possible ‘business cases’.

The roll-out of these identified projects can and must be done considering the need in short, medium or long term time horizon.

Coordinated actions from all these levels of government must not only be seen but must be carried out.

Infrastructure projects that are suitable, well designed and with sufficient returns will attract private sector investments. Towards this end, consultants can assist in assessing the suitability of projects for privatisation.

In making the case for privatisation, the questions that needs to be answered are as follows:

> Whether the project is financially acceptable to the private sector and do the private sector have an adequate financial incentive to participate?

With the government as an enabler as opposed to a regulator within the parameters of risks assigned.

> What will be the benefits, returns and costs to private and public investors? In terms of economics and financials

> How the benefits, returns and costs of a project are distributed among the four primary stakeholders (public, lenders, private sector and government)?

However, in order not to ‘drown out’ unsolicited private sector initiatives or proposals, a proper evaluation system must be used which includes some of the relevant guidelines.

More importantly, these proposals must be viewed in the context of national, state and local government’s infrastructure planning.

There needs to be a review of the business case for each of the privatisation projects to consider the capital expenditure (capex), operating expenditure (opex) and government support instruments such as grants and subsidies, where required, for key national projects so that a clear understanding of who will bear the capex in cases where the business case is built around the operations of an infrastructure asset.

The input of independent consultants to undertake these reviews are critical as these initiatives require a complex web of stakeholders and money flows that must be calibrated just right for the privatisation projects to be financially viable for the private sector and economically beneficial to the country.

Using independent consultants will ensure that the project assessment is done professionally with clarity for all decision makers with assumptions and risks clearly defined and performing sensitivity analysis to quantify the investment returns and benefits.

In summary, shifting and changing mindsets of stakeholders through a transparent structured approach by acknowledging and assigning appropriate risks to relevant primary stakeholders will be crucial for Malaysia to attain a sustainable infrastructure privatisation model.

Datuk Ir B Nitchiananthan is the executive director and group chief executive officer of HSS Engineers Bhd. The views expressed here are the writer’s own.

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