Despite the strides made in building infrastructure in developing Asia, improving access and quality remains a huge agenda. Over 400 million people live without electricity in the region, 300 million without access to safe drinking water, and 1.5 billion lack basic sanitation (ADB 2017). Narrowing developing Asia's vast infrastructure gap will be essential to make headway on improving this situation, as well as for sustaining growth and for tackling many of the region's emerging development challenges.
Traditional procurement is still by far the most used method for building and upgrading infrastructure in the region, with more than 90% of infrastructure spending coming from public funds. This is equivalent to 5.1% of GDP annually. Private sector spending in infrastructure is just 0.4% of GDP annually (ADB 2017). Public funds and support from multilateral development banks will not be sufficient to meet the region's demand for infrastructure. But partnering with the private sector could potentially fill the financing gap. PPPs have proved themselves to be one of the most viable ways to involve the private sector in building and operating infrastructure, including social infrastructure. So far, the increased use of PPPs to finance, build, and operate infrastructure in the region is concentrated in just a few countries, notably India and the People's Republic of China. But PPPs are starting to gain traction in other countries (Appendix A2.3).
This chapter shows the complex path through which PPPs, either as an infrastructure project or a public finance tool, can bring macroeconomic benefits. We identify four direct channels to do this, based on literature reviews and country experiences. Through PPPs, the infrastructure-growth link becomes stronger, especially when partnership arrangements emphasize the quality of infrastructure services, better maintenance, and delivering projects on time and within budget. Public sectors need to strengthen their institutional capacity to carry out PPPs, and the legal and regulatory frameworks for PPP processes. And transparency and good governance must be second nature in the practice of PPPs. Improvements on all these fronts would free up more public resources and enable more effort to go into other public services where needs are pressing, such as pro-poor interventions (conditional cash transfers, for example). And bankable projects have the potential to move so far hard-to- budge long-term fund investments into infrastructure.
Empirical results of this analysis suggest that PPPs are associated with improved access to infrastructure services and better services, and so affect economic growth and other development outcomes. While the macroeconomic impacts of PPPs may differ from country to country, they are mainly positive. But this optimism is conditional on considerable institutional improvements for PPPs being made, especially on contracts. All PPP legal and regulatory frameworks must ensure that social welfare is the overall goal for infrastructure PPPs, regardless of the different priorities and needs of public and private sector partners.
Countries across the region have significantly improved their handling of infrastructure PPP projects, though most are still at an early stage of developing these partnerships. The exceptions are India, the Philippines, and the Republic of Korea (EIU 2014). To be better equipped to handle PPPs, governments need to develop the technical expertise and capacity to deliver complex PPP projects. World Bank (2016), which assesses how well the governments of 82 economies prepare, procure, and implement PPP projects, finds that most countries in developing Asia lag behind countries in the Organisation for Economic Co-operation and Development, Latin America, and Europe. Further improvements are needed for PPP project preparation and procurement, and for dealing with unsolicited project proposals. If these are not tackled, PPPs may end up being seen as an inferior choice to traditional procurement, making it harder for these partnerships to be more widely adopted and undermining their potential to deliver macroeconomic benefits.