Financing PPPs through the Capital Markets

Several Asian countries, including the Republic of Korea, Malaysia, and Thailand, have well-developed domestic capital markets, and were early users of infrastructure and corporate bonds, and listed equities, for financing PPPs in the region. Overall, however, considerable differences exist in the depth, liquidity, and structure of capital markets among Asian countries. This section examines how the Republic of Korea has financed PPPs in the capital market.

Infrastructure bonds were not much used in the Republic of Korea during the early phase of PPPs. Out of 203 BTO projects implemented by 2009, only seven were partly financed by these bonds (Table 8.9). One reason for their low use is the country's practice of funding infrastructure projects in a sequence, corresponding to the progress of construction and future equity sales. Table 8.10 shows infrastructure bond issuance for PPPs during 2012-2017 when 18 bonds were issued, totaling W3 trillion ($2.81 billion). At 21.7% of the combined cost of the 18 projects, this is a significantly high level and an indication of the financial market's recognition of the characteristics of PPP projects, such as profitability and riskiness. This clearly shows that the depth and sophistication of financial markets can affect the implementation of PPPs.

Table 8.9: Infrastructure Bond Issuance in the Republic of Korea, 2009

... = not available.

Source: Asian Development Bank and Korea Development Institute. 2011. Case Studies from Korea on Public-Private Partnership Infrastructure Project. Manila and Seoul.

Table 8.10: Bond Issuance for PPP Projects in the Republic of Korea, 2012-2017

Source: Public and Private Infrastructure Management Center, Republic of Korea.

While it is true that PPP projects enable governments to implement social infrastructure projects despite limited financial resources, it is neither possible nor recommended to rely entirely on PPPs for infrastructure. When governments borrow to finance infrastructure through PPPs, these loans need to be paid off in the medium and long term, and governments cannot increase the amount of future liability indefinitely. Insufficient government financial resources, which often happen because of past heavy investment, can lead to a drop in public spending on infrastructure, which in turn can hurt gross domestic product growth and affect a government's ability to repay debt. Because of infrastructure's effect on growth, many developing countries in Asia are promoting PPPs rather than cutting infrastructure spending when financial resources are tight.

Indeed, the increased interest in PPPs for building and upgrading infrastructure puts a spotlight on the need for clear budgeting and accounting rules for PPP projects (Box 8.1). However, standards are lacking. Because of this, PPPs can be used to circumvent safety ceilings and fiscal rules on spending, thereby creating an incentive to move public investments off government balance sheets. This could include allocating spending to future budgets, thereby increasing government liabilities, and providing guarantees for private financing. Regardless of how this is done, taxpayers bear the risk of high liability in the future from these practices. Therefore, governments need to incorporate procedures in their budgeting systems to deal with these risks as they apply to PPP projects. There is no one-size-fits-all procedure for this, and procedures will need to be calibrated to specific country requirements. Governments everywhere should continuously update their national budgeting systems to ensure affordability, value for money, and long-term fiscal sustainability. They should also develop the process of connecting accounting and budgeting rules that affect the choice of mode of service delivery and procurement options based on value for money.