Friday, July 29, 2011

New Govt Should Push PPP Scheme for Investment

New govt should push PPP scheme for investment
By The Nation
Published on July 3, 2011

Public Private Partnership is under-utilised, has potential

The new government should strengthen the joint investment scheme with the private sector under the Public Private Partnership (PPP) to cope with possible fiscal challenges. Whoever wins, the government will face a big challenge to manage the expectations of the public, as every political party has promised the voters populist policies that require massive spending.

The promises have led to concern that if the new government has to use the fiscal budget to finance the programmes they have promised to voters, the new government may face a fiscal deficit.

One of the options that the government can explore is the Public Private Partnership (PPP), which the government has under-utilised.

The PPP format will help ease the government's investment budget especially when the new government is likely to face a budget deficit. Bank of Thailand Governor Prasarn Trairatvorakul recently urged the new government to limit the 2012 budget deficit to Bt350 billion to avoid pressure on fiscal policy and inflation.

The government had targeted that the investment budget would account for 5.5 per cent of GDP. However, it has so far managed to invest only 3.5 per cent of GDP due to limiting constraints. Besides, a certain amount of budget has been used to finance populist measures.

Examples of PPP projects are the Bangkok Mass Rapid Transport. Currently, four MRT projects - the Purple Line, Dark Green, Green and Blue Lines - come under the PPP format. The value of these projects combined is Bt22.7 billion. The value was small compared to the government's target to boost the value of PPP investment to Bt1.29 trillion.

If the government better utilises the PPP platform, it can draw the money from the private sector to finance the investment, easing the government's fiscal burden.

However, the government has under-utilised the PPP platform. First of all, the private sector was concerned about political instability and uncertainties in the aftermath of a change in government. They were afraid that every time the government changes, its policy also changes.

Another hurdle discouraging the private sector from participating in the PPP project is the legal hurdle or the uncertainty regarding legal interpretations. As things turned out, companies participating in public projects have sometimes encountered legal problems or unpredictable interpretations of the law.

The PPP format can be done in two formats: Build-Transfer, where the government maintains ownership of the project and Built-Operate-Transfer, where the private sector finds the source of investment.

In fact, if the government can manage to provide clear and transparent procedures for PPP investment projects as well as clearing political and legal hurdles, the private sector would want to take part in the PPP investment. This is because the private sector could manage to lessen the risk due to the government's support.

Apart from helping ease the government's fiscal burden, the PPP would also help boost the capacity of the private sector. PPP would provide an option on fund raising, which is one of the challenges facing Thai operators, especially after the Asean market is integrated under the so-called Asean Economic Community, which will be fully formed in 2015. Thai private sector will face direct competition with all the other companies in Asean countries.

The traditional form of investment, where the government has to shoulder most of the investment budget, would not help enhance the competitiveness of the private sector. And the Thai private sector will not be able to maintain its competitiveness unless companies find solutions to the following issues: how to find comprehensive fund raising, value-chain solutions, effective partnership programs and hedging instruments.

Thus, the new government should look for options that promote investment without adding pressure on the budget as well as promote local competitiveness instead of focusing on spending the fiscal budget to finance the majority of its investment in the future.

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