Construction procurement: Asian construction market

1 February 2016

Hannah Feddon looks at the use of partnership-based procurement in the Asian construction market

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In Asia, governments balancing insufficient public sector capital with a need for significantly improved infrastructure are increasingly turning to partnership-based procurement routes.

The approach has been used in Singapore, Vietnam, Malaysia, Indonesia, Thailand and Philippines. As the Public Private Partnership (PPP) model is both flexible and adaptable, the definition tends to vary between countries.

Globally, PPP is far from being a new method. Mature PPP markets, such as the UK, have seen the industry and model evolve to address many of the obstacles associated with early projects. This is due to several factors:

• the strong historical pipeline of projects in these mature markets created an environment in which an iterative process could be followed, whereby various aspects were able to be analysed, improved on, controlled through changes in policy or procedure, and the effectiveness of these outcomes monitored
• the use of single entities to maximise the benefit of past experience, and to shorten the learning curve.

The lessons learned throughout this process have political, societal and cultural sensitivities. As such, while the global PPP community benefits from the experience gained from more mature markets, it is also important that each PPP is assessed within, and tailored to, the unique project context. Because of this, new users will still experience a learning curve, while existing users continue to do so on a lesser scale.

Lessons learned

Governments using PPP for the first time can make the most of the lessons learned by the global industry.

For example:

• a wide range of project types limits the degree of document standardisation possible by limiting availability of project-specific precedents
• a high number of different awarding authorities and lack of a central PPP body could result in a reduction in the learning cycle
• countries such as Singapore have made good use of the pre-existing body of knowledge, benefiting from previous process iterations
• the question of whether PPPs are value for money has been hotly debated globally, and in Singapore was a key driver in its implementation
• value for money is a key concept in PPP but quantification and evaluation of risk as a factor of value over the life of a project is a new concept to many awarding authorities. It is important for private and public sectors to work together to build trust and confidence during this process, and to work toward establishing a transparent and robust value for money evaluation
• awarding authorities will be in a stronger position to evaluate the value for money of PPP projects if they have already undertaken a knowledge gathering exercise of their current assets. Often, several discreet government departments are responsible for capital projects, refurbishments, maintenance and operation. Centralisation of data allows awarding authorities to gain important insight, allowing a more thorough evaluation of value for money of PPP against traditional procurement
• governments can refine their approach as they progress through the iteration cycle and gather more knowledge. This has been evident with the Malaysian government continuing to refine its approach and improve effectiveness. This leads to improvement in performance delivery through greater private sector efficiency
• it is important to identify the correct projects by undertaking appropriate feasibility studies, followed by development of a detailed business case
• it is important to develop a strong pipeline of work. Projects being delayed, cancelled or put on hold is a challenge for the local PPP market in attracting investors and sustaining the required body of excellence.

The future

As mature markets have demonstrated success in delivering PPP projects, there has been an increasingly strong interest for PPP procurement-based projects in Asia in the recent years. As the region develops, there is a need for building and maintaining quality infrastructure to meet the demand for the growing population and the increase in economic activities.

According to the Asian Development Bank, from 2010 to 2020 it is estimated that Asia’s total infrastructure investment needs will top US$8 trillion, to cope with current challenges of economic growth and population growth.

Figure 1: the Singapore Sports Hub

There are numerous and diverse PPP project deals being structured in the emerging markets, ranging from transport and energy infrastructure to social infrastructure. Thailand, Philippines and Indonesia are among the emerging countries with PPP experience with mixed success in development and implementation of the projects.

Highlighting one of the projects in the region, the Singapore Sports Hub (figure 1), is the world’s largest sports facility infrastructure project and includes the National Stadium, multi-purpose indoor arena and the Aquatic Centre. Costing SGD$1.33bn in construction, the 25-year PPP deal was structured to achieve a balance of interest between the public sector, the private sector and members of the public.

It allows the government to get better value for money in the delivery of public services, and provides the private sector business opportunities and gain efficiency and innovation in providing solutions for the government. Since its inception in 2008, various parties have been involved in the collaboration and this has built business partnerships and created job opportunities. The construction took four years and was completed in June 2014.

The 28th Southeast Asian Games was recently held at this facility, hosting most of the competitions, and many upcoming major sports events are scheduled including the Barclays Asia Trophy, the Asian Fencing Championship and the 5th Fina World Junior Swimming Championships.

Since the Hub's inception, various parties have been involved and this has built business partnerships and created job opportunities

As PPP procurement models progress in mature markets, the experience is adopted in the Asian market and integrated in local cultural context. Lessons learned provide valuable guidance in execution of PPP projects.

With the rapid urbanisation in Asia, traditional public service delivery will be inefficient in meeting the demands of people. Provision of public services through PPP will help to alleviate the financial burden on the government. Besides enabling capital investment, PPP encourages knowledge sharing between private sector and public sector.

Continued growth for PPP projects is expected. In the joint ministerial statement at the 21st APEC finance ministers’ meeting in 2014, infrastructure investment and financing is welcomed in the region to realise growth potential and meet development goals. PPP project investment is needed to address funding gaps between infrastructure needs and existing resource capability of the public sector.

While PPP procurement strategy brings about various benefits and opportunities to the public and private sector, there are challenges that limit its progress:

• capacity building within public sector is essential for infrastructure investment in which economic and legal frameworks have to be put in place to minimise risks and to attract the private sector
• impact of the financial crisis on PPP projects results in delay and eventual abandoning of the project. Under unstable economic situations, it is difficult to secure debt financing. In addition, there will be no incentives for private sector to participate in PPP deals if social benefits to consumers are not supplemented with financial returns for the private sector. Incentives and right climate are essential in fostering strong PPPs
• collaboration and communication between public and private entities as investment model of infrastructure projects moves from short term traditional type of contract to long-term investment under the PPP model. Trust needs to be built in order for partnership to progress and ensure smooth running of the project.

Future opportunities

For the developing Asian countries such as Vietnam, Philippines and Indonesia, there will be continued increase in PPP in 2016 to 2025. Looking at sectors specifically, power, water and waste water, and leisure and sports are expected to provide the greatest opportunities.

However, many factors will have to be considered in determining the viability of PPP projects and ensuring success of the long-term contractual deal between the public and private sector.

Hannah Feddon is Strategic Asset Management Consultant at Faithful and Gould

Further information

• Image © Alamy
• This feature is taken from the RICS Construction journal (November/December 2015)