Private sector participation in public infrastructure and public private partnerships (PPP) are not new in Malaysia.

PPP 1.0

The Privatization Master Plan was launched in 1991. It outlined the policies, processes, modalities and other issues for private sector participation in public infrastructure development. Though it was called “privatisation”, many of the projects were concession-based. The Privatisation Master Plan was designed to achieve the following objectives: reduce the government’s financial burden; promote business competition; stimulate private entrepreneurship and investment; reduce the size of the public sector and monopolistic tendencies; and assist the bumiputera. The plan allowed private sector initiated (PSI) projects. Several modalities were developed, including management buyout (MBO), build own operate (BOO), build lease transfer (BLT), build operate transfer (BOT) and land swaps. Many of these modalities are still being used for new projects.

There were many successes but also some failures. Most of the failures were blamed on absent or inadequate regulatory reforms and lopsided agreements. Some of the failed projects were nationalised due to the financial difficulties of the private companies. These included the urban transport system in Kuala Lumpur and the national sewerage system.

PPP 2.0

The Ninth Malaysia Plan (2006-2010) introduced the Private Finance Initiative (PFI), which was supposed to embody most of the principles of the UK’s PFI programme. The PFI was designed to show a stronger working relationship between the government and the private sector — apart from providing financing for the projects, the private sector was expected to bear some of the risks too. Various concepts were introduced such as KPIs, the Reward and Penalty System, Public Sector Comparator and Risks Distribution. The PFI was to be an obvious extension of what Malaysia had done, fairly successfully, under the previous privatisation programme.

Here is a bit of background on the UK’s PFI. When Margaret Thatcher came into power in 1979, she promoted wider share ownership and increased efficiency through the effective use of privatisation. Many government-owned entities were floated on the London Stock Exchange and the shares were sold to a wider public. These measures coincided with an increase in North Sea oil revenues and a move to lower taxation. The Public Sector Borrowing Requirements (PSBR) was used as a policy tool. As a result, the UK public investment as a percentage of gross domestic product saw a decline from a high of some 9% to a low 2% in the early 1990s. By mid-1990, the Public Sector Net Investment stood at only 0.6% of the GDP (the UK had a deficit of more than RM190 billion at that time), the lowest level in a decade. This resulted in falling standards in hospitals and public assets. There was a backlog of repairs and maintenance, which hampered the delivery of quality services to the public. The backlog of repairs of schools at that time was estimated at some RM50 billion, while that for maintenance in health services buildings was over RM20 billion.

The UK government used PFI to bridge the public sector funding gaps. Private investors were invited to develop public infrastructure projects and the government paid the investors over a number of years. The UK PFI was essentially a DBFO (design, build, finance and operate) method of financing public infrastructure that included hospitals, defence-related assets, schools, roads and social housing. Under the PFI, the private company had to raise the finance to design, build and maintain the public facility for a long period, which typically exceeded 20 years. In return, the private company was paid a “regular fee” by the government.

Criticism and demise of the UK PFI

The PFI faced much criticism. Both the National Audit Office and the UK Parliament Treasury Select Committee on PFI issued reports that were critical of the way the programme was implemented.

As a result, in 2008, the UK reclassified £60 billion of its PFI payment obligations as public sector debt. This was in line with the International Public Sector Accounting Standard, IPSAS 32. (Previously, the UK classified these payment obligations as “off balance sheet”. This was permitted under the earlier Eurostat Accounting Rules, which was based on Cash Accounting.) Malaysia has had a similar experience of reclassifying PFI payment obligations as public debt.

After 2008, the UK government tried to develop a new form of PPP (called PF2) to replace PFI but it scrapped its PFI programme entirely in 2018.

PPP 3.0

There is no PPP 3.0 in Malaysia yet, even though there is still a huge need for private sector participation in public infrastructure development.

Unlike PPP 1.0 and PPP 2.0, where lessons could be learnt from other countries (and policies, processes and success stories emulated), PPP 3.0 has to be developed locally to take into account Malaysia’s unique business and regulatory conditions. There is no country that has developed a successful and comprehensive programme that Malaysia can easily emulate beyond PPP 1.0 and PPP 2.0. PPP 3.0 would have to be a “PPP with Malaysian characteristics”.

Traditionally, public infrastructure has been financed through government budgets, either from tax revenue or from government borrowings. Some may be financed through special purpose vehicles (SPVs), for example, DanaInfra Nasional Bhd, which was set up to raise finance for several infrastructure projects. The debts of these SPVs are guaranteed by the government and can be considered, ultimately, as government debts. Some public infrastructure projects may be “privatised” to private investors to develop. These private investors would recover their cost of investment through collecting tolls or charges from users. Examples of this type of infrastructure include toll roads, IPPs (independent power producers) and land-swap projects. In these cases, the government does not carry any liability from these projects unless it has given some form of revenue guarantee to the private investors. These are the PPP 1.0 projects.

The PPP 2.0 modalities have many weaknesses, the main being the need to account for them as public sector debts, in line with IPSAS 32. PFI is currently not favoured by many countries.

Role of national development financing institutions (DFIs)

Many countries have also set up DFIs to provide financial services in sectors or regions that are underserved by commercial banks or financial institutions. DFIs are also known by a variety of names: state investment bank (SIB), mission-oriented or challenge-led bank, or promotional bank (as in Italy) and policy bank (as in China). They are usually owned by the government and their roles can be very specific and objective-driven. In some countries, their DFIs have evolved to serve home companies overseas. Successful ones include KfW of Germany and China Development Bank (CDB), which provide financing for projects outside their home countries. Another example is Singapore’s Development Bank of Singapore (DBS), which has evolved into a regional financing powerhouse with a market capitalisation of more than RM200 billion.

In the next article, we will talk about DFIs and the role they can play in a PPP 3.0, namely how they can provide patient capital and crowd in private participation in public infrastructure through blended financing and capital formation, and foster growth by recycling them. We will talk about how Malaysia could use its experience in PPP, and the use of Islamic financing, to participate in infrastructure projects in other countries. 

H K Yong was the PPP adviser of the Commonwealth Secretariat London, where he advised governments of the 53 member countries on PPP policies and provided capacity building to public servants. He also worked in a national development bank.