By Maribeth Hunsinger, JD Candidate 2019
Image Credit: PowderPhotography
The relatively young nations of Central Asia have been slowly opening their economies to foreign investment over the past twenty years. However, infrastructure shortfalls in the region, including failing transportation and utility networks, are hampering continued economic growth and development.
The World Bank estimates that over $1 trillion a year in additional infrastructure investment will be required to meet the current demand shortfall in emerging markets and developing economies. The gap in global infrastructure investment has a tangible impact on quality of life worldwide: 2.6 billion people have no access to electricity, while 800 million people have no access to clean water. Infrastructure spending differs not only across regions, but also across countries within the same region, depending on factors such as government funding, legal frameworks, and security issues.
Inadequate infrastructure can reduce output, lower productivity, impede the flow of people and goods within and between countries, and impose higher transaction costs. However, the governments of most Central Asian states have relatively limited financial capacity to rehabilitate existing infrastructure or fund new infrastructure. These nations are facing declining growth projections and budgets following the 2014-15 drop in global oil prices, and they will likely need to find different methods of financing their widening infrastructure gaps.
Infrastructure in Central Asia
Governments have traditionally financed infrastructure and made it available as a public good. However, with the breakup of the Soviet Union, the five post-independence Central Asian states – Kazakhstan, the Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan – have experienced difficulty with developing and maintaining their national infrastructure. The existing Soviet infrastructure in Central Asia is, for the most part, failing and in need of upgrades. The link between local infrastructure and Russian’s own networks exacerbates the need for new infrastructure.
Central Asia has generally experienced economic growth in the period since the collapse of the Soviet Union. Unfortunately, the precipitous drop in oil prices in the last eighteen months, from over $100 per barrel to around $30 per barrel, is exposing the lack of region’s lack of economic resilience, regardless of whether a country is oil-rich or oil-poor. The Economist’s Intelligence Unit forecasts that 2016 will be the first year since 1998 that oil exporter Kazakhstan’s economy contracts. Price declines in non-oil commodities such as copper, aluminum, and cotton, coupled with low import demand from China, are also dampening the export revenues of Central Asian countries. In such an environment, private sources of infrastructure investment may be necessary to meet developmental needs.
Potential for Public-Private Partnerships
Public Private Partnerships (PPPs) present an option to meet the funding gap in developing economies, and could be an important factor in improving the current infrastructure issues in Central Asia. PPP refers to a long-term arrangement between public and private sector parties. PPPs are often used as a funding model for public infrastructure projects, where the public partner is a government entity or public agency, and the private partner is a privately-owned company, public corporation, or consortium.
PPPs are constructed using a variety of investment and incentive structures for the involved parties, but typically the private partner will make a risk-bearing equity investment and execute some combination of design, financing, construction, rehabilitation, or operation of assets on behalf of the public partner. In addition to accelerating the development of civil infrastructure in developing countries, PPPs can perpetuate local private sector capabilities (through joint ventures and sub-contracting opportunities) and gradually expose state-owned enterprises to increasing levels of private sector participation.
Legal Framework for Public-Private Partnerships
An increasing number of foreign governments have enacted PPP or concession laws to incentivize foreign investment, and Central Asia is no different. These laws serve a variety of purposes depending on the country, including: establishing an institutional framework to support PPPs, giving regulatory priority to PPP projects over others, and closing legal gaps pertaining to investors’ rights and procurement processes.
In 2014, the Economist published its “Infrascope” for the Asia-Pacific Region, which benchmarked countries’ PPP-readiness relative to four developed countries in the region. Legal and regulatory frameworks constituted twenty-five percent of each country’s weighted score, indicating the importance that aspects such as regulatory consistency, bid fairness/transparency, contracting mechanisms, and dispute-resolution practices play in creating an environment conducive to PPP.
Of the nineteen Asian countries evaluated in the Infrascope, three were in Central Asia – Kazakhstan, Kyrgyz Republic, and Tajikistan. Kazakhstan ranked highest of the three, but still came in behind countries such as Pakistan and Bangladesh. Kazakhstan had exhibited recent improvements to its investment climate and PPP policies, but was lacking in the institutional reforms required to minimize risk and improve deal flow. Despite the fact that both the Kyrgyz Republic and Tajikistan have passed PPP laws, they ranked second- and third-to-last, respectively. This was in part for their failure to deliver any PPP projects (Kyrgyz Republic) and their need to improve institutional support for PPP (Tajikistan).
An Emerging Opportunity: Kazakhstan
Following the publication of the Infrascope, Kazakhstan, which previously had enacted a Concessions Law pertaining specifically to the Build-Operate-Transfer type of PPP projects, enacted a PPP law in 2015 that provides for a more extensive legal framework to regulate all forms of PPP projects. This law allows government-owned companies to act as the public partners, whereas previously only government entities could fill this role. It also provides for the possibility of multiple public and private partners in a singe PPP, and for step-in rights (the right to substitute a partner) for private partners.
These provisions serve not only to make foreign investment in Kazakh infrastructure projects more attractive, but also to send a signal to foreign creditors and investors that the country is an increasingly stable and welcoming environment in which to make such investments. Ideally, such actions on Kazakhstan’s part will motivate its neighboring states to make improvements to their own PPP policies in order to incentivize private parties to begin participating in projects in those countries as well.
Central Asia boasts ample natural resources and strong economic potential, but the region will need to improve its physical infrastructure networks if it is to realize this potential. PPPs present a potential means of attaining such improvement through private, likely foreign, investment. However, in the absence of strong economic growth to incentivize foreign lenders to invest in its infrastructure and markets, the region will need to demonstrate progressive, reliable legal and regulatory frameworks to promote such investment.