Availability of Risk Mitigation

Transcription

1 Private Infrastructure Investment: Availability of Risk Mitigation Instruments in ASEAN Member States

2 There is a broad consensus that the large infrastructure needs of the ASEAN region cannot be satisfied with public investment alone, and that private investment is required. However, the involvement of private operators in long-term infrastructure projects requires not only a pipeline of bankable and financially-viable projects with appropriate risk/return profiles, but also sufficient access to private financing. The latter can be a challenge for a number of the economies in ASEAN, given that since the 2008 financial crisis traditional project finance providers have lowered their risk exposure to emerging markets. One of the ways to better persuade investors/lenders to embark on long-term infrastructure projects is to encourage the most efficient use of public and private risk-mitigation tools. These include, amongst others, insurance and guarantee coverage for commercial and political risks. In addition, reliable legal frameworks can also reduce the exposure of private investors to risks in long-term infrastructure projects. Access to both finance and risk-mitigation instruments are important for a favourable investment decision by investors and lenders, particularly for infrastructure projects in countries with less evolved institutional frameworks and capital markets. After describing increasing infrastructure needs, the necessary private investor involvement and the liquidity of capital markets, the report identifies the main commercial and political risks in infrastructure projects. The report next analyses the types of risk-mitigation instruments used to mitigate risks of equity and debt investors. The survey conducted for this report highlighted the importance of political risks (e.g. regulatory changes, breach of contract) for investors. This is why the last two chapters of the report put a specific focus on political risk insurance instruments offered by private insurance companies, public Export Credit Agencies and multilateral agencies, as well as the related availability of risk mitigation instruments. ASEAN Connectivity Coordinating Committee The ASEAN Connectivity Coordinating Committee (ACCC) is responsible for coordinating and overseeing the effective implementation of the Master Plan on ASEAN Connectivity (MPAC) 2010 and its successor document MPAC The MPAC 2025 is envisioned to achieve a seamlessly and comprehensively connected ASEAN that will promote competitiveness, inclusiveness and a greater sense of Community. OECD Southeast Asia Regional Programme The Programme aims to bring the relationship of the OECD and Southeast Asian countries to a new, more strategic level, support domestic reform processes and contribute to regional integration initiatives. The Programme s structure is designed to encourage a systematic exchange of experience to develop common solutions to regional and global policy challenges. It is comprised of six thematic Regional Policy Networks (RPNs) on tax, good regulatory practices, investment policy and promotion, education and skills development, small and medium-sized enterprises (SMEs), and publicprivate partnerships (PPPs). Further work is being developed through initiatives on trade, innovation and gender. Each Regional Policy Network is composed of policy experts from Southeast Asia and OECD countries, who will jointly decide on its work programme. 2

3 FOREWORD The ASEAN Connectivity Coordinating Committee of the Association of Southeast Asian Nations (ASEAN) mandated the OECD Southeast Asia Regional Programme s Regional Policy Network on PPPs to conduct a project on Access to Risk Mitigation Instruments for Private Infrastructure Investment in Southeast Asia. The project is supporting the ASEAN Connectivity Coordinating Committee s (ACCC) activities in coordinating and overseeing the effective implementation of the Master Plan for ASEAN Connectivity (MPAC) 2010 and its successor document MPAC The MPAC calls for infrastructure improvements to promote economic growth, narrow development gaps, foster ASEAN integration and community building, enhance competitiveness and inclusiveness, improve labour mobility and connect its Member States with one another and with the rest of the world. The Master Plan aims to improve connectivity, based on three pillars: physical transport, energy and ICT infrastructure development (physical connectivity), trade, investment and services liberalisation (institutional connectivity) and education, culture and tourism (people-to-people connectivity). The project proposal was presented to the ASEAN Connectivity Coordinating Committee (ACCC) Meeting in Jakarta on 22 March First findings were presented for comments and feedback at the 3/2014 ASEAN Connectivity Coordinating Committee Meeting in Nay Pyi Taw/Myanmar, the ASEAN Public Private Partnership (PPP) Networking Forum on December 2014 in Manila, and at the 1/2015 ASEAN Connectivity Coordinating Committee Meeting in Jakarta on 5 March The project was developed under the overall guidance of Alexander Böhmer, Head of Division, OECD Southeast Asia Division; and Mr. Lim Chze Cheen, Director and Head of ASEAN Connectivity Division. The report was drafted by Knut Gummert, OECD Southeast Asia Division. Valuable input was provided by the team of the OECD Southeast Asia Division: Andrew Fitzpatrick, Audrey Berthet and Vivian Lang. The project benefited from input from Hélène Francois, Directorate for Financial and Enterprise Affairs; and Ihssane Loudiyi, Directorate for Public Governance. The report further benefited from feedback from Gizella Herrera, Senior Officer, ASEAN Connectivity Division; the ACCC; the ASEAN Member States; Peter Mumford, Southeast Asia Regional Director for Economic and Trade Policy; and Benjamin Chew, Head of the Southeast Asia Prosperity Fund. The project received financial support from the South East Asia Prosperity Fund of the UK Foreign & Commonwealth Office. The deliverables of the project are comprised of this report and a website which presents the findings of this report as well as a database on financial risk mitigation instruments and political interventions, from which data was used for this report s analysis. The website enables ASEAN policy makers, lenders and investors to compare risk environments and available mitigation instruments in ASEAN Member States, from public and private issuers. The report is based on ongoing OECD work on infrastructure and investments, along with numerous indepth interviews and a survey on Project Risks and Mitigation instruments. Interviews have been conducted with selected public and private stakeholders, including: PPP units, Export Credit Agencies, EXIM banks, central banks, multilateral institutions, ministries, commercial and development banks, investors, project sponsors, private insurance companies, and construction companies. 3

4 Contents FOREWORD... 3 EXECUTIVE SUMMARY INFRASTRUCTURE NEEDS AND INVESTMENT IN ASEAN MEMBER STATES Summary Infrastructure needs in the ASEAN region Private Participation in Infrastructure Investment Financing private infrastructure investment Debt financing in the ASEAN region Equity financing PROJECT RISKS AND MITIGATION STRATEGIES Summary Commercial and political risks in Public-Private Partnerships Risk management Risk mitigation instruments Risk mitigation instruments to cover political risk Risk mitigation instruments to cover commercial risks Public support and institutions for facilitating access to financing and risk mitigation AVAILABILITY OF POLITICAL RISK INSURANCE AND GUARANTEES IN ASEAN Summary Market for Risk Insurance Demand and beneficiaries of political risk insurance Supply of PRI from public and private providers Supply of PRI from private insurance companies Supply of PRI from bilateral agencies Supply of PRI from multilateral agencies Constraints in accessing political risk insurance LEGAL AND REGULATORY FRAMEWORKS ON INVESTMENT PROTECTION Summary Institutional frameworks for Public-Private Partnerships in ASEAN Member States Legal frameworks to protect long-term investment Domestic legal frameworks to protect long-term investment in ASEAN Member States International investment agreements Investor-state dispute settlement in ASEAN countries REPORT FINDINGS AND RECOMMENDATIONS Bibliography Annex I Investment needs, and legal and institutional environment for PPP projects in ASEAN Annex II Profiles of Major Agencies providing risk mitigation instruments Glossary

5 Tables Table 1.1 Infrastructure coverage by region Table 1.2 Infrastructure investment needs and government funding Table 1.3 Characteristics of procurement modes Table 1.4 Private participation in infrastructure projects in ASEAN Member States Table 1.5 Instruments to finance PPP projects Table 2.1 Definition of main political risks in private infrastructure projects Table 2.2 Overview of main project risks and selected risk mitigation instruments Table 2.3 Instruments to reduce demand risk Table 3.1 Berne Union PRI issuance by providers Table 3.2 Political risks covered by public providers Table 3.3 MIGA s Outstanding Guarantee Portfolio in ASEAN Countries, Table 4.1 PPP-related legal and institutional frameworks in ASEAN-10 countries Table 4.2 Core investment protection guarantees in selected ASEAN countries legal frameworks Table 4.3 World Bank Doing Business indicator on the investment framework Figures Figure 1.1 Procurement modes for public services Figure 1.2 Typical structure of a PPP project (i.e. BOT) Figure 1.3 Volumes of privatisation infrastructure in certain ASEAN Member States, Figure 1.4 Volume of PPP projects by region and total number, Figure 1.5 Investment commitments to infrastructure projects with private participation (billion USD) Figure 1.6 Project finance loans (commitments by region) Figure 1.7 Domestic equity and credit market Figure 1.8 Number of derivatives traded in selected ASEAN economies Figure 1.9 ASEAN domestic market capitalization Figure 2.1 Main project risks and potential risk transfer Figure 2.2 Main constraints on private infrastructure investments in ASEAN Figure 2.3 Background of survey respondents Figure 2.4 Political risks of most concern in private infrastructure investment in Southeast Asia Figure 2.5 OECD Country Risk classification* for ASEAN Member States (excl. Brunei Darussalam) Figure 2.6 Commercial risks of most concern in private infrastructure investment in ASEAN countries Figure 2.7 Risk management process Figure 2.8 Most frequently used strategies to mitigate political risks Figure 2.9 Parameters of risk mitigation Figure 2.10 Mechanisms to mitigate construction risks Figure 2.11 Most effective mechanisms to mitigate demand risks Figure 2.12 Most effective mechanisms to mitigate exchange rate risks Figure 2.13 Most effective mechanisms to mitigate operational and supply risks Figure 2.14 Government actions to reduce risks in private infrastructure investments Figure 3.1 Providers of risk mitigation instruments Figure 3.2 Global and ASEAN PRI new business and exposure Figure 3.3 Global new business of Short-Term, Medium- Long-Term and Investment insurance Figure 3.4 PRI exposure in ASEAN-6 and CLMV countries Figure 3.5 New PRI business in ASEAN-6 and CLMV countries Figure 3.6 Ratio of PRI cover to inward FDI flows in ASEAN countries Figure 3.7 Claims Paid by Country Figure 3.8 Demand changes for PRI in ASEAN after GFC Figure 3.9 Demand for PRI cover in ASEAN Figure 3.10 Demand for PRI cover in CLMV

6 Figure 3.11 Importance of PRI to access finance Figure 3.12 Available market capacity of private insurers to cover single project risk Figure 3.13 Maximum capacity and tenure per risk Figure 3.14 NEXI: New business of long-term products and total exposure Figure 3.15 SINOSUREs exposure in short-term and medium-/long-term insurance Figure 3.16 SINOSUREs medium- and long-term insurance Figure 3.17 MIGA and ADB products Figure 3.18 Level of constraints to access to Political Risk Insurance in ASEAN Member States Figure 4.1 International Investment Agreements in ASEAN Member States Boxes Box 2.1 Interviews and the OECD Survey on Project Risk and Mitigation Box 2.2 IIGF s Guarantee Box 2.3 CGIF s Guarantee Box 3.1 MIGAs Investment Guarantee Box 3.2 ADB s Political Risk Guarantee (PRG) A case study in Viet Nam

7 Selected Abbreviations ACCC ASEAN Connectivity Coordinating Committee ACIA ASEAN Comprehensive Investment Agreement ADB Asian Development Bank AEC ASEAN Economic Community AIF ASEAN Infrastructure Fund AMS ASEAN Member States APEC Asia Pacific Economic Cooperation ASEAN Association of Southeast Asian Nations BIT Bilateral investment treaties BLT Build, Lease, Transfer BoC Breach of contract BOT Build-Operate-Transfer CD Civil disturbance CEN Confiscation, Expropriation, Nationalization CLMV Cambodia, Lao PDR, Myanmar, Viet Nam DSCR Debt service coverage ratio ECA Export credit agency EIB European Investment Bank EIU Economist Intelligence Unit ERIA Economic Research Institute for ASEAN and East Asia EU European Union EXIM bank Export-Import bank Expro Expropriation FDI Foreign direct investment GDP Gross domestic product ICIEC Islamic Corporation for the Insurance of Investment and Export Credit ICSID International Centre for Settlement of Investment Disputes IFC International Finance Corporation IFI International financial institutions IIA International Investment Agreement IIGF Indonesia Infrastructure Guarantee Funds IMF International Monetary Fund IPP Independent Power Producer ISID Investor-State Dispute Settlement MIGA Multilateral Investment Guarantee Agency 7

8 MPAC NHFO ODA OECD OPIC PCG PDF PPA PPI PPP PRI RMI SOE SPV T&C TIP UNCTAD USD VfM Master Plan on ASEAN Connectivity Non-honouring of financial obligations Official Development Assistance Organisation for Economic Co-operation and Development Overseas Private Investment Corporation of the United States Partial Credit Guarantees Project Development Fund Power Purchase Agreement Private Participation in Infrastructure Public-Private Partnerships Political Risk Insurance Risk Mitigation Instrument State-Owned Enterprise Special Purpose Vehicle Transfer and convertibility restrictions Traditional Infrastructure Procurement United Nations Conference on Trade and Development US Dollar Value for Money 8

9 EXECUTIVE SUMMARY Infrastructure gaps in the ASEAN region hamper sustainable economic and social development. The ADB estimates that regional demand for infrastructure investment amounts to USD 60 billion per year until 2020, fuelled by strong economic growth, an increasing population and urbanisation. The large infrastructure requirements are reflected in the Master Plan on ASEAN Connectivity (MPAC) 2025, which call for improved infrastructure among others. This Plan aimed to foster physical, institutional and people-to-people connectivity. Its implementation is supported by the Secretariat of the Association of the Southeast Asian Nations (ASEAN) and its ASEAN Connectivity Coordinating Committee (ACCC). Infrastructure investment from the public sector will not be sufficient in meeting demand, hence should be complemented with private sector participation. Infrastructure projects can take a number of forms, ranging from relatively limited service and management contracts, lease contracts, concessions and Public- Private Partnerships (PPPs) to full or partial public divestitures. Governments benefit from efficiency gains by harnessing the management and technical expertise of private companies and private financing sources. However, PPPs are not a panacea and governments should ensure value-for-money and fiscal sustainability. ASEAN Member States (AMS) recognise the value of using PPPs for infrastructure provision and have embarked on improving legal and institutional frameworks. The ASEAN Principles for Public-Private Partnership Framework, welcomed by the ASEAN Leaders for voluntary adoption at the 25 th ASEAN Summit in 12 November 2014, offers guidelines for AMS on how to implement effective PPP frameworks. Greater private sector investment in bankable infrastructure projects comes with challenges of its own, as sufficient access to equity and debt financing is required. This has become increasingly challenging since the global financial crisis, particularly for certain ASEAN Member States. Traditional project finance providers have since lowered their risk exposure to emerging and developing markets. Furthermore, commercial banks have reduced lending in the face of more stringent regulations such as Basel III (ADB, 2014; Mash and McLennan Companies 2013). Both international capital markets and well-developed ASEAN domestic capital markets should have been in a position to offer sufficient liquidity for financing private infrastructure projects over the recent years. Interviewed experts noted the contrast between different AMS: on the one hand, domestic capital markets in Singapore and Malaysia are sufficiently deep to finance large infrastructure projects and, in Thailand, the Philippines and to some degree Indonesia, smaller projects can be financed domestically. On the other hand, in Cambodia, Lao PDR, Viet Nam and Myanmar, access to local currency denominated loans is restricted, with investors having to rely mainly on international capital markets. Despite the liquidity in international and domestic capital markets, relatively few PPP projects are currently underway in the region, which raises the question why available capital does not translate into realised infrastructure projects. For example, only 5.6% of global PPP projects were implemented in East Asia and the Pacific in 2012 (PPIAF database). To explain this paradox, recent studies have proposed a number of measures to promote private sector infrastructure investments, including improvements to legal and regulatory environments and easing access to finance through improved availability to financial risk mitigation instruments. The need for the latter has been widely recognised on a global scale, for instance by the Camdessus Panel and the G8, which called for concessional risk mitigation instruments and sub-sovereign lending to cover risks in crucial infrastructure investments. This report identifies the main project risks in private-sector infrastructure projects, along with the most effective risk mitigation instruments applied in ASEAN Member States. The analysis builds upon a comprehensive literature review, a qualitative survey and numerous interviews with experts from both the public and private sector, including: PPP units, Export Credit Agencies, EXIM banks, central banks, multilateral institutions, ministries, commercial and development banks, investors, project sponsors, private insurance companies and construction companies. Reflecting on the importance of political risk, the report assesses supply and demand for political risk insurance and guarantees, which are used to ease access to equity and debt financing. 9

10 Central to this report is the thesis that both commercial and political risks continue to act as major deterrents to debt and equity financing for private-sector infrastructure investments in the region, hence the low levels of private participation in infrastructure investments that we observe on a sustained basis. Commercial and political risks constrain access to finance in a number of ways: Commercial risks relate to cash flow and return and can threaten the financial viability of a project. Our analysis finds that the main commercial risks relevant to private sector infrastructure projects are construction and exchange rate risks, followed by counterparty, demand, and social and environmental risks. Political risks affect cash flow and the security of assets, and are of particular concern for investors and lenders in long-term and large-scale infrastructure investments requiring large upfront capital investments and with long payback periods. Our analysis finds that the main political risks relevant for private infrastructure projects are: adverse regulatory changes, breach of contract and non-honouring of (sovereign) financial obligations. In both our survey and interviews with experts, political risks were consistently mentioned as main constraint for investment decisions in infrastructure projects. The survey found that contractual arrangements, insurance and guarantees are the most effective instruments for mitigating or transferring commercial risks. To mitigate political risks, joint venture or alliances with local companies and political risk insurance were reported to be the most effective instruments. Insurance and guarantees are increasingly used in developing and emerging economies to transfer political risk (MIGA 2014). Given the importance of political risk and the reported effectiveness of insurance and guarantees this report includes an analysis of both the demand for, and supply of, political risk mitigation instruments, with the following findings: Demand for political risk insurance and guarantees increased from 2008 onwards, as a result of greater risk awareness following the global financial crisis, the European debt crisis and various political events that ensued. Global exposure to investment insurance grew from USD 100 billion in 2006 to USD billion in 2013, according to Berne Union data. The increase in demand reflects a greater need to ease access to equity and debt financing. Demand varies among the ASEAN Member States. For instance, political risk insurance plays an important role in accessing financing of infrastructure projects in Lao PDR, Cambodia, Myanmar, and to a lesser extent Viet Nam. In Indonesia, the Philippines and Thailand, levels of demand depend on the respective sector, project characteristics, stakeholders and/or contractual arrangements. In Brunei Darussalam, Malaysia and Singapore, demand is low as most commercial banks feel comfortable with the risk levels, hence rarely require cover. The supply of political risk cover decreased after 2008, attributable to higher risk awareness on the part of insurance companies, financial institutions and public issuers. For example, monoline insurance, which provided credit enhancement by ensuring principal and interest payments, has since disappeared from the ASEAN market. In recent years, the availability of political risk cover has increased as public and private sector issuers have augmented their capacities, as well as the tenure of their insurance and guarantee products. Nonetheless, their insurance products continue to face constraints, such as: Short tenors and low capacities constrain insurance products from private insurance companies; Complex processes facing multilateral agencies; National interests affecting cover from bilateral agencies. Private investors will only commit to financially viable infrastructure projects that are backed by a sound, transparent and predictable legal and regulatory framework. To reassure investors, national governments have strengthened their regulatory and institutional frameworks to protect private investment in recent years. At regional level, the ASEAN Comprehensive Investment Agreement seeks to harmonise national frameworks for 10

11 investment protection. ASEAN governments have also embarked on improving their institutional frameworks by, for example, establishing central PPP units and increasing regulatory powers. Survey results, as well as a summary of this report s the main findings, have been made available on a publicly-available website which also provides detailed information on the main risks for infrastructure investments, as well as a summary of the most effective risk mitigation instruments used by the private sector. The website also features a database on risk mitigation instruments provided to ASEAN Member States (AMS), lenders and project sponsors with an overview of available financial instruments and public interventions to incentivise private investment. This enables private and public stakeholders to compare the investment climate for infrastructure investment and to learn from good practices. Chapter 1 of this report describes current infrastructure needs, the role of the private sector in infrastructure development and national and regional capital markets as sources for financing. Chapter 2 describes the main project risks in private infrastructure investment and effective risk mitigation instruments. Reflecting the importance of political risk, Chapter 3 then analyses the supply of and demand for political risk insurance and guarantees from private insurance companies, and from bilateral and multilateral agencies. Chapter 4 assesses the legal framework for investment protection. The final chapter concludes by summarising the main findings of the report and recommendations. 11

12 Chapter 1 1. INFRASTRUCTURE NEEDS AND INVESTMENT IN ASEAN MEMBER STATES Unmet large and increasing infrastructure needs constrain social and economic development in the ASEAN Member States. The first section of this report explores the existing infrastructure gaps and investment needs in Southeast Asia, at both domestic and regional levels. Private participation in infrastructure investment is one approach to reducing these infrastructure gaps that is emphasised in national and regional development plans. Forms Modes of private participation and their potential benefits are discussed here, along with an overview of the limited number of PPP projects in the region. Large scale private infrastructure investments require access to equity and debt funding. Funding sources for PPPs and the development of debt and equity markets are therefore described in the final section of this chapter. 12

13 1.1. Summary The OECD Economic Outlook for Southeast Asia, China and India 2016 identifies infrastructure investment as critical for most Member States of the Association of Southeast Asian Nations (ASEAN) to foster economic growth, reduce poverty and, in some cases, move beyond the middle-income trap. 1 Growing populations, rapid urbanisation and increasing economic activity in the ASEAN region further increase the need for significant infrastructure investment. This chapter describes the infrastructure needs in ASEAN Member States, national and infrastructure development plans and the persisting public financing gap. Stronger private participation in infrastructure investment would strengthen infrastructure development by complementing insufficient public resources. National and regional development plans name public-private partnerships (PPPs) as an important procurement approach; however traditional infrastructure procurement will remain dominant. Furthermore, PPPs are no panacea and their selection should be based on value for money and an optimal allocation of risk. Private participation in infrastructure is still relatively limited in ASEAN in comparison to other regions, and also varies widely among the ASEAN Member States. For instance, in Indonesia, Malaysia, the Philippines, Thailand, and, to a lesser extent, Viet Nam, PPPs are increasingly used. Where the number of PPP projects is low, high perceived commercial and political risks in long-term infrastructure projects are cited as a major reason. Other risks mentioned by interviewed experts relate to political and governance frameworks such as complex and/or non-transparent procurement processes, as well as legal and institutional frameworks, along with limited public capacities to implement complex PPP projects. Further constraints include inefficient risk allocation and the lack of a national pipeline of bankable and financially viable projects. The different modes of private infrastructure participation and their contractual structures are discussed in more detail below. Large-scale private infrastructure projects entail significant debt and equity financing needs. Access to financing for such large amounts depends on domestic capital markets, the development of which varies strongly between ASEAN economies. The liquidity of certain domestic markets, and of international capital markets, coupled with low long-term interest rates, should in theory provide a satisfactory environment for financing private investment. In practice, access to debt and equity financing for PPPs is hampered by high levels of perceived, or actual, risks. Regional and East Asian banks have increased their exposure providing long-term commercial rather than project loans. These banks tend not to refinance these loans though are willing to keep them in their books due their perceived low risk profiles in the operational phase. However, an increasing volume of infrastructure loans might oblige banks to refinance these loans, as they approach country and single-borrower limits. The size of domestic capital markets and their risks/low ratings might constrain the ability to refinance loans on domestic and international capital markets. Domestic credit and equity markets in most ASEAN economies have grown steadily over the past few years, however remain small in comparison to other Asian economies. Domestic bond markets have deepened particularly in Malaysia, Thailand and Singapore, followed by Indonesia and the Philippines. The aggregated bond market of these five countries remains at USD 1127 billion in 2014, however, still relatively small in comparison to competing Asian countries. Private companies access to the bond market might be even more limited, as government bonds dominate the market (at 70%) and state-owned enterprises (SOEs) might account for a high share of corporate bond issuance. The capitalisation of domestic equity markets in Singapore, Malaysia, Thailand, Indonesia and the Philippines has been increasing, reaching USD 2.37 trillion in 2014; however this market capitalisation represented only 3.4% of the global market and 10.5% of the Asia- Pacific region. These figures show that, despite progress made in deepening equity markets, ASEAN governments might wish to further develop domestic capital markets in order to ease access to financing. 13

14 1.2. Infrastructure needs in the ASEAN region High infrastructure needs hamper economic and social development in many countries in the ASEAN region, whose infrastructure is still less developed than that found in OECD or Latin American countries. Despite improvements, poor quality and coverage of roads, missing railway links, inadequate port infrastructure, inland waterways, aviation facilities, telecommunications, power and clean water are examples of the high investment needs in many ASEAN economies (Table 1.1 and Table Annex 1). To upgrade and build required infrastructure, the ADB estimates financing needs in the region to amount to USD 60 billion a year until Other assessments show even higher investments needs between 2010 and 2020; for example USD 110 billion in Viet Nam, USD 450 billion in Indonesia and USD 127 billion in the Philippines (Table 1.2). Table 1.1 Infrastructure coverage by region Country Roads (km) Rail (km) Phone (number) Electrification Per 1,000 people Percentage Clean Water ASEAN Asia OECD Latin America Africa n.a Source: ERIA (2013) based on ADB, UNDP and UNESCAP data. ASEAN governments have increased investments since the financial crisis but further investment is required. ASEAN economies on average spend only about 4% of their GDP on infrastructure (Groff, 2014), which is well below the investment needs in most ASEAN economies, such as 13.61% in Lao PDR or 8.71% in Cambodia (Table 1.2). Considering total governmental capital expenditures, many countries continue to face large investment gaps. Lower global energy prices reduce public expenditures on subsidies that might free funds in several ASEAN economies. However, high levels of public deficits and debt restrict debt financing for infrastructure investment. Issuing new public debt might be constrained by relatively high gross debt levels in those ASEAN countries, whose debt level exceed the average debt of 43.3% in emerging countries or 40.1% in emerging Asia. Private participation in infrastructure investment could complement insufficient traditional infrastructure investment. Table 1.2 Infrastructure investment needs and government funding Total estimated investment needs (USD million) Investment needs as % of estimated GDP (annual) Government capital expenditure, percentage of GDP ( average) Budget Surplus/Deficit (% of GDP) 2013 General government gross debt, 2014 (% of GDP) Brunei Darussalam NA NA NA Cambodia 13, Indonesia 450, Lao PDR 11, Malaysia 188, Myanmar 21, Philippines 127, Singapore Thailand 172, Viet Nam 109, Source: Author's calculation based on JICA-RI Working Paper (2012), World Economic Outlook (2014), and World Bank data. Note: Numbers in 2008 prices The Master Plan for ASEAN Connectivity (MPAC) 2025 calls for infrastructure improvements among others to spur a seamlessly and comprehensively connected and integrated ASEAN that will promote

15 competitiveness, inclusiveness and greater sense of ASEAN Community. The Master Plan seeks to improve regional integration through enhanced physical, institutional and people-to-people connectivity Private Participation in Infrastructure Investment Private participation in infrastructure investment, such as Public-Private Partnerships (PPPs), offers an alternative procurement approach to accelerate infrastructure provision. PPPs could improve public value for money in infrastructure procurement, while strengthening service quality, coverage and financing. The potential benefits of PPPs will be discussed in this section along with their complexity by describing the different modes of PPPs and involved stakeholders. Finally, the limited usage of PPPs in many ASEAN economies and related reasons are discussed in more detail. Public-Private Partnerships procurement should be based on higher value for money and the appropriate allocation of risks. Value for money (VfM) can be defined as an optimal combination of quantity, quality, features and price expected over the project s life cycle. Thereby, the public sector benefits from private sector technological and management know-how and innovation. Cost reductions over the contract duration can be achieved by bundling the construction and operation phase of the asset. These benefits of lower costs, higher user-fees and service quality need to off-set higher transaction and private financing costs. These benefits further increase if constraints on the public side hamper traditional infrastructure procurement. Value for money in private infrastructure projects relies largely on the appropriate allocation of risks among public and private parties. Consequently, risks need to be clearly classifiable, measurable and contractually allocated to the party best able to manage them (see chapter 3 for more information on project risks and risk transfer). Certain commercial risks can be controlled and thus should be covered by the private sector. Political and legal risks, however, cannot be directly influenced by the private sector. A sound, transparent and predictable legal, regulatory and institutional PPP framework mitigates political and legal risks for investors and lenders. To reduce fiscal risks and ensure long-term fiscal sustainability sound accounting and budgeting processes are critical. For example, the public sector is advised to include future expenditures, financial obligations and contingent liabilities in the budget documentation and financial statements. The ASEAN Principles for PPP frameworks (ASEAN, 2014) and the OECD Principles for Public Governance of Public-Private Partnerships (2012) provide recommendations on a conducive legal and institutional framework for PPPs. PPP projects are increasingly used, but traditional infrastructure procurement (TIP) remains the most frequently applied approach for infrastructure development. TIP is, in many instances, the best option from a value for money perspective as governments in general enjoy significantly lower financing costs or potential efficiency gains are limited. For example in OECD economies, the share of PPPs in infrastructure procurement only exceeds 15% in Mexico and the UK, followed by 10-15% in Australia and Finland and 5-10% in Republic of Korea (OECD, 2014b). In India, private investment in roads has increased strongly, reaching 34% of all investments during the 11th plan ( ) (UNESCAP, 2014). The following section provides an overview on different modes of public-private collaboration and the structure of contractual arrangements. Private-Private Partnerships: procurement modes and structure of contractual arrangements PPPs, in general, refer to contractual arrangements between the public and private sector. The private sector delivers and finances infrastructure assets, and provides goods and services that traditionally have been provided by the government (OECD, 2008). Effective contractual arrangements align the service delivery objectives of the government with the private sector s objective to generate profits. Contracts often define quality and quantity of services and an appropriate transfer of risks. The private sector may be responsible for the design, construction, financing, operation, maintenance and service delivery. The private sector receives revenues from the public authority or end users (OECD, 2012). PPPs encompass, in the broad definition applied here, four modes: management and lease contracts, concessions, Public-Private-Partnerships and divestitures/private ownership. These procurement modes can be broadly distinguished along the level of risk allocation, ownership and private financing and investment (Figure 1.1 and Table 1.3). Ownership can stay with the government or could 15

16 be temporarily or indefinitely transferred to the private sector. Increasing private investment and financing entails significant risk transfers to the private sector. Larger risk transfers to the private sector may offer larger efficiency gains to the project through the private sector s technological and management skills. Yet higher risk transfers come with costs, as the private sector requires higher profits to balance higher risks. Figure 1.1 Procurement modes for public services PPP options Source: Author s compilation based on UNESCAP (2011) and OECD (2008) Table 1.3 Characteristics of procurement modes Mode Main Variants Ownership Investment responsibility Supply and management contract Risk allocation Contract duration (years) In a management contract, the private partner manages a public facility, thereby, allowing the public sector to benefit from private partner knowhow and skills in design, delivery, operation, labour management and input procurement. The private partner, in general, receives a performance-based payment and rarely bears commercial risks. The public sector owns the facility and bears almost all risks. Construction / Turnkey contract Affermage / Lease Outsourcing Public Public Public 1-3 Maintenance Public Public/Private Public/Private 3-5 management Operational management Public Public Public 3-5 In a turnkey contract, the private partner promises to deliver the facility to a fixed fee / costs and fixed time. The private partner assumes design and construction risks. Turnkey / Design- Public Public Public/Private 1-3 Build The private partner leases an existing facility from the public sector for a defined period, and operates and maintains it. No large private investments required in generally. The public partner assumes most risks. The private partner bears operational risks. 16

17 Concession Public-Private Partnerships (increasing risk transfer and financing of private sector) Private ownership Affermage and lease are very similar the main difference is the revenue collection and sharing between both parties. Affermage Public Public Public/Private 5-20 Lease (e.g. Build- Lease-Transfer) Public Public Public/Private 5-20 The private partner buys the right to use the asset/facility and - depending on the project - to provide services and receive revenues. The private partner finances, builds and operates the facility and thus, assumes larger risks. The ownership might remain with the government, if not; the facility is transferred back to the government at the end of the concession contract. There are many similarities with BOT contracts. Franchise Public/Private Public/Private Public/Private 3-10 Build-Operate-Transfer (BOT): The private partner is responsible for the design, construction, finance and operation of the facility and, thus, assumes construction and operational risks. The exact level of risk allocation differs and is defined in the contract. The facility is transferred to the public partner at the end of the contract. The public partner assumes contingent liabilities though explicit and implicit public guarantees. Other contracts: Build-Own-Operate-Transfer (BOOT); Build-Transfer-Operate (BTO); Build-Rehabilitate- Operate-Transfer (BROT) BOT Public/Private Public/Private Public/Private Build-Own-Operate (BOO): The private partner builds, owns, operates and maintains the infrastructure facility no obligation to transfer the facility to the public sector. The private partner assumes significant risks; high potential of efficiency gains through the private partner s skills and knowhow. Requires strong capacities in public procurement and regulatory authorities. Other contracts: Build-Own-Maintain (BOM); Build-Own-Operate (BOO); Build-Develop-Operate (BDO); and Design-Build-Operate (DBO); Design-Build-Finance-Operate (DBFO) BOO Private Private Private Indefinite The private partner owns and operates the asset and is responsible for the service delivery. The role of public partner is limited to a regulatory role, which is especially relevant in sectors of natural monopoly. Divestiture Private Private Private Indefinite Source: Author s compilation based on UNESCAP (2011) and OECD (2008) A typical PPP project is a network of contracts between the government and private partners (Figure 1.2): A Special Purpose Vehicle (SPV) or Project Company is a legal entity created by the project sponsors. The SPV implements the infrastructure project and engages in contractual arrangements with the different stakeholders. The creation of an SPV is common in projects with limited- or non-recourse project finance, where the sole security is the project s cash flow and assets. The SPV is dissolved once the PPP project has been either finished or transferred back to government at end of the concession period. Investors, like project Figure 1.2 Typical structure of a PPP project (i.e. BOT) Source: Authors compilation based on Delmon (2011) and OECD (2008) 17

18 sponsors or shareholders, provide equity and subordinated loans to the SPV. Project sponsors often include an experienced construction company and a service operator. The government could provide financing through a joint venture or Viability Gap Funding. Lenders provide debt financing through corporate debt, non- or limited recourse project finance and corporate/project bonds. Typical lenders include commercial banks and, increasingly, institutional investors (pension, mutual and sovereign funds). Customer/government: The SPV has an off-take agreement with a State-Owned Enterprise (SOE) or a public authority (bulk delivery), sells the service directly to end users, receives subsidies or has a mixture of these options. Government / grantor issues the concession agreements to the SPV. The grantor might provide financial support either in the form of direct subsidies and capital or indirectly through guarantees. Insurers, such as multilateral/ bilateral agencies and private insurance companies, issue financial instruments to mitigate commercial and political risks. Privatisation of infrastructure assets Privatisation of infrastructure assets is a further option to increase private participation in infrastructure. Privatisation allows the public sector to raise resources to fund new infrastructure investment. The private sector is typically more interested in investing in existing (brownfield) assets, which have a lower risk profile than greenfield investment. Investors avoid the riskier construction phase and acquire a project with a known revenue stream and operational costs. Since 2007, around 300 infrastructure transactions took place in the ASEAN region worth close to USD 60 billion (Kroll, 2014). This is largely driven by the trend of privatisation of public infrastructure assets (both outright and concessional) in the Philippines, Thailand, and Figure 1.3 Volumes of privatisation infrastructure in certain ASEAN Member States, Privatisation proceeds in USD billion Indonesia Malaysia Philippines Thailand Viet Nam Source: Author s calculations based on World Bank Privatisation Database Note: Include only transactions of at least US$1 million Malaysia (Figure 1.3). The majority of the privatisation transactions took place in the energy sector: 22 out of 34 transactions involved energy companies. Privatisation, however, typically involves existing infrastructure assets and does not usually entail required investment in new infrastructure. The state of Public-Private Partnerships in the ASEAN region The usage of Public-Private Partnerships remains relatively limited in Asia and the ASEAN region. Only 5.6% of the global volumes of projects with private participation in infrastructure are implemented in East Asia and Pacific. Most PPP projects are conducted in Latin America and the Caribbean (Figure 1.4). In East Asia and Pacific, projects in India, Republic of Korea, Australia and China account for over 80 per cent of the region's investment in PPP projects between 2001 and 2011 (UNESCAP, 2013). In the ASEAN region, private participation in infrastructure accounted for USD 10 billion in 2011, down from USD 18 billion in 2010 (ERIA, 2013). The volume of PPP activities in the ASEAN region increased throughout the 1990s but experienced a significant slowdown during the Asian Financial crisis. Cancellations and renegotiations of PPP projects during the crisis reduced investor confidence in certain ASEAN economies (Navarro, 2005). Since the 2000s, the volume of PPPs has gradually increased but remains below pre-crisis levels. The volume decreased again after the 2008 global financial crisis. 18

19 Figure 1.4 Volume of PPP projects by region and total number, Middle East and North Africa Sub-Saharan Africa Eastern Europe and Central Asia South Asia East Asia and Pacific Latin America and the Caribbean Volume in billion USD Number of projects Year Source: Author s calculations based on PPIAF Database, accessed November 2014 Note: Years refer to financial closure Figure 1.5 Investment commitments to infrastructure projects with private participation (billion USD) Commitements in billion USD Vietnam Thailand Philippines Myanmar Malaysia Indonesia Lao PDR Cambodia Source: Authors calculation based on World Bank; PPIAF PPI Project database. Note: The PPIAF PPI database includes low- and middle-income countries, thus excl. Singapore and Brunei Darussalam Private participation in infrastructure varies greatly among the ASEAN Member States. In Indonesia, Malaysia, the Philippines, Thailand, and, to a lesser extent, Viet Nam, PPPs are increasingly used (Figure 1.5 and Table 1.4). Singapore and Brunei Darussalam seldom use this procurement approach, while Cambodia and Lao PDR have only conducted a few PPPs. Based on national development plans, Malaysia envisages PPP investment of USD 5 billion per year for , Viet Nam USD 6.5 billion, Indonesia USD 4.2 billion and Thailand USD 1.6 billion. These are ambitious targets in comparison to actual levels. According to the experts interviewed, the current low number of PPPs can be attributed to: 19

20 Lack of skills and knowledge in public authorities Unclear legal and institutional frameworks Unstructured procurement processes Inefficient risk allocation High commercial and political risks in long-term infrastructure projects Lack of a national pipeline of bankable and financially viable projects Table 1.4 Private participation in infrastructure projects in ASEAN Member States Brunei Darussalam Background PPP projects The infrastructure in Brunei Darussalam is financed, owned, managed and operated for the most part by public authorities, civil service departments, wholly-owned government companies, and in one case, a statutory authority. Private sector involvement in the operations and financing of the infrastructure is limited in Brunei Darussalam (Jones 2014a). Reasons include the Government s reluctance to forego control of key national resources, the abundance of public funds and the limited scale of the Brunei Darussalam market. Cambodia Background PPP projects The quality of infrastructure in Cambodia might negatively affect economic development. Recognizing this, the Government of Cambodia (GOC) has placed infrastructure development at the top of its priority list in the Rectangular Strategy and the National Strategic Development Program (NSDP) to support economic growth but also to enhance economic competitiveness and diversification. The shortage of financial resources is a major obstacle to the implementation of an infrastructure development plan. Due to limited ODA and public funding, the GOC considers PPPs as an important approach to receive private financing as well as managerial and technical competencies. Despite a still incomplete legal framework, a number of PPPs in the power sector and several projects in transport and telecommunication have been implemented, or are in the process of being implemented and further PPP projects are planned. The level of private investment in areas such as water and transport remains low. No larger PPP projects have been implemented in the social sectors such as health and education. Indonesia Background PPP projects To accelerate economic growth, infrastructure investment is prioritized in the National Medium Term Development Plan (RPJMN) and the Masterplan for the Acceleration and Expansion of Indonesia s Economic Development Plan (MP3EI ). The MP3EI sets targets for infrastructure funding and envisages a high degree of cooperation among the central government, local governments, state owned enterprises and the private sector. Despite the existence of a complete and well-structured PPP framework, Indonesia s performance with PPPs can only be said to be mixed. Very few projects have been completed so far and until recently, PPPs were only a feature in the toll roads sector. Following the recent reforms, enabling conditions are now in place and the establishment of an APEC Pilot PPP Centre in Indonesia (2013) may help to improve the situation. Lao PDR Background Infrastructure development has always been identified as a priority for the country s socioeconomic development. The 7 th National Socio-Economic Development Plan or NSEDP 20

21 ( ) aimed at promoting the development of infrastructure deemed to be key to reach the 2020 Vision of seeing Lao PDR emerge from the list of Least Developed Countries (LDCs). Limited government financial capacity will remain a major constraint. PPP projects Projects with PPP characteristics have been implemented in the energy and transportation sectors, like the Nam Theun2 hydropower project. The project was realized as a BOT with the NT2 Power Company Ltd (NTPC), mandated through a concession agreement to build, own, operate and transfer the project to the Government of Laos at the end of a 25-year period. Malaysia Background PPP projects Since 1983, PPPs have been an important development modality. The privatisation programme engendered large projects in the private sector, particularly in transportation, telecommunications and energy. In line with the current 10th Malaysia Plan, the Government encourages private sector investments in development projects through either PPPs or direct investment. The PPP objectives of the 10 th Malaysia Plan focus on improving basic infrastructure and upgrading public transportation in Greater Kuala Lumpur. In 2012, the Government undertook 52 projects in the construction stage with an estimated value of RM 62.7 billion including roads, port facilities, transport systems (such as the Mass Rapid Transit for the greater KL), power plants, as well as social infrastructure projects in the education sector ( Since 1983, close to 600 projects have been implemented using PPP/Privatisation approaches. Projects were applied in a wide range of sectors road, rail and transport, ports, education, health, solid waste, and power generation while using a wide diversity of instruments BOT, BOOT and BLT. The first BOT highway project is the North South Highway, in which Malaysia s Government provided substantial financial assistance to the concessionaire in the form of a support loan, traffic volume supplement and external risk supplement. Among recent examples, one may mention the BOT of the KLIA Express and Transit; the high-speed rail train is designed, financed, constructed, operated and maintained by Express Rail Link Sdn Bhd (ERLSB) for a concession period of 30 years. More recently (2012), Kumpulan Europlus Bhd has been awarded a 60-year concession to build the West Coast Expressway from Banting, Selangor, to Taiping, Perak. Myanmar Background PPP projects Infrastructure development is one of the ten priority areas listed in the Framework for Economic and Social Reform and PPPs are one approach. The government seeks to mobilise both donor and private sector funding to provide infrastructure. The government has begun using PPPs in multiple sectors of the economy, including telecommunications, electricity, natural resources, housing, civil aviation, roads, and public transport. Myanmar currently has 61 road projects covering 5,895 km under the BOT system and being carried out mostly by local companies. Hydropower and coal-fired thermal power plants are only allowed in the form of joint ventures with the Myanmar Government or on a BOT basis. Philippines Background PPP projects The Philippines was one of the first developing countries with a dedicated regulatory and institutional framework for PPPs. PPPs are an important element of the Philippines Development Plan ( ) and the Philippine Government has embarked on a major reform of its PPP legislation. Benefiting from strong government support, PPPs have been widely used in the mid-1990s and private infrastructure investment commitments peaked at 15.5% of GDP in 1997 (ADB, 2012). In the wake of the Asian Financial Crisis, however, the pace of PPP investment slowed sharply and the power sector emerged as the only sector recording successful PPP projects. While the decline 21

22 continued during the first half of the Arroyo administration as most infrastructure projects were financed using ODA, the number of projects started to increase beginning in the mid-2000s (Navarro and Llanto, 2014). Since 2010, the PPP Centre has tendered and awarded nine PPPs and a further fourteen are at an advanced stage in the development pipeline. Singapore Background PPP projects Background PPP projects The Singapore Government introduced PPPs under the Best Sourcing Framework, to encourage public agencies to engage private sector providers in delivering non-core government services if it is more efficient to do so. Public agencies can engage the private sector in many ways, such as contracting for manpower, Business Process Outsourcing, or to deliver services, particularly those that require the development of new physical assets. With a well-established legal system, a supportive banking sector and an increasing body of experts familiar with PPPs, Singapore seeks to become a regional centre for expertise and financing for PPPs. The concept of PPP was first introduced in Singapore in 2003 when the first PPP contract was awarded by the Public Utilities Board (PUB) for a desalination plant. The ITE College West (2008) was the first genuine availability-based social infrastructure PPP. The S$1.3 billion Sports Hub (2014) will be operated for over 25 years, with an annual payment by the Government. Due to results of the 2007/08 financial crisis, the Government of Singapore had to work with the PPP consortium to secure sufficient financing from the private sector. Despite the favourable legal environment, few PPP contracts have been awarded so far. Thailand PPPs broadly cover concession-based private investment in public infrastructure and infrastructure development in the country has been primarily achieved through such schemes. Despite these developments, Thailand has been said to be facing a logistics bottleneck as investments in infrastructure remain limited. Examples of high-profile PPP projects in Thailand include the construction of power plants providing power to Electricity Generating Authority of Thailand (EGAT), the construction of the BTS SkyTrain, the Bangkok Underground Train, as well as the Don Muang Tollway, and various ExpressWays. Potential PPP projects include a high-speed rail link between Bangkok, Chiang Mai and Nong Khai, connecting the capital to Lao PDR and China. Further investments are also planned in motorway expansion and improved road networks. Viet Nam Background Investment in infrastructure development has been a major engine of growth in the past in Viet Nam. Investments in transport, energy, telecommunications, water, and sanitation amounted to 9 10% of GDP in recent years, a high level by international standards (World Bank, 2006). State budget and ODA are major sources for infrastructure development, but might not be sufficient to reduce the persisting infrastructure gap identified in the Socio-Economic Development Plan (SEDP). As the Government of Viet Nam s resources appear insufficient, PPPs are increasingly recognized as an alternative. Encouraging and creating favourable conditions for private investments into infrastructure is explicitly mentioned as an objective in the Master Plan on economic restructuring for the period PPP projects The majority of PPP contracts have been Build-Operate-Transfers (BOTs) structures - other forms of concession include BTO, BT, BOO contracts. The Government has recently released a List of National Projects Calling for Foreign Investment which may be seen as a promising start to develop a pipeline of viable projects. Source: Authors compilation based on ASEAN countries laws and secondary sources mentioned in the text. 22

23 The majority of PPP projects are implemented in the energy sector, which represents 59% of total PPP projects between 2000 and The dominance of energy projects can be explained by stable and predictable revenue flows, and lower risk levels. Risks are lower as a result of track records of successful projects and lower demand risks due to off-take agreements with SOEs or public authorities. Immense and increasing energy needs further reduce demand risk. Private foreign investment might also be restricted in sensitive sectors, such as telecommunications and water. Despite large infrastructure needs in all sectors, the usage of PPPs remains limited in the ASEAN region. A PwC survey on infrastructure in 2011 highlighted the large potential for investments in infrastructure: 50% of the respondents stated that Southeast Asia is good or excellent situation for attracting and financing investments. However, recent developments on international capital markets have reduced access to financing, which especially hurts large-scale infrastructure projects, which require large upfront capital investment. Governments are advised to target the above mentioned constraints and risks to incentivise private investors and to ease their access to financing Financing private infrastructure investment Large-scale private infrastructure projects entail significant debt and equity financing needs. Access to liquid and deep domestic and international capital markets is particularly critical for projects that are financed with debt ratios of up to 70 to 90%. Globally, liquid capital markets, partly a result of quantitative easing, low inflation rates and low long-term interest rates, should have created a conducive environment for financing infrastructure projects after the Global Financial crisis. This section examines the main sources for infrastructure financing and the liquidity of capital markets in ASEAN economies. Infrastructure projects can be Table 1.5 Instruments to finance PPP projects Asset category Debt Mixed Equity Financing Bonds Loans Hybrid Listed equity Unlisted equity Source: OECD (forthcoming) Instruments Project Bonds / Sukuk Corporate Bonds Municipal Bonds / Revenue Bonds Debt Funds Securitised Loans, Syndicated Loans, CLOs Subordinated Loans, Mezzanine Finance Listed infrastructure equity funds, Indices, Trusts Shares Unlisted Infrastructure Funds Direct /Co-Investment Providers of funding Commercial banks, development banks, institutional investors, government Project sponsors, equity funds, development banks, institutional investors, government Risk Profile Low Risk- Return Medium Risk- Return High Risk- Return financed through debt and equity instruments resulting in different risk and return profiles and participation rights (Table 1.5). Starting from the top of the table, risks are in general increasing as one moves from debt to equity, making direct investment in equity the riskiest of such investments (OECD, 2015c). The selection of the financing instrument depends on the nature of the asset, regulatory and tax considerations. Commonly, PPP projects are financed through non- or limited recourse project finance with limited security of the project's cash flow or assets Debt financing in the ASEAN region Debt financing is traditionally the most important source for PPPs, and a mix of project loans and bonds is usually used. In general, debts are mostly issued in local currencies, which reduce foreign exchange risks that derive from a mismatch of revenue streams and debt service. Yet in several ASEAN economies, such as Cambodia, Lao PDR, Myanmar and Viet Nam, national capital markets are too shallow to finance large infrastructure projects and investors rely on international capital markets. 23

24 Project finance loans Loans provide the bulk of financing for infrastructure projects as their leverage is higher than in noninfrastructure investment and loans contribute 70 to 90% of the total capitalisation (OECD, 2015c). Project loans are commonly used to finance the construction phase but project loans are comparably less frequently used in the ASEAN region (Figure 1.6) and infrastructure investors rely often on commercial loans. Limited or non-recourse project finance restricts securities of the bank to projects' revenues and assets. Banks frequently demand further securities, such as guarantees from project sponsors, sufficient capitalisation and capital reserve instruments to ensure the project company s ability to honour debt services. Access to long-term infrastructure financing decreased after 2008 and recovered partially thereafter. In the wake of the 2008 Global Financial Crisis, the European debt crisis and new bank regulations, commitments of project finance loans dropped by almost 45% in 2009 from a peak of USD 247 billion in 2008 but recovered to USD 200 billion in In particular large European banks reduced lending or withdrew entirely from the ASEAN region due to more prudent risk profiles, and in anticipation of new regulations (Basel III) and national laws (ADB, 2014; Marsh and McLennan Companies 2013). Basel III s equity requirements for long-term infrastructure loans and the Net Stable Funding Ratio have increased banks' overall costs to finance long-term loans with likely negative effects on access to these loans. This shortfall in long-term financing has been partly substituted by banks from ASEAN economies, Japan, Republic of Korea or China. According to interviewed experts, the impacts of Basel III remain limited and ASEAN banks are willing to keep project loans on their books, instead of refinancing them. The main factors are the familiarity with the project, investor and country, along with the project s lower risk profile after the construction phase. However, an increasing volume of infrastructure loans might oblige banks to refinance infrastructure loans, as they approach country and singleborrower limits. Figure 1.6 Project finance loans (commitments by region) Source: Thomson One Banker Project finance bonds Project finance bonds serve to refinance loans after the riskier construction phase to benefit from longer maturities and potentially lower capital costs. Refinancing via bonds is frequently constrained by high risks and 24

25 low credit ratings, as e.g. national regulations often restrict institutional investors, such as pension funds, to purchase investment grade bonds. Credit enhancement through comprehensive insurance and guarantee products can improve credit ratings to investment grade. Monoline insurance, a common instrument to improve bond ratings, however, halted in the ASEAN region after the Global Financial Crisis. Beyond the rating, bond issuances depend on the access to deep domestic or international capital markets. Institutional investors, such as pension funds and sovereign wealth funds, increasingly invest in long-term infrastructure bonds and provide equity. Australian and Canadian pension funds are most active, but mainly engage in infrastructure projects located in OECD countries. Infrastructure projects enable them to invest in assets which match their long-term liabilities and provide a certain security against inflation. World-wide, project bonds commitments increased from USD 8.5 billion in 2007 to USD 27 billion in 2012, reaching a peak of USD 49 billion in 2013 (OECD, 2014). The increased investor interest derives, at least partly, from low yields in comparable asset classes such as sovereign bonds. Yet project loans still dominate infrastructure financing with around USD 200 billion in ASEAN Credit Markets The region s credit markets have historically been dominated by debt financing from the banking sector, but bond and equity financing are of increasing importance. After the Asian crisis, many countries in the region aimed to strengthen their domestic capital markets to reduce reliance on loans denominated in foreign currencies and exchange rate risks (ADB, 2001). However, domestic capital markets are not deep enough in most ASEAN economies to finance large private infrastructure projects. Based on interview findings, domestic capital markets in ASEAN economies can be roughly grouped as follows: Singapore and Malaysia have sufficiently deep capital markets to finance large infrastructure projects. In Thailand, Philippines, and to some degree, Indonesia, projects of up to approximately USD 500million can be financed domestically while a few experts indicated larger amounts. Above USD 500 million, investors have to tap into the international capital market. In Cambodia, Lao PDR, Viet Nam and Myanmar, access to local currency denominated loans is restricted and investors rely mainly on hard currency loans. The aggregated credit and equity markets increased steadily and could provide needed long-term financing for private infrastructure projects. The aggregated amount of credits, bonds and equity increased steadily in 2012 to USD 4,865 billion of Indonesia, Myanmar, Philippines, Singapore, Thailand and Viet Nam (Figure 1.7). The increase was only shortly interrupted in the wake of global financial crisis in 2007/08. Domestic bond markets have deepened steadily but government bonds continue to dominate. Government bonds increased to USD 787 billion in 2014, continuously presenting a market share of 70%. Liquid corporate bond markets could provide needed long-term financing for private infrastructure projects. Malaysia, Thailand and Singapore have the deepest bond markets in the region, followed by Indonesia and the Philippines. Yet the aggregated bond market of these five countries remains at USD 1127 billion in 2014 still relatively small in comparison to competing Asian countries. China s bond market had a size of USD 5143 billion and Japan s bond market amounts to USD 9742 billion. Bond financing for infrastructure projects might be further restricted in the region, as only Singapore and Malaysia possess developed project bond markets. Private companies access to the bond market might be even more limited, as state-owned enterprises (SOEs) might account for a high share of corporate bond issuance. In many East Asian economies 1, SOEs issue up to 40% of corporate bonds (Reserve Bank of Australia, 2013). Domestic capital markets increasingly offer Islamic bonds/sukuks as an alternative source of financing for infrastructure projects. The asset-backed nature of these instruments might be well suited for these investments. Malaysia, Indonesia, Singapore, and Brunei Darussalam have all established sukuk markets, while Thailand has introduced regulations to stimulate Islamic finance. Malaysia is the largest sukuk market, 1 China; Hong Kong, Singapore, Indonesia, Malaysia, the Philippines, Republic of Korea, Taiwan and Thailand 25

26 accounting for nearly 60% of outstanding global sukuk in 2013 (ADB, 2014). As of June 2014, the total sukuk outstanding in Malaysia stood at billion ringgit, representing slightly over half of the volume of total outstanding bonds 2. Figure 1.7 Domestic equity and credit market Aggregate Domestic Credit Aggregate Bonds Aggregate Equity Billion USD Source : Asian Development Bank, Asian Bonds Online. Author's Calculation Note: Information on Malaysia, Philippines, Thailand, Indonesia and Singapore. 2013: No data from the Philippines available. National strategies to deepen capital markets have been complemented by regional approaches. The Asian Bond Markets Initiative (ABMI) aims to develop efficient and liquid bond markets in the region to use savings in the region for investment. The ABMI also contributes to reduce the risk of maturity and currency mismatches in financing. The ASEAN Trading Link, implemented in 2012, fosters the collaboration of the stock exchanges from Malaysia, Viet Nam, Indonesia, Philippines, Thailand and Singapore. ASEAN Trading Link seeks to reduce transaction costs and eases investors access to investment and trading opportunities in all participating ASEAN economies by providing a single integrated platform. The Credit Guarantee and Investment Facility (CGIF) was launched in 2010 to promote credit enhancement for large cross-border corporate bond issuance. Deeper domestic financial markets not only ease the access to infrastructure financing, but could also introduce the full suite of financial instruments for risk mitigation, such as derivatives, futures and currency swaps. For example, a more mature swap and derivative market would stimulate foreign currency borrowing by improving firms ability to hedge their foreign exchange liabilities. In most ASEAN economies, derivatives markets remain at a nascent stage. With the exception of commodities futures trade in Bursa Malaysia, which has seen constant growth since 2008, other derivative markets are far from liquid (Figure 1.8). Given that derivatives are one tool used to address risks in infrastructure investments, the development of derivative markets would be an important next step to enable private financiers to obtain a lower risk-return ratio. 2 Securities Commission Malaysia, accessed 19 February

27 Figure 1.8 Number of derivatives traded in selected ASEAN economies 12 Number of contracts traded (in million) Currency futures Thailand Futures Exchange Interest Rate futures Thailand Futures Exchange Source: Authors calculation based on data from the World Federation of Exchanges Interest Rate futures Singapore Exchange Commodities futures Bursa Malaysia Alternative debt instruments have been developed to reflect institutional investors willingness to finance infrastructure projects. These instruments reduce risks for investors by financing a portfolio of projects or collaborating with experienced partners. New instruments include the co-investment, securitisation and debt fund models: The partnership or co-investment model enables (institutional) investors to co-invest with a mandated lead arranger (MLA) bank in a portfolio of infrastructure loans. The investor directly lends to the project company and benefits from the debt services. Securitization allows institutional investors to invest in a pool of infrastructure loans generated by a bank, hence lending indirectly to project companies. Securitized loans allow investors more flexibility in terms of sector and country selection (Buscaino et al., 2012). In debt fund models, institutional investors provide funds which are managed by an asset manager. The strategy of investment is defined before the fundraising phase, allowing less flexibility than two other alternatives. Yet it facilitates access to infrastructure market for less experienced investors. There is a growing interest from institutional investors for debt funds: Debt funds represented less than 1% of the global infrastructure fundraising in 2011 but its share increased to 12% in 2012 and to 23% or USD 8 billion in 2013 (Probitas Partners, 2013 and 2014) Equity financing Equity financing can be provided through listed/public equity, traded on a stock exchange, and unlisted/private equity. Typical equity contributors to infrastructure projects are project sponsors and other companies participating in the engineering, procurement, construction, operation or maintenance of the project. Recent OECD trends show an increasing involvement of institutional investors, such as pension funds, sovereign wealth funds and insurance companies. Their investment focuses more on projects in developed countries with lower risk profiles/higher ratings and usually in brownfield rather than greenfield projects. Equity amounts to relatively low 10 to 30% in typical infrastructure projects. 27

28 Figure 1.9 ASEAN domestic market capitalization Domestic Market Capitalization (in billion USD) Bursa Malaysia HoChiMinh SE Indonesia SE Philippine SE Singapore Exchange The Stock Exchange of Thailand Source: Authors calculation based on data from the World Federation of Exchanges Note: No data available on Lao PDR and Cambodia as they are not members of the World Federation of Exchanges. The development of equity markets, as the source of equity financing, varies among ASEAN economies. The majority of countries, such as Cambodia, Indonesia, Malaysia, Lao PDR, Philippines, Singapore, Thailand, Viet Nam, have well-functioning financial supervisory and capital market structures. Brunei Darussalam and Myanmar do not currently possess stock exchanges or self-regulatory entities, although efforts to develop them are underway. Domestic market capitalisation in Singapore, Malaysia, Thailand, Indonesia and Philippines has been increasing since 2008, with Singapore taking the lead at a growth rate of 184% (Figure 1.9). Other countries such as Malaysia, Thailand, Indonesia, and Philippines are also making progress in developing their equity markets. However, the total ASEAN 3 domestic market capitalisation of USD 2.37 trillion in 2014 represented only 3.4% of the global market and 10.5% of Asia-Pacific. This shows that despite the progress made in deepening equity markets, ASEAN governments should seek to further develop domestic capital markets to ease access to equity financing. Alternative sources of equity finance include co-investment platforms and private equity funds: Co-investment platforms or infrastructure investment vehicles pool institutional investors resources to invest jointly in infrastructure projects. These co-investment platforms take advantage of network effects, allowing investors to invest in larger scale projects with higher returns while reducing costs and risks through investing in several projects (Bachher & Monk, 2013). Co-investment platforms have been created in emerging countries such as in the Philippines with the Philippine Investment Alliance for Infrastructure fund (PINAI). Co-investment and syndication platforms have been also introduced by some Development Banks. Private equity funds activity in infrastructure investment rose substantially in the 2000s - from USD 2.4 billion in 2004 to USD 39.7 billion in 2007 (Probitas and Partners, 2013). In the wake of the Global Financial Crisis, private equity investment decreased and reached USD 17.5 billion in Including Malaysia, Thailand, Indonesia, Philippines and Viet Nam. 28

29 Chapter 2 2. PROJECT RISKS AND MITIGATION STRATEGIES Project risks influence the financial viability and bankability of private investment, thereby constraining infrastructure development in Southeast Asia. The findings of an OECD survey on the main commercial and political risks are discussed in this chapter. Lenders and investors apply various strategies to lower risks, mitigate their impacts and transfer them to third parties. This chapter discusses the perceived effectiveness of risk mitigation strategies such as contractual agreements, financial instruments and consultation processes for managing risks. Governments seek to incentivise private investment through subsidies, for instance, as well as seeking to reduce risks or ease access to financing through instruments such as insurance and guarantees. This chapter will present the main instruments and institutions providing these instruments.

30 2.1. Summary Greater private participation in infrastructure provision is required to narrow infrastructure investment gaps. Liquid international and, in some cases, domestic capital markets, as well as low long-term interest rates, seem to provide a conducive environment for private infrastructure participation. However, such private activities currently face constraints, notably from high perceived commercial and political risks, in several ASEAN economies. This chapter discusses major risks risk management processes and identifies effective risk mitigation strategies commonly applied in infrastructure projects in the region. In addition, public instruments for reducing risk and easing access to finance are presented. High perceived commercial and political risks can reduce the willingness of private investors and lenders to engage in infrastructure projects. These risks can also constrain a project s commercial viability and bankability, thereby limiting access to equity and debt financing. Risks threaten a project s revenue stream and the security of its assets, which are of particular importance in limited or non-recourse project finance. Furthermore, infrastructure investments generally face higher risk profiles than other private investments due to their long-term and large-scale nature, the requirement of high up-front capital expenditure and their potentially large social and economic impacts which raise the risks of political interference. The main perceived risks, based on the survey findings, are as follows: The main commercial risks relate to construction and exchange rate risks, followed by counterparty, demand, and social and environmental risks. Whereas construction risks are perceived to apply across the region, exchange rate risks have greater prominence in countries, including Cambodia, Lao PDR, Myanmar and Viet Nam. The main political and legal risks are adverse regulatory changes and breach of contract, followed by non-honouring of (sovereign) financial obligations and civil disturbance, terrorism or war. To minimise these risks, a comprehensive and ongoing risk management process is required to identify, assess and manage potential negative impacts of risks. This process aims to reduce the likelihood of a negative event occurring, as well as reducing the impact of these events and/or transferring the risk to a third party. This chapter presents common risk mitigation processes, followed by a comprehensive assessment of risk mitigation strategies that are applied in private infrastructure investment in Southeast Asia. The risk mitigation strategies applied by investors and lenders aim to ease access to debt and equity financing. Lenders and investors may deploy multiple strategies to reduce their exposure to, or lower the impact of risks. Financial risk mitigation instruments such as insurance and guarantees, but also other instruments are reported as being effective in mitigating and transferring risks: For commercial risks, contractual arrangements are reported as the most effective strategy for transferring and mitigating risks, followed by insurance and public guarantees. For political risks, joint ventures or alliances with local companies, as well as political risk insurance (PRI), are reported to be the most effective instruments. Given the significance of political risk in the ASEAN region, and the importance of risk mitigation instruments such as insurance and guarantees to transfer these risks, chapter 3 examines the availability of these risk mitigation instruments in more detail Commercial and political risks in Public-Private Partnerships Commercial and political risks directly influence the financial viability and bankability of private infrastructure projects. Common commercial risks include construction, demand and exchange rate risks, which ultimately increase the uncertainty of revenue streams and project costs. While political risks, such as expropriation, war and civil violence, affect the security of the investment, the operation and revenue streams are mainly affected by adverse regulatory changes. Bankability and access to financing depend on manageable 30

31 risk levels and a reliable contractual arrangement ensuring stable revenue streams and protection of invested assets. The relevance of risks changes throughout the project s life-cycle. The life cycle is for simplicity reasons separated into construction and operational phases. Figure 2.1 provides an overview of the most common risks, which are explained in more detail in Table Annex 3. Included information on risk allocation is by no means standardised and varies based on the nature of the project, sector, procurement mode, participating stakeholders as well as the specifics of the contract. This section describes the most common political and commercial risks in infrastructure projects, complemented by survey findings on main risks in Southeast Asia and specific risks in infrastructure projects. Figure 2.1 Main project risks and potential risk transfer Construction Phase Operational Phase COMMERCIAL RISKS Risk Party* Risk Party* Source of risk include: Technological Demand risk Shared Construction & characteristics completion risk (time Valuation of input & Private Macroeconomic risk Shared delay, cost overrun, output performance) Cost and access to Operational risk Private financing Property damage Private Input raw material risk Shared Increased by: Others: design, financing risk Private Exchange rate risk Long investment and Shared payback period Force Majeure Shared High upfront costs Other: Availability risk Private Complexity of technology POLITICAL RISKS Expropriation (plant & equipment) Work permit for skilled labour Public Public Adverse regulatory changes / creeping exprop. Actions of sovereign Expropriation, entities, society Nationalisation Increased by: Breach of Contract Reliance on public Political Violence/Unrest financial and institutional Public support Non-honouring of Project cycle longer than financial obligations political cycle War / Terrorism Transfer and Social and environmental convertibility restrictions impact of investment Source: Authors' compilation based on OECD Project Risk and Mitigation survey, OECD (2014), Burger et al. (2009) Note: * Risk allocation based on good practices but allocation depend on project arrangements Political risk Political risk influences domestic and foreign investors' and lenders perspectives on a country's attractiveness for investment. Access to foreign financing sources is of particular importance for capitalintensive infrastructure projects in countries with shallow domestic capital markets. Political risk derives from legitimate and illegitimate actions or inactions of the government and non-government actors which influence the revenue stream or value of the asset or firm. MIGA defines political risks as: risks that are associated with government actions which deny or restrict the right of an investor/owner i) to use or benefit from his/her 31

32 assets; or ii) which reduce the value of the firm. Political risks include war, revolutions, government seizure of property and actions to restrict the movement of profits or other revenues from within a country. 4 Political risk is a major constraint for private infrastructure investment in developing economies. BLP- Preqin (2013) identified regulatory interference and political risks as the largest impediments for a sustained flow of private infrastructure deals. The MIGA-EIU Political Risk Survey (2013) consistently identifies political risk as one of investors top concerns. In the 2013 MIGA-EIU Political Risk Survey, political risk was the most important constraint, second only to macroeconomic instability. In the ASEAN region, the three most important constraints for private infrastructure projects are linked to the legal/political and institutional framework. In the project s survey: 'Lack of clear and stable legal and regulatory framework' has been mentioned by around 75% of the 35 respondents (Figure 2.2), followed by 'Capacity of the governmental counterparties' (61%) and 'Political risks' (54%). These findings correspond with the perspective of the interviewed experts, who highlighted the negative impact of perceived political and legal risks on the investment climate. Experts recommended strengthening public authorities' capacity and knowledge on developing, procuring and implementing PPP projects; and reducing red tape in accessing permits, licences and authorisations, which are prone to cause delays. Land acquisition is another common concern in many ASEAN Member States and respondents commented that new laws on land acquisition, for instance in Indonesia, have not necessarily led to significant improvements. Beside these constraints, a major impediment of PPP projects, mentioned in both interviews and survey comments, is the lack of a pipeline of economically viable and bankable infrastructure projects. Reasons mentioned include the lack of public expertise, political interference in project selection, and the strong role of state-owned enterprises (SOEs). Figure 2.2 Main constraints on private infrastructure investments in ASEAN Access to debt and equity financing Access to permits, licences, authorisation Access to skilled labour / staff Bribery and corruption Capacity of the governmental counterparties Lack of clear and stable legal and regulatory framework Land acquisition Limited market opportunities Macroeconomic instability Political risks Shortage of economic infrastructure Other Source: Author s calculations based on OECD Project Risks and Mitigation survey Respondents Note : Multiple answers of up to 4 options The OECD and MIGA-EIU surveys highlight the importance of political risk but differ on the importance of other constraints. Most striking is the divergence on macroeconomic instability, which is the main constraint in the MIGA-EIU survey but was rarely named in the OECD survey. These disparities might be explained by the regional focus of the OECD survey on Southeast Asia: the global MIGA-EIU survey includes the Middle East and North Africa, Sub-Saharan Africa and selected Latin American countries, where macroeconomic instability might be of higher relevance. The different results on 'Access to skilled staff could derive from the OECD survey s focus on private investments in infrastructure, whereas the MIGA-EIU survey more broadly addresses constraints for foreign direct investment. The workforce in the ASEAN region might be also better skilled. In addition, construction companies and service operators often rely on international staff to manage the

33 construction of infrastructure assets. In the operational phase, infrastructure assets require a smaller work force than, for example, companies in the manufacturing sector. Despite these differences, both surveys correspond in their findings on the importance of political risk. Box 2.1 Interviews and the OECD Survey on Project Risk and Mitigation Interviews and a quantitative survey have been conducted to collect primary data. These data cover mainly major project risks and constraints for private infrastructure investment, applied risk mitigation strategies, and the demand for and supply of financial risk mitigation instruments, such as insurance and guarantee products. Interviews Objective: In-depth semi-structured and unstructured interviews have served to collect data and information to complement secondary information within in-depth information on Southeast Asian economies. Covered topic areas: Interviews covered mainly the importance of commercial and political risk in private infrastructure projects, applied risk mitigation strategies, the availability of financial risk mitigation instruments (insurance and guarantees) and the access to debt and equity financing. Further topics addressed include: the infrastructure gap in the region, infrastructure procurement through public-private partnerships, financial/capital market development, and sector specific issues. Target group: Approximately 120 experts and officials have been interviewed via phone and during a fact finding mission to Indonesia, Malaysia and Singapore. These countries have been selected based on their economic relevance and/or their developed capital market: Singapore has been selected as most insurance companies, brokers and commercial banks are based there; Indonesia, as the largest economy and Malaysia due to the number of implemented PPP projects, and the development of its capital market. Interviewed experts derive from: National organisations, such as export credit agencies (ECAs), EXIM and development banks, which constitute 30% of the interviewed experts. Private insurance companies and brokers represent approximately 20% of the interviewed experts. International and regional organisations, such as the World Bank Group, and ADB and affiliated institutions, with approximately 10% of the interviewed experts. Major commercial banks engaged in infrastructure investment constitute approximately 10% of the interviewed experts. Consulting companies, construction companies, rating agencies and project sponsors constituted 20% of the interviewed experts. Method: In-depth interviews based on semi-structured and unstructured questionnaires: Semi-structured questionnaires have been used when conducting more than 5 interviews on the same issue. This includes for example interviews on the risk and availability of financial risk mitigation instruments, or access to financing with the main ECAs, international finance institutions, private insurance companies, brokers and commercial banks. These semi-structured questionnaires consisted of one section of mainly closed-ended questions, which allowed for aggregating and comparing their answers. A second section was sector specific and contained mainly open-ended questions to gather more in-depth insights. Unstructured questionnaires have been applied when the purpose was to gather information from noncore topic areas. The number of interviews has been limited to 2 to 4. Examples include more in-depth interviews on specific risks, such as natural hazards, and transfer and convertibility restrictions, or specific risk mitigation strategies, such as the availability of derivate to mitigate exchange rate/interest rate risk. These mainly open-ended questions allow for gathering in-depth information but limit their comparability. 33

34 Survey on Project Risk and Mitigation Objective: Following the interviews, this survey collected specific data on commercial and political risk, and effective risk mitigation strategies and the availability of financial risk mitigation instruments. The survey targeted the main stakeholders and provides a comparable data set on the main topics of the report. Content: The survey is divided into three sections: - Section A identifies commercial and political risks of most concern in private infrastructure projects in ASEAN economies. - Section B seeks investors, lenders and insurers opinion on the most effective mitigation strategies. - Section C evaluates the demand and supply of political risk insurance and guarantees in ASEAN economies. Target group: Despite this limited number of 40 respondents, the survey succeeded in covering the main stakeholders of the insurance/guarantee market: Participating issuers include: the main export credit agencies, EXIM banks, international financial institutions, private insurance companies and brokers. Participating buyers and beneficiaries include the largest regional and Japanese banks active in infrastructure financing, construction companies and leading private enterprises in infrastructure investment Figure 2.3 Background of survey respondents 18% 23% Commercial Bank Project sponsor Broker 8% 3% 5% 10% Private insurer Bilateral Agency (e.g. ECA, EXIM bank) Multilateral Agency (e.g. MIGA, WB, ADB) Other public sector (Central Bank, Ministry) 15% 18% 3% Other private sector (e.g. construction and service company) Other Source: OECD Political risk in the ASEAN region The main political risks for private infrastructure investments in the ASEAN region are adverse regulatory changes/creeping expropriation and Breach of Contract (BoC), according to the OECD survey (Figure 2.4). 5 These findings correspond with the global MIGA-EIU Political Risk Survey (MIGA 2014), which identified both as the main risks. The OECD survey further underlines the decreasing importance of expropriation, despite its potentially severe negative effect. Reasons include the increasing protection against expropriation in domestic laws and adherence to international investment agreements. Governments also refrain from outright expropriation due to their high visibility and negative impact on the country's attractiveness for FDI. Although the region is prone to natural disasters, including earthquakes, flooding and tsunamis, force majeure risk has 5 This information on the regional level does not reflect conditions in individual ASEAN economies, due to large variations in their social and economic development, and their legal system. In-depth studies on selected countries with high perceived risks might be a potential next step. 34

35 been reported by only few respondents. Civil disturbance, terrorism, war ranks forth, likely reflecting internal conflicts in several countries. Transfer risks and currency inconvertibility is a minor constraint; investors can freely repatriate capital and profits in most ASEAN economies. Thailand and Malaysia have some control over foreign currency remittances. In Myanmar, the right to repatriate capital seems to be limited in practice, as transfers of foreign currency are subject to the permission of the Foreign Exchange Management Department (OECD, 2013). The regional perspective on political risks provides an idea of the main risks constraining private investments. Given the disparities between ASEAN economies, the discussion further below on the demand for risk mitigation offers more detailed information on political risks in the respective countries. Figure 2.4 Political risks of most concern in private infrastructure investment in Southeast Asia Adverse regulatory changes/ creeping expropriation Breach of Contract (BoC) Civil disturbance, terrorism, war Confiscation, Expropriation, Nationalization (CEN) Do not know Force majeure (e.g. earthquakes, floods, Acts of God) Non-Honouring of Financial Obligations (NHFO) by (sub-) sovereign / SOE Non-Honouring of Government / Sovereign Guarantees Transfer and Convertibility restrictions (T&C) Other Source: Author s calculations based on OECD Project Risks and Mitigation survey Respondents Note: Multiple answers of up to 4 options The importance of political risks and their impact on private infrastructure projects, however, vary throughout the ASEAN region. Interviewed experts reported that Singapore, Brunei Darussalam and Malaysia are perceived as low risk investment destinations. High risk levels are observed in Myanmar, Cambodia and Lao PDR, while the Philippines, Thailand, Indonesia and Viet Nam have political risk levels in between the two country groups. These findings correspond with the OECD Country Risk Classification, used by the Participants to the Arrangement on Officially Supported Export Credits to measure country risk (Figure 2.5). This Country Risk Classification includes transfer and convertibility risks, war, expropriation, civil disturbance and natural disasters. Singapore, Brunei Darussalam and Malaysia have scores indicating low country risks. The CLMV countries (Cambodia, Myanmar, Laos and Viet Nam) score 4 or higher which reflects major challenges to access export credits and to attract foreign investments. The remaining countries belong to the middle risk group. 35

36 Figure 2.5 OECD Country Risk classification* for ASEAN Member States (excl. Brunei Darussalam) 7 Code 0 to 7, with 0 the lowest country risk Classifications above 3 are considered high. 0 Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Viet Nam Source: OECD (2014), OECD Country Risk classification ( Note: * The country risk classifications of the participants to the Officially Supported Export Credits include transfer and convertibility risks, war, expropriation, civil disturbance and natural disasters. Political risks are affected by the rule of law, property rights, investor protection, and an accessible and efficient court system. Thus, risk mitigation instruments, such as political risk insurance and credit guarantees, can help to bridge the gap by reducing these political risks while countries strengthen their domestic investment climate. Most ASEAN Member states have progressively improved their domestic investment climates thereby reducing perceived political risks. Chapter 4 discusses the investment climate in ASEAN economies in more detail. However, an improved investment climate does not directly affect commercial risks, which are more project-specific. Table 2.1 Definition of main political risks in private infrastructure projects Political risk Adverse regulatory changes / creeping expropriation Arbitration award default Breach of contract (BoC) Civil disturbance Confiscation, expropriation, nationalization (CEN) Non-Honouring of (Sovereign) Financial Obligations (NHFO) Sub-sovereign risk Transfer and convertibility restrictions Definition A series of events - mostly regulatory changes - by the host government (or a sub-sovereign entity/ regulatory agency) that results in a deprivation of the investor's rights in the use of the property or revenue stream, even where the property is not seized and the legal title to the property is not affected. Losses arising from a government s non-payment, as a binding decision or award by an arbitral or judicial forum cannot be enforced. Loss resulting from government termination or rescission of contracts (e.g. a concession or a power purchase agreement) without compensation for existing investments in a product or service. Property or income losses from domestic political violence, including hostile actions by national forces, civil war, revolution, insurrection, or politically motivated terrorism or sabotage. An action whereby a government seizes property or assets of the foreign investor without full compensation to the investor. This is also referred to as 'ownership risk' or nationalization. Losses resulting from a failure of a sovereign, sub-sovereign, or state-owned enterprise to make a payment when due under an unconditional financial payment obligation or guarantee related to an eligible investment. Losses related to breach of contracts, non-payment or other actions or inactions by a subsovereign host government or contractual counterparties. Inability to convert domestic currency into foreign currency, or to transfer funds outside the host country, due to actions of the host government. 36

37 Source: Author s compilation based on OECD (2008) and MIGA (2013) Commercial risks in the ASEAN region Commercial risks originate from financial, economic and technical causes with negative impacts on costs and revenue, which ultimately might threaten the financial viability of the project. Commercial risks are especially important in the construction phase and decline in the operational phase. Interviewed experts indicate that private parties perceive construction, demand/traffic and exchange rate risks as the main commercial risks. The commercial risks mentioned most frequently in the survey as key concerns in private infrastructure projects in ASEAN Member States are Construction risk and Exchange rate risk (Figure 2.6). Characteristics of the main commercial risks are depicted in more detail in Figure 2.1 and Table Annex 3. Commercial risks are frequently transferred to the project company, indirectly affecting project sponsors and lenders. Commercial risks can be divided into: Economic or market risks, which include changes to input and output prices; variation in demand from projected levels; the access to and cost of debt and equity financing; and counterparty risks. Technical or physical risks, which derive from the physical characteristics of the facility and construction site (i.e. contamination); applied technology during construction and operation; and the social and environmental impact of the facility. Figure 2.6 Commercial risks of most concern in private infrastructure investment in ASEAN countries Construction risk Credit or counterparty risk Demand risk Design risks Exchange rate risk Financing / re-financing risk Operational risks Poor risk management and mitigation Reputational risk Social and environmental risks Supply risks Technological risks Other financial risks Do not know Source : Author s calculations based on OECD Project Risks and Mitigation survey Respondents Note: Multiples answers of up to 3 options Construction risks are the main commercial risk. They include engineering and technical feasibility risks, time delays, cost overruns and performance risks, which all could cause significant losses due to additional costs and forgone revenues. This explains investors preference for brownfield infrastructure projects. Exchange rate risks are of particular importance for infrastructure projects, where debt services and revenue streams are denominated in different currencies. Large infrastructure projects are often (co-) financed on the international capital market in USD, Euro or Yen denominated loans. However, revenue streams, such as end-user fees, public subsidies or availability payments, occur almost exclusively in local currencies. In case of a devaluation of the local currency, revenue streams might be insufficient to meet costs, including supply costs and debt service. This mismatch between revenue and debt service currencies created challenges in the past, including those encountered during the Asian Financial Crisis 1997/98. For example, the sharp 37

38 devaluation of the baht in Thailand against the USD significantly affected the financial viability and indebtedness of infrastructure projects. The return on assets of the Bangkok Expressway was close zero until 2002 (Nikomborirak, 2004), thereby reducing private interest in other infrastructure projects. Demand or traffic risk greatly influences the project s financial viability. Project companies and lenders are often reluctant to bear this risk, as demand depends on many factors outside the direct control of the project company. A comprehensive transfer of traffic/demand risk to the private partner would typically reduce or eliminate private interest in participating in PPPs. At least, it would significantly increase the return on investment required by the private partner to compensate for the risk. Demand risk is mentioned by 32% of survey respondents, which appears to be relatively low in comparison to the stated importance of demand/revenue risks in interviews. A possible explanation for this could be the use of existing mitigation strategies, which effectively reduce demand risks. This will be discussed in detail in chapter 3.4. Other specific risks in infrastructure projects Investors and lenders face significant risks in large-scale and long-term private infrastructure investment. Projects require large capital expenditures at the outset combined with a limited ability to disinvest; and revenue streams of up to 30 years to recover investments. From an investor s perspective, low- or nonrecourse project finance limit collateral to the project s revenue streams and its assets. Beyond the project level, large-scale infrastructure projects involve environmental and social risks, which increase the risk of political or regulatory interventions. Private infrastructure investments combine large capital expenditures to develop or buy physical assets at the outset and long-term payback periods. The long timeframe often extending beyond a couple of decades increases uncertainty about estimated demand and revenue streams. In addition to long payback periods, it can be difficult for investors to disinvest or sell the investment in case of unfavourable market developments or policy changes. The likelihood of political interference is larger in infrastructure projects whose project cycles of 20 years and beyond exceed shorter political cycles, increasing the risk of political intervention of new governments or their potential reluctance to honour financial obligations. According to interviewed experts, private partners often refrain from concluding PPP contracts with public counterparts on the municipal level. Indonesia was mentioned as one example, where the private sector might engage in PPPs with the local government of Jakarta but would request sovereign guarantees for contracts in other municipalities. Targeting this challenge, the Indonesia Infrastructure Guarantee Funds (IIGF) seeks to reduce this risk (see chapter 4 for more information). Tariffs below cost-recovery levels hamper extension and service delivery of public infrastructure services, but social pressure might impede increasing tariffs. Low, subsidized tariffs and revenue streams in publicly provided infrastructure services frequently impede investments in maintenance and the expansion of network coverage, and are often complemented with lower service quality. PPP projects are one way to increase investment in existing infrastructure and to improve service quality by raising end-user tariffs towards costrecovery levels. Yet end-users might perceive subsidized tariffs for water, electricity or rail services as wellearned rights and resist tariffs increases. The social pressure could entice governments or regulators to prohibit operators from increasing tariffs, even if contractual arrangements allow increases; water, sewage and power sectors are prone to such interventions. In the absence of public compensation payments, the prohibition of tariff increases might threaten the financial viability of PPP projects. In cases where costrecovery prices threaten access to affordable public services, public financial support might be required. Public financial support to cover below-cost recovery prices increases the political risk of non-honouring of financial obligations and adverse regulatory changes. Private infrastructure projects are usually financed with a high proportion of debt, often exceeding 70%. Project Finance is often arranged on a limited- or non-recourse basis with the only collateral available for lenders being the project s cash flows, financial assets and contractual rights. While such a structure benefits sponsor companies by capping their exposure to their paid-up capital, it increase credit risks for lenders. Lenders frequently require project companies to enact appropriate protections, such as guarantees from the 38

39 parent-company or sovereign guarantees, reserve accounts and other contractual agreements to mitigate commercial and political risks. Governmental interventions to protect end-users can be required in infrastructure projects that constitute natural monopolies. Many public infrastructure systems (e.g. electricity grids, telecommunications, and rail systems) contain an important network dimension and may be natural monopolies. To protect consumer interests, governments might be inclined to intervene in network-based sectors, either to lower entry barriers to strengthen competition, or to regulate outputs and prices to ensure service levels and affordability. The operation of infrastructure networks by SOEs could expose private competitors to large entry barriers; and governments should ensure a level playing field for private companies. On the other hand, when regulations are developed and negotiated in an opaque environment, or when regulators lack independence vis-à-vis their political masters (or when they simply lack the necessary expertise), the regulatory framework can be a source of unpredictable change or may discriminate against particular providers in ways that threaten the viability of an investment Risk management Risk management seeks to reduce the probability of negative events and their impact. A risk analysis typically involves four sequential steps: risk identification; risk level and impact assessment; risk mitigation, followed by on-going risk monitoring (Figure 2.7). Risk management enables project companies, project sponsors and lenders to anticipate and influence the occurrence and impact of risks, improve the available information for investment decision making and reduce the risk of false assumptions. It further supports the construction and operation of the project in terms of benchmarked quality, time and cost. This section presents common risk mitigation processes: i. Risk Identification The first stage of risk management seeks to identify potential risks throughout the life-cycle of the infrastructure project. The life-cycle consists of the design, construction and operational phase, and may include the transfer of the asset to a public authority or decommissioning. Risks can be distinguished into commercial and political (legal) risks, which are explained in more detail in section 2.2. Risk identification is of particular importance for PPP projects, as their Value for Money depends on the appropriate transfer of risks to the party best able to manage them. Common methods: Brainstorming with key stakeholders and a checklist of main project risks. ii. Risk Assessment The assessment to determine the risk level includes estimating the probability that the risk occurs and the expected financial losses through its impact on e.g. the project completion, cash flow or security of the assets. This allows stakeholders to identify risks with the highest priority. Common methods: Qualitative analysis (e.g. Monte Carlo simulations) to assess the risks importance based on their relative probability/likelihood and impact. Figure 2.7 Risk management process iii. Risk Mitigation Once their potential impact and priority is evaluated, appropriate strategies should be considered to reduce either the probability of occurrence or the level of impact if identified risks materialise. Five main risk strategies can be distinguished (OECD, 2006): Risk avoidance: Eliminate the source of the risk to avoid the risk from materialising. Risk prevention: Reduce the probability that a risk occurs, if the risk cannot be avoided. Risk insurance: Transfer the risk to a third party by financial risk mitigation instruments. 39

40 Risk transfer: Reallocate the risk to the party best able to bear it. Risk retention: Self-insure the risk as risk acceptable or mitigation costs too high. In principle, risks in PPPs should be allocated to the public or private party best able to manage them. This may mean the party for whom it costs the least to prevent a risk from realising (ex-ante risk management) or the party for whom it costs the least to manage the negative results of realised risk (expost risk management). The public party should, thus, conduct comprehensive risk assessments during the project preparation to verify that risks can be clearly identified, measured and transferred. If the public party bears substantial risks, potential contingent liabilities should be managed and transparently published in the budget documentation or fiscal statement. Risk transfer to the private side is crucial to ensure value for money, but also results in higher return requirements. Excessive risk transfer threatens to reduce the private party s willingness to engage in PPPs. The level of risk transfer is defined by the selected PPP approach, but various factors influence the possibility to transfer risks from the public to private parties, such as project characteristics, the specific sector, the country background and involved project partners. 6 Risk allocation should be defined by the nature of the risk, which could be distinguished in commercial and political risks. Commercial risks that can be controlled or influenced by the private party should be largely transferred to the private party (Figure 2.1). Examples are design, construction, technological, certain environmental and financing risks. Political risks, such as legal and regulatory risks, or pre-existing environmental risks cannot directly be managed by private parties and thus should be allocated to the public party. Political risks include: Adverse legal and regulatory changes, expropriation, transfer restrictions and currency inconvertibility, and civil disturbance (see chapter 2.2 for detailed information on commercial and political risks). The allocation of certain risks, such as demand, land acquisition or force majeure risk, depends largely on the project characteristics, the sector and country background. Yet a risk allocation matrix could provide guidance to public officials. iv. Risk Monitoring Risks and applied mitigation strategies should be monitored throughout the project life to identify and adjust to changing conditions. Public parties are advised to monitor risks and service provision of PPP projects throughout the operational phase. A comprehensive and ongoing risk management process is vital to identify commercial and political risks and incorporate mitigation instruments to reduce, mitigate and/or transfer these risks Risk mitigation instruments Lenders and investors apply multiple instruments to reduce, mitigate and transfer risks Table 2.2. Financial risk mitigation instruments, such as political risk insurance and guarantees (PRIs), are critical to mitigate risks. Commercial risks are often mitigated or transferred through contractual arrangements, insurance and guarantees (Ruster, 1996). Political risks are mainly mitigated through insurance and guarantee instruments. These instruments are especially applied for projects in developing countries with higher risk perception. Political risk insurance covered about 6% of global FDI flows but about 14.2% of FDI flows to developing countries in For additional information on risk transfer, see the ASEAN Principles on PPP Frameworks (2014) and OECD Principles for Public Governance of Public-Private Partnerships (2012). 40

41 Table 2.2 Overview of main project risks and selected risk mitigation instruments Risks* Selected risk mitigation instruments* Providers Construction risks Fix costs/fixed date (turnkey) contracts Construction company Main commercial risks - Time delay Delay in start-up (DSU) insurance (caused by property damage) Private insurers - Cost overrun Derivatives to hedge against input price spikes Financial market Bank guarantees Banks - Performance Performance bonds/surety/subcontractor insurance Private & public insurers Warranties Supplier - Property damage Construction-all-risk insurance Private insurers - Damage of equipment during transport - Third party insurance claims Demand risk Exchange rate risk Operational risk Supply (price) risk Non-payment by private obligor Marine Cargo insurance Marine Cargo Delay in Start-up Third party liability insurance Off-take agreements Availability payments, Take-or-pay contracts Minimum revenue guarantees Derivatives (i.e. futures) Contractual agreements (linking tariffs with FX) Service contracts with Key Performance Indicators (KPI) Property damage insurance Derivatives (i.e. futures) Put-or-Pay contract Pass-Through contract Credit insurance Comprehensive cover (commercial & pol risks) Private insurers Private insurers Private insurers Off-taker Off-taker / Government Government Financial market Off-taker / Government Service provider Private insurers Financial market Supplier Off-taker Private insurers Private (few) & public insurers Main political risks Expropriation (plant & equipment) Force Majeure (i.e. natural disaster) Contract frustration (vs private or public) Expropriation & Regulatory changes Comprehensive Contractors Plant and Equipment insurance Natural Catastrophe cover Business interruption cover Contract frustration cover Expropriation cover International or national (NY, SG, HK law) arbitration courts (contractually defined) Private insurers Private & public insurers Private insurers Private & public insurers Private & public insurers (Arbitration) Courts Political Violence Political violence cover (property damage) Private & public insurers Currency inconvertibility/ Transfer restrictions Currency inconvertibility cover Private & public insurers Comprehensive cover Private insurers (few) Breach of Contract & Non-honouring of financial Contract frustration cover Private & public insurers obligations International or national (NY, SG, HK law) arbitration courts (contractually defined) (Arbitration) Courts Not honouring an arbitration Arbitral award cover award Private & public insurers Legal risk Denial of justice cover Private & public insurers Note: The table is not comprehensive but focuses on selected risks and risk mitigation instruments with a focus on insurance, guarantees and contractual provisions Risk mitigation instruments to cover political risk 41

42 Risk mitigation instruments are critical to enable access to finance for long-term investments in countries where the perception of regulatory, contractual and enforcement risks are a major concern for private investors and creditors (WB, 2007). Commonly used strategies to avoid and reduce political risk in PPPs are political risk insurance and joint ventures or alliances with local companies, according to the survey (Figure 2.8). This corresponds with findings from interviewed experts, who named joint ventures as a common strategy for most stakeholders: International banks prefer to provide debt financing in collaboration with local banks with better knowledge of the local market, political system and specific risks. Similar reasons are stated Figure 2.8 Most frequently used strategies to mitigate political risks Consultations with government and political leaders Consultations with local communities and NGOs Contractual allocation of political risk to public side Credit default swaps Invested gradually while developing familiarity with the local environment Joint venture or alliance with local company Operational hedging Political risk insurance Risk analysis Use of third-party consultants Other Do not know Source: Author s calculations based on OECD Project Risks and Mitigation survey Respondents Note: Multiple answers of up to 4 options by international project sponsors, investors and contractors to use joint ventures. In contrast to joint ventures, political risk insurance and guarantees transfer the risk either partly or fully to a third party better able to bear the risk. This could be a commercial insurance company, or a bilateral or multilateral organisation. The supply and demand of Political Risk Insurance and Guarantees, abbreviated PRI, will be further discussed in chapter four. This section builds on a survey conducted within the Risk mitigation projects and survey from MIGA, a member of the World Bank Group. The most common strategies to mitigate political risk reported in the OECD and MIGA surveys largely correspond. The MIGA survey also identifies joint ventures, risk analysis and engagement with governments as main instruments. Disparities exist for gradual investments and political risk insurance. Gradual investments to get to know the local environment has been mentioned by 5 respondents of the OECD survey and interestingly, none of the contacted project sponsors reported this instrument. The disparity might derive from the focus of the MIGA-EIU survey on general investments, whereas the OECD survey asked about risk mitigation instruments in private infrastructure investments. Gradual investments in infrastructure projects are restrained by their large scale and small numbers. The disparity in Political Risk Insurance is more striking, as it was reported as the main strategy in the OECD survey. However, it was only mentioned by 15 percent of MIGA-EIU respondents as a key strategy to mitigate political risks. There, PRI appears to be viewed as a supplementary strategy to cover risks. Once again, this could be explained by the survey s different focus: political risks are probably more important in large-scale infrastructure projects with a long payback period than for general private investment. In addition, the OECD survey sample includes several private and public insurers, which might bias the findings towards PRIs. Political risk insurance and guarantees Political risk insurance, partial/full political guarantees and credit guarantees are the main financial instruments to mitigate political risks. Risks are insurable according to the OECD Insurance Committee, if they are assessable, random, and unforeseen. Political risk insurance and guarantees cover losses typically caused 42

43 by specified political risks, such as expropriation, breach of contract, currency inconvertibility, political violence and arbitration award default. Credit guarantees usually refer to financial guarantees, which cover default on debt service, where the claim process can be relatively straightforward. Conversely, the beneficiary of insurance has to file a claim conforming to the terms of the insurance agreement and within a specific period of time and claims may not be payable in the absence of an international arbitration award. Insurance and guarantees can be distinguished based on their coverage and covered risks (Figure 2.9). - Political Risk Insurance (PRI) can insure both equity investors and commercial lenders against the default by a public or private entity caused by a political event. Coverage is generally limited to less than 100% of the investment, although it may cover up to 100% of a loan. Coverage, pricing, tenure, and eligibility vary widely by host country, sector or type of investment and PRI provider. Issuers of PRI cover include bilateral and multilateral agencies, and private insurance companies. Figure 2.9 Parameters of risk mitigation - Political Risk Guarantees typically cover the full amount of debt owed to Source: World Bank, 2007 commercial lenders in private projects if the debt default is caused by political risks specified under the guarantee. In general, covered political events are widely defined and may even include force majeure events. The most common examples are Partial risk guarantees (PRG) offered by multilateral development banks and some bilateral agencies. These guarantees can cover up to 100% of debt service (principal and interest) if the debt default is caused by political risks specified under the guarantee. PRGs generally require that the government provide a counter-guarantee or indemnity to the multilateral institution. - Credit guarantees cover losses in the event of a debt service default with no differentiation of the source of the default, commercial or political. They are also referred to as comprehensive coverage instruments. Credit risk mitigation can broadly be classified into two types: Full Credit Guarantees or Wrap Guarantees cover the entire amount of the debt service in the event of a default. They are often used by bond issuers to achieve a higher credit rating to meet the investment requirements of investors in the capital markets. Until the global financial crisis in 2007/08, private monoline insurers issued wrap guarantees for bonds issued by infrastructure project companies in the ASEAN region. Partial Credit Guarantees (PCGs) cover part of the debt service of a debt instrument regardless of the cause of default. PCGs ease the borrower s access to financing by reducing interest rates and/or increasing the tenure. The guarantee typically covers debt service for late maturities, which may be beneficial when lenders are not willing or able to provide a financing tenure long enough to match the cash flow of a project. Alternatively, they can cover a portion of principal and interest payments payable throughout the term of a borrowing. PCGs are increasingly used by subnational entities and private companies to borrow from commercial banks or to issue bonds. - Innovative applications: Important examples of innovative risk mitigation instruments can be found in the World Bank s Review of Risk Mitigation Instruments for Infrastructure Financing and Recent Trends of Developments. They include Multilateral Wrap Guarantees by combining Partial Credit Guarantees (PCG), PCG combined with contingent loan support, PCG for pooled financing, complementary guarantees by combining a PCG and PRI, corporate finance with PCG and PRI, privatisation guarantees, brownfield 43

44 project support, country-specific guarantee facilities, global or regional guarantee facilities and guarantee initiatives for local capital markets. Main stakeholders in insurance and guarantees are project companies, beneficiaries, brokers and insurance providers. The beneficiary can be the direct buyer of the insurance or guarantee, or a third party like a commercial bank. Commercial banks are concerned about credit risk and seek cover to reduce the losses given the borrower defaults on the debt service. Project sponsors and other equity providers seek to reduce investment risks which derive from the loss of equity, investments or revenue streams. Main providers of insurance and guarantees are Export Credit Agencies, multilateral organizations and private insurers, which will be presented in the section Risk mitigation instruments to cover commercial risks Contractual agreements, guarantees, insurance and hedging tools are the most common instruments to mitigate commercial risks, according to the survey on Project Risk and Mitigation. These instruments seek to transfer risks to a third party better able to manage them. However, the transfer of commercial risk might be limited in the covered amount and duration. This section describes the mitigation instruments applied for the main risks: construction/completion risk, demand risk, exchange rate risk, and supply risks (Table 2.2). Figure 2.10 Mechanisms to mitigate construction risks Bank guarantees Contractual agreements Derivative contracts Insurance Performance bonds, warranties Security package Other Do not know Respondents Source : Author s calculations based on OECD Project Risks and Mitigation survey. Note: Multiples answers of up to 3 options Construction and completion risk mitigation Contractual arrangements are the most effective instruments to mitigate construction risks in ASEAN (Figure 2.10). Contractual agreements have been mentioned by 77% of respondents, followed by insurance (61%) and performance bonds/ warranties (48%). Other instruments include contingency funds, cash trapping provisions and lines of credit (WB, 2007). Construction risks further decrease by collaborating with experienced construction companies and sponsors. i. Contractual arrangements The most important contractual agreement is the construction contract. This contract allocates completion risks from the project company or the Special Purpose Vehicle to the construction company. The company then transfers risks to their sub-contractors. Construction contracts are typically in the form of an EPC (engineering, procurement and construction) or turnkey contract. The construction company / contractor typically guarantees the completion of the construction on a fixed date, for a fixed budget (LSTK) and with defined performance standards. Thus, the construction company bears the completion risk, which could include: obtaining permits and insurance, procuring required materials and labour, constructs and performance testing of the facility. Contractors are commonly requested to provide insurance and guarantees for these risks and to cover potential cost overruns. Various instruments seek to reduce the risks and guarantee that the construction company/contractor meets its obligations: - Liquidated damages (LDs) pay the project company compensation if the contractor does not meet its obligations (WB 2007). The liability of the contractor is generally limited to a certain percentage of the contract budget, but LDs can accrue daily and be quite onerous. 44

45 Examples are delay and buydown LDs: Delay LDs - In case of a delay, the contractor compensates the project company for additional interest and fixed costs and might compensate equity investors foregone income. Buydown LDs - In case the project does not meet the agreed performance standards, the contractor compensates the project company for lower operational cash flow. The buydown LDs are used to pay back parts of the debt to ensure an unchanged debt service ratio. - Contingency funds cover unexpected cost overruns in construction projects. Contingency funds are typically limited to 5 to 15% of the construction budget, scope of the risks and time, as they end after completion of the construction. As cash reserves of 5 to 15% are expensive, instruments such as stand-by letters of credit or sponsor guarantees are often used. ii. Insurance The project contract frequently requires construction companies to obtain insurance to cover construction risks. Risks, such as time delay, cost overrun and performance risk, can only covered by insurance in so far as they result from property damage. For example, private insurance companies provide: - Construction All Risk (CAR) and erection all-risk ("CEAR") insurance covering potential property damage to operations and assets on the site during the construction. - Delay in start-up (DSU) insurance covers additional interest costs, revenue losses and fixed costs linked to the time delay in the project completion. The insurance mainly covers losses caused by property damage. - Third Party Liability insurance covers any claim by third parties in connection with construction risks. - Marine cargo insurance covers damage of equipment during transport. The primary insurer is likely to reinsure the risks to mitigate the impact of a major claim. To ensure a reliable insurance cover, lenders might insist on a maximum retained percentage for a local insurer and specify credit ratings for reinsurance. In Southeast Asia, the increasing number of infrastructure projects entails an increasing demand for insurance. The dynamism and fast economic growth of Southeast Asia encourage private insurers to increase their activity in the region. For example, most of the top 25 reinsurers in the world have a regional hub in Singapore. In Singapore, the underwriting of construction projects reached USD 4.5 billion in 2014 and experts project an increase to USD 6.5 billion by iii. Sureties (performance bonds, warranties) Sureties guarantee that the contractor delivers the asset with the agreed characteristics. A surety bond contract is an agreement between three parties that are the surety, the project owner and the contractor. After a claim, the indemnity is paid on demand. Some private insurers issue surety bonds to mitigate performance risks. The three primary types of surety bonds provided by private insurers are: bid bonds, performance bonds and payment bonds. Sureties, such as performance bonds, warranties and bank guarantees, are commonly used instruments. - Warranties guarantee the functionality of the facility for a determined period. - Performance bonds and bank guarantees ensure the delivery of the facility with the agreed performance standards. Otherwise, the third party compensates the project company or equity investors for higher operational costs or foregone revenues. 7 Asia Insurance Review (Accessed 1 May 2015). URL: NewsLetter-Article/id/31135/Type/eDaily/Singapore-Construction-insurance-grows-as-emerging-marketsbuild 45

46 Demand risk mitigation Predicable and safe revenue streams are a prerequisite for financially viable and bankable projects. This seems at odds with the low frequency with which demand risks are cited in the survey, mentioned by only 32% of the respondents. The existence of effective mechanisms, such as availability payments and minimum traffic guarantees, to reduce demand risks might be the most likely explanation (Figure 2.11). Availability payments, mentioned by 78% of the respondents, transfer demand risk to the off-taker, typically a governmental agency or State-owned Enterprise (SOE). This leaves availability risk, i.e. the underperformance or lack of availability of the facility, with the project company. Minimum traffic/revenue guarantees compensate the project company if revenue or traffic falls below a defined minimum threshold. Insurance products covering demand risk are not available. Investors and lenders are reluctant to bear demand and revenue risks due to the long-term nature of infrastructure projects, making it difficult to estimate traffic and demand. The increased likelihood of political interference can endanger debt repayment and equity returns. Despite these risks, investors and lenders are increasingly comfortable to bear demand risks in selected ASEAN countries, such as Singapore and Malaysia, with low perceived political risks and a track record of successful private infrastructure projects. For example, the Figure 2.11 Most effective mechanisms to mitigate demand risks Availability payment through e.g. off-take agreement Economic balance contracts Flexible-term contracts / duration adjustments contracts Minimum traffic / revenue guarantee Subsidies Do not know Source Author s calculations based on OECD Project Risks and Mitigation survey Note: Multiples answers of up to 3 options Malaysian government covered traffic risks in the first toll roads and, after developing a positive track record, progressively transferred traffic risks to the private partners. Sharing demand risk between the public and private side can improve the financial viability of projects, thus, reducing the risk of expensive renegotiations and increasing the number of bidders in the tender process with positive impacts on competition, costs and contract terms. Over time, countries can develop a track record of successful projects enabling them to introduce a gradual transfer of demand and traffic risks to the private side. Demand and traffic risks may ideally be shared between public and private sector. Transferring the entire risk to the public sector may lead to proliferation of inflated demand and revenue estimations in project proposals. The government faces high contingent liabilities and fiscal risks in case of a complete risk transfer to the public sector. Private parties willingness to bear demand risks depends on the sector (but also project, contract, country and counter-party specific characteristics): Energy sector: Investors and lenders are increasingly comfortable financing power plants, as demand risks are frequently mitigated through contractual agreements. Independent power producers (IPPs) will expect either a take-or-pay contract or availability payments. These contracts leave the demand risks with the public sector and the private project company only bears the availability risk. The project company might seek additional securities, e.g. sovereign guarantees, in countries with a higher risk perception, such as Myanmar, Cambodia, Lao PDR, and Viet Nam. Likewise, additional public securities might be requested to reduce breach of contract and non-payment risks in case of an off-take agreement with a sub-national entity or an either insolvent or small SOE. Other Respondents 46

47 Toll roads: In selected countries, such as Malaysia, project companies increasingly bear traffic risks. Governments in Indonesia and Philippines seek increasingly to shift traffic risks to project companies. Other economic infrastructure: Private parties are reluctant to take demand and revenue risks in capital intensive infrastructure investment, such as rail ways, water and sewage systems. Public financial support might be required as cost recovery prices are unlikely to be achieved. For social infrastructure projects, such as schools and hospitals, the government frequently bears the demand risk as revenues derive directly through performance based payment mechanisms. Table 2.3 Instruments to reduce demand risk Instruments Availabilitybased OR Take-or-Pay contracts Description Take-or-Pay agreements guarantee the project company fixed payments by the off-taker, often a governmental agency or SOE, as long as the project company honours the agreed performance standards of the infrastructure or services, environmental and social standards. Payments typically cover fixed costs (debt service, fixed operational and maintenance costs) and payments for variable operational and maintenance costs and inputs/fuel depend on actual output. Contracts often include penalties if availability or Key Performance Standards are not met. Additional payments may be made for superior service delivery. To compensate the higher risk of off-takers offering fixed-prices, tracking accounts track the difference of the contract and spot market price, and payments are due if a certain threshold is exceeded. Challenge: Public side covers full demand risks reducing the project company s incentives to increase demand. Example: Off-take agreement of an independent power producer with PNL, an Indonesian SOE. Economic balance If the IRR (internal rate of return) falls below a certain minimum, the project company is compensated through increased tariffs, subsidies or contract length. Minimum thresholds can be combined with maximum thresholds to limit the potential profits if the traffic is far higher than estimated. Challenge: Long and expensive renegotiations to define the economic balance are often required, as the economic-balance cannot be specifically defined in the original contract. Project sponsors are not incentivized to reduce operational costs or increase revenues if the IRR falls close to the minimum, which allows for renegotiations. Example: France, Spain Minimum revenue or traffic guarantees Minimum revenue or traffic guarantees trigger compensation from the government if revenues or traffic falls below a defined minimum threshold. The lower threshold can be combined with a higher threshold to share additional profits between the private and public side. Challenge: Strong correlation between economic shocks and traffic decreases, which lead to public payment obligations in times of lower tax incomes and higher budget constraints. Examples: Minimum revenue or traffic guarantees proved successful to motivate companies to engage in PPP projects in Republic of Korea and Malaysia. Duration adjustments Duration adjustment contracts link the duration of a concession to a predefined level of traffic or revenue. The contract ends either at the maximal contract duration or when the present value of the revenues reach the determined amount. In the Least Present Value of the Revenues (LPVR) approach, the bidder with the lowest present value of the revenues wins the tender process (Engel, Fischer and Galetovic, 2001). Challenge: Project sponsors do not favour duration adjustment contracts, as project sponsors 47

48 bear the traffic risk that revenues do not reach the LPVR before the end of contract. They bear the downside traffic risk but they do not benefit from upside opportunities, as the concession ends earlier in case of higher traffic. Example: Concessions in Chile or the Litoral Centro highway in Portugal (EIB, 2007). Public subsidies Public authority pays the project company subsidies to substitute user fees either partly or completely. Payments could be linked to availability of infrastructure facility or key performance indicators. Penalties reduce subsidy payments if availability or performance criteria are not met. Additional payments could honour better service delivery. Guaranteed public payments to cover debt service of the project with the aim to reduce credit risks, thereby, improving access to finance. Challenge: Public contractor bears demand risk completely. Increases political risks as payments depend on public authorities. Source: Authors compilation based on EIB (2007), Engel, Fischer and Galetovic (2001), WB (2007) Exchange rate risk mitigation The most effective instruments to reduce exchange rate risks are contractual arrangements, followed by hard currency revenue and matching payment streams (Figure 2.12). Contractual arrangements, including tariffs linked to the exchange rate, have been mentioned by 75% of OECD survey respondents. Tariffs linked to exchange rates or paid in hard currency pose significant risks for the public sector. A similar instrument, which pegged user fees or subsidies to exchange rates, did not prove promising in the past. Matching revenue and expenditure streams in Figure 2.12 Most effective mechanisms to mitigate exchange rate risks Contractual agreements Derivative contracts Matching payment streams (revenue vs expenses) Tariffs paid completely or partly in hard currency like USD Do not know Source: Author s calculations based on OECD Project Risks and Mitigation. Note: Multiples answers of up to 3 options the same currency is an efficient approach. The project company could finance the project through local currency denominated loans to match debt service payments with future revenue streams in the local currency. Other potential mitigation strategies include currency risk-sharing agreements, letters of credit, back-to-back loans and credit swaps. Derivative contracts have been only selected by 33%. This appears relatively low, as hedging exchange rate or currency risk by forward contracts and currency futures, swaps and options is often seen as a common instrument. However, the availability of swaps and futures is often limited in the region, according to interviewed experts. The availability of long-term hedges appears to be restricted in Indonesia, the Philippines and Thailand. Currency swaps involving local currencies of Cambodia, Lao PDR, Myanmar and Viet Nam are not available on the private market. The inability to hedge against exchange rate risk probably constrains access to financing from the international market. Other Respondents Operational and supply risk mitigation Operational risks relate to projects inability to run at the desired level of efficiency regarding service delivery and/or maintenance costs. Supply risk refers the inability to purchase and receive inputs for operating the facility or augmenting prices. Contractual agreements and Public support are the most effective 48

49 mechanisms to mitigate those risks (Figure 2.13). Contractual arrangements, such as Put-or-Pay or Pass- Through clauses, transfer supply risks from the private operator to the supplier or off-taker, often a public authority or SOE. In Put-or-Pay contracts, the supplier guarantees the project company the availability of inputs, like fuel for a gas power plant. If the supplier fails to honour the contract, indemnity payments compensate higher cost for purchasing the input on the spot market or for foregone revenues. Pass-Through contracts mitigate price risks for the project company by linking input prices with off-take prices. Lenders focus on credit risk and the ability of the project company to meet debt service obligations. Debt service/contingency reserve funds reduce the risk that debt service cannot be met due to cash flow shortages. Contingency reserves are created through equity contribution or cash flow reserves to ensure the payment of debt service in case of an abrupt and short-term decline of the project s cash flow. Other instruments include standby letters of credit or project sponsor guarantees (WB, 2007). A minimum DSCR (debt service coverage ratio) equity lock-up is used if the cash flow is just large enough to meet the debt service and lower than a certain threshold; cash reserve mechanisms/cash traps limit dividend payments, until the cash flow exceeds the required DSCR. Figure 2.13 Most effective mechanisms to mitigate operational and supply risks Cash reserve mechanisms / equity lockups Debt service / contingency reserve funds Derivative contracts Insurances Public support Contractual agreements Other Do not know Respondents Source: Author s calculations based on OECD Project Risks and Mitigation survey. Note: Multiples answers of up to 3 options 2.5. Public support and institutions for facilitating access to financing and risk mitigation To increase private sector readiness to invest in PPP projects, the public sector might seek to ease access to financing and/or to reduce risks and uncertainties while ensuring value for money. Common instruments for incentivising private investments include direct and indirect financing from the public, an improved investment climate and investor protection. This section presents an overview on government actions reported in the survey as beneficial to reduce risks in private infrastructure investment. This section further describes public financial incentives and institutions to ease access to financing and risk mitigation in ASEAN Member States. Government mechanisms to reduce risk in private infrastructure investment Dedicated, conducive and transparent legal and institutional frameworks are the main requirements to reduce the risk environment for private infrastructure investment, according to the OECD survey. A dedicated legal framework, including the regulatory environment, PPP and procurement laws, has been reported by 75% of the respondents as crucial to reduce the risks in PPPs. Respondents raised additional requests, which relate to general framework for PPPs, such as a conducive planning framework (PPP pipeline), more efficient processes to acquire permits, licences and authorization, and an effective institutional framework. Providing sovereign guarantees have been mentioned by 1/3 of the respondents, which reflects the opinion stated in the interviews by private and public issuers of insurance and guarantee products. Sovereign guarantees reduce risk exposure of public and private issuers, and might increase supply of insurance cover. This instrument, however, comes with potentially significant contingent liabilities for the public sector. One interesting observation is the limited relevance of access to financing and the corresponding (re-) financing risk. This corresponds to the findings on the main commercial risks, where financing risk is of limited importance (Figure 2.6). 49

50 Figure 2.14 Government actions to reduce risks in private infrastructure investments Adherence to international investment agreements Cover demand risk (e.g. minimum revenue guarantees, availability payments) Public financial support (PDF, Viability Gap Funding) Strengthen domestic capital market Support land acquisition Consider sovereign guarantees for infrastructure projects Establish a national (infrastructure) development or EXIM bank Establish a national Export Credit Agency or Investment Promotion Agency One stop shop to get permits, licences and authorization Effective institutional framework (e.g. PPP units, procurement authorities) Dedicated legal framework (regulations, PPP, public procurement law) Conducive planning framework for private investments (e.g. project pipeline) Source: Author s calculations based on OECD Project Risks and Mitigation survey Respondents Governments are advised to strengthen the legal, regulatory and institutional framework to reduce risks and incentivise private infrastructure investment. This general recommendation likely does not refer to the whole region considering the varying legal and institutional frameworks in ASEAN economies. ASEAN governments have progressively improved legal and institutional frameworks to incentivise private infrastructure investment. Improvements include strengthening the institutional PPP framework by, for example, establishing new PPP units and regulators. However, constraints on investments linked to the legal and institutional framework persist in certain countries. The legal environment on PPP legislations and investor protection is discussed in more detail in chapter 4. Public institutions and support mechanisms in the ASEAN region Governments seek to incentivise private investment directly through subsidies and guarantees, which improve projects bankability and access to long-term financing. Subsidies are direct fiscal support provided by public entities to private investors involved in an infrastructure project. These grants directly or indirectly increase investors revenue or decrease the project cost, thereby encouraging investors to keep their investment in the project. There are different kinds of subsidies, such as in kind contributions (i.e. land), upfront contributions to pay for capital costs and regular payments to the private company based on the availability and quality of the service to be provided. There are also implicit subsidies, such as concessionary loans or the payment for project preparation, which decrease capital costs. In addition, the public entity can also provide a grant through a viability fund gap scheme which supports infrastructure projects that face financial difficulties. Viability gap fund schemes are usually designed to award the concession via competitive bidding, where the amount to be covered by the state is the variable. For instance, this system implemented in Indonesia covers up to 20% of the total project cost of infrastructure project. The public sector could also choose to provide financial and non-financial guarantees or indirect fiscal support to private investors involved in infrastructure projects. In making such choices, the public sector should be careful to appropriately allocate risks and structure its support to ensure Value for Money. Public support is advised to focus on socially and economically beneficial projects that need financial support to be commercially viable. ASEAN governments have set up mechanisms to reduce political risk and provide credit enhancement for infrastructure investment. Notable examples are the Indonesia Infrastructure Guarantee Fund (IIGF - Box 2.2) 50

51 to mitigate political risks; Danajamin Nasional Berhad in Malaysia, a bond guarantee facility; and on regional level, the Credit Guarantee and Investment Facility (CGIF) (See Table Annex 1 for an overview on institutions in all ASEAN Member States). As most of these initiatives have been established recently, the number and size of completed projects remains small. All facilities offer products either to mitigate political risks, to reduce credit risks and to act as credit enhancement. Thereby, governments are advised to ensure Value-for-Money throughout the life-cycle of infrastructure projects, and manage expenditure levels and inherent contingent liabilities. To balance the increased risk transfer to the public side, governments in OECD countries seek to enact revenue sharing formulas or determine the maximal return on investment. Box 2.2 IIGF s Guarantee Purpose: IIGF provided guarantees for the Central Java Power Plant in Batang Regency to construct a megawatt gas-fired combined-cycle power station. The plant is built by the PT Bimasena Power Indonesia (BPI) consortium under a Build-Operate-Transfer (BOT) scheme with a 25-year concession period. Total coverage of the guarantee: Rp 300 billion Assessment: Positive: recognized by the International Finance Corporation (IFC) as one of the best PPP projects in the world. Challenge: The project suffered from time delays due to the slow issuance of necessary permits, the completion of AMDAL process, and land acquisition. The belated financial closer delayed the construction and completion had to be postponed by one year. Source: IIGF Annual Report, 2013 The Credit Guarantee and Investment Facility (CGIF) was established in 2010 to promote financial stability and boost long-term investments in the region 8. It offers guarantees on local currency denominated bonds issued by corporations in the ASEAN+3 region to facilitate companies' access to local currency bonds with longer maturities. This reduces their dependency on short-term foreign currency borrowing, and address currency and maturity mismatches. Increased local currency bond issuance will also promote financial stability in the region and aid the development of ASEAN s bond markets. CGIF will provide guarantees for local currency denominated bonds issued by investment grade companies in ASEAN+3 countries. CGIF has received capital contributions of $700 million from ADB, ASEAN, China, Japan and the Republic of Korea (Box 2.3). Box 2.3 CGIF s Guarantee Purpose: provided guarantees for the issuance of a SGD180 million, 10-year bond in the SGD bond markets by Protelindo Finance B.V ( Protelindo ), which is owned by PT Profesional Telekomunikasi Indonesia, the largest independent owner and operator of telecommunications towers in Indonesia. Amount raised: SGD180 million Interest rate: 3.25% Tenure: 10-year Assessment: Protelindo was able to access the SGD bond markets at a longer tenure and at pricing which it would have been unable to do so otherwise. Leveraging CGIF s financial strength and AA rating, the issue attracted strong interest from a broad spectrum of institutional investors. Investors in Singapore were allocated the majority (91 per cent) of the 8 Website: 51

52 issue. Asset managers, insurance companies and sovereign wealth funds were allocated 97 per cent, and the remaining 3 per cent went to banks. Source: DBS Press Release, DBS completes first public bond issue guaranteed by the CGIF for Protelindo Finance B.V, November 21, 2014 Public instruments both national and regional reduce risks and uncertainty for the private sector or facilitate the access to financing with positive impacts on private sectors access to equity and debt financing. The public sector s cover of project risks should be restricted to risks the private sector cannot directly control or which could be mitigated more cost effectively from the public sector. Other risks should be increasingly transferred to the private sector via insurance and guarantee products. 52

53 Chapter 3 3. AVAILABILITY OF POLITICAL RISK INSURANCE AND GUARANTEES IN ASEAN Availability of political risk insurance (PRI) and guarantees is instrumental to facilitate investors and lenders needs to mitigate political risk in order to ease access to financing. PRI typically cover losses of events, such as expropriation, breach of contract, currency inconvertibility, political violence, adverse changes of regulations and arbitration award default. Demand for political risk cover has increased since 2007/08 in countries with higher risk perception. Main final beneficiaries of guarantees and insurance are commercial banks and risk cover is required to access debt financing for certain projects. Supply of PRI and guarantees strongly increased after 2007/08, whereas the market remains dominated by bilateral agencies. The chapter assesses supply and demand of PRI products with the objective of identifying potential gaps in their availability.

54 3.1. Summary Financial instruments for mitigating political risks are crucial to transfer project risks to third parties in order to enable or ease access to financing. A growing demand for political risk cover has been reported by interviewed experts and can be observed in its augmented issuance whereby, across ASEAN, issuance of PRI and guarantees strongly increased after 2007/08. This increase in demand can be attributed to greater risk awareness following the global financial crisis, as well as the European debt crisis and political events since Demand for PRI cover is driven by country and project risk characteristics, but also the willingness of commercial banks and project sponsors to take on political risk. Familiarity of investors and lenders with the host country reduces demand for PRI cover. For example, project sponsors and investors reported that they feel comfortable investing without PRI cover when they know the country of investment, and the political and legal environment. Commercial banks, however, often require project sponsors to buy PRI cover before providing debt financing in certain ASEAN Member States. In general, European commercial banks and smaller regional banks might request PRI cover, whereas large Asian banks are less likely to require PRI cover. ASEAN economies can broadly be distinguished into four categories, according to interviewed experts: Countries where most commercial banks, especially larger Asian banks, feel comfortable with the perceived risk levels, hence usually do not require political risk cover: Brunei Darussalam, Malaysia and Singapore. Countries where political risk cover is required for certain infrastructure projects: Indonesia, the Philippines and Thailand. Countries where political risk cover is required for infrastructure projects: Cambodia, Lao PDR and to a lesser extent Viet Nam. Countries where investors and lenders perceive political risks to be high, hence almost always require political risk coverage: Myanmar. Political risk insurance and guarantees are supplied by bilateral and multilateral agencies, and private insurance companies. Private insurance companies and banks issue insurance and guarantees against commercial risks, but they increasingly offer political risk insurance. Multilateral agencies, such as the ADB, the Islamic Development Bank and the World Bank group, typically provide guarantees and loans for investments that are aligned with their development goals. Bilateral agencies, such as export credit agencies and EXIM banks, support the economic performance of their home country by providing insurance, guarantees and funding to strengthen exports and investment. Bilateral agencies dominate the market for political risk cover. Chinese SINSOURE and the Japanese NEXI, the two largest bilateral agencies, accounted for 77% of all PRI issuance from bilateral agencies, and 57% of total issuance (MIGA, 2014). Constraints to access to PRI cover varies among ASEAN Member States, influencing access to debt and equity financing for private infrastructure investment. The highest constraints have been reported for Cambodia, Lao PDR and Myanmar, followed by Indonesia and Viet Nam. The lowest constraints exist in Singapore, followed by Brunei Darussalam and Malaysia. These findings reflect the risk level in the countries, indicating that risks have a strong impact on insurance agencies willingness to provide PRI cover. The main gaps in the availability of political risk insurance and guarantees relate to specific cover for breach of contract and adverse regulatory changes, which also happen to be identified as the main political risks. This chapter discusses the market of PRI cover, focusing first on the demand for PRI cover and main beneficiaries. The supply of PRI cover separately assesses bilateral and multilateral agencies, and private insurance companies. Given the importance of bilateral agencies and the growing role of private insurance companies, this chapter describes in more detail their products. 54

55 3.2. Market for Risk Insurance The market for risk insurance, including PRI and guarantees, and export credit insurance, has grown over the last decade. Bilateral agencies and private insurance companies provide long-term PRI, investment insurance and short-term as well as medium to long-term export credit insurance (ECI). Availability of PRI and guarantees is instrumental to facilitate investors and lenders needs to mitigate political risk in order to ease access to financing. PRI covers here all instruments of private and public providers that cover political risks, such as political risk insurance, partial/political risk guarantees as well as partial and full credit guarantees. These products typically cover losses from events, such as expropriation, breach of contract, currency inconvertibility, political violence, adverse changes of regulations and arbitration award default. The chapter assesses supply and demand of PRI products with the objective of identifying potential gaps in their availability. PRI is issued by bilateral and multilateral agencies, and private insurance companies (Table 3.1 and Figure 3.1). The market remains relatively small, despite the entry of new players. The combined issuance of the top 5 private and bilateral providers and 2 multilateral providers accounted for 95% of the global PRI issuance of all Berne Union members in 2012 (MIGA 2014). Bilateral providers dominate the market - the two largest providers alone accounted for 77% of all bilateral issuance and 57% of total issuance (MIGA, 2014). Likewise, the top 2 private providers account for 71% of the issuance by private Table 3.1 Berne Union PRI issuance by providers Type of Provider PRI issuance in 2012 (million USD) Top 5 17,821 Private providers Top 5 73,855 Bilateral providers Top 2 2,917 Multilateral providers Source: MIGA (2014) based on Berne Union data members of the Berne Union. In addition to providing cover for commercial risks, private insurance companies (and the Lloyd's market) increasingly issue political risk cover. Private and public providers differ in their coverage of commercial and political risks, the acceptable country risk levels, objectives and targeted customers. The assessment is based on Berne Union data, whose membership consists of the most relevant providers of PRI. 9 Figure 3.1 Providers of risk mitigation instruments Risks Providers Objectives & Targeted customers 9 The Berne Union - founded in 1934 is a leading global organisation for the export credit and investment insurance industry. In 2014, the Berne Union consists of 79 members active in export and investment insurance market. Its members include multilateral institutions, bilateral agencies, like ECAs and EXIM banks and private insurers. The Berne Union provides data on the insurance activities of its members, supports the sound principles in export credits and foreign investment, and provides a forum for professional exchanges amongst its members (see: 55

56 Multilateral institutions Bilateral agencies Multilateral agencies focus more on investments in high risk countries, where private providers rarely offer RMIs Projects have to support development objectives (agency and country) Customers: Investors in developing and emerging economies In general, bilateral agencies provide RMIs in countries with higher risks profiles where private providers rarely offer RMIs. Projects are eligible if they serve national interests (investments, trade, economic growth) Customers: Mainly national enterprises Private provider Provision of RMIs for commercial risks and investment in countries with relatively low risk level (private provider are moving into riskier countries and developing new RMIs to better serve customers). Provision of RMIs based on required fees to cover the risks Customers: No focus on specific enterprises Political risk insurance and guarantees, investment insurance and medium to long-term export credit insurance (ECI) are common instruments to mitigate risks in infrastructure projects. For example, ECIs cover default risks in export contracts of capital goods with repayment terms of typically 5-7 years, which could increase to 10 or even 15 years. Short-term (ST) export credit insurance covers durations of less than one year - usually 30, 60 or 90 days. This short period reduces the instruments relevance for infrastructure investment and, short-term ECIs are not discussed in detail in this report. This chapter covers these different instruments but focuses on the availability of political risk insurance. Export Credit Insurance Export credit insurance (ECI) provides protection for exporters against default or non-payment by the buyer due to commercial or political reasons. These instruments are usually tied to the nationality of exporters or suppliers and sometimes to the nationality of project sponsors or lenders. Export credit guarantees or insurance generally cover both political risk and commercial risk. Long-term ECI improve the access to financing, as it enables exporters to use receivables as collateral and to offer buyer credits to their customers, which include project companies/spvs involved in long-term infrastructure projects. ECI terms are defined by the OECD Arrangement on Officially Supported Export Credits and Sector Understanding. The issuance market is dominated by short-term (ST) and medium- to long-term (MLT) export credit insurance. ST and MLT export credit guarantees and insurance (ECI) are issued by private insurance companies and Export Credit Agencies (ECAs). ECA offer instruments for export transactions that cover bankruptcy, insolvency of the borrower or buyer, failure of the buyer to effect payment, failure or refusal of the buyer to accept goods, and termination of the purchase contract. The bulk of export credit guarantees and insurance targets short-term export transactions which dominate new business from Berne Union members with USD 1,703 billion in 2014 (Figure 3.3). Medium- to long-term export credit insurance amounted to of USD billion in Export credit insurance cover commercial and political risks for infrastructure projects only insofar as exports of capital infrastructure goods are concerned and in generally targets exporters and not project sponsors and SPVs. Thus, this instrument is not covered extensively in the report. 56

57 200.0 New business PRI (ASEAN) Exposure PRI (ASEAN) New business PRI (global) Exposure PRI (global) 2,000.0 New business PRI (global) New business MLT (global) New business ST (global) In billion USD , , Figure 3.2 Global and ASEAN PRI new business and exposure Figure 3.3 Global new business of Short-Term, Medium- Long-Term and Investment insurance Source: Author's calculation based on data from Berne Union Political Risk Insurance The issuance of political risk insurance has increased both globally and in the ASEAN region over the last decade. Main drivers of growth are increased demand from lenders and partly investors after the Global Financial Crisis and political events after 2009, such as the Arab Spring and civil/political disturbance in ASEAN countries. New business of PRI, issued by Berne Union members, increased globally from USD 32 billion in 2005 to USD 74.5 billion in 2014 a rise of 132.7% (Figure 3.2). Decreases of new PRI business after 2008 resulted from increased risk awareness of PRI issuers and the disappearance of monoline insurance in the ASEAN region. Globally, exposure to PRI increased by 95% to USD 174 billion between 2005 and 2014, reflecting the awareness of political risks. New private insurers are entering the market, driven by rising demand and relatively high premiums in comparison to low yields in liquid capital and financial markets. The market for political risk insurance in the ASEAN region outperformed the global market during this period. New business in ASEAN increased by 247% to USD 13.6 billion (Figure 3.2) and exposure in AEAN represented 16% of global exposure in PRI exposure increased throughout the region reflecting both changed risk awareness and stronger inward FDI flows. The highest increases occurred in Indonesia, Singapore and Viet Nam (Figure 3.4). Declining or stable insurance issuances could be observed in Brunei Darussalam and the Philippines. In Indonesia, new business increased by 256% between 2006 and The PRI growth, however, coincides with an increase of FDI inflows by 275% to USD 18.4 billion between 2006 and Thus, the ratio of PRI new business to FDI inflows remained at approximately 22% (ratio only increased to 51% in 2009). In Singapore, PRI cover had been insignificant until 2006, but new business increased to approximately USD 500 million in 2007 and exposure has increased since then to USD 2.5 billion, but the PRI/FDI ratio remains very low at around 1%. Viet Nam experienced the highest increases in PRI cover: exposure increased between 2005 and 2013 from USD 0.1 billion to USD 2.2 billion. The increase coincided with higher FDI inflows, which grew from USD 2.0 billion to USD 8.9 billion. The PRI/FDI ratio increased since 2005, reaching 36% in 2012 and 24% in This development might indicate increased risk awareness. The Philippines is the only country which experienced a declining PRI exposure, despite simultaneously increasing FDI inflows. This reflects expert statements that of declining risk levels in the country. 57

58 Figure 3.4 PRI exposure in ASEAN-6 and CLMV countries Exposure Investment Insurance in ASEAN-6 Exposure Investment Insurance in CLMV BRUNEI DARUSSALAM INDONESIA PHILIPPINES THAILAND MALAYSIA SINGAPORE Billions CAMBODIA LAOS MYANMAR VIET NAM Source: Author's calculation based on data from Berne Union The PRI / FDI ratio in most ASEAN economies exceeds the global average, indicating higher risk perceptions. Worldwide, 4.6% of FDI inflows have been covered by political risk insurance in 2013, a significant increase from 2.7% in 2006 and The higher ratio can be explained by higher risk awareness and lower FDI flows. The ratio reflects findings from interviews and the survey, which indicate that AMS can be divided into three risk groups: Singapore and Brunei Darussalam have the lowest PRI/FDI ratios of around 1%. In both countries, the ratio peaked in 2008 with 11% in Brunei Darussalam and 4% in Singapore (Figure 3.6). Lao PDR, Cambodia and Myanmar are the countries with the highest risk perception and PRI/FDI ratios. The ratio is exceptionally high in Lao PDR, reaching on average 178.5% between 2005 and Reasons for this high ratio might include measurement errors on PRI cover (Berne Union data) or inward FDI flows (UNCTAD data), or domestically funded investment covered with PRI. Inward FDI flows to Lao PDR remained relatively stable with around USD 300 million over the period, whereas new PRI cover exceeded FDI inflows significantly in 2005 and after Cambodia at 88.3% experienced the second highest PRI/FDI ratio in the region, followed by Myanmar with a relatively low 52.3%. Indonesia, Malaysia, Thailand, the Philippines and Viet Nam rank between these groups. Unexpectedly low rations can be observed for Thailand (9%) and Viet Nam (20%). Expert statements on the risk level and demand in both countries indicated higher ratios. Figure 3.5 New PRI business in ASEAN-6 and CLMV countries 4000 New Business Investment Insurance in ASEAN-6 BRUNEI DARUSSALAM THAILAND INDONESIA MALAYSIA PHILIPPINES SINGAPORE 4000 New Business Investment Insurance in CLMV CAMBODIA MYANMAR LAOS VIET NAM

59 Source: Author's calculation based on data from Berne Union Figure 3.6 Ratio of PRI cover to inward FDI flows in ASEAN countries BRUNEI DARUSSALAM CAMBODIA INDONESIA LAOS MALAYSIA 200% PHILIPPINES SINGAPORE THAILAND VIETNAM MYANMAR RATIO of PRI new business / FDI inflows 180% 160% 140% 120% 100% 80% 60% 40% 20% 0% Source : Author's calculation based on data from Berne Union (PRI cover) and UNCTAD data on Figure 3.7 Claims Paid by Country inward FDI flows Note: * Ratios based on aggregated PRI and FDI flows from 2005 to PHILIPPINES VIET NAM SINGAPORE MYANMAR Claims on PRI could indicate the risk level in ASEAN countries. Claims have been scarce in the past decade and the amounts involved appear rather modest. Claims amounted to USD million between 2005 and 2014 (Figure 3.7). This represents % of the aggregated exposure in the ASEAN region, well below the 20 global average of 0.06%. Claims occurred only in 4 of the 10 ASEAN 10 countries, with the highest cumulative claim of USD 91.3 million in Viet Nam. 0 At the same time, claims for shortterm export credit insurance Source : Author's calculation based on data from Berne Union amounted to 0.17%, lower than the claims-to-exposure ratio of 0.37% for medium- to long-term export credit insurance Demand and beneficiaries of political risk insurance Millions Demand for political risk insurance increased globally after 2007/08, due to stronger risk awareness of investors and lenders. Risk awareness has been driven by events, such as the global financial crisis (GFC), the European debt crisis and political developments since Despite a generally stable investment environment in the ASEAN region, large disparities in perceived risks persist and influence the demand for PRI. Two-third of the survey respondents mentioned increased demand since the global financial crisis in the ASEAN region (Figure 3.8). Demand is linked to increased risk perception due to political and social unrest, government changes and adverse regulatory changes. Regarding the demand for political risk insurance, ASEAN Member States can be broadly distinguished into four groups: 59

60 i. The demand for PRI cover is lowest in Singapore, followed by Brunei Darussalam and Malaysia (Figure 3.10). Almost all respondents stated that PRI cover is not required to access financing for investment in Singapore. Only 40% of the respondents stated so for Malaysia and Brunei Darussalam. In Brunei Darussalam, demand for BoC cover is the highest. In Malaysia, demand to cover civil unrest is comparatively lower. Most commercial banks, especially larger Asian banks, feel comfortable with risk levels in Brunei Darussalam, Malaysia and Singapore and usually do not require political risk cover to provide financing. Figure 3.8 Demand changes for PRI in ASEAN after GFC ii. Indonesia, the Philippines and Thailand experience similar low levels of demand and political risk coverage is restricted to certain infrastructure projects. Demand is slightly lower in the Philippines and slightly higher in Indonesia (Figure 3.10). This reflects findings from interviews that risk levels decreased in the Philippines and increased in Thailand in the recent past. Thailand is the only country, where demand for civil conflict, war and terrorism cover dominates. A small minority mentioned that no insurance would be required in the three countries. iii. iv. Political risk coverage is required for infrastructure projects in Lao PDR, Cambodia and, to a lesser extent, Viet Nam. Demand to cover Non-Honouring of Financial Obligations is considerably lower than demand for the other risks. Despite large similarities, demand is slightly lower in Viet Nam. Cover for Breach of Contract was cited most frequently in Cambodia and Lao PDR, which reflects this risk's position as one of the main political risks in the ASEAN region. Investors and lenders perceive political risks in Myanmar as high and almost always require political risk coverage. 60

61 Figure 3.9 Demand for PRI cover in ASEAN 6 Malaysia The Philippines Breach of contract Breach of contract Civil conflict, war and terrorism Civil conflict, war and terrorism Expropriation Expropriation Non-honouring of financial obligation Non-honouring of financial obligation Transfer risk and currency Transfer risk and currency No insurance required Respondents No insurance required Respondents Breach of contract Singapore Breach of contract Thailand Civil conflict, war and terrorism Civil conflict, war and terrorism Expropriation Expropriation Non-honouring of financial obligation Non-honouring of financial obligation Transfer risk and currency No insurance required Respondents Transfer risk and currency No insurance required Respondents Brunei Darussalam Indonesia Breach of contract Breach of contract Civil conflict, war and terrorism Civil conflict, war and terrorism Expropriation Expropriation Non-honouring of financial obligation Non-honouring of financial obligation Transfer risk and currency inconvertibility Transfer risk and currency inconvertibility No insurance required Respondents No insurance required Respondents Figure 3.10 Demand for PRI cover in CLMV Cambodia Myanmar Breach of contract Civil conflict, war and terrorism Expropriation Non-honouring of financial obligation Transfer risk and currency No insurance required Respondents Breach of contract Civil conflict, war and terrorism Expropriation Non-honouring of financial obligation Transfer risk and currency No insurance required Respondents

62 Lao PDR Vietnam Breach of contract Civil conflict, war and terrorism Expropriation Non-honouring of financial obligation Transfer risk and currency No insurance required Respondents Breach of contract Civil conflict, war and terrorism Expropriation Non-honouring of financial obligation Transfer risk and currency No insurance required Respondents Source: Author s calculations based on OECD Project Risk and Mitigation Survey Note: 13 out of the 41 respondents did not reply to this question. Demand for PRI cover is mainly driven by the need to ease access to both equity and debt financing. The requirement for coverage depends not only on the country and project characteristics, but also the willingness of commercial banks and project sponsors to take on political risk. PRI cover is more relevant to ease access to debt financing in comparison to equity financing, according to interviewed experts and survey findings (Figure 3.11). Familiarity with the host country reduces demand for PRI cover. Project sponsors reported that they feel comfortable investing without PRI cover when they know the country of investment, the political and legal environment. Commercial banks often require project sponsors to buy PRI cover or acquire coverage themselves. Banks demand is linked to their familiarity with the market and their internal risk management processes. European commercial banks and smaller regional banks might request PRI cover, whereas Japanese, Korean, Chinese and large regional banks are less likely to require PRI. Internal risk management processes require banks to access PRI cover, for example, if single borrower or country limits are reached or they request insurance against certain risks. In addition, banks could reduce their capital requirements under Basel III by purchasing credit guarantees and comprehensive risk insurance. Figure 3.11 Importance of PRI to access finance Equity Finance Debt Finance 16 Scale : 0 - not important to 5-very important Source : Author s calculations based on OECD Respondents Project Risks and Mitigation survey Beneficiaries and buyers of Political Risk Insurance Investors, lenders, importers/exporters and contractors that are affected by political risks are potential buyers and beneficiaries of political risk cover. Commercial banks are the main beneficiaries as they often request cover as a prerequisite to provide financing. Purchasers of insurance and guarantee products are mostly project companies or equity sponsors that acquire them to ease access to financing. Interviewed experts mentioned that large international and small regional banks are often requesting PRI cover. Their requests might result from their limited familiarity with the host country of the investment, or regulatory requirements limiting their country and sector exposure. It is striking that equity sponsors and bond holders rarely ever obtain political risk cover. Interviewed experts mentioned various potential reasons for the divers demand: The demand for RMIs from lenders derives from their objective to reduce (default) risk. Low levels of risk and uncertainty are ultimately a main concern for commercial banks. 62

63 The low demand from bond holders might be related to a lack of need due to risk diversification through investments in numerous projects and limited exposure to a single infrastructure project. Infrastructure projects with high political risk which, thus, would benefit from PRI cover, might have a too low rating to be investable for most institutional investors. Bond holders include institution investors, such as pension funds, mutual funds, sovereign wealth funds and life insurers. Equity sponsors might either feel comfortable with taking on risks as they are familiar with country and project risks, engage in other risk reducing activities, or perceive premiums as prohibitive high. A lack of knowledge about the available RMIs and high transaction costs might be a further explanation. The lower demand of equity sponsors and bond holders could also relate to the gap in supply of affordable and appropriate PRI cover. According to interviewed experts, providers of PRI cover feel more comfortable issuing insurance for commercial banks than for bond holders. Banks are more familiar with the project, conduct their own due diligence and are incentivised to ensure the solvency of the project Supply of PRI from public and private providers Political risk insurance and guarantees are issued by bilateral and multilateral agencies, and private insurance companies. While discussing the characteristics of all three groups of suppliers, this chapter particularly focuses on supply of PRI from private insurance companies. Issuance of PRI cover of private insurers is market-driven, whereas public agencies are requested to serve specific targets. However, given the dominance of bilateral agencies, the two main providers of PRI in the ASEAN region are also presented: Japan s NEXI and China s SINOSURE Supply of PRI from private insurance companies Private insurance companies and banks issue insurance and guarantees against commercial risks, but they increasingly offer political risk insurance. Historically, these providers focused on lower-risk segments of emerging markets, due to their internal risk management or rating requirements. With a growing risk appetite, private insurers expanding PRI cover to developing countries, while simultaneously raising capacity and tenures of their products. Beside private insurance companies, the syndicates of the Lloyd s market are important issuers of PRI. Prior to the global financial crisis, commercial banks and insurers offered monoline insurance that offered wrap guarantees for certain structured debt transactions, including asset-backed securities and project finance debt. However, monoline insurance disappeared from the ASEAN market in the wake of the global financial crisis. The capacity of private insurers has increased significantly over the last years, but might nevertheless be too low for major infrastructure projects. Private insurance companies and the Lloyd s syndicates use coinsurance and syndications to insure large projects. Their overall capacity increased to USD 2.2 billion in 2014 (Figure 3.12). 10 The capacity increase derives from growing capacities of existing private insurers along with the entry of new insurance companies. Yet capacity might remain too small to cover major infrastructure projects, such as the upgrading of the Panama Canal, with a budget of USD 5.25 billion, or the new airport in Istanbul, with expected cost of 7 billion Euros, an amount three times the available capacity in the private market. The capacity decreases for investment in higher-risk countries and for longer tenures. 10 Lloyd's is not an insurance company but an insurance market where independent insurance underwriters join to syndicates. Currently, 96 syndicates exist which provide mainly general insurance and reinsurance. The market enables underwriters to pool and spread risks (see 63

64 Figure 3.12 Available market capacity of private insurers to cover single project risk Total Maximum Capacity (in billion USD) Sep 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jul 07 Jan 08 Jul 08 Jan 09 Jul 09 Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Alongside capacity, private insurers have also increased the tenure in insurance covering project risks (Confiscation, Expropriation and Nationalisation - CEN). Market capacity for tenures of up to three years amounts to USD 2.22 billion, slightly decreases to USD 1.86 billion for a tenure of seven years, and falls to USD 0.72 billion for 15 years (Figure 3.13). The amount further declines for higher risk investment. The relatively small amount might oblige project sponsors to seek cover from bi- and multilateral agencies for long-term infrastructure projects. Thus, investors and lenders might be inclined to seek PRI cover directly from a multilateral agencies or the Export Credit Agency of their home countries. Nevertheless, private insurers are playing an increasingly relevant role in PRI insurance. The collaboration of private and public insurers is one example, where private insurers provide coverage for - depending on the country - 7 to 12 years and the public agency covers the remaining tenure. Thereby, private insurance companies can benefit from the multilateral institutions preferred creditor status through guarantor of record programmes. Private companies could further provide reinsurance, which enables public agencies to reduce risk exposure with the aim to underwrite further projects. Figure 3.13 Maximum capacity and tenure per risk ,215 Project Risks (CEN) Trade Risks Political (CF) Trade Risks Commercial (Credit) 2,140 2,022 2,002 1,863 Capacity (USD million) ,559 1,355 1,554 1,025 1, Source: Arthur J. Gallagher (2014) Tenor Available (Years) 64

65 Characteristics of insurance cover from private insurers: Coverage can be more easily tailored to the needs of investors and lenders including: equity investments, debt instruments, such as corporate/project loans and bonds for national or crossborder projects. Instruments can cover contracts for goods and services. The negotiation process is shorter: The time between request and signature of the contract might take one to two weeks instead of at least 2 to 6 months for public agencies. Private insurers cover explicitly commercial and political risks in emerging and developed countries, whereas public agencies either focus on PRI or over default risk insurance (ECI). Private insurance cover is not limited to projects which are aligned with specific development goals (multilaterals) or national interests (ECAs). Transactions costs are lower but higher premiums and frequently lower capacity restrict their products. Supply of PRI from private insurance companies The supply of political risk insurance from private insurance companies varies greatly in the ASEAN region. Supply depends on the perceived risk levels, based on the project characteristics, the sector and country. Most private insurers seek sovereign guarantees before issuing political risk insurance in countries with high risk perception. However, this requirement restrains their access to these markets, as almost all ASEAN governments limit their provision of sovereign guarantees, which often come with significant contingent liabilities. ASEAN Member States can be broadly separated in four groups, according to interviewed experts and the survey: Private insurers are willing to provide 4 point political risk insurance (PRI) for most infrastructure investments in Singapore, Brunei Darussalam and Malaysia. Four point PRI includes expropriation, currency convertibility and transfer risks, political violence, and breach of contract risks. Private insurers are in most cases willing to provide 3 point PRI cover for infrastructure investments in Indonesia, Philippines and Thailand. Three-point PRI cover excludes breach of contract (BoC), whose provision at a reasonable premium probably requires an off-take agreement with a strong SOE or a sovereign guarantor. Most private insurers are reluctant to provide 4 point PRI in Cambodia, Lao PDR and Viet Nam. Insurers are especially reluctant to underwrite counterparty risks, like breach of contract, but feel slightly more comfortable with providing a 3 point PRI cover. The covered 3 point risks are linked to governmental actions and insurers often seek to obtain a sovereign guarantee from the Ministry of Finance. Due to growing awareness of contingent liabilities, ASEAN governments are less willing to provide sovereign guarantees. Private insurers do not underwrite infrastructure investment in Myanmar, due to the high perceived risks, lack of data and track record to ascertain risks. In riskier countries, public agencies have the advantage of diplomatic leverage arising from direct connections between their governments and the host government. Thus, private insurers feel more comfortable to provide PRI coverage when public agencies are providing insurance or financing. Thereby, private insurers indirectly gain access to their political leverage. With time, however, public agencies might be able to pull out gradually, as risk perception of large-scale project decreases and risk mitigation coverage from private providers becomes available at a reasonable cost. 65

66 Supply of PRI from bilateral agencies Bilateral agencies support the economic performance of the home country by providing financing support or cover support for exports and investment. Financing support includes credits to foreign buyers, refinancing or interest-rate support. Cover support refers to export credits insurance or guarantees for credits provided by private financial institutions. Relevant agencies include bilateral development agencies, Export Credit Agencies (ECAs), export-import (EXIM), and investment insurance agencies. Bilateral agencies are the main issuers of export credit and investment insurance, having a market share of 78% of political insurance and guarantee products. The largest two agencies alone, China s SINOSURE and Japan s NEXI, account for 57% of total PRI issuance (MIGA, 2014). This section describes products and exposure of the main ECAs with a focus on SINOSURE and NEXI. Bilateral agencies provide risk coverage to private financiers to promote their respective countries exports, encourage investment by their nationals, or promote their countries financial institutions. Only a few agencies name the development of host economies as an objective on their website. An increasing number of bilateral providers are gradually adjusting their products to cover exports and investments of Medium, Small and Micro Enterprises (MSMEs). They seek to cover projects in countries with higher risk perception. ECAs can provide further services, such as debt collection, factoring, business information, risk assessments and direct lending. Bilateral agencies underwrite political and commercial risks and might provide investment insurance and lending. Access depends on the countries risk level and the focus of the agency, i.e. investment and/or export facilitation. In the description of the covered risks, the report does not distinguish between insurance and guarantees for equity investments and project finance, as the instruments largely overlap. Comprehensive export credit insurance and guarantees offer the same protection against default, like credit guarantees. Almost all of the included bilateral agencies offer 3 point political risks insurance, covering: expropriation, transfer restrictions and currency inconvertibility, and political violence. Ten out of the covered 16 agencies cover default on contract, and only five cover adverse regulatory changes and four agencies non-honouring of sovereign financial obligations (Table 3.2) (See Annex II for more specific information on ECAs). The most generous terms and conditions of the provision of export credits are defined in the non-binding Arrangement on Officially Supported Export Credits. This Arrangement limits terms and conditions of officially supported export credits (e.g. minimum interest rates, risk fees and maximum repayment terms) and the provision of tied aid with the aim to create a level-playing field and to limit trade distortions. Further topics addressed are good governance issues, such as anti-bribery measures, environmental and social due diligence, and sustainable lending. The OECD developed and is monitoring the Arrangement, and provides a forum for participating countries to discuss the Arrangement and the special Sector Understandings For more information, see: 66

67 Table 3.2 Political risks covered by public providers Provider Insurance name Confiscation, expropriation, nationalisation ATRADIUS (Netherlands) COFACE State Guarantees Directorate (France) OECD Countries Special Risk Credit Insurance Export Credit Insurance Foreign Investment Insurance X Transfer restrictions / Currency inconvertibility X Political violence, unrest, war, terrorism X Breach of Contract X Adverse regulatory changes X Non Honouring of Financial Obligation X X X X X No COFACE private Export Credit Insurance X X X X X Lending No No Lending Instrument PWC (Germany) JBIC (Japan) Investment Guarantees of the Federal Republic of Germany Guarantees for Co-financing, Overseas Syndicated Loans and Public Sector Bonds X X X X No Yes X X X X X Export and Import Loans, Overseas Investment Loans, Untied Loans and other* NEXI (Japan) Overseas Investment Insurance Overseas United Loan Insurance X X X X X No KSURE (Korea) Overseas Investment Insurance X X X X X No Political Risk Insurance (PRI) X X X X X X EDC (Canada) Contract Frustration Yes Foreign Buyers Loans, Insurance (CFI) X X X Foreign Investment Financing Medium Term Export Yes Direct Loans, Export Contract EFIC (Australia) Payment Insurance X X X X Loan and other ** OPIC (US) Political Risk Insurance X X X X X X Yes Direct loans UK Export Finance (ECGD) Overseas Investment Insurance X X X Yes Loans to overseas buyers Non-OECD Overseas Investment ECGC (India) X X X Insurance Sources: Websites and annual reports of included agencies. Note: All instruments available in ASEAN Member States. No

68 Nippon Export and Investment Insurance (NEXI) NEXI insures Japanese companies against risks in foreign transactions. Covered risks include 4 point political risks, restrictions on currency exchange and tariff increases. The later relates to adverse changes of regulations, one of the main political risks. Commercial risks are indirectly covered through NEXI s insurance against the default risk of the foreign counterparty. The main products for medium and long-term businesses include: Overseas Investment Insurance covers the losses when a subsidiary or joint venture of Japanese companies is forced to discontinue business due to war, revolution, prohibition of foreign currency exchange, suspension of remittance, force majeure, or bankruptcy and default of a borrower. New business increased to USD 5.7 billion in Overseas Untied Loan Insurance covers Japanese companies or commercial banks against risks, like inability to collect loans or redeem bonds due to war, revolution, prohibition of foreign currency exchange, suspension of remittance, force majeure or default of a borrower or bond issuer. This insurance also covers extended guarantees to the borrowings by Japanese overseas subsidiary, foreign governments or companies. The amount of new business is very volatile with USD 0.8 billion in 2007 and a peak in 2009 (USD 13 billion). Buyer s Credit Insurance covers loans of Japanese financial institutions to foreign importers who purchases goods and services from a Japanese exporter. Losses are insured which incur due to war, revolution, prohibition of foreign currency exchange, suspension of remittance or force majeure such as natural disaster or bankruptcy or default of an importer. Investment and Loan Insurance for Natural Resources and Energy seek to secure a stable natural resource supply and covers senior loans, subordinated loans and investments. Short-term and medium to long-term Export Credit Insurance covers Japanese exports or technical cooperation against risks, such as war, revolution, import restriction or prohibition, terrorism, force majeure or bankruptcy of the importer. Figure 3.14 NEXI: New business of long-term products and total exposure Iin billion USD New business: Overseas Investment Insurance (OII) New business: Overseas Untied Loan Insurance (OULI) New business: Buyer's Credit Insurance (BCI) Total exposure (OII & BCI & OULI) Source: Author s calculations based on NEXI Annual reports. Note: Orginal amounts in YEN. Exchange rate on 20 March 2015

69 New business in ST and MLT insurance decreased significantly in 2007 and the amounts remain far below their peaks in 2006: ST insurance decreased from USD 67.1 billion in 2006 to USD 22.3 billion in 2009, before recovering gradually to USD 31.2 billion in Likewise, MLT insurance decreased from USD 48.7 billion in 2006 to USD 24.3 billion in Overseas Investment and Insurance Overseas Untied Loan Insurance, and, to a certain degree, Buyer s Credit Insurance are long-term insurance and linked to long-term investment. The aggregate exposure of the three products decreased in the wake of the GFC and grew strongly by 148% after 2007 to USD 43 billion in 2013 (Figure 3.14). China Export & Credit Insurance Corporation (SINOSURE) SINOSURE, the world s largest ECA in term of exposure, promotes China s foreign trade, economic cooperation and economic growth by providing insurance which covers political and commercial risks. SINOSURE has a strong regional focus on issuing Export Credit Insurance for businesses with Asia. Between the time of its establishment in 2001 and 2013, SINOSURE has supported exports, domestic trade and investment with a value of USD billion. Thereby, new business increased from USD 3 billion in 2002 to USD 397 billion in Export credit insurance alone amounted to USD 327 billion in 2013 (Figure 3.15). Short-term export credit insurance (ST-ECI) dominates SINOSURE issuances with USD billion in Its ST-ECI insurance represents 18.8% of the total issuance of all Berne Union members. Other relevant products are overseas investment insurance and medium-/long-term export credit insurance (OECD, 2015a). Medium- to long term products 12 : Medium- to long-term export credit insurance is dominated by buyer credits, followed by supplier credit and refinancing insurance. Issuance increased from USD 0.8 billion in 2008 to USD 18.2 billion in 2013 (Figure 3.16). Asia appears to be the main destination with 47% of total MLT cover in 2011 and 61% in 2012 (OECD, 2015a). Buyers credit insurance accounted for 58% of the MLT cover, suppliers credit insurance for 6% and refinancing insurance for 35%. Eligible are 'Chinese financial institutions, or a foreign financial institution that has (i) branches in China, (ii) at least USD 20 billion in assets, and (iii) export credit experience in the last three years, with the exporter being a legal entity registered in China (except Hong Kong, Macau and Taiwan)' (OECD, 2015a). Investment insurance covers a Chinese company s losses due to expropriation, war and political violence, transfer restriction and breach of government undertaking in the host country (OECD, 2015a). Investment insurance cover increased six fold from USD 5.4 billion in 2008 to USD 30.7 billion in According to OECD (2015), claims amount to approximately 0.1%. Lease insurance covers losses of lessor s rent due to political risks or lessee default. Lease insurance numbers are relatively small, amounting to USD 1.6 billion in SINOSURE is the only institution specialized in credit insurance, but both the China Exim bank and the China Development Bank support exports and investment abroad. China Exim bank provides export credit lending mainly for seller s credits, with average tenures shorter than 5 years. The Exim bank also offers buyer s credits with tenures above 10 years (OECD, 2015a). China Exim bank also provides official development aid in the form of soft loans. The China Development Bank is very active in international finance, however, no clear evidence exist to classify these activities as officially supported export credits (OECD, 2015a). 12 Source: SINSOURE website English.html 69

70 Figure 3.15 SINOSUREs exposure in short-term and medium-/long-term insurance 350 Short Term Export Credit Insurance (ST) Medium-Long term Export Credit insurance (MLT) Investment Insurance Overseas Investment Insurance Lease Insurance Figure 3.16 SINOSUREs medium- and long-term insurance 35 Investment Insurance Lease Insurance Medium-Long term Export Credit insurance (MLT) Billion USD Billion USD Source: Author s calculations based on OECD (2015), CHINESE EXPORT CREDIT POLICIES AND PROGRAMMES Source: Author s calculations based on OECD (2015), CHINESE EXPORT CREDIT POLICIES AND PROGRAMMES Note: Orginal amounts in YEN. Exchange rate on 20 March Supply of PRI from multilateral agencies Multilateral agencies have a small market share of 3.1% compared to private insurers and bilateral agencies (Table 3.1). Yet their objectives, experiences and diplomatic leverage might enable multilateral agencies to provide PRI cover for countries and projects with higher political risks. One third of the survey respondents mentioned that multilateral agencies are the most frequently used source of political risk insurance and guarantees. Multilateral agencies, such as the ADB, Islamic Development Bank and the World Bank group, typically provide guarantees and loans for investments that are aligned with their development goals. This chapter focuses on MIGA, as the main provider of PRI in the World Bank Group, and the Asian Development Bank (ADB) due to its regional focus. World Bank Group The members of the World Bank Group issue insurance and guarantees for a broad range of assets, including debt, equity and quasi equity, either for a single asset or a portfolio of assets. The instruments are available in local or foreign currency to finance or guarantee investment in new or existing projects with a short-, medium- and long-term maturity (Table Annex 6) include for example: 13 - Partial Risk Guarantees (PRGs), provided by the World Bank, cover commercial lenders against default arising from a government-owned entity failing to meet its obligations. PRGs can cover changes in law, failure to meet contractual payment obligations, expropriation and nationalization, currency transfer and convertibility, non-payment of a termination amount, failure to issue licenses in a timely manner, other risks to the extent they are covered by a contractual obligation of a government entity, and noncompliance with an agreed dispute resolution clause. - World Banks Partial Credit Guarantees (PCGs) provide a comprehensive cover for private lenders against risks for a specific period of investment and serve to extend maturity and improve market terms. 13 Source: &menuPK= &contentMDK= and topics_ext_content/ifc_external_corporate_site/structured+finance/products/partial+credit+guarantee 70

71 - IFC Partial Credit Guarantees serve as a credit-enhancement mechanism for bonds and loans. It is an irrevocable promise by IFC to pay principal and/or interest up to a predetermined amount, irrespective of the cause of the payment default. It can be applied to a single credit or to a portfolio of credits. World Banks Multilateral Investment Guarantee Agency (MIGA) MIGA is a member of the World Bank Group and one of the main providers of credit guarantees. MIGA offers political risk insurance and credit enhancement to private sector investors and lenders, designed to protect foreign direct investments (FDI) against political risks in developing countries. Eligible investments include long-term debt and equity investments as well as other assets and contracts with long-term tenures. As a multilateral development agency, MIGA only supports investments that are developmentally sound and meet high social and environmental standards. Political risks covered by MIGA include: - currency inconvertibility and transfer, - expropriation (including creeping expropriation), - war, terrorism, and civil disturbance, - breach of contract, and - non-honouring of (sovereign) financial obligations Since 1988, MIGA has issued more than USD28 billion in PRI, including USD 3.2 billion in guarantees in 2014 alone (Box 3.1). New issuance and total exposure were relatively stable until the GFC and increased substantially afterwards (Figure 3.17). New issuance of guarantees increased by 50% in 2008, before declining to pre-crisis levels in 2009 and 2010 and significantly increased thereafter, which resulted in a cumulative growth of 125% from 2007 to In the same period, total exposure grew by 134% to USD 12.4 billion. The exposure in AMS accounted for USD million, with the largest amount in Indonesia (Table 3.3). Myanmar joined MIGA in 2014 and all ASEAN Member States but Brunei Darussalam are now members of MIGA. Table 3.3 MIGA s Outstanding Guarantee Portfolio in ASEAN Countries, 2013 Gross exposure (USD million) Net Exposure (USD million) Viet Nam Thailand Indonesia Lao PDR Source: MIGA Annual Report 2013, Page 30 71

72 Figure 3.17 MIGA and ADB products Billion USD MIGA: New Guarantees ADB: Gross Exposure Partial Credit Guarantee MIGA: Gross Exposure Guarantees ADB: Gross Exposure Political Risk Guarantee Source: Author s calculations based on Annual reports from MIGA and ADB Box 3.1 MIGAs Investment Guarantee Eligible projects need to be financially and economically viable, environmentally sound, and consistent with the labour standards and development objectives of the country. Eligible: Equity, quasi-equity investments and loans from commercial banks or shareholders. Political risks covered: currency inconvertibility and transfer restriction; expropriation; war, terrorism and civil disturbance; breach of contract; and non-honouring of sovereign financial obligations. Duration: Minimum of three years and a maximum of up to 15 years (20 years depending on the project) Coverage: up to 90 percent of the investment and typically 95 percent of the principal plus up to 150 percent of the principal for interest. Amount: USD 220 million (higher through reinsurance) Beside the investment guarantee, MIGA s Small Investment Program seeks to facilitate investment into small and medium-size enterprises (SMEs) involved in the finance, agribusiness, manufacturing, and services sectors. Source: MIGA Investment Guarantee Guide Asian Development Bank The Asian Development Bank provides guarantees such as (i) partial credit guarantees for eligible projects to cover certain principal and/or interest payment risks that the project and its commercial co-financing partners cannot easily absorb or manage on their own, and (ii) political risk guarantees (PRG) to cover specifically defined political risks. Guarantees can be provided when ADB has a direct or indirect participation in a project or related sector, through a loan, equity investment or technical assistance. The organisation provides political risk guarantees for loans from commercial banks, shareholders, guaranteed loans, bonds, financial leases, letters of credit, promissory notes, and bills of exchange. 14 Box 3.2 presents a case study of a political risk guarantee provided by ADB in collaboration with MIGA and NEXI for a power project in Viet Nam. However, the actual usage of ABDs guarantees is limited (Figure 3.19). 14 Source: According to the information in ADB Guarantee against Political Risk Brochure 72

73 ADB products to cover political risks: Partial Credit Guarantee (PCG) covers non-payment by the borrower or issuer on the guaranteed portion of the principal and interest due. Political Risk Guarantee (PRG) provides lenders coverage against the following political risks: transfer restriction, expropriation, political violence, contract disputes and non-honouring of a sovereign obligations or guarantees. Box 3.2 ADB s Political Risk Guarantee (PRG) A case study in Viet Nam Purpose: Provided a loan and guarantees for the Phu My 3 (PM3) BOT Power Company Limited (the BOT Company) to construct a megawatt gas-fired combined-cycle power station Total amount of direct loans: US$37,460, Total amount of PRG: US$29,968, Assessment: Being a direct lender and provider of PRG, ADB played a critical role in mobilizing commercial financing since commercial banks hesitated to lend on an uncovered basis given the market conditions, political situation, and lack of track record for Independent Power Producer (IPP) projects in Viet Nam at that time. Guarantee instruments from the Asian Development Bank (ADB) Operating Entity: The BOT Company was established as a special purpose company incorporated in Viet Nam. The BOT Company covered the cost of building the early transfer infrastructure facilities comprising the interconnection line, part of the cooling channel, the liquid fuel pipeline, and the data connection. PRG: The PRG was provided to 5 commercial banks to cover approximately USD30 million of their loans to the BOT Company. PM3 is the first project for which ADB provided parallel PRG cover with the Multilateral Investment Guarantee Agency (MIGA) and Nippon Export and Investment Insurance. The PRG pricing and fees were derived from the comparison with the terms of the MIGA PRG and the PRG pricing for PM2.2, in which ADB is acting as the Guarantor of Record. The Government also provided guarantee undertakings to cover performance obligations of the Viet Namese counterparties under the project agreements. PRG Coverage: The ADB PRG covered (i) currency convertibility and transfer; (ii) expropriation, confiscation, and nationalization; (iii) political violence including war, terrorism, and/or civil disturbances; and (iv) inability of the ADB guaranteed lenders to enforce any arbitral award following breach of contract, including payment default of the Government under its guarantee in respect of certain obligations of the Viet Namese parties under the project agreements. Source: ADB Project Document: Viet Nam: Loan and Political Risk Guarantee to the Phu My 3 Power Project, February 2007, Interviewed experts have raised the following advantages for PRI cover of multilateral and bilateral agencies: Ability to provide guarantees (and longer tenures) for equity and debt financing in countries with perceived high political risks. Public agencies face lower political risks due to: their diplomatic leverage with host countries, the higher visibility of repayment claims and corresponding negative impact on the investment climate. For example, MIGA only had to pay 6 claims worldwide out of its 620 guaranteed projects. PRI products from public agencies have longer tenures than products of private insurers, thus matching long-term debt financing of infrastructure projects. The participation of multilateral (and bilateral) institutions facilitates the access to finance and insurance from commercial banks and private insurers. The involvement of public institutions reduces perceived project risks due to their diplomatic leverage and required due diligence. 73

74 3.5. Constraints in accessing political risk insurance Availability of PRI cover varies among ASEAN Member States, influencing access to debt and equity financing for private infrastructure investment. Constraints in the access to PRI are especially high in countries with both higher risk perception and demand for PRI, according to interviewed experts and survey findings. Access varies as well regarding the different political risks: constraints persist especially in mitigating Breach of Contract and Adverse Regulatory Changes risks. Access is further influenced by sector and project specific risks, and the participating stakeholders, such as project sponsors and lenders, and insurers willingness and ability to accept risks. Insurers and lenders access to political risk cover is constrained and the main constraints reported 1/3 of the respondents are too short tenors and too high premiums. This might especially be the case in countries with higher risk perception where PRI cover is requested from lenders. Other constraints have been mentioned similarly frequently, indicating that not a few single constraints exist but that access and sufficiency of PRI cover is limited in several cases. Providers of PRI cover The objectives of private and public providers influence access to PRI. Thereby, the availability of insurance and guarantees from public agencies is less sensitive to country risks, due to the agencies' diplomatic leverage and the usage of sovereign guarantees or bilateral investment treaties (BIT), which reduce political risks and ensure claim recoveries. Private insurers, on the other hand, rely even more on a comprehensive risk assessments and an economically viable pricing before providing political risk cover. Providers have been discussed in more detail in section 3.4. Disparities among ASEAN Member States The access to political risk insurance varies among the ASEAN Member States. The highest constraints have been reported for Cambodia, Lao PDR and Myanmar, followed by Indonesia and Viet Nam (Figure 3.18). Simultaneously, experts and survey respondents stated that PRI demand is highest for these countries. The lowest constraints exist in Singapore, followed by Brunei Darussalam and Malaysia. These findings reflect the risk level in the countries, indicating that risks have a strong impact on insurance agencies willingness to provide PRI cover. The ability of public agencies to bear risks due to the development focus of multilateral agencies and national objectives of bilateral agencies does not seem to balance the private insurers reluctance to provide PRI cover (without sovereign guarantees) in these countries. Most public agencies are requested to operate on a cost neutral basis. Beyond the national differences, the access to PRI for the respective political risks varies as well. 74

75 Figure 3.18 Level of constraints to access to Political Risk Insurance in ASEAN Member States Scale: 0 - no constraint to 5 - large constraints Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar The Philippines Source: Author s calculations based on OECD Project Risks and Mitigation survey Singapore Thailand Vietnam Access to PRI cover depends on the specific risk investors and lenders seek to insure against. In most ASEAN countries, 3 point cover is easily accessible; the cover includes expropriation, currency inconvertibility and transfer restrictions, and political violence. The access to PRI for the other two main political risks, Adverse Regulatory Changes and Breach of Contract (BoC), is constrained in countries with higher perceived risk levels, according to expert interviews. Insurers feel more comfortable providing 3 point cover, as the risks in question are not directly linked to a particular investment. This is especially the case for currency inconvertibility and transfer restrictions, and political violence, since these risks impact the whole economy, which reduces the likelihood of their realisation. Insurers frequently limit the cover for Adverse Regulatory Changes to public actions targeting the specific investment, thereby excluding regulatory changes affecting a whole sector or the wider economy. Thus, Adverse Regulatory Changes and BoC cover are mainly linked to specific investment, which increases the likelihood of occurrence. PRI cover for these two risks is more accessible in countries with a good investment climate including a reliable and transparent legal system, and access to national, regional or international dispute settlement systems. According to interviewed experts, the effectiveness of risk cover for these two risks is also hampered by: Adverse regulatory changes: Insurance providers are increasingly developing products to cover this risk, but access and effectiveness are still limited. According to interviewed experts, the effectiveness of PRI against adverse regulatory changes is constrained by a significant degree of uncertainty as to whether claims will be approved, as well as the timing and requirements to prove claims. For example, if the government or regulator rejects a contractually guaranteed increase in user fees, a successful award from a regional or international arbitration court is often required as a basis to make a claim. Beside the expensive nature of an international arbitration award, one to five years might pass between the claim s submission and payment (MIGA, 2012). Similar to MIGA procedure, RMIs from bilateral agencies and private insurers require an arbitration award either from an international, regional or national court (i.e. the contract might, for example, cite Singapore, Hong Kong or New York law as a forum for legal disputes). Insurers might also restrict insurance against the non-honouring of arbitration awards. Even more important from the perspective of the insured/beneficiary, an adverse regulatory change will not automatically trigger claims payment - the beneficiary needs to prove that the specific regulatory change caused an expropriatory violation of an existing contract. For example, bilateral agencies might conclude that claims are justified only if the adverse regulatory change directly targeted the specific company but not a whole sector. Another requirement might be the full loss of the investment; adverse regulatory changes, however, often lead to a partial loss of revenue, for example, through the inability to increase end user fees as anticipated in the contract. 75

76 Breach of contract: PRI might exclude or limit the cover against breach of contract (BoC) (Aubert, 2013). As BoC is one of the main political risks in the context of infrastructure investment, the limited cover might hamper financing projects. The effectiveness of available PRI cover is reduced by constraints related to the characteristics of the underwriting products and the ease of access to long-term financing for infrastructure investment. The main constraints related to insurance include too short tenures, followed by complex processes to acquire PRI and limited coverage. Short tenures and a lack of capacity have been raised by several experts as major constraints for PRI cover from private insurers. Over the last few years, private insurers increased capacities and tenures. Complex processes have been reported regarding PRI cover from multilateral and bilateral agencies. Limited PRI coverage and narrow terms of risk cover have been reported as general constraints in insurance contracts. Inability of insurance companies to receive sovereign guarantees refers both to private and public insurers, which seek either a sovereign guarantee or the existence of a BIT before providing political risk insurance. 76

77 Chapter 4 4. LEGAL AND REGULATORY FRAMEWORKS ON INVESTMENT PROTECTION Sound, transparent and predictable legal, regulatory and institutional frameworks to regulate and protect investment are crucial to reduce political and commercial risks with the aim to further enabling private investments in infrastructure. Governments of ASEAN Member States have been strengthening PPP frameworks and implemented reforms, inter alia, enhancing the institutional framework for PPPs by establishing new PPP units and regulators. Yet further improvements are critical to reduce legal uncertainty and risks. Great discrepancies remain in the level of sophistication of the regulatory and legal framework and in the legal security provided to investors across the ASEAN region. International Investment Agreements (IIAs) constitute another layer of the legal protection regime for investments. The protection through the ASEAN Comprehensive Investment Agreement and bilateral investment treaties are explained below.

78 4.1. Summary A clear, sound and predictable legal and institutional framework is particularly important for physical infrastructure investment, where the investment is long-term and it is difficult for an investor to disengage. These frameworks are instrumental in reducing political and commercial risks with the aim to further enabling private investments in infrastructure. Private investors will only commit to commercially viable infrastructure projects that are backed by a credible environment. A sound framework is of particular importance in developing and emerging countries where there is a higher risk perception. The institutional framework has been improved across the ASEAN region in the 2000s with the establishment of, for example, new PPP units and regulators. Yet further improvements are critical to reduce legal uncertainty and risks. Indonesia, Malaysia, the Philippines and Thailand have fairly developed PPP frameworks and experiences in PPP implementation: Malaysia and the Philippines have established rather comprehensive institutional frameworks. Singapore has PPP policies in place and view PPP as a form of procurement approach but the institutional environment needs to be further developed. Indonesia and Thailand have recently established new institutions, but there remain challenges in their institutional frameworks. Viet Nam has recently taken significant steps to define an administrative framework for PPPs, but still needs to build its institutional capacity to support greater private participation in infrastructure. Cambodia, Lao PDR and Myanmar are in the early stages of establishing PPP programmes including frameworks. Lao PDR and Myanmar have yet to build their PPP agendas (Table Annex 2 provides an overview on the legal and institutional framework in the AMS). In Brunei Darussalam, there is no separate PPP-focused body. A sound legal framework for investment, underpinned by consistent and clear rules, can mitigate uncertainty and non-commercial risks for investors. A key concern of investors, in particular when engaging in infrastructure projects, is to preserve the security of their investment. In this context, the protection of property rights is a key aspect of the protection sought for by prospective investors. Great discrepancies remain in the level of sophistication of the regulatory environment and in the legal security provided to investors across the ASEAN region: While some ASEAN countries, such as Singapore and Brunei Darussalam, are endowed with very robust legal frameworks for the protection of investment, other AMS are still developing their frameworks and business environment. Reform efforts undertaken, to varying degrees, by countries are gradually paving the way for a harmonised legal landscape in Southeast Asia. International Investment Agreements (IIAs) constitute another layer of the legal protection regime for investments. For example, the ASEAN Comprehensive Investment Agreement (ACIA) seeks to provide a strong and harmonised framework for investment protection across the ASEAN region. Convergence towards the high standards of protection contained in ACIA still requires countries to undertake a sustained regulatory reform effort. This chapter assesses the domestic and international legal frameworks related to investor rights and protection, including on access to dispute settlement systems, as provided in investment and PPP laws, bilateral and IIAs. 78

79 4.2. Institutional frameworks for Public-Private Partnerships in ASEAN Member States Faced with regulatory challenges involving PPPs, ASEAN governments have recently taken a more comprehensive approach towards building appropriate PPP environments (Table Annex 2). Recent reforms have given particular attention to enhancing the institutional environment for PPPs (EIU, 2011). The institutional framework has been improved across the ASEAN region in the 2000s with the establishment of, for example, new PPP units and regulators. Yet further improvements are critical to reduce legal uncertainty and risks. Indonesia, Malaysia, the Philippines and Thailand have fairly developed PPP frameworks and experiences in PPP implementation (Table 4.1): Malaysia and the Philippines have established rather comprehensive institutional frameworks. Indonesia and Thailand have recently established new institutions, but there remain challenges in their institutional frameworks. Singapore has PPP policies in place Table 4.1 PPP-related legal and institutional frameworks in ASEAN-10 countries ASEAN Member State Dedicated PPP Unit Key agencies Policy framework Key legal provisions Financial support Land acquisition Brunei Yes / Central PPP Unit Department of Economic Planning and Development Limited PPP specific policy No specific PPP law No PDF No Land acquisition law Cambodia No Council for the Development of Cambodia Limited PPP specific policy Law on Concession (2007) No PDF No framework on land acquisition Indonesia Yes / P3CU within BAPPENAS BAPPENAS, BKPM, MoF, CMEA MP3EI and PPP Book Perpres No 66 (2013) PPP Regulation IIGF, PT-SMI, IIF, VGF (provided by RMU) Land acquisition law (2011) Lao PDR No Ministry of Planning and Investment (MPI) Limited PPP specific policy No specific law on PPP / PPP Decree under preparation No PDF No framework on land acquisition Malaysia Yes / 3PU UKAS Prime Minister s Department Privatisation Masterplan and PPP Guidelines PPP Guidelines (2009) Facilitation Fund (VGF) but no PDF Land acquisition Act Myanmar No MNPED Limited PPP specific policy but NCDP No specific PPP law / New FIL as framework No direct incentives/financial support to PPP projects Notification39(2011) Foreigners not allowed to buy land but may lease land Philippines Yes / PPP Centre National Economic Development Authority NEDA NEDA Development Plan Republic Act No (1994) BOT Law (amendments submitted) PDMF, PPP Strategic Support Fund; no VGF nor CLF PPP Strategic Support Fund provides fund for land acquisition Singapore No Ministry of Finance Limited PPP specific policy/guidance provided by the PPP Handbook No specific legislation No direct incentives/financial support to PPP projects Land Acquisition Act Thailand Yes / PPP Committee State Enterprise Policy Office (SEPO) and PPP Committee Policy to increase infrastructure spending Private Investment in State Undertaking Act B.E (2013) PPP Act PDF to be established under the New Act Land law (conditions imposed on land ownership) Viet Nam No Ministry of Planning and Investment (MPI) Source: OECD, ESCAP (2014) and Indonesia (2013). Pilot projects / PPP feasibility study fund Decision 71 (2010) on PPP & Decree 24 (2011) BOT. To be merged into New PPP Decree PDF and VGF under preparation No Land Acquisition Act 79

80 and view PPP as a form of procurement approach but the institutional environment needs to be further developed. In Brunei Darussalam, there is no separate PPP-focused body. Viet Nam has recently taken significant steps to define an administrative framework for PPPs but still needs to build its institutional capacity to support greater private participation in infrastructure. Cambodia, Lao PDR and Myanmar are in the early stages of establishing PPP programmes including frameworks. Lao PDR and Myanmar have yet to build their PPP agendas (Table Annex 2 provides an overview on the legal and institutional framework in the AMS). Independent regulators and dedicated PPP or Infrastructure Units can help to strengthen institutional framework for PPPs. 15 PPP/Infrastructure Units support other institutions, like line ministries, with necessary skills to identify, develop and negotiate projects suitable to private participation. It also diminishes the costs associated with co-ordinating interaction and responsibilities of various government agencies. Yet ASEAN countries PPP implementation capacity still varies considerably with only a few countries having established dedicated PPP units for instance (Table 4.1). Independent regulatory agencies are another important factor in ensuring policy predictability and stability, and constitute an important driver for enhancing private sector participation in infrastructure. The existence of separate regulators is not a guarantee of regulatory independence, but it inspires market confidence. CLMV countries have only recently established separate regulators in telecommunications. In the electricity sector, a number of countries still rely on line ministries as regulators, even if they often operate in the sector through vertically-integrated enterprises. Strong institutional frameworks are important for enhancing private sector participation in infrastructure and must be accompanied by enhanced government capacity to implement such projects. Adopting PPPs is not an easy task for governments, requiring significant changes to traditional public sector management (OECD, 2014). A whole new set of skills, instruments, institutions and procedures are required from governments to appropriately design, budget, implement, monitor and evaluate PPPs, including for instance: identifying, selecting and designing projects based on value for money, establishing and monitoring output-based contracts, budgeting and managing allocated project risks, among others. In many cases, poor project development capacity leads to the preparation of projects with limited bankability and interest from the private sector. Based on interviewed experts, the lack of knowledge and skills in public institutions active in PPP projects is a major constraint for increased private investments Legal frameworks to protect long-term investment Sound, transparent and predictable legal frameworks to regulate and protect investment are instrumental in reducing political and commercial risks with the aim to further enabling private investments in infrastructure. Private investors will only commit to commercially viable infrastructure projects that are backed by a credible regulatory environment. A sound legal framework for investment, underpinned by consistent and clear rules, can mitigate legal uncertainty and non-commercial risks for investors. Legal risks are of particular concern for investors and lenders in long-term and large-scale infrastructure investments with large upfront capital investments and long-term payback periods. This is of particular importance in developing and emerging countries where there is a higher risk perception. To assure investors concerns on the security of their investment, enabling legal frameworks should be designed and implemented, with sound and unambiguous provisions that lay down the legitimate protection of investors properties. Legal frameworks for investment are composed of two layers of legal instruments, namely the international investment agreements (IIAs), and the relevant domestic legislation. The domestic legal and regulatory framework for investment encompasses the available dispute settlement systems, core guarantees of protection of property rights, such as the compensation in case of expropriation, non-discrimination between domestic and foreign investors and guarantees of free transfers of funds. IIAs, like the ASEAN Comprehensive Investment Agreement (ACIA), Free trade Agreements with an investment chapter (FTAs) and Bilateral Investment Treaties (BITs), provide covered investors with protection clauses, including National 15 In some OECD jurisdictions, for example the United Kingdom and New Zealand, countries utilize an Infrastructure Unit within the Ministry of Finance/Treasury to support all major infrastructure development, rather than focus exclusively on PPPs. 80

81 Treatment and Most Favoured Nation (MFN) treatment; protection against expropriation, and access to investor-state dispute settlement through international arbitration. Poor regulatory and legal environments have an adverse effect on private sector willingness to invest in long-term infrastructure and capital goods. Perceived political and legal risks have been major constraints worldwide to enhance private participation in infrastructure (MIGA, 2014). Thus, the provision of targeted instruments to mitigate risks arising from poor legal and regulatory environments is critical to increasing the attractiveness of debt and equity investments in companies managing infrastructure / PPP-based projects Domestic legal frameworks to protect long-term investment in ASEAN Member States A sound legal framework for investment, underpinned by consistent and clear rules, can mitigate uncertainty and non-commercial risks for investors. In particular, private investment in key infrastructure sectors, where long payback periods are expected, require particularly strong and stable legal protection guarantees. There are great discrepancies in the level of sophistication of the regulatory environment and in the legal security provided to investors across the ASEAN region, with countries at very diverse levels of openness, economic development as well as political backgrounds, from market-based to socialist economic models (Table 4.2). While some ASEAN Member States, such as Singapore and Brunei Darussalam, are endowed with very robust legal frameworks for the protection of investment, other ASEAN Member States are still developing their frameworks and business environment. Yet reform efforts undertaken, to varying degrees, by countries are gradually paving the way for a harmonised legal landscape in Southeast Asia. With a view to achieving the ASEAN Economic Community, individual countries have been progressively bringing their domestic legislation in line with common protection standards, on the basis of the ASEAN Comprehensive Investment Agreement (ACIA). Governments have also gradually unified their legal regimes for investment by enacting all-encompassing investment laws which govern all investments, regardless of their origin (Table 4.2). By doing so, they grant foreign investors a minimum standard of non-discrimination: Cambodia, Lao PDR, Indonesia, Viet Nam and, more recently, Myanmar, have introduced, in the past decade, all-encompassing investment laws that superseded bimodal regimes for foreign and domestic investment. Myanmar s new investment law, passed in 2016 consolidates two previous distinct laws governing foreign and domestic investments separately, thus bringing Myanmar s regulatory framework further in line with its ASEAN peers. Malaysia, the Philippines and Thailand do have two separate laws for the treatment of domestic and foreign investments. Singapore protects both domestic and foreign investment under its domestic regime although this is not set out in specific laws on investment. Despite strong improvements, legal provisions and procedures governing private sector participation in Southeast Asian countries tend to be complex, numerous and scattered over many different instruments, and they usually have no fixed time frame for completion (ESCAP 2007). Greater consolidation of countries domestic regulations, as well as further legal harmonisation among ASEAN member states is therefore needed in order to facilitate investment into key infrastructure sectors. The national legal frameworks for the protection of long-term investment will be assessed in more detail in the following sections. Core investment protection provisions in domestic legal frameworks A key concern of investors, in particular when engaging in infrastructure projects, is to preserve the security of their investment. Infrastructure investments are long-term and often large-scale, which involves more risks for investors. In this context, the protection of property rights is a key aspect of the protection 81

82 sought by prospective investors. Legal frameworks must contain sound and unambiguous provisions that lay down the legitimate protection of investors properties. ASEAN Member States (AMS) have, to various degrees, endeavoured to strengthen the protection dimension of their investment regulatory frameworks, so as to improve transparency, predictability and openness. Among the less advanced countries, Viet Nam and Cambodia have very liberal and favourable investment regulations to attract foreign investment, while Myanmar and Lao PDR are still lagging behind in terms of investment protection and liberalisation. Meanwhile, among more advanced economies, Malaysia does not apply a general principle of national treatment, so as to preserve its affirmative action policies. A third approach is adopted by countries like Indonesia and the Philippines, which have rather complex investment legal frameworks composed of several layers of regulations may constraint investments. Finally, Brunei Darussalam and Singapore have very liberal investment regimes, with strong legal guarantees, including recourse to arbitration to solve investment disputes. Some AMS, particularly the CLMV countries (Cambodia, Lao PDR, Myanmar, Viet Nam), will have to further develop their investment legislation in order to comply with standards contained in the ACIA and to reassure prospective investors that they are provided with strong guarantees and operate in a safe regulatory environment. This section summarises the main substantive differences in the treatment of investment as provided in each of the nine ASEAN countries. It also shows policy areas where countries have achieved a fair degree of legal harmonisation. Table 4.2 Core investment protection guarantees in selected ASEAN countries legal frameworks ASEAN Member States Existence of a single investment law covering domestic and foreign investments Principle of national treatment / nondiscrimination enshrined in legislation Negative list approach Protection against expropriation Guarantee of free transfer of funds provided by law Possibility to recourse to investment arbitration provided by law Adherence to international conventions on arbitration (ICSID Convention, & New York Convention) Adherence to International Investment treaties (including BITs and FTAs) Brunei Darussalam Cambodia Yes Yes, except for land Yes Yes / Yes Yes Yes Yes Yes / Yes, but incomplete Yes Yes Yes Yes Lao PDR Yes Yes / Yes Yes No Not member Yes of ICSID Indonesia Yes Yes Yes Yes Yes Yes Yes Yes Malaysia No No / Yes Yes Yes Yes Yes Myanmar 2 separate laws for domestic and foreign investments Philippines 2 investment laws No Yes, but inadequate Yes, but incomplete Yes Yes, but unclear Not ICSID member. Adhered to NY Convention Yes Yes Yes Yes Yes Yes Yes Singapore No Yes Yes Yes Yes Yes Yes Yes Yes Thailand 2 laws on investment No Yes Yes, but incomplete Yes Yes ICSID Convention signed but not ratified Viet Nam Yes Yes Yes Yes Yes Yes Not a ICSID member Source: OECD Yes Yes 82

83 The principle of non-discrimination in AMS investment legal frameworks Non-discrimination is a central tenet of an attractive investment climate. The non-discrimination principle provides that all investors in like circumstances are treated equally, irrespective of their ownership. It can feature as a general principle in the Constitution or at lower regulatory levels, such as in the investment law, and may vary greatly in its scope of application. One of the concepts derived from the principle of nondiscrimination in the context of foreign investment is that of national treatment, which requires that a government treat foreign-owned or -controlled enterprises no less favourably than domestic enterprises in like situations. Affirming the non-discrimination principle in a law is a common practice that signals a positive and open investment policy, without prejudice to the possibility for the state to preserve its sovereign right to implement any developmental policies. The guarantee of non-discrimination enshrined in the ACIA is sometimes contained in investment laws of host countries to protect legitimate expectations of foreign investors and incorporates principles of transparency, good faith and guarantees against denials of justice. AMS domestic investment legislation has not incorporated such a standard, which rather features, in accordance with the most common global practice, in their bilateral and regional investment agreements. The national treatment standard, which is one of the legal expressions of the principle of nondiscrimination, ensures a degree of equality between foreign and domestic investors in like circumstances. National treatment is the core and underlying principle of the ACIA. It provides that Each Member State shall accord to investors of any other Member State treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the admission, establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory. Among ASEAN Member States, only Malaysia, Thailand and Myanmar have not enshrined the principle of national treatment in law: In Myanmar, the principle of protection against discrimination is granted to citizens of Myanmar only. Foreign investors remain subject to specific restrictions and are not given the same rights and business opportunities as domestic investors. The principle of national treatment has not been incorporated in Myanmar s 2011 investment framework. Malaysia does not provide for an explicit principle of national treatment. As it has no overarching investment law and rather regulates investment in sector-specific legislation, the principle of nondiscriminatory treatment between foreign and domestic investors has not been enshrined in the laws. The protection of property rights is granted throughout a broad range of legal provisions as well as in the Constitution. All other ASEAN Member States have progressively incorporated the principle of non-discrimination, or national treatment, for example: In Lao PDR, the 2009 Investment Promotion Law, which governs both domestic and foreign investment, provides that Investors have equal rights to invest and to have their benefits protected under the laws and regulations of the Lao PDR and international treaties to which Lao PDR is party (Article 60). Likewise, Indonesia has complied with the ASEAN obligation to incorporate a principle of nondiscrimination. The national treatment principle is enshrined in the 2007 Investment Law and most remaining restrictions pertain to foreign equity. Both domestic and foreign business registration are overseen in the same manner by a single board. A negative list, regularly renewed, sets out sectors where foreign equity ownership is limited (OECD, 2010). However, Article 33 of the Constitution reserves land, water and natural resources to state control. 83

84 In the Philippines, many restrictions on foreign equity and land ownership remain. The 1987 Constitution has a clause that supports laws restricting foreign ownership of property to 40%, with minor adjustments by subsequent laws. The Vietnamese authorities commit to treat investors in all sectors equally, as well as to provide nondiscriminatory treatment to both domestic and foreign investors. The introduction of the principle of non-discrimination is the main innovation of the 2005 investment law, which thereby brought Viet Nam in line with the requirement of non-discrimination contained in ACIA. Protection of property rights in relevant domestic legislation All ASEAN Member States have progressively improved the treatment of investors by reinforcing core protection standards, in particular against unlawful expropriation, which is most often provided both in domestic legislation and in investment treaties. The concept of expropriation includes direct expropriation, where the state obtains a formal transfer of title or outright physical seizure, and indirect expropriation, where a state interferes in the use of a property or in the enjoyment of its benefits even where the property is not seized and the legal title to the property is not affected. ASEAN Member States have achieved a good level of protection of investment in case of expropriation, with some variations in the degree of protection against indirect expropriation. Most AMS protect against expropriation (direct & indirect) and grant fair compensation, in accordance with international standards. However, countries are generally silent on the criteria used to determine an indirect expropriation. Few AMS (e.g. Cambodia, Myanmar) protect against nationalisation only and are silent on methods of compensation. Myanmar provides weaker legal guarantees to foreign investors than its peers. The Indonesian Investment Law provides that the government cannot take measures to nationalise or expropriate the proprietary rights of investors, unless provided by statutory law. The law specifies that compensation is based on the market value of the expropriated asset. In Malaysia, the protection against expropriation is provided in the Constitution as well as in relevant IIAs, which usually provide a higher degree of protection against expropriation. In Viet Nam, the 2005 Investment Law protects against expropriation and defines the mechanisms for compensation. It also contains a legal stability clause, which ensures that legal predictability is granted to investors, while leaving some leeway for the authorities to introduce new regulations. It contains a guarantee that, in case of changes of law, compensation should be considered in some relevant circumstances. In Lao PDR, the legal protection against expropriation is in line with most accepted international standards. It states that protection is granted against government seizure, confiscation or nationalisation. As for the compensation mechanism, it might potentially be considered as problematic as it grants that expropriated assets shall be compensated with the actual value at the prevailing market price at the time of transfer, while most often, the best compensation mechanism is considered to be based on the market value of the asset before the decision of expropriation. In Myanmar, the protection of investment still needs considerable improvements to meet ACIA standards and to catch up with the level of legal security granted in neighbouring countries. The enactment of the 2011 Foreign Investment Law has enhanced the level of protection granted to investors. Yet the scope of protection is limited to events of nationalisation only and not extending to indirect expropriation and other measures tantamount to expropriation. The government is currently preparing a new investment law covering both foreign and domestic investment together, which is expecting to substantially improve the quality of the legal framework for investment. The new investment law consolidates the domestic and foreign investment. The World Bank Doing Business Index reveals similar disparities in the development of the legal framework among ASEAN member states. The two indicators 'protecting investors' and 'enforcing contracts' 84

85 reflect the soundness of the legal framework to protect investors and access to the domestic dispute settlement systems. Three countries, namely Malaysia, Thailand and Singapore rank among the top countries in the overall index as well as with the two mentioned indicators (see Table 4.3). In general, the ASEAN Member States tend to rank higher in 'protecting investors' and the general DB indicator in comparison to the 'enforcing contracts' indicator. The included OECD countries and China outperform most of the ASEAN Member States in 'enforcing contracts' but the gap in 'protecting investors' is less pronounced, and Malaysia and Singapore even outperform the mentioned OECD countries. The 'Strength of investor protection index' indicates that in particular the CLMV countries, Brunei Darussalam, Indonesia and the Philippines could further improve legal framework to reduce the risk for investors. Table 4.3 World Bank Doing Business indicator on the investment framework Country Ease of Doing Business Rank Rank Extent of disclosure index (0-10) Protecting Investors Ease of shareholder suits index (0-10) Strength of investor protection index (0-10) Enforcing Contracts Rank Time (days) Cost (% of claim) ASEAN Member countries Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar , Philippines Singapore Thailand Viet Nam Selected Asian and OECD countries Australia China Germany India , Japan Korea, Rep United Kingdom United States Source: Authors compilation based on World Bank Doing Business Note: The indicator 'Protecting Investors' includes an additional index: Extent of director liability index. Enforcing contracts further includes: 'Procedures (number)' International investment agreements International Investment Agreements (IIAs) constitute another layer of the legal protection regime for investments. Investment treaties protect covered foreign investors and afford the right to settle disputes with state authorities before ICISD or other dispute resolution mechanisms, as provided in the relevant treaty. The main protection provisions contained in investment agreements, either IIAs, the ASEAN Comprehensive Investment Agreement (ACIA) and Bilateral Investment Treaties (BITs), in the region include: standards of 85

86 treatment, including National Treatment and Most Favoured Nation (MFN) treatment; the protection against expropriation, and access to investor-state dispute settlement through international arbitration. IIAs provide legal stability for investors, which is particularly relevant in countries where foreign investors might wish to get an additional layer of protection and not rely exclusively on the domestic rule of law. IIAs are relevant to long-term infrastructure projects as they might include, for example, clauses on expropriation and access to dispute settlement courts. PPP contracts often contain a jurisdiction clause for dispute resolution or refer to international arbitration / or third party countries, like Singapore or London. Especially in countries with insufficient legal protection or unreliable court system, international arbitration is of importance. The ASEAN Comprehensive Investment Agreement (ACIA) The ACIA seeks to provide a strong and harmonised framework for investment protection across the ASEAN region. It was concluded in 2009 and contains elements of liberalisation, promotion, facilitation and protection of investment. ACIA incorporates innovative good investment treaty practices and embraces a more balanced approach to investment protection by preserving more policy space for governments. Drawing on the foundations of the ASEAN Investment Guarantee Agreement and the ASEAN Investment Area, ACIA creates a comprehensive agreement that provides for a transparent and unified regime of protection of investment, hence giving more legal predictability and security to investors operating in the region. One of ACIA s guiding principles is to improve the transparency and predictability of investment rules, including the need for AMS to harmonise their investment policies. This transparency requirement is reflected in the obligation for AMS to notify the ACIA Council when introducing new laws or any changes to existing laws, regulations or administrative guidelines that could significantly affect the treatment of investment or the commitments of AMS to implement ACIA provisions. AMS are also required to make publicly available all relevant laws and regulations pertaining to investment. Individual countries must progressively bring their domestic laws in line with the provisions of ASEAN agreements in a transparent manner. Convergence towards the high standards of protection contained in ACIA requires countries to undertake a sustained regulatory reform effort. Under ACIA, ASEAN-based investors benefit from provisions for the treatment of investment and investors which are enforceable by an effective investor-state dispute settlement (ISDS) system. The core underlying principle of ACIA is that of non-discrimination, comprised of the principles of national treatment and most-favoured-nation (MFN) treatment and the freedom to appoint senior management and boards of directors. The Most-Favoured-Nation (MFN) provision allows an investor covered by a treaty signed between his home country and the country where the investment has been made, to invoke the more favourable standard of treatment contained in a treaty signed by the host country with another country. This mechanism, when used in a region with numerous investment treaties, grants investors with a complex, yet very favourable protection regime. ACIA also provides investors with guarantees of full protection and security, fair and equitable treatment, compensation in case of strife, the right to the free transfer of funds and protection against unlawful expropriation. ACIA contains a clear language on what constitutes indirect expropriation and what is excluded from the scope of indirect expropriation. Individual BITs, while covering indirect expropriation as well, are drafted in a much more vague manner and thus leave it to arbitral panels to determine what may constitute an indirect expropriation. The Agreement also contains no local content requirement and no condition on the entry of investment. ACIA also prohibits performance requirements, export requirements and trade balancing requirements. ACIA incorporates a number of guarantees for host countries, such as the right to regulate, as well as environmental and social safeguards. Likewise, the Agreement contains a set of reservations to the implementation of the national treatment and MFN treatment, which allow AMS to derogate from these principles under certain circumstances and in a number of economic sectors. ACIA contains a strong protection 86

87 provision against unlawful expropriation, yet it is limited by a number of exceptions so as to preserve countries regulatory space. For example, the protection against expropriation does not apply to measures of expropriation relating to land, which remain governed by individual states domestic laws and regulations. Therefore, investment disputes arising out of rights and titles on land are less likely to be brought before international arbitration. Likewise, issuing compulsory licenses that are granted in accordance of the WTO TRIPS Agreement cannot be considered as expropriatory measures under the provisions of ACIA. Overlapping investment treaties in ASEAN Member States ASEAN Member States have concluded IIAs at a rapid rate during the past decades to increase the protection and promotion of investment. This has created overlaps of numerous legal frameworks, composed of Bilateral Investment Treaties (BITs), Free Trade Agreements (FTAs) with investment chapters, ACIA and multilateral agreements within the ASEAN region, to which domestic legislation adds an additional layer of regulation and protection (Figure 4.1). ASEAN Member States have signed currently 26 intra-asean BITs, which makes the overall regulatory landscape for investment protection in the region rather complex. Figure 4.1 International Investment Agreements in ASEAN Member States BIT FTA ASEAN FTA BIT with AMS Brunei Darussalam Cambodia Indonesia Lao PDR Malaysia Myanmar Philippines Singapore Thailand Viet Nam Source: OECD compilation; Note: BIT: Bilateral Investment Treaties; FTA - Free Trade Agreement; AMS - ASEAN Member States Inconsistencies and overlaps between the 26 intra-asean BITs and ACIA raise questions which rules are applicable for the protection of investors. The existing framework might be complemented by the Regional Comprehensive Economic Partnership (RCEP), which will be a regional FTA between ASEAN and the following dialogue partner countries: Australia, China, India, Japan, Republic of Korea, and New Zealand. Regarding the various treaties, it is thus essential to understand what legal obligations are binding upon states, and what rights are granted to investors. ASEAN investors have the right to choose to invoke either the provisions of ACIA or of a relevant BIT, depending on whichever is more favourable to their claim. Investors might seek to structure their investments in such a way so as to benefit from the most advantageous applicable regime. Yet the coexistence of conflicting rules might also create a less predictable legal environment for investment. Despite variations, ASEAN IIAs are generally consistent with the provisions of ACIA, in particular with regard to core protection clauses, such as expropriation and access to investor-state dispute settlement. Inconsistencies between domestic investment frameworks in comparison to IIAs and regional treaties state a larger challenge. National approaches to investment treaty policy vary substantially across ASEAN, both in their volume and content. Most countries in the region support a treaty-based international investment policy: Singapore, Malaysia, Indonesia and Viet Nam have very pro-active treaty policies and rank as top signatories of FTAs and BITs. 87

88 CLMV countries mostly have first generation treaties, with a strong focus on the protection and promotion of investment. Malaysia has started to incorporate safeguards clauses to preserve regulatory space and public interest goals in a rather innovative way. The government of Indonesia is currently considering termination of its existing investment treaties. Like Indonesia, other countries in the world are gradually shifting away from BITs, which are increasingly regarded as impeding States policy space, without having shown a clear impact on FDI. Rebalancing investor protection and host country s policy space ASEAN governments are inserting more exceptions into investment treaties, to strike a better balance between the protection standards granted to foreign investors and the safeguarding of public policy objectives, such as environmental protection and public health. Such safeguards are included in the ACIA, country FTAs and ASEAN FTAs and allow states to retain more policy leeway to restrain international commitments, while exempting the state from liability of breaches of treaty obligations. This trend is less strongly reflected in individual countries BITs, which contain a rather traditional repertoire of provisions. For example, Indonesia s first generation BITs limit exceptions to essential security and public order, financial issues and public health. The ACIA contains a full set of exceptions, including a balance-of-payment exception and an exception relating to national security. In addition Article 17 of ACIA contains safeguards covering the protection of public morals, the maintenance of public order, protection of life and health, conservation of natural resources, if such measures are made effective in conjunction with restrictions on domestic production or consumption. ACIA shows a clear regional policy stance towards providing governments a broader policy space to preserve their right to regulate and implement new policies. From an investor point of view, ACIA reduces the scope of protection, and can therefore be considered as less advantageous, for ASEAN investors, than individual treaties. Countries have recognised the need to strike a balance between safeguarding investors rights and promoting environmental, social, and corporate governance goals. Similarly, ASEAN economies are increasingly incorporating regulations on sustainable development as well as environmental and social concerns into domestic legal frameworks. The progressive policy shift is crucial to ensure maximum positive spill-overs of big investment projects to the society as a whole. This is particularly needed when it comes to big infrastructure investments, which may have significant positive social and economic impacts if regulated by well-balanced legal provisions. Yet it remains to see whether these provisions in AMS do actually create legally binding obligations for investors Investor-state dispute settlement in ASEAN countries Under ACIA and individual BITS, investors can resolve their disputes with host states through international arbitration, including before ICSID tribunals or under UNCITRAL rules or any other rules agreed upon in the contract. Investors can bring a claim under ACIA s ISDS provision if the dispute arose out of a breach of the host state s obligations under ACIA relating to the management, conduct, operation or sale of a covered investment. ASEAN Member States have all ratified the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which provides a legal mechanism for enforcement of awards that are not rendered under the auspices of ICSID. The New York Convention requires courts of contracting parties to give effect to an agreement to arbitrate in a matter covered by an arbitration agreement and to recognise and enforce awards made in other states. Endorsing the New York Convention marks a collective commitment to 88

89 recognise and enforce foreign rulings and arbitration awards, both between investors and state authorities and between private parties only. Overall, there have been important reform efforts, in many ASEAN countries, to make arbitration available for the settlement of investor-state disputes. Yet country approaches to investment arbitration vary significantly: Singapore and Malaysia are global leaders in the promotion of investment and commercial arbitration and have established arbitration centres (Singapore International Arbitration Centre and Kuala Lumpur Regional Centre for Arbitration respectively) that are recognized worldwide as major arbitration seats and used well beyond the ASEAN geographical scope. Malaysia, following Singapore, has introduced sophisticated legal mechanisms for the promotion of international arbitration to settle investment and commercial disputes. Malaysia has adopted a holistic and integrated approach to arbitration, encompassing both domestic and international disputes in a single Arbitration Act. Indonesia introduced in 2007 a dispute settlement mechanism and provided that disputes between the government and foreign investors shall be settled through international arbitration. In Viet Nam, the law explicitly states that disputes arising from specific forms of contracts must be settled in accordance with the dispute resolution mechanisms agreed by the parties and stated in the contract. Myanmar is not yet a party to the ICSID convention but an important step towards a standardised arbitration framework has been taken when Myanmar joined the New York Convention in The government has further started amending the arbitration regime, drawing upon on the UNCITRAL Model Law on International Commercial Arbitration, as amended in 2006, which is widely used as a model for countries arbitration laws. The upcoming Arbitration Act is expected to cover both domestic and foreign commercial disputes under the same regime. Lao PDR is the only remaining ASEAN country that does not grant investors a right to access arbitration, whether domestic or international. Instead, Lao PDR has established a Committee for Economic Dispute Resolution, which provides an alternative to the court system. With this system in place, dispute resolution related to an investment in Lao PDR can be carried out through amicable resolution, administrative resolution, dispute resolution by the Committee for Economic Dispute Resolution, or by filling a claim before domestic courts. The region has embarked upon a trend towards a less interventionist approach with regard to arbitration. Yet some ASEAN Member States provide no or very uncertain access to arbitration mechanisms. Myanmar, Lao PDR and Viet Nam have not yet adhered to ICSID. As for Thailand, it has signed, but not yet ratified the ICSID Convention. In Lao PDR, the legislation does not give access to investment arbitration and Myanmar s investment law contains an unclear, ambiguous ISDS provision. As a result, investors face higher risks in these countries as they cannot resort to ICSID arbitration in the event of a dispute against the state authorities. 89

90 Chapter 5 5. REPORT FINDINGS AND RECOMMENDATIONS This report, commissioned by the ASEAN Connectivity Coordinating Committee, makes the case for continued effort towards deepening capital markets and reducing risk levels in ASEAN Member States, in order to offer investors more adequate access to secure finance, namely project finance. Without such access, implementing private infrastructure investments in emerging markets would face greater challenges. The availability of financial and legal risk mitigation instruments is crucial, particularly in countries with higher perceived risk levels. Encouraging investors to engage in long-term infrastructure projects will require both innovative financing solutions and strengthened institutional and legal protection frameworks for investment. Furthermore, new public support programmes such as the ASEAN Infrastructure Fund, the Asian Infrastructure Investment Bank the expanded Partnerships for Quality Infrastructure support measures to improve access to infrastructure financing. The report started from the initial assumption that the infrastructure financing paradox in the ASEAN region some high levels of available liquidity combined with few PPP projects might be explained by higher perceived risks amongst potential investors and lenders in the region. Following the empirical research conducted for this report, several key findings of the report might help to form a more complete understanding of why ASEAN economies find themselves in this paradoxical situation: 1. Private infrastructure investments depend on access to financing, which usually constitutes of bank lending and capital markets. Deep and broad domestic capital markets can be a source of locally denominated debt and equity financing. After the Asian Financial Crisis, several ASEAN economies successfully strengthened their domestic capital markets, yet disparities remain: In Brunei Darussalam, Malaysia and Singapore, domestic capital markets are reported as sufficiently deep and broad to finance large infrastructure projects. In Thailand, Philippines, and to some degree, Indonesia, projects of up to approximately USD 500 million can be financed domestically, with some interviewed experts even indicating larger amounts. In the CLMV countries (Cambodia, Lao PDR, Viet Nam and Myanmar), access to local currencydenominated debt from banks and on domestic capital markets is restricted. At the same time, access to international capital markets is limited due to insufficient or expensive instruments to hedge against risks such as exchange rate risk. 2. However, commercial and political risks still act as a significant constraint on equity and debt financing for private-sector infrastructure investments in certain ASEAN Member States. High perceived risk levels reduce the bankability of projects which depend mainly on stable revenue streams and safe assets as collateral. Perceived political risks also constrain private investors willingness to make investment decisions for future infrastructure projects. The main perceived risks, based on the survey findings, are as follows: The main commercial risks relate to construction and exchange rate risks, followed by counterparty, demand, and social and environmental risks. Whereas construction risks are perceived to apply across the region, exchange rate risks have greater prominence in countries, including Cambodia, Lao PDR, Myanmar and Viet Nam.

91 The main political and legal risks are adverse regulatory changes and breach of contract, followed by non-honouring of (sovereign) financial obligations and civil disturbance, terrorism or war. 3. Strong and transparent institutional frameworks have been reported by interviewed experts and in the survey as crucial to reduce political and legal risks for private lenders and investors. The framework has improved across the ASEAN region in the 2000s with the establishment of, for example, new PPP units and regulators. Yet further improvements are critical to reduce legal uncertainty and risks: Malaysia and the Philippines have established rather comprehensive institutional frameworks. Singapore has PPP policies in place and view PPP as a form of procurement approach but the institutional environment needs to be further developed. Indonesia and Thailand have recently established new institutions, but there remain challenges in their institutional frameworks. Viet Nam has recently taken significant steps to define an administrative framework for PPPs, but still needs to build its institutional capacity to support greater private participation in infrastructure. Cambodia, Lao PDR and Myanmar are in the early stages of establishing PPP programmes including frameworks. Lao PDR and Myanmar have yet to build their PPP agendas (Table Annex 2 provides an overview on the legal and institutional framework in the AMS). In Brunei Darussalam, there is no separate PPP-focused body. 4. Ensuring a stable and clear legal framework for investment, underpinned by consistent and clear rules, has been reported as paramount to reduce legal and political risks for investors and lenders. Legal frameworks for investment are composed of two layers of legal instruments, namely the international investment agreements (IIAs), and the relevant domestic legislation. The domestic legal and regulatory framework for investment encompasses the available dispute settlement systems, core guarantees of protection of property rights, such as the compensation in case of expropriation, non-discrimination between domestic and foreign investors and guarantees of free transfers of funds. All ASEAN Member States have progressively improved the treatment of investors by reinforcing core protection standards. For example, ASEAN Member States have achieved a good level of protection of investment in case of expropriation, with some variations in the degree of protection against indirect expropriation: The Indonesian Investment Law provides that the government cannot take measures to nationalise or expropriate the proprietary rights of investors, unless provided by statutory law. The law specifies that compensation is based on the market value of the expropriated asset. In Malaysia, the protection against expropriation is provided in the Constitution as well as in relevant IIAs, which usually provide a higher degree of protection against expropriation. In Viet Nam, the 2005 Investment Law protects against expropriation and defines the mechanisms for compensation. In Lao PDR, the legal protection against expropriation is in line with most accepted international standards. It states that protection is granted against government seizure, confiscation or nationalisation. Cambodia protects against nationalisation and is silent on methods of compensation. In Myanmar, the protection of investment still needs considerable improvements to meet ACIA standards and to catch up with the level of legal security granted in neighbouring countries. 91

92 5. Risk mitigation instruments can stimulate access to debt and equity financing. Lenders and investors may deploy multiple strategies to reduce their exposure to, or lower the impact of risks. Financial risk mitigation instruments such as insurance and guarantees, but also other instruments, are reported as effective in mitigating and transferring risks: For commercial risks, contractual arrangements are reported as the most effective strategy for transferring and mitigating risks, followed by insurance and public guarantees. For political risks, joint ventures or alliances with local companies, as well as political risk insurance (PRI), are reported to be the most effective instruments. 6. Financial instruments for mitigating political risks are reported by interviewed experts as particularly important. Insurance and guarantees might be required to access debt financing or facilitate access to financing through longer loan tenors and lower financing costs. Major constraints for private infrastructure investment include a lack of clear and stable legal and regulatory framework and the capacity of the governmental counterparties' and 'Political risk'. The growing importance of political risk cover can be observed in its augmented issuance whereby, across the ASEAN region, demand for political risk insurance and guarantees strongly increased after 2007/08, mainly driven by the need to ease access to debt financing. This increase in demand can be attributed to greater risk awareness following the global financial crisis, as well as the European debt crisis and political events since ASEAN Member States can broadly be distinguished into four categories, according to interviewed experts: Member States where most commercial banks, especially larger Asian banks, feel comfortable with the perceived risk levels, hence usually do not require political risk cover: Brunei Darussalam, Malaysia and Singapore. Member States where political risk cover is required for certain infrastructure projects: Indonesia, the Philippines and Thailand. Member States where political risk cover is required for infrastructure projects: Cambodia, Lao PDR and to a lesser extent Viet Nam. Member States where investors and lenders perceive political risks to be high, hence almost always require political risk coverage: Myanmar. Financial risk mitigation instruments act as credit enhancements, easing the access to debt and bond markets. Mitigation via comprehensive cover ease access to capital markets for refinancing and might reduce capital requirements under Basel III. However, the impact of Basel III remains limited in the ASEAN region, according to interviewed experts. Regional ASEAN banks are willing to provide debt financing and keep loans on their books after the construction phase, instead of refinancing them. However, an increasing volume of infrastructure loans might oblige banks to refinance, as they approach country and single-borrower limits. Yet Basel III might influence the access to financing in the mid-term, depending on the regulatory implementation of Basel III. Measuring this impact, however, is difficult at this point. By contrast, the supply of political risk insurance (PRI) in certain ASEAN Member States decreased in 2007/8 mainly due to higher risk awareness amongst insurance providers and financial institutions. After 2008, supply started to increase again, but supply from private insurance companies varies between ASEAN economies which can again be distinguished into four categories, as follows: Countries where private insurance companies are willing to provide four-point PRI (cover for (i) breach of contract; (ii) expropriation; (iii) currency inconvertibility and transfer risk; (iv) unrest) for most infrastructure investments: Brunei Darussalam, Malaysia and Singapore. Countries where private insurance companies are usually willing to provide three-point PRI (which excludes breach of contract) for infrastructure investments, or four-point PRI (depending on involved stakeholders and sector): Indonesia, the Philippines and Thailand. 92

93 Countries where most private insurance companies are reluctant to provide four- or three-point PRI: Cambodia, Lao PDR and, to some degree, Viet Nam. Countries where private insurance companies do not underwrite infrastructure investments, due to high perceived risks, lack of data and a missing track record: Myanmar. The main significant gaps in the availability of political risk insurance and guarantees relate to specific cover for breach of contract and adverse regulatory changes, which also happen to be identified as the main political risks. In particular, such risks have been reported in Cambodia, Lao PDR and Myanmar. 7. In addition to private insurance companies, bilateral and multilateral agencies provide political risk insurance. Bilateral agencies, such as Export Credit Agencies (ECAs), dominate the market: Chinese SINSOURE and the Japanese NEXI, the two largest bilateral agencies, accounted for 77% of all PRI issuance from bilateral agencies, and 57% of total issuance (MIGA, 2014). Cover and costs from bilateral agencies depends on the projects risk level, is linked to national economic objectives and is tied to nationality. This might favour companies from countries with ECAs that are strongly engaged in the ASEAN region and may limit the degree of competition amongst international investors and lenders. The report makes the key observation that the availability of political risk insurance is most constrained in those markets where it is most required. Ongoing efforts to reduce both levels and perceptions of political and regulatory risks should be encouraged to help address this issue. As part of this process, multilateral agencies can play an important bridging role, working with private-sector providers to extend cover in riskier environments. Recommendations Large disparities between ASEAN Member States persist in terms of both risk environments and the availability of risk mitigation instruments. Working towards a lower-risk environment would ease access to risk mitigation instruments, finance and would encourage further private infrastructure investment in most ASEAN economies. In this regard, progress has been made, however further action is needed for ASEAN Member States to realise their full investment potential. 1. The risk environment and private sector infrastructure investment would benefit from transparent and predictable legal and regulatory investment framework, implemented by sufficiently resourced and appropriately mandated authorities. The ASEAN Principles for PPP Frameworks (2014) and the OECD Principles for Public Governance of Public-Private Partnerships (2012) provide guidance on strengthening PPP frameworks. ASEAN governments have progressively improved legal and institutional frameworks to incentivise private infrastructure investment. Yet constraints in these frameworks persist in certain Member States which are reflected in two of the three main overall constraints for investments reported in the survey: lack of clear and stable legal and regulatory framework and capacity of the governmental counterparties. Institutional investment frameworks ASEAN Member State have improved their institutional framework by establishing and strengthening authorities, such as PPP units. Existing constraints and risks could be reduced by: Clear responsibilities and authority of involved authorities, such as PPP units, PPP teams in line ministries, contracting and procurement agencies, the central budget authority, the supreme audit institution and regulators. Public contracting and procurement authorities might wish to further strengthen their understanding of and capacity to develop, procure and implement PPP projects efficiently and effectively. Capacities of authorities on sub-national level are advised to be strengthened. 93

94 Public contracting authorities could benefit from guidelines and a risk sharing mechanism between government and the private sector. Legal and regulatory frameworks of investment Clear, predictable adequately enforced legal frameworks for infrastructure investment reduce uncertainty and risks for private investors. These frameworks are based on high standards of public and corporate governance, and the rule of law, including protection of core property and contractual rights. Dedicated legal frameworks for private infrastructure investment have been identified in the survey as a major instrument to reduce risks and faster private investment. ASEAN Member States are advised to further strengthen their legal frameworks, thereby reducing legal and political risks, and improving the investment environment for PPPs. The OECD Policy Framework for Investment (2015) provides information on improving investment conditions and legal frameworks. Strengthening legal protection is likely to be one of the most effective ways of reducing investors and lenders overall risk perceptions in ASEAN economies with higher risk perception. Domestic laws and regulations could be aligned with the ASEAN Comprehensive Investment Agreement for ensuring investor protection, access to effective investor-state dispute settlement system and nondiscrimination, comprised of the principles of national treatment and most-favoured-nation (MFN) treatment. Implement stable, predictable and transparent legal frameworks of private infrastructure investment. Despite significant improvements, such as enacted PPP laws, the legal framework remains a constraint of PPP projects in certain countries. Survey respondents identified a dedicated legal framework for PPPs, including PPP laws, procurement and concession laws as a main public approach to reduce risks. A clear legislation on land acquisition and public support in acquiring land could accelerate the implementation of PPP projects. Land acquisition has been stated as one main constraint for PPPs in several ASEAN Member States. Changes of legal and regulatory frameworks are advised to be implemented through a transparent policy process and in consultation with the private sector and the civil society. Investors are concerned with circumstances of frequent changes on short notice and without consultation. For example, adverse regulatory change has been stated as the main political risks in the survey and interviews. 2. Availability of financial risk mitigation instruments for political risks is limited in certain ASEAN Member States, particularly for cover against breach of contract and adverse regulatory changes. Governments could facilitate access financial risk mitigation instruments by: Governments are advised to reduce political risks and establish a conducive risk environment (see recommendation 1). A lower risk environment would improve the availability of insurance and guarantee products from public and private issuers with longer tenures and lower fees. Governments might wish to promote competition in financial services through, for instance, reducing regulatory barriers on market entry and limited foreign ownership. This might then increase the supply of mitigation instruments against political and commercial risks whilst lowering their prices. Deeper and broader domestic financial markets could serve required financial instruments for risk mitigation, such as derivatives, futures and currency swaps. 3. ASEAN Member States are advised to ease access to financing through strengthening domestic financial and capital markets and access to international capital markets: Governments might therefore wish to strengthen national and regional capital markets to ease access to project financing. Availability of project financing (non- or limited recourse financing) and 94

95 project bonds is constrained in certain ASEAN Member States. Private-sector infrastructure investment is frequently financed through corporate loans. Yet single borrower and country limits might constrain infrastructure financing in the future. Governments might wish to further strengthen domestic and regional equity markets to ease access to equity financing for infrastructure projects. Well-functioning financial supervisory and capital market structures such as stock exchanges would strengthen the comparatively low liquidity of selected domestic markets. Governments might wish to develop, or further strengthen, domestic credit markets. Domestic debt capital markets, such as sukuk and bond markets, could be a source of refinancing for infrastructure projects. Policy lessons can be drawn from the experiences of countries such as Singapore and Malaysia, regarding the development of capital markets and required institutional frameworks. Governments are advised to monitor public fiscal support, such as direct payments, guarantees, subsidies and equity and capital contribution to ensure affordability, fiscal sustainability and an appropriate risk allocation. Excessive fiscal support and risk taking by governments is not desirable for fair risk sharing and value of money of the public sector. In summary, ASEAN Member States can encourage greater private-sector infrastructure investment by deepening their capital markets, through enhancing project finance capacities, promoting innovative financing solutions and improving investor/lender access to political risk insurance instruments for a number of markets. Promoting institutional and legal protection standards further facilitates to encourage greater private-sector infrastructure investment. 95

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100 Ricote, E. E. (2013), The Philippine PPP Program and the Role of the PPP Centre, Presentation to the APCoP Regional Roundtable on Public Sector Management & PPPs for Development, ADBI, Tokyo, April, Sallehuddin, M. (2012), Critical issues on Investment Law Harmonization within ASEAN, ASEAN Law Association, Securities Commission Malaysia (2014), Islamic Capital Market Statistics, Shishido, H., S. Sugiyama and F. Zen (2013), Moving MPAC Forward: strengthening Public-Private Partnership, Improving Project Portfolio and in Search of Practical Financing Schemes, ERIA Discussion Paper Series , ERIA, Jakarta, (2007), The Business of Investment Insurance in China, Sinosure (2014), SinoSure to Serve CAREC Transport & Trade Facilitation Overview of Export Credit Insurance Service, Presentation Sinosure, Meeting/Presentation-Materials/8-Sinosure.pdf. Sotharith, C. (2014), Cambodia Country Report, in Zen, F. and M. Regan (eds.), Financing ASEAN Connectivity, ERIA Research Project Report FY2013, No. 15., ERIA, Jakarta, pp Ping, T. J. and A. Trager (2014), Making Public-Private Partnerships Work: Implications for Singapore and the Region, Ethos, Issue 13, June, pp Thanadsillapakul, L. (2001), The Investment Regime in ASEAN countries, asialaw.tripod.com/articles/lawaninvestment.html#f1. TRANSyT (Transport Research Center) (2007), Evaluation of Demand Risk Mitigation in PPP Projects, EIB University Research Sponsorship Programme. UNESCAP (2007), Public-Private Partnerships in Infrastructure Development - An Introduction to Issues from Different Perspectives, Paper prepared for the High-level Expert Group Meeting on Public-Private Partnerships, Seoul, 2-4 October 2007, referencia/guias_manuais/unescap_ppp_in_infrastructure_development.pdf. UNESCAP (2013), Innovative Financing Options for Regional Infrastructure Development and Maintenance, Economic and Social Commission for Asia and the Pacific- Forum of Asian Ministers of Transport, Second Session, 4-8 November 2013, Bangkok, UNESCAP (2014), Mobilizing Private Funding: the Case of the National Highways of India, Wong, J. (2013), On Legal Harmonisation within ASEAN, The Singapore Law Review, October 2013, World Bank (2006), Infrastructure Strategy Cross-sectoral issues, World Bank, siteresources.worldbank.org/inteapinfrastruct/resources/crosssectoralissues.pdf. World Bank s Singapore Infrastructure Hub (2014), ASEAN connectivity Building a PPP pipeline. 100

101 Country Name Annex I Investment needs, and legal and institutional environment for PPP projects in ASEAN 16 Table Annex 1 Infrastructure development in ASEAN member countries WEF Infrastructure rank Road density (km of road per 100sq. km of land area Annual change Brunei Darussalam Cambodia (04-09) Roads, paved (% of total roads) Annual change Rail lines (total routekm) Annual change Liner shipping connectivity index (max value in 2004= 100) Air transport, freight (million ton-km) Annual change Air transport, passengers carried (1,000 people) Annual change Improved water source (% of population with access) % % % 864 1, % - - 1% % % % Indonesia % % 5,324 4, % (98-12) , % 9,916 77, % Lao PDR % % % % Malaysia % % 1,622 2, % , , % 16,561 39, % Myanmar % % % 438 1, % Philippines % (2008) % 5,756 27, % Singapore % % , , Thailand ,103 5, % , , % 17,392 35, % Viet NamViet Nam (04-07) 2.4% (04-07) 1.5% 3,142 2, % % 2,878 17, % Source: World Development Indicator (2013) 16 Information in the Annex will feed into the website.

102 Table Annex 2 Legal and institutional environment for PPP projects in ASEAN Legal and institutional environment for PPP projects Brunei Darussalam Legal framework Institutional framework In Brunei Darussalam there is no specific PPP legislation. As of 2012, the Department of Planning and Development (DEPD) under the Prime Minister s office has been designated to oversee the implementation of PPP projects. Two vehicles have been put in place to drive forward the PPP agenda, i) a steering committee to set the strategic direction and framework for PPP implementation, and ii) a central PPP unit to administer PPP policies and work with relevant ministries/agencies to implement projects. Cambodia Challenges Legal framework Institutional framework In Cambodia there is no specific PPP law to date and a model concession agreement providing the detailed terms is still required. The Law on Concession provides a general framework, and a detailed enforcement decree or regulation is to be drafted. Individual government departments and agencies are in charge of each project and would benefit from clear procedures, standards and criteria to be used in selecting, bidding, and negotiating a PPP project. The relevant legislation is the Law on Concession, enacted in 2007, provides the basic legal framework for implementing PPP projects by defining the sectors in which PPP project agreements may be envisaged. These sectors include: power, transportation, water supply and sanitation, sewerage, telecommunication, tourism, gas and oil infrastructure, waste management and treatment, SEZs, irrigation and agricultural, social infrastructure related to health, education, housing and sport. The Law on Concession also defines the format for PPP in the above sectors. Other relevant laws include the Law on investment (1994, amended in 2003) and the Sub-decree on BOT (1998). PPPs in Cambodia are contractual arrangements between the government and the private sector, with the latter agreeing to provide infrastructure and related services in exchange for project revenues and government support. The two key players are the Council for the Development of Cambodia (CDC) and the Ministry of Economy and Finance (MEF). CDC is the one-stop service entity for obtaining authorization required to implement an investment project in accordance with the Law on Investment. It is in charge of coordinating and implementing the evaluation of private investments. The Cambodia Investment Board (within CDC) is in charge of investment issues except for SEZs. The MEF assesses and approves government liabilities for proposed projects. The Private Sector Forum, a bi-annual public-private dialog, encourages the private sector's participation in the energy sector. The Public-Private infrastructure Advisory Facility encourages private participation in the energy sector based on transparent competition. Indonesia Challenges Land acquisition is deemed to be one major challenge in the overall PPP transaction process (ERIA 2014). There have been improvements in regulations and institutions, but there are reports of persistent delays and implementation challenges. Until recently, it seems that PPPs were considered in Indonesia primarily as a source of private sector finance with less consideration given to the bankability of the projects. No single leading agency is in charge of PPP development: proliferation of players involved in the process and the lack of coordination among Ministries can constrain the implementation of PPPs. Establishing a stronger central PPP unit to plan and manage projects is therefore critical and has been recently been established in the MoF. Regulatory coherence remains a central issue. First, contradictions between various

103 provisions are not unusual. For instance Presidential Regulation 13 (2010) stipulated that SOE/ROE may be allowed to act as contracting agency in PPP Projects while Government Regulation No. 50 (2007) did not stipulate this. Coordination and consistency could be improved between the national, regional and local levels. Lastly, because regional and local governments are often the contracting authorities entering into a PPP concession and ensuring its delivery, insufficient capacity at the regional and local levels constitutes a further obstacle to the development of infrastructure PPP projects. Legal framework Institutional framework In the wake of the Asian Financial Crisis ( ), several new laws on infrastructure were passed, IPPs were renegotiated and the National Committee for the Acceleration of Infrastructure Provision (KKPPI) was established. Starting in the mid-2000s, further moves were made in order to establish a stronger legal foundation for PPP projects, including: The enactment of Presidential Regulation (Perpres) No. 67 of 2005 regarding cooperation between the Government and legal entities in providing infrastructure, which was later amended by Presidential Regulation No. 13 of 2010, Presidential regulation No 56 of 2011, and Presidential Regulation No 66 of These regulations provide the basis for PPP implementation in Indonesia (the PPP Regulation ). The enactment of Presidential Regulation No 42 of 2005 establishing the Committee for Acceleration of Prioritized Infrastructure Development (KPPIP) to replace the KKPPI, which was later amended by Presidential Regulation No 12 of New laws passed by the Indonesian Parliament for specific business sectors: Law No. 23 of 2007 regarding Railways; Law No. 17 of 2008 regarding Shipping; Law No. 18 of 2008 regarding Waste Management; law No. 1 of 2009 regarding Aviation; Law No. 4 of 2009 regarding Mineral and Coal Mining; Law No. 22 of 2009 regarding Land Transportation; Law No. 30 of 2009 regarding Electricity. Law No 2 of 2012 on land procurement for Public Interest, complemented by Presidential Regulation No 71 of 2012 on Land acquisition for Public Projects, Regulation of National Land Agency No 5 of 2012, and Presidential regulation No 63 of 2013 on National Land Agency aimed to facilitate land acquisition. Ministry of Finance Regulation No 38 of 2006 on guidance for controlling and management of risks in provision of infrastructure, complemented by Presidential Regulation No78 of 2010 and MoF regulation No 260 of No single leading agency is in charge of PPP development, but a number of Ministries and government agencies: the National Development Planning Agency (BAPPENAS), the Investment Coordinating Board (BKPM), the Ministry of Finance (MoF) and the Coordinating Ministry for Economic Affairs (CMEA). BAPPENAS issues an annual PPP Book that contains the list of government projects that can be implemented through cooperation with private companies. BKPM is also involved in the process, primarily as a source of information for potential investors. The Indonesian government has created several supporting bodies which are embedded in the ministries and agencies: The Public Private Partnership Central Unit (P3CU): under the Directorate for PPP Development within BAPPENAS provides guidance for project preparation, procurement and project implementation; The KPPIP (see above) is a steering committee at ministerial level co-chaired by the Minister of CMEA and the head of BAPPENAS; The Risk Management Unit (RMU) in the MoF assesses the conditions for government support for PPP projects; The Government Contracting Agency (GCA) cooperates directly with the company involved in the PPP project. 103

104 Lao PDR Challenges Legal framework Institutional framework Current procurement rules and regulations are not well adapted to PPP projects as they do not yet capture Value-for-Money over the whole PPP project lifecycle. The bulk of PPP projects were unsolicited and competitive procurement for PPP projects is not common practice. There is no specific legal and regulatory framework to facilitate private domestic and foreign direct investment in infrastructure development, and PPPs are not officially defined in any sector. There is no single institution that is fully accountable for facilitating and monitoring private infrastructure development and the lack of coordination between the relevant authorities. To address these challenges, the Lao Government has thus engaged in developing the framework for PPPs under the leadership of the IPD with support from the Asian Development Bank. The initiative focuses on three main areas, namely (i) institutional capacity building, (ii) policy and legislation framework development, and (iii) demonstration of model/pilot projects in social sectors, namely education and healthcare. In Laos, there is no specific legal, institutional and financial framework to facilitate private domestic and foreign direct investment in infrastructure development, and PPPs are not officially defined nor encouraged in any sector. As a result, infrastructure investment is regulated through the general legal framework: Business Law (1994, amended in 2009): allows investors to establish business enterprises in all economic sectors and ensures right and benefit of investors. Investment Promotion Law (1990, amended in 2009): provides investment incentives including (1) profit tax exemption in early state of investment, (2) reducing tax for import of machine, equipment, vehicles and raw materials which are necessary for project. The first Law on Foreign Investment Promotion and Management (1998) was amended to become the Law on the Promotion of Foreign Investment (2004). The Decree on Special Economic Zones (2009). The Public Investment Law: regulates public investment project planning, approving, implementing and managing in details. A number of other laws may also be relevant for PPP projects, namely the Regulation on bidding, the Decree on competition, the Environmental protection Law (1999), the Environmental and Social Impact Assessment regulation. A PPP Decree aims to promote and govern Public-Private Partnerships as a regular method of delivering infrastructure and services The Ministry of Planning and Investment (MPI) is the key actor in managing investment projects and hosts a one-stop service to assist domestic and foreign investors with licenses, concession projects and the like. Within the MPI, the Investment Promotion Department (IPD) administers the foreign investment system and reviews investment applications under the Investment promotion Law. The PPP Development and Knowledge Centre, located within IPD, seeks to facilitate PPP initiatives by initiating policy and legislation development, and piloting PPPs on education and healthcare. Other ministries may also be involved in the management of infrastructure investment projects: The Ministry of Finance is also in charge of conducting affordability analysis and granting financial support to PPP projects. The Ministry of Industry and Commerce facilitates, approves and manages general investment projects. The Ministry of National Resources and Energy (MONRE formerly WREA) is responsible for social and environmental impact management. Other ministries: Ministry of Public Work and Transportation, the Ministry of Agriculture and 104

105 Forestry, as well as the Administration of SEZs. Malaysia Challenges Legal framework Institutional framework Challenges Legal framework The private local or foreign investors can initiate the process of privatisation by submitting a proposal of privatisation project to the government. In 1985, privatisation guidelines, which did not distinguish between privatisation and PPPs, were issued, detailing the objectives of the policy, the methods applicable and the implementation mechanism. In the early 1990s due to resource constraints, Malaysian Government decided to encourage private sector participation in infrastructure, leading to the Privatisation Masterplan. The Privatisation Action Plan (PAP) assists the implementation of the Masterplan. In 2009, the government issued the PPP Guidelines which set out many key principles on how to procure and implement defined public infrastructure projects. The 9th Malaysia Plan ( ) aimed to streamline and enhance the efficacy of the privatisation programme by implementing public projects using the PPP or Private Finance Initiative (PFI) scheme. The 10 th Malaysian Plan ( ) provides a clear, robust, detailed and transparent framework for the concept and method of procurement. The Facilitation Fund Guidelines were issued in 2011 with a view to encouraging implementation of private sector projects. The Guidelines detail the definition and objectives of the Facilitation Fund as well as the conditions to apply for its support. Land acquisition is regulated in the Land acquisition Act (1960). An amendment in 1991 broadens the conditions under which the State may acquire private land to implement projects that are in the interest of the country s economic development. A single dedicated PPP Unit facilitates implementing Malaysia s PPP programme: Public Private Partnership Unit (3PU) or Unit Kerjasama Awan Swasta (UKAS). 3PU was established under the Prime Minister s Office in 2009 and is responsible for screening, structuring, and negotiating PPP projects. 3PU also manages the Facilitation Fund, which is equivalent to a viability gap fund (VGF). The PPP Committee supervises the evaluation of projects. It is chaired by the Director General of 3PU and made up of members from the Ministry of Finance (MOF), the Attorney General s Chambers, the Economic Planning Unit, the Federal Land Commissioner and the Valuation and Property Services Department. Myanmar Rapid progress has been made in appointing private sector counterparts, despite the absence of sector or national policy frameworks and processes, or institutional management functions dedicated to PPPs. Over the past few years, PPP projects in Myanmar have largely been unsolicited and also primarily MoU-based. They have thus not gone through a competitive process. Building the level of knowledge and expertise in public authorities to procure and implement PPP projects. For example, the government needs to build the expertise to evaluate proposals on quality, fair terms and conditions, and delivery sustainable of commercial, financial, and economic value (ADB, 2014). Thus, project selection and negotiations lack a unifying approach, making it difficult for the government to determine and ensure value for money. The establishment of a clearer legal framework should be a priority. There is no PPP specific law in Myanmar but a number of the recently enacted laws intended to promote investment into Myanmar contain provisions relevant to PPP projects. This includes the New Foreign Investment Law (FIL) enacted in 2012 and the Myanmar Special Economic Zone Law (MSEZL) enacted in The new FIL grants greater tax incentives, like up to 5 years of tax holiday, for investment in infrastructure and the creation of SEZs. In 2013, the Ministry of National Planning and Economic Development (MPED) and the Myanmar Investment Commission (MIC) issued detailed regulations of the new FIL, setting out in particular the permitted activities for foreign investors and the activities which require 105

106 a joint venture. BOT rules are also contained in FIL as well as in Foreign Investment Rules (2013). Further relevant laws are: Myanmar companies Act (1914), and the Myanmar citizen investment law (1994) amended into New Myanmar citizen investment law (2013). Institutional framework Challenges Legal framework Institutional framework The main public authorities involved in PPP policy are the Ministry of National Planning and Economic Development (MNPED), the Myanmar Investment Commission (MIC), which appraises and approves investment proposals and the Directorate of Investment and Company Administration (DICA), which issues permits for investment proposals. Around 15 percent of these projects are managed by the Ministry of Construction, Public Works. Philippines Historically, challenges included the clarity and consistent application of regulations and competencies of contracts. Two laws, together with the Implementing Rules and Regulations (BOT IRRs), provide the basic legal framework for PPPs: In 1990, Congress enacted Republic Act No 6957 (BOT Law), which authorizes the private sector to enter into agreements with the government (through BOT and BT schemes) to finance, construct, operate and maintain public infrastructure. The BOT Law was amended in 1994 (Republic Act No. 7718), allowing for new types of PPPs in developing infrastructure (e.g. BOO, BLT, BTO, DOT) and expanding the incentives granted to private contractors. Overall, the revised law provides clearer guidelines on how PPPs are to be executed, improved project processing mechanisms and clearer governance and accountability measures. The PPP Center is working on further proposed revisions to the PPP law. The Joint Venture Guidelines issued by the National Economic Development Authority (NEDA) in 2008 and revised in 2013 provide the rules and procedures for the competitive selection of private joint venture partners. Under the guidelines, the private partner can entirely take over the joint venture project after the government divests itself of any interest in it. Other related laws and regulations include: Republic Act No 7160 (1991), known as the Local Government Code of the Philippines. Republic Act No 8974 (2000) facilitates the acquisition of Right-of-Way, site or location for national government infrastructure projects and for other purposes. Republic Act No 8975 (2000) ensures the expeditious implementation and completion of government infrastructure projects by prohibiting lower courts from issuing temporary restraining orders, preliminary injunctions or preliminary mandatory injunctions in particular. Republic Act No 9184 (known as the Government Procurement Act) sets the rules for the approval of government contracts. Executive Order No 78 provides alternative (out of court) dispute resolution mechanisms for conflicts that may arise during the contract lifetime of a PPP project. Following the rebidding of the Cavite Laguna Expressway (CALAX) in 2014, the PPP Centre decided to pursue amendments to the BOT Law. A series of amendments are currently being examined by the Philippines Congress. The passage of the BOT Law Amendments or the PPP Act (expected in 2015) will define standards, further encourage private sector participation, reduce red tape and improve transparency. Other proposed amendments include the institutionalization of the Project Development and Monitoring Facility (PDMF), the PPP Governing Board and the contingent liability fund. The proposed amendments also include the separation of regulatory and commercial functions of government-owned and -controlled corporations and create a list of projects called Projects of National Significance. By virtue of being included on the list of projects of national significance, projects will be insulated from local laws, among others by local government units In 2010, under Executive Order No 8, the Build-Operate and Transfer (BOT) Centre has been reorganized and renamed as the Public-Private Partnership (PPP) Centre and is located now at the National Economic and Development Authority (NEDA). The PPP Centre is involved at 106

107 each stage of the project cycle, including: providing advisory services, facilitating the development of PPP projects, managing the project development and monitoring facility, capacitating national implementing agencies and LGUs; advocating policy reforms and monitoring implementation of PPP projects. The PPP Centre also publishes a PPP Investment Brochure listing all PPP projects in the pipeline. The NEDA Investment Coordination Committee, the central socioeconomic planning and policy development and public investment programming and monitoring agency, is tasked with project approval ADB (2011). A lack of clarity persists of the delineation of responsibilities between the PPP Centre and NEDA s PPP Group and the delineation of responsibilities between the PPP Centre, and central and local levels government agencies is unclear. The revised JV guidelines (2013) define the NEDA-ICC as the approving authority for all JV proposals involving infrastructure projects and public utilities. Under Executive Order No 136 (2013), the PPP Governing Board was established as the country s overall policy-making body for all PPP-related matters, including the PDMF (see below). The mandate of the PPP Centre expanded to cover: BOT Law, Joint Venture arrangements, as well as other PPP arrangements. The Project Development and Monitoring Facility (PDMF) is a revolving pool of funds made available to enhance the investment environment for PPP and to develop a robust pipeline of viable and well-prepared PPP infrastructure projects. To that end it supports implementing agencies in the conduct of pre-investment studies, and project monitoring. Regulators provide sector-specific regulatory rules, such as those relating to prices, routes, standards or operating parameters. These regulators include the Toll Regulatory Board, Maritime Industry Authority, Energy Regulatory Commission, Civil Aviation Authority of the Philippines, and National Water Resources Board (Navarro and Llanto 2014). Challenges Legal framework Institutional framework Challenges Legal framework Singapore Singapore has no separate PPP-focused body or PPP specific legislation. There is no PPP specific legislation but Singapore has a very conducive environment for PPP projects thanks to its stable and transparent legal framework that provides a sound architecture for efficient and corruption-free public procurement. The MoF officially launched its PPP initiative with the publication of the PPP Handbook in 2004 (revised in 2012) which provides the private and public sectors with the guidelines for successful structuring and management of PPP projects in Singapore. In Singapore there is no separate PPP-focused body or institution. The Ministry of Finance (MOF) is the central coordination agency for PPP projects and oversees the role of each relevant Government department in its implementation of PPP projects. The PPP Advisory Council, located in the MOF, is tasked to strengthen PPP skills in public and private sectors along with resolving cross-agency issues. Thailand Historically, regulations lacked details on procurement methods, on selection criteria or risk allocation. The PPP Act includes a number of improvements: In particular, agencies have to consider PPP alternatives and justify non-ppp options, thereby forcing government agencies to seriously analyse whether they will be getting value for money from PPP proposals. The new mandatory use of consultants is another significant change aimed at optimizing the use of PPPs. Since 1992, PPPs have been governed primarily by the Private Participation in State Undertaking (PPSU) Act B.E. 2535, also known as the Joint Venture Act. The main rationale for the PPSU was to prevent corruption by transferring project approval to the Cabinet and create ex-ante check and balance procedures, curbing discretion of the project agency. The 1st and 2nd Ministerial Regulations 2537 (1994) provided details on procedure and details of bidding process. In 2013, a new Act, aptly titled the Private Investment in State Undertaking Act B.E ( PPP Act ), replaced the PPSU Act, providing greater specificity in definitions, procedures, 107

108 Institutional framework Challenges Legal framework and time frames. According to the MOF, the PPP Act represents a fundamental change by introducing clear systematic guidelines and proper risk allocation and management to implement PPP projects, enhancing national competitiveness and fiscal discipline. An important feature of the new PPP Act is that it sets clear timelines for the conduct of PPP projects, reducing in particular the PPP approval process time from 20+ to 10 months. Eight organic laws (2014) and five in 2015 define mainly the method to calculate project value, procedures to invite private firms into joint investments, the screening process, contract standards and joint investments by private firms in projects worth less than 1 billion baht. The PPP Act (2013) established the PPP Committee to take primary responsibility for PPPs in Thailand. The PPP Committee will be supported by the State Enterprise Policy Office ( SEPO ) at the MoF which will function as the secretariat of the PPP Committee and as a central PPP unit. The SEPO will be responsible for drafting guidelines for PPPs, providing recommendations on project feasibility to the PPP Committee, assessing projects, preparing a draft PPP Strategic Plan or PPP Masterplan for approval of the PPP Committee. The new law also provides for the establishment of a Project Development Fund to support PPP projects. The MoF plans to establish a venture fund worth 2 billion Baht to be used as seed money for private companies to conduct feasibility studies. Viet Nam Historically, there has been a lack of clarity in PPP regulations and a perceived lack of experience of local authorities. The 2007 BOT Decree 78 stipulated the sectors, conditions, procedures and incentives applicable to infrastructure development investment projects through BOT, BTO, BT and similar contractual forms. The Decree 24 (2011) BOT Decree expressly encourages investment in infrastructure facilities, including roads, rail, airports, ports, water and waste plants, and power plants; no restrictions exist on the infrastructure sectors which are open to foreign investors. The prevailing legislation governing PPPs in Viet Nam is the current law found in Decision 71 (2010) promulgating the regulation on pilot investment under the PPP model. Under Decision 71, (a) the goal of PPP is to secure investment from domestic and overseas public sector companies to develop and improve infrastructure and public services; (b) the total state participation portion must not exceed 30 percent of the total investment in any project except in cases specially decided by the Prime Minister; (c) private investors' equity capital in a project must represent at least 30 percent of the private sector capital in any project; and (d) private investors may raise commercial loans and capital of other sources, without government guarantee up to 70 percent of the private sector capital in a project. Viet Nam is finalizing a much improved legal framework for PPP projects with the goal to revitalize investment in infrastructure projects ( New PPP Law ). In early January 2015, the Ministry of Planning and Investment ( MPI ) sent a final draft PPP Decree to the Prime Minister for consideration and approval. The new PPP Decree seeks to bring those developments under one decree and provide more clarity and incentives for private investors. The new Investor Selection Decree (October 2014 draft) guiding the Law on Public Procurement specifically provides incentives for investors who propose smaller PPP projects. It further includes more PPP projects forms (e.g., BOO), fiscal incentives for investorproposed projects, choice of foreign law and dispute settlement, government guarantees and publication of PPP project status. In addition, the list of important laws and regulations that may apply to PPP projects are: - Law on Construction: governs the construction permits, site clearance, and building of construction works and supervision of construction; - Law on Land and its implementing regulations govern the ownership and use of land. The state is the owner of all land in Viet Nam and private ownership of land is not permitted. However, the government may allocate or lease land to individuals, 108

109 organizations and businesses by granting land use rights; - Law on Investment (Law 59/2005/QH11): provides the legal framework for investment projects implemented by companies under the law on Enterprises or specific types of contracts (e.g., BOT contracts) and regulates the licensing of investment projects, the rights and obligations of investors, and the projection of the investors' legal rights, to name a few; - Law on Enterprises (Law 60/2005/QH11): the Law on Enterprises provides the framework for Viet Nam's corporate law. - Anti-Corruption Law: the Viet Namese government enacted Decree 74 in order to fight against money laundering, and activities under the PPP Pilot Program must be structured to ensure transparency and compliance with Decree 74 and other antimoney laundering regulations; - Law on Tenders: provides the framework for tending activities to select contractors for the provision of consultancy services, procurement of goods, construction and installation. Institutional framework Source: OECD The Ministry of Planning and Investment (MPI) coordinates the implementation of PPP projects and is in charge of the overall investment activities and the licensing of private sector projects. The MPI organizes training and capacity building on PPP for other government agencies. Located at the MPI, the Government of Viet Nam recently created a PPP office (under the Public Procurement Agency) as a focal point for all PPP activities. It is a one-stop-shop in charge of national coordination of PPP projects. The Prime Minister also approved the establishment of an inter-ministerial steering committee. Selected line ministries have also been designated to oversee and implement various PPP projects, including: the Ministry of Finance, the Ministry of Industry and Trade, the Ministry of Construction, the Ministry of Transportation and the State Bank of Viet Nam. 109

110 Table Annex 3 Main commercial risks in private infrastructure projects Commercial risks Availability risk Construction and completion risks Contractual and legal risk Credit risk Demand risk Description Availability risk refers to underperformance of the facility which results in services being partially or wholly unavailable, or where these services fail to meet the quality standards. Off-take agreements might link payments to the availability of services, such as electricity or water. Constructions risks derive from weak planning, due diligence and project appraisal in the project procurement and design phase. They include: time delay, cost overrun and performance risks. Time delays in the construction phase Reason include: Most commercial risks, like design risks; delay in land acquisition, permits and licences; technical problems in the applied construction or construction side; and physical risks. And: inaccurate contract time estimates; construction procedures; work permissions. Impacts include: Time delay may translate into risk of substantial cost increases and forgone revenue streams. Cost overruns Reasons include: Higher construction costs, time delays, increased interest during construction (IDC). Impacts include: Cost overruns may translate into lower return on investment for the investors, or even make the project unfeasible, higher fees for end users and reputation risks for construction companies. Performance risks relate to the inability of the private partner to deliver the facility in the conditions as agreed in the contract. Reasons include: Bankruptcy of the contractor; design faults; usage of untested/innovative technology in the construction and operation of the facility. Impacts include: The performance deficiencies could cause lower productivity and higher maintenance costs. Legal risk refers to losses caused by: regulatory or legal action, legal disputes, inability to enforce or meet contractual obligations. Reasons include: New stakeholders; stakeholder request changes; unreliable dispute settlement system. Impacts include: Delayed dispute resolution, delayed payment on contracts or insolvency of contractor. Credit risk refers to the credit worthiness of the borrowing SPV/project company or the project sponsors. Reasons include: Downgrading of the SPVs/project sponsors credit rating. Impacts include: Increased risks from the lenders perspective which could increase financing costs. Demand and traffic determine the financial viability and bankability of PPP projects where direct user fees are the main source of revenue for the project company. Demand risks derive from the discrepancies between the actual and forecasted demand. Forecasting demand over periods of up to 20 or 30 years is at least difficult and often inaccurate. Demand depends on many factors that cannot be controlled by the project company. In addition, traffic forecasts are often prone to over-estimation ( optimisms bias ) forecasts from project sponsors seems to be more prone to optimism bias than lending banks forecasts (see Robert Bain, 2009). Too high traffic forecasts undermined the financial viability of, for example toll roads. Reasons include: Demand and traffic fluctuations might result from factors such as the wider economic development, import competition, market trends, changes in income and demographics, change in end-users preferences, technological obsolescence, and emergence or disappearance of substitute or complementary products or competing facilities. Impacts include: Demand and traffic fluctuations directly affect the project s revenue stream and, thus, the ability to honour the debt service, pay dividends and ultimately the financial viability. 110

111 Design risks Financial risks Financing / refinancing risk Force majeure Land acquisition Operational risk Permits, licences and authorisation Physical risks Property damage Social and environmental and risks Reasons include: Inadequate and incomplete design; engineering errors; selection of unsuitable materials; design exceptions and owner demands changes. Impacts include: Project fails to meet the agreed performance and service standards. A necessary rework of the design may entail substantial cost overruns and time delays Financial risks affect the cash flow of investors and their ability to honour their debt service, thus, directly influencing credit risks. Main factors are inflation, interest and exchange rate currency risks. The long tenure of infrastructure projects and loans increase the importance of these risks. Exchange rate / currency risks Foreign exchange rate risks can affect the project company s future cash flows, like revenue streams, supply and operational costs and debt service. Reasons include: Exchange rates are determined by real interest rate differentials among countries, balance of payments and other variables which affect market expectations. Other factors include regulations on capital transfers, capital mobility, Impacts include: Exchange rates positively and negatively influence the project company s future cash flows. In the worst case, the revenue stream in a local currency might be insufficient to honour debt services for hard currency loans which ultimately could lead to the default of the project company. Financing / re-financing risk refers to the access to financing such as loans, guarantees and equity. Impacts include: Higher interest rates, debt services or shorter credit tenures could endanger the financing and implementation of projects. Risks beyond the reasonable control of a party, incurred not as a product or result of the negligence of the afflicted party, which have a materially adverse effect on the ability of such party to perform its obligations. Land acquisition is a frequently mentioned risk in many ASEAN Member States especially for large-scale infrastructure projects, like transportation or power plants. Reasons include: Ineffective dispute settlements, strong opposition from citizens and NGOs, or significant prices increases. Unclear or not existing laws, regulations and procedures on the process, consultation, resettlement and compensation for land acquisition. Impacts include: Time delays of the financial closure and the construction time. Operational and maintenance risks relate to the projects inability to run at the desired efficiency in service delivery or higher than expected operating and/or maintenance costs. Reasons include: Inadequate or failed internal process, people, system or from external events Impacts include: Inability to honour off-take agreements, loss of revenue, reputational risk. The requirement for permits, licences and authorisation acts as a safeguard for e.g. economic, social and environmental standards, but the involved red tape is often mentioned as a critical constraint for PPP projects. Reasons include: Unclear processes to require permits; changed regulations on permits. Impacts include: Time delays in financial closure and project completion. Risks derive from the physical characteristics of the facility and construction site. Reasons include: Contamination of the construction side; subsurface conditions / geology geotechnical conditions; topography. Impacts include: Construction delay, additional costs Property damage occurs in the construction and operational phase of the project. Reasons include: Action like terrorism or by natural disasters, such as drought, cyclones or floods. Impacts include: Injury or destruction of property with negative impacts on construction time and costs. Large scale infrastructure projects include large environmental and social risks and need to be managed. Risks are highest in the construction phase but affect the operational phase as well. These risks have a strong impact on the acceptance of infrastructure projects by civil 111

112 society and especially in the affected communities. Investors and lenders need to assess and reduce the projects social and environmental impact. Many larger financial institutions and countries adopted the Equator Principles, a risk management framework to determine, analyse and manage environmental and social risks (see Reasons include: - Environmental risks relate to the projects' impact on climate change, renewable natural resources, biodiversity, water and soil contamination and pollution. Direct risks refer to proximity to floodplain, coastal zone, high sensitivity for palaeontology area. - Social risks: Construction and (involuntary) resettlement impact human rights of the population and especially affected local communities and indigenous, disadvantaged or vulnerable groups. Others: health and safety of labour force and cultural property and heritage. Impacts include: - Risks could reduce the acceptance of the project in the civil society, which may hamper or impede the project's implementation. - An increasing number of financial institutions apply the Equator Principles and, thus, the risks influence access to financing. Supply risk Supply risks occur in the construction and operational phase: Access to input for the construction of the facilities like material, goods, services and labour. Access to input for operating the facility, for example labour or supply of natural gas for a gas power plant. Reasons include: Unavailability and costs of required input materials and labour. Impacts include: Construction delay or cost overruns. Operational phase - Higher costs or inability to provide services. Technical risks Risks refer to the applied technology during construction and operation phase. Reasons include: Usage of untested, innovative or out-of-date technology. Impacts include: Time delays, cost overruns and performance risks in the construction. Source: Author s compilation based on literature reviews Table Annex 4 Overview on public institutions in ASEAN Member States to facilitate PPP financing and risks reduction Brunei Darussalam No PDF or other instrument to provide financial support or reduce risks. Cambodia No PDF or other instrument to provide financial support or reduce risks. Indonesia The Indonesian government created various institutions and instruments to facilitate at different stages of the PPP process: land funds for land acquisition or clearance (e.g. the Land Capping Fund), the VGF and the IIGF at the preparation stage, while the PT SMI, the IIF and the PIP intervene at the implementation stage. Indonesia Infrastructure Guarantee Fund The IIGF or PT Penjaminan Infrastruktur Indonesia, was established by the Government of Indonesia in 2009, with support from the World Bank. IIGF aims to increase private participation in infrastructure provision (Box 2.1on a project example). IIGF acts as a single window institution to evaluate projects requiring government guarantees and provides these guarantees to reduce the credit risk. Thanks to IIGF's BBBrating by Fitch, guarantees can lead to credit enhancement and an improved access to financing. The IIGF covers political risks on the sub-sovereign level and provide direct technical assistance to local contract agencies. Political risks covered by IIGF include: Currency inconvertibility and transfer Expropriation and repossession Force majeure Unfair change in law Non-honouring of financial obligations IIGF also covers political risks, such as delays in the processing of permits and licenses, 112

113 PT Sarana Multi Infrastruktur / SMI Indonesian Infrastructure Fund Viability Gap Fund Pusat Investasi Pemerintah (PIP) changes of rules and regulations, lack of tariff adjustment and failure to connect the facility to the network/facilities. Upon the application of IIGF guarantees, such risks inherent in the projects will be borne or allocated to the government in each PPP contract. Eligible forms of investment range from loans, mezzanine financing, to equity. SMI, established in 2009, is a project development facility in charge of accelerating the supply of infrastructure financing through partnerships with banks and multilateral financial institutions by developing showcase PPP projects, assisting in their preparation and negotiation and providing advisory services for infrastructure projects. The IIF, established in 2010, is a private enterprise jointly funded by the government of Indonesia, the Asian Development Bank (ADB), the International Finance Corporation (IFC) and two private financing institutions 17. It focuses on investing in commercially feasible infrastructure projects to address the constraints on the flow of private investments in infrastructure. The VGF, established by the MoF in 2012, seeks to provide additional capital to support the financial viability of projects. According to expert statements, the implementation and activities of the VGF need to be strengthened. The Government Investment Unit of Indonesia or Indonesia Investment Agency/Pusat Investasi Pemerintah (PIP) is Indonesia s sovereign wealth fund managed by the MoF. PIP has the operational responsibility in the central government s investment management. It aims to foster economic growth through the acceleration of infrastructure development and investments in strategic sectors ( Lao PDR No PDF or other instrument to provide financial support or reduce risks. Malaysia Danajamin Nasional Berhad Danajamin Nasional Berhad, established in 2009, provides guarantees for private bonds with the aim to stimulate the Malaysian bond and sukuk (Islamic bonds) market. The guarantees facilitate Malaysian companies access to the capital market. The guarantees cover the principal payment and up to one coupon/profit of the bond/sukuk. Danajamin is jointly owned by Minister of Finance and Credit Guarantee Corporation Malaysia Berhad and benefits from a local AAA rating. In 2013, Danajamin has total assets of RM1.9 billion. Danajamin has the objective to: provide guarantees to enable financially viable companies access the capital market to obtain financing, with emphasis on long-term financing. catalyse the further development of the domestic PDS market as an alternative source of financing to complement the banking industry stimulate economic growth by improving access to capital for Malaysian companies Facilitation Fund The facilitation fund, managed by the 3PU, is equivalent to a viability gap fund (VGF) and (VGF) aims at bridging the viability gap of projects. The fund is aimed at facilitating new private sector investment, large-scale ventures and selected privatisation and PFI projects. Myanmar No PDF or other instrument to provide financial support or reduce risks. Philippines For the time being, no risk management and government support exist, such as a Value Gap Funds or a Contingent Liability Fund. Project Development and Monitoring Facility PPP Strategic Support Fund The Project Development and Monitoring Facility (PDMF) is a revolving pool of funds made available to enhance the investment environment for PPP and to develop a robust pipeline of viable and well-prepared PPP infrastructure projects. To that end it supports implementing agencies in the conduct of pre-investment studies, and project monitoring. The PPP Strategic Support Fund was established to cover costs for Rights of way acquisitions and relate costs (including resettlement costs). 17 Sumitomo Mitsui Banking Corporation (SMBC) and the Deutsche Investitions-und Entwicklungsgesellschaft (DEG). 113

114 Clifford Capital Project Development Fund Project Development Facility & Viability Gap Singapore Clifford Capital is a specialist finance company established with support from the Government of Singapore. It supports companies that have a meaningful presence in Singapore in their investments or exports overseas, to capture business opportunities around the world. Clifford Capital is focused primarily on providing project finance, asset-backed and other structured debt financing solutions to companies in the infrastructure and offshore marine sectors ( Thailand Thailand seeks to establish a Project Development Fund to support PPP projects. The MoF plans to establish a venture fund worth 2 billion Baht to be used as seed money for investment projects. Private firms can borrow money from the fund to conduct feasibility studies and are required to pay back the money only when they receive profit from projects. Viet Nam The government is setting up a number of tools to support PPP projects, including the Project Development Facility, which is envisioned to help undertake a rigorous assessment of potential projects, and the Viability Gap Fund, which will provide needed Government support to make them financially viable. 114

115 Annex II Profiles of Major Agencies providing risk mitigation instruments Annex II presents an overview of financial risk mitigation instruments provided by selected public agencies. This information feed into the website which makes available information on these agencies, including a short description of their objectives complemented by an overview of their products that are most relevant for infrastructure investment. Initially, the website focuses on the main multilateral agencies active in the ASEAN region and bilateral agencies both from the 10 main home countries of FDI flows into the ASEAN region and public agencies from the region. International agencies covered are the World Bank Group and the Asian Development Bank. The website focuses on instruments, like insurance and guarantees, which enable investors and lenders to transfer political and commercial risks to third party. The database will be complemented by information on public policy interventions of ASEAN governments, which seek to ease the environment for private investment in infrastructure, such as Viability Gap Funding. The website provides ASEAN policy makers, lenders and investors with information on the risk environment for private infrastructure investment, and directs them to relevant providers and products of risk mitigation. The goal of the website is to promote transparency and collate information on a single platform. Featuring such a broad array of providers would also allow website users (typically government officials and private sector entities such as project sponsors and lenders) to have a comprehensive overview and links to the most pertinent insurance and guarantee providers. Annex 2. 1 Guarantee instruments in the World Bank Group Annex 2. 2 International Finance Corporation (IFC) Annex 2.3 Asuransi Ekspor Indonesia (ASEI) Annex 2. 4 Credit Guarantee and Investment Facility (CGIF) Annex 2.5 China Export & Credit Insurance Corporation (SINOSURE) Annex 2. 6 COFACE Group (Private) Annex 2. 7 COFACE State Guarantees Annex 2. 8 Development Credit Authority (USAID) Annex 2. 9 Export Credit Guarantee Corporation of India Ltd (ECGC) Annex Export Credit Insurance Corporation of Singapore (ECICS) Annex Export Development Canada (EDC) Annex Export Finance and Insurance Corporation (EFIC) Annex Export-Import Bank of Malaysia Berhad (MEXIM) Annex Export-Import Bank of Thailand (EXIM Thailand) Annex Indonesia Exim Bank Annex Indonesia Infrastructure Guarantee Fund (IIGF) Annex International Enterprise Singapore (IE) Annex Japan Bank for International Cooperation (JBIC) Annex Korea Trade Insurance Corporation (KSURE) Annex Nippon Export and Investment Insurance (NEXI) Annex Overseas Private Investment Corporation (OPIC) Annex Philippine Export-Import Credit Agency (Phil EXIM) Annex UK Export Finance

116 Annex 2. 1 Guarantee instruments in the World Bank Group Source: The World Bank Group website, Guarantee products matrix_march

117 Annex 2. 2 International Finance Corporation (IFC) Summary Founded in 1956, International Finance Corporation (IFC) is a member of the World Bank group that work with more than 100 developing countries. The organisation aims to support companies and financial institutions in emerging markets to create jobs, generate tax revenues, improve corporate governance and environmental performance, and contribute to their local communities. IFC provides structured finance products, including the Partial Credit Guarantees, to support cost-effective forms of financing that would not otherwise be readily available to clients. Institution type Multilateral development agency Ownership Owned by 184 member countries (as of June 2015) Head office 2121 Pennsylvania Avenue NW, Washington, DC, U.S.A. Rating AAA/A-1+ by Standards and Poors and Aaa by Moody s Major instruments Contact Full Credit Guarantee, Partial Credit Guarantee structuredfinance@ifc.org; Switchboard: (202) Instrument name Instrument type Eligible projects and borrows Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Fee Comprehensive risk coverage Full Credit Guarantee, Partial Credit Guarantee Guarantee Corporate, project, structured and trade financing that: meet development objectives of the host country; benefit the local economy technically sound; have good prospect of being profitable; environmentally and socially sound no sector restriction are located in IDA and IBRD countries Private sector lenders, investors, and other providers of credit to the private sector Equity investments; shareholder loans; shareholder loan guarantees (minimum maturity of more than one year); non-shareholder loan (relate to a specific investment or project in which some other form of direct investment present); and other forms of investments (technical assistance and management contracts, asset securitisations, capital market bond issues, leasing, services, and franchising and licensing agreement) Failure to meet payment obligation 100% of each debt service payment, subject to a maximum cumulative pay-out equal to the guarantee amount Marketed based 117

118 Annex 2.3 Asuransi Ekspor Indonesia (ASEI) Summary Founded in 1985, Asuransi Ekspor Indonesia (PT ASEI) is a financial institution wholly-owned by the government of Indonesia and a member of Berne Union. Its main goal is to promote non-oil Indonesian companies exports and international trade with Indonesia by providing financial instruments. PT ASEI provides broad range of insurance products including export and domestic credit insurance, counter bank credit guarantees, import insurance to Indonesian exporters/importers, domestic sellers/buyers and banks. In particular, export credit insurance provided by PT ASEI protects domestic companies exporters against political and commercial risks and supports domestic exporters to enter new international markets. Credit insurance allows banks to increase their credit supply to domestic exporters and investors. Moreover, ASEI is deeply involved in the bonding sector as it is licensed to issue advance payment bonds, bid bonds, performance bonds, maintenance bonds and custom bonds. Institution type Ownership Head office Rating Major instruments Information Export Credit Agency % Government of Indonesia Menara Kadin Indonesia Building, 22nd Floor Jl. H.R. Rasuna Said Block X-5 Kav. 2-3 Jakarta INDONESIA Fitch BBB- Export credit Insurance, credit insurance and guarantees List of ASEI products: - Export Credit Insurance - Financing Insurance for Export Bill - Credit Insurance and Credit Guarantee - Surety Bond - General Insurance Example of relevant products for private infrastructure investments Instrument Instrument type Eligible investments, borrowers, and projects Eligible beneficiaries Eligible forms of investment Risk types covered Export Credit Insurance Insurance Indonesian exporters/importers, domestic sellers/ buyers and banks Indonesian exporters to enter new and non-traditional markets Loans, equity, bonds, credit, post shipment financing Commercial risks: Importer insolvency Importer payment default Importer refusal of acceptance of goods Political risks: 18 ASEI is a state-owned company, established in November 1985 with the main purposes to promote national non-oil and gas export. 118

119 Maximum tenure Maximum amount or cover Currency control/remittance ban Import quota restrictions Revocation of import license Act of war or other hostilities No set maximum Indemnity of up to 85% of loss. If PT ASEI recovers any amount under subrogation, 15% of that amount recovered is returned to the exporter. Annex 2. 4 Credit Guarantee and Investment Facility (CGIF) Summary The Credit Guarantee and Investment Facility (CGIF) was established in 2010 and promotes financial stability and boosts long-term investments in the region via its mandate to develop local bond markets in the ASEAN+3 region. It offers guarantees on local currency denominated bonds to facilitate companies' access to local bonds with longer maturities. This reduces their dependency on short-term foreign currency borrowing and addresses currency and maturity mismatch. Increased local currency bond issuance promotes financial stability and aid the development of ASEAN s bond markets. CGIF has received capital contributions of $700 million. CGIF's bond guarantee operation is aimed at supporting ASEAN+3 companies access the region's bond markets to achieve the following benefits: expand and diversify their sources of debt capital, raise funds in matching currencies and tenures transcend country sovereign ceilings for cross-border transactions gain familiarity in new bond markets to mobilise capital across the region Institution type Ownership Head office Ratings Major instruments Contact Instrument Instrument name Instrument type Eligible projects and bond issuers Multilateral development agency Ten ASEAN Members States together with the People's Republic of China, Japan, Republic of Korea (ASEAN+3) and Asian Development Bank (ADB) c/o Asian Development Bank, 6 ADB Avenue, Mandaluyong City, 1550 Metro Manila, Philippines Standard & Poor's ( Global Ratings : AA / A-1+, ASEAN Rating: axaaa) RAM Ratings (Global, ASEAN & National Ratings: AAA) MARC (National Rating: AAA) TRIS Rating (National Rating: AAA) Bond guarantee E: guarantee_enquiries@cgif-abmi.org, Tel: Bond guarantee Bond guarantee Irrevocable and unconditional bond guarantee CGIF's guarantees are available to corporations that meet the following eligibility criteria: 119

120 Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Guarantee fee Corporate entities and principal shareholders are from an ASEAN+3 country The corporate entity must be of an acceptable credit profile based on CGIF's internal credit assessment The corporate entity's project or business (for general funding purposes) satisfies CGIF's environmental and social safeguards standards The proceeds of corporate entity's bonds will not be used for activities which are on its list of prohibited activities (refer to CGIF s website) Bond holders Local currency denominated bonds issued by companies in ASEAN+3 countries. Non-payment by the issuer Bond tenure of up to 10 years Up to a 100% of the issued bond Up to USD 140 million equivalent for a single issuance No information Annex 2.5 China Export & Credit Insurance Corporation (SINOSURE) Summary Founded in 2001, China Export and Credit Insurance Cooperation (SINOSURE) is one of the world s largest government export credit agency. Sinosure, a member of Berne Union, is the only Chinese policy insurance company specialized in credit insurance and aims to promote China s foreign trade and economic co-operation. The service network of Sinosure comprises 24 offices nationwide and one representative office in London, UK. Sinosure s main products include short term and medium-long term export credit insurance and overseas investment insurance. Asia is the main destination of Sinosures s export credit insurance representing between one third and half of the market. Institution type Ownership Head office Rating Major instruments Information Export Credit Agency State-owned North Wing, Fortune Times Building, No 11 Fenghuiyuan, Xicheng District, Beijing. S&P A long-term (2007) Export credit insurance, investment insurance, domestic trade credit insurance, bond and guarantee List of Sinosure products: Short Term Export Credit Insurance - Comprehensive Cover Insurance 120

121 - Letter of Credit Insurance - Specific buyer s Insurance - Specific Contract Insurance - Insurance against Buyer s Breach of Contract Medium and Long Term Export Credit Insurance - Buyer Credit Insurance Program - Supplier s Credit Insurance Program - Investment Insurance - Overseas Investment Insurance - Inbound Investment Insurance Bond and Guarantee - Financial Guarantee - Non Financial Guarantee 121

122 Example of relevant products for private infrastructure investments Instrument Instrument type Eligible investments, and projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Instrument Instrument type Eligible investments, and projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Instrument Instrument type Eligible investments, and projects Eligible beneficiaries Eligible forms of investment Overseas Investment Insurance Political Risk Insurance (PRI) Direct investments (including equity investments, shareholder loans etc.), loans, other types of investments as approved by SINOSURE Enterprises and financial institutions registered and having its principal place of business in Mainland China, excluding those controlled by foreign, Hong Kong, Macau and Taiwan enterprises, institutions and citizens; Financial institutions that provide financing for overseas investments by the enterprises mentioned above loans, equity, including earnings and interests Political Risk Insurance Expropriation Transfer and Convertibility restrictions War damage Inability to operate due to war Breach of contract No stated maximum tenure No stated maximum amount Buyer Credit Insurance Programme Medium- and Long-term Export Credit Insurance Contracts/loan agreements that have a value of no less than USD 1 million; have a prepayment of cash payment ratio of not less than 15% or 20%in the case of export of vessels; and have a credit period from 1 year to 10 years Chinese financial institutions or foreign financial institutions that have branches in China, have a total asset of no less than USD 20 billion, have been involved in export credit transactions in the latest 3 years. Contract, letter of credit, credit, bonds, loans Default of payments by the borrower or guarantor under the credit agreement due to certain political and commercial risks 10 years No maximum stated. Minimum amount of US $1 million Bond and Guarantee Medium- and Long-term Export Credit Insurance Export business supported by government policies; has sound financial health and good operating activities; and has good credit record Exporters and banks which provide export related finance Package Loan Guarantee: Guarantee of loans for pre-shipment finance Negotiating Under Documents Insurance NUDI: An insurance cover for banks negotiates under export documents 122

123 Risk types covered Maximum tenure Maximum amount or cover Supplier s Credit Guarantee: SINOSURE provides guarantee to a bank, which provides finance to the supplier of an international contract Project Finance Guarantee: SINOSURE provides guarantee to a bank, which provides finance to a project Default on payments No maximum stated No maximum stated 123

124 Annex 2. 6 COFACE Group (Private) Summary Coface Group, the private entity of Coface, provides insurance products to promote international trade. To do so, Coface provides credit insurance and bond products. Credit insurance products are the main instruments extended to exporters to mitigate the risks faced. Credit insurance products provided by Coface include single risk insurance which contains five types of guarantees to protect French companies exposed to political and commercial risks. Globalalliance and Topliner are other credit insurance products covering French companies in their overseas transactions. Institution type Private Insurer Ownership Coface Corporation19 Head office 1, place Costes et Bellonte CS Bois-Colombes, France Representation in Indonesia, Malaysia, Singapore, Thailand and Viet Nam SEA Asia-Pacific Revenues 95 million (2013) Rating Moody s A2 (as of March 2014), Fitch Rating AA- (as of March 2014) Major instruments Single risk insurance (e.g. political risk) List of Coface Group products: Credit Insurance - Single Risk (political risk guarantee, export & domestic guarantee, import guarantee, financing guarantee, investment guarantee) - Globalliance (credit insurance policy) - TopLiner (additional cover to Globalliance) Bonds - Contract bonds - Customs and Excise bond Example of relevant products for private infrastructure investments Instrument Single Risk Insurance Product Single Risk Insurance include five types of guarantees : - Political risk guarantee - Export and Domestic Guarantee - Import Guarantee - Financing Guarantee - Investment Guarantee Eligible beneficiaries All companies Eligible forms of N/A investment Risk types covered - Changing legislation Political risks : - Breach of contract - Conflict - Expropriation, Nationalization 124

125 - War, terrorism Maximum tenure Maximum amount or cover No information 90%-100% of the exporters losses depends the risks 125

126 Annex 2. 7 COFACE State Guarantees Summary Founded in 1946, la Compagnie Française d'assurance pour le Commerce Extérieur (Coface), member of Berne Union, is owned by the bank group Natixis. Coface is divided into a public entity, Coface State Guarantee, and a private entity, Coface Group. Coface State Guarantee is a French export credit agency which promotes and supports domestic companies exports by providing public exports guarantees on behalf of the French government since These insurance products include credit insurance, investment insurance and export risk insurance. Credit insurance, the major product provided by Coface to banks and domestic exporters, protect them against risks such as counterparty default. Coface has developed partnerships with other French institutions such as BPI and UbiFrance through the label BPI France Export, Chamber of Commerce or banks. Institution type Ownership Head office Representation in SEA Rating Export Credit Agency Coface Corporation operating on behalf of the French State 1, place Costes et Bellonte CS Bois-Colombes, France Indonesia, Malaysia, Singapore, Thailand and Viet Nam Moody s A2 (as of March 2014), Fitch Rating AA- (as of March 2014) or Information Tel: +33 (0) List of Coface Government Guarantees products : - Market Survey Insurance - Investment Insurance - Credit Insurance - Export Risk Insurance - Currency Exchange Insurance - Bonds and Working Capital Guarantee Example of relevant products for private infrastructure investments = Instrument type Investment insurance Eligible projects All investment above 15 million and transactions French investments: capital + dividends, or bank loans granted by a French bank. Eligible All companies incorporated under French law wishing to protect a long-term beneficiaries investment abroad against political risks, as well as banks that back them Eligible forms of Equity investments, an allocation of funds to a local branch or office, a investment shareholder loan or current account advance, a bond in exchange for local loans, Risk types covered royalties or an accompanying bank loan. Political risks Transfer and convertibility restrictions Political violence Property infringement / expropriation Breach of contract of local authorities (in certain cases) 126

127 Maximum tenure Maximum amount or cover Fee 3-20 years Equity investments and bank loans: max 95% of eligible losses, no stated maximum amount The premium rate is fixed for the duration of the contract, based on the country and project risks. The insured amount is adapted to the variation in the value of the investment over time: the insured party estimates this value every year, up to a limit of 150% of the paid-in funds. 127

128 Annex 2. 8 Development Credit Authority (USAID) Summary Founded in 1999, the Development Credit Authority (DCA) is wholly owned by the US government. This authority allows the United States Agency for International Development (USAID) to provide credit guarantees to local and foreign private lenders, particularly for loans in local currency. It provides partial credit guarantees including loan guarantee, loan portfolio guarantee, portable guarantee and bond guarantees. Its goal is to support US investment abroad and foster economic growth in developing countries by providing these various insurance products. In particular, USAID DCA provides partial credit guarantees to facilitate domestic small businesses investments in developing countries by protecting them against risks. USAID DCA collaborates with other financial institutions and development organizations to facilitate access to insurance products for domestic companies overseas transactions. Institution type Ownership Head office Rating Major instruments Information Bilateral development agency United States government Ronald Reagan Building, 1300 Pennsylvania Avenue, NW, Washington, DC U.S.A. Moody s Aaa, S&P AA+, Fitch AAA Credit guarantees List of USAID s Development Credit Authority products : Partial Credit Guarantee Loan Guarantee Loan Portfolio Guarantee Leasing Portfolio Guarantee Bond Guarantee Example of relevant products for private infrastructure investments Instrument Instrument Eligible borrowers, and projects Eligible beneficiaries Eligible forms of investment Partial Credit Guarantees Debt guarantee Borrowers could be private sector enterprises, municipalities, or other subsovereign entities Projects must meet local USAID development objectives, and not be tied to U.S. export transactions or to U.S. companies DCA guarantees support projects in the following sectors micro, small, and medium enterprises; democracy and governance; natural resources management; agriculture; infrastructure; energy; education; and health Lenders: non-sovereign financial institutions (foreign or local), local capital market participants and investors Debt (e.g. loans, leases, bonds, letters of credit, or other debt instruments issued by local financial institutions, private sector lenders (denominated in U.S. dollar or in local currency)) 128

129 Risk types covered Max tenure Maximum amount /cover Fee Default on payment 20 years A 50% pari passu guarantee on principal of the loan(s) Cover loans from to $100,000,000 Origination Fee: A one-time, up-front fee on the total guaranteed amount Utilization Fee: An annual fee on the average outstanding guaranteed loan amount Annex 2. 9 Export Credit Guarantee Corporation of India Ltd (ECGC) Summary Founded in 1957, Export Credit Guarantee Corporation of India Ltd. (ECGC), is the Indian Export Credit Agency. This state-owned company is under the control of the Ministry of Commerce. A member of Berne Union, ECGC is the fifth largest export credit agency in the world in terms of national exports coverage. Its main goal is to support Indian companies to expand their exports worldwide. Particularly, ECGC provides credit risk insurance and export credit insurance products for exporters and banks to protect them against political and commercial risks. It also provides overseas investment insurance to domestic companies that invest in affiliated companies abroad. Institution type Ownership Head office Rating Major instruments Information Export credit agency Company with 100% shareholding by the Government of India Express Towers, 10th Floor, Nariman Point, Mumbai 40021, Maharashtra, India ICRA20 Rating: AAA Export credit insurance to exporters, export credit insurance to banks, Overseas investment insurance Tel: / cud@ecgc.in 20 ICRA, formerly known as Investment Information and Credit Rating Agency of India Limited, is one of the most experience credit rating agencies in India. 129

130 List of ECGC products : Export Credit Insurance for Exporter Short Term (Turnover Based) - Shipments Comprehensive Risks Policy - Small Exporter Policy - Specific Shipment Policy - Services Policy - Export Turnover Policy - Export Specific Buyer Policy Export Credit Insurance for Exporter Medium and Long Term - Construction Works Policy - Specific Policy for Supply Contract - Specific Shipment Policy - Specific Services Policy - Specific Services Contract Policy - Letter of Credit Confirmation Confirm - Consignment Export Policy Special Schemes o (Exposure Based) - Factoring - Buyer s Exposure Policy - Buyer s Credit Cover - IT Enable Services Policy - Line of Credit Cover - Small and Medium Enterprises - Overseas Investment Insurance - Software Project Policy - - Customer Specific Cover Example of relevant products for private infrastructure investments Instrument Instrument type Eligible projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Overseas Investment Insurance Insurance Investments abroad made for the purpose of setting up or expansion of overseas projects. For investment in any country to qualify for investment insurance, there should preferably be a bilateral agreement protecting investment of one country in the other. ECGC may consider providing cover in the absence of any such agreement provided it is satisfied that the general laws of the country afford adequate protection to the Indian investments. Indian investors Equity, capital, untied loan Political risk War, Civil War, Revolutions in buyer s country Expropriation Restrictions on remittances The period of insurance cover will not normally exceed 15 years in case of projects involving long construction period. The cover can be extended for a period of 15 years from the date of completion of the project subject to a maximum of 20 years from the date of commencement of investment. Amount insured shall be reduced progressively in the last five years of the insurance period. 90% 130

131 Fee Instrument Instrument type Eligible projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Fee Instrument Instrument type Eligible projects Eligible beneficiaries Eligible forms of investment Risk types covered Premiums based on country, industry, and transaction characteristics and number of risks covered; rates start as low as 0.5% per year to insure one political risk; discounts apply if more than one risk is insured against Construction Works Policy-(CWP) Insurance Construction projects abroad An Indian contractor who executes a civil construction job abroad Exports, contracts, and activities linked to construction projects Political and comprehensive risks Insolvency of the employer (when he is a non-government entity); Failure of the employer to pay the amounts that become payable to the contractor in terms of the contract, including any amount payable under an arbitration award; Restrictions on transfer of payments from the employer's country to India after the employer has made the payments in local currency; Failure of the contractor to receive any sum due and payable under the contract by reason of war, civil war, rebellion, etc; The failure of the contractor to receive any sum that is payable to him on termination or frustration of the contract if such failure is due to its having become impossible to ascertain the amount or its due date because of war, civil war, rebellion etc; Imposition of restrictions on import of goods or materials (not being the contractor's plant or equipment) or cancellation of authority to import such goods or cancellation of export license in India, for reasons beyond his control; and Interruption or diversion of voyage outside India, resulting in his incurring in respect of goods or materials exported from India, of additional handling, transport or insurance charges, which cannot be recovered from the employer. No maximum stated 85% Not stated Specific Contract Policy Insurance Exporters that have secured contract for Turnkey Projects, EPC contract or any other contract which involves supplies of capital goods and services for erection and commissioning of the project. Indian exporters of capital goods and services Exports Commercial Insolvency of buyer Protracted default of buyer Buyer s failure to accept goods Political War, Civil War, Revolutions 131

132 Maximum tenure Maximum amount or cover Fee Other conditions Regulatory changes (i.e. New import restrictions) Transfer delays Open bank risks Default Insolvency No maximum stated 90% Not stated Cover for third country exports as well Reduced premium for projects funded by Multi-lateral agencies 132

133 Annex Export Credit Insurance Corporation of Singapore (ECICS) Summary Export Credit Insurance Corporation of Singapore (ECICS Limited), regulated by the Monetary Authority of Singapore (MAS), is a subsidiary of IFS Capital Limited, a financial institution providing financial services. ECICS Limited is a Singaporean export credit agency whose goal is to support domestic companies exportation by providing financial services such as credit insurance, bonds and guarantees programs. Their trade credit insurance products, including overseas investment insurance or specific policy for capital goods cover exporters and investors losses that incurred due to political or commercial risks such as counterpart default. It has developed partnerships with NEXI and other financial organizations such as the Multilateral Investment Guarantee Agency (MIGA). As a result they can provide jointly overseas investment insurance coverage to exporters allowing them to share risks. Institution type Ownership Export credit agency /general insurance company Private company Head office 7 Temasek Boulevard #10-01 Suntec Tower One Singapore Rating Major instruments Information A.M. Best rating: Financial strength rating of A- and issuer credit rating of A- (2014) Export credit insurance, overseas investment insurance, bonds and guarantees Tel : principalofficer@ecics.com.sg enquiries@ecics.com.sg List of ECICS products : Credit Insurance - Comprehensive Short-term Policy (Export/Domestic) - External Trade Policy - Specific Policy for Capital Goods - Guarantees for Supplier and Buyer Credit Finance - Overseas Investment Insurance Policy Bonds and Guarantees - Performance Bond - Advance Payment Bond - Contract Tender Bond/Bid Bond - Retention Money Bond - Maintenance Bond - Qualifying Certificate Bond - Customs Bond - Foreign Worker Bond - Tenancy/ Rental Bond - Account Payment Bond - Utility Service Bond - Advertising Media Bond 133

134 - IATA Freight Forwarding Bond - Airline Freight Forwarding Bond Example of relevant products for private infrastructure investments Instrument Instrument type Eligible projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum Tenure Maximum amount or cover Fee Other Instrument Instrument type Eligible projects Eligible beneficiaries Eligible forms of investment Risk types covered Overseas Investment Insurance Policy Insurance Overseas investments by Singapore-registered companies Companies registered in Singapore Expropriation Transfer and Convertibility restrictions War and civil disturbance Breach of contract by host government The period of cover can be up to 20 years, depending on the nature of the projects. Indemnity is up to 90%. Premium is dependent on the portfolio of risks (such as countries) offered for credit protection, the credit terms that you offer to your buyers and your credit management Coverage is provided either through ECICS, or jointly with Multilateral Investment Guarantee Agency and/or Nippon Export and Investment Insurance (NEXI) of Japan. Specific Policy for Capital Goods Insurance Exports of capital and semi-capital goods involving medium and long-term credits Singapore-based exporters Exports of capital goods such as machinery, turnkey plants and heavy equipment, as well as overseas construction projects and services. Insolvency of buyer Transfer delay, or delay in payment due to imposition of foreign exchange controls in the buyer s country Cancellation or imposition of import licence in the buyer s country War and other disturbances in the buyer s country which could affect debt settlement 134

135 Maximum amount or cover Fee Buyer s failure to take up the goods Contract frustration / repudiation for public buyers Sovereign risk Calls on bonds No maximum stated Premiums based on type of risk covered (credit risk, construction risk, securities), coverage (political risk, commercial risk), country risk, financing structure, duration, buyer, and the like 135

136 Annex Export Development Canada (EDC) Summary Export Development Canada (EDC) is the Canadian export credit agency. Committed to the principles of corporate social responsibility (CSR), it is a self-sufficient agency that relies financially on loan interests and premium collection despite being a Crown corporation operating on behalf of the government of Canada. Its objective is to foster Canadian economic growth and support domestic companies exports and investments by providing a broad range of financial products. These products include insurance, guarantees, bonding products and financial services. Insurance products protect Canadian exporters against overseas transaction risks, such as political risk insurance covering domestic exporter losses due to unpredictable political risks. Small businesses are the major recipients of these financial products provided by EDC. Export Development Canada has developed partnerships with various private financial institutions to provide bond, guarantees and financial products. EDC supports companies in finding financing solutions by providing its financial capacity and sharing the risks with the private sector. In particular Export Development Canada and Business Development Bank of Canada (BDC) have signed a protocol and EDC is currently collaborating with the Canadian Commercial Corporation Institution type Ownership Head office Representation in Southeast Asia Rating Contingent liability limit Major instruments Information Export Credit Agency Government of Canada (a Crown Corporation) Export Development Canada, 151 O Connor, Ottawa, Canada, K1A 1K3 EDC Office in Singapore Canadian High Commission, One George Street, #11-01, Singapore Moody s Aaa, S&P AAA $45.0 billion Export credit insurance (accounts receivable insurance), political risk insurance and guarantees Tel : (613) contact: export@edc.ca List of EDC products : Insurance Products - Credit Insurance - Accounts Receivable Insurance (ARI) - Trade Protect - Contract Frustration Insurance - Performance Security Insurance Bonding and Guarantee Solutions - Account Performance Security Guarantee - Surety Bond Insurance - Foreign Exchange Facility Guarantee Financing - Export Guarantee Program - Foreign Buyer Financing - Foreign Investment Financing 136

137 - Political Risk Insurance - Customer Financing Guarantee - Structured and Project Finance Example of relevant products for private infrastructure investments Instrument Instrument type Eligible investments, borrowers, and projects Eligible beneficiaries Interests insured Risk types covered Maximum tenure Maximum amount or cover Fees Instrument Instrument type Eligible investments, borrowers, and projects Eligible beneficiaries Political Risk Insurance (PRI) Insurance Overseas investments that are beneficial to Canada including : - Direct investment with joint venture or foreign subsidiary - Loans issued to a joint venture or foreign subsidiary - Physical assets held overseas - Loans issued directly to sovereign borrowers or guaranteed by sovereign borrowers. Private sector companies, lenders Equity: equity (paid-in-capital) Debt: Loans, shareholder loans, loans to sovereign and semi-sovereign obligors Assets: equipment, inventory, cash accounts, other physical assets Creeping or outright expropriation Political Violence Transfer and Convertibility restrictions Repossession Non-payment by a government PRI of Assets: up to 5 yrs PRI of Investment (Equity): up to 10 yrs PRI of Loans and Non-Honoring of Sovereign Obligations Insurance (NHS): up to 20 yrs Asset coverage: 90% of eligible losses, no stated project limit Equity coverage: 90% of eligible losses, no stated project limit Bank loans: up to 100% of eligible losses, no stated project limit Non-Honouring of Sovereign Obligations coverage: 90% - 95% of eligible losses, no stated project limit Premiums based on country, industry, and transaction characteristics and number of risks covered; discounts apply if more than one risk is insured against. Accounts Receivable Insurance Export Credit Insurance Exports that are beneficial to Canada Exporters 137

138 Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Fees Instrument Eligible investments, borrowers, and projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Fees Instrument type Eligible investments, borrowers, and projects Eligible beneficiaries Eligible forms of investment Risk types covered Current assets: cash, accounts receivable, inventory Fixed assets: vehicles, machinery, equipment and buildings Insolvency of customer Default on payment Refusal to accept goods Hostilities in a particular market that prevent the buyer from paying Cancellation of export/import permits Cancellation of contract Currency conversion or transfer No information Up to 90% of losses Several factors impact rates including: type of coverage, goods, buyer credit risks, and the foreign country. Contract Frustration Insurance (CFI) Specific export contracts for services and capital goods or projects Canadian exporters of capital goods or services and their Canadian suppliers. Loans, accounts receivable, bonds Commercial and political risks Insolvency of customer Default on payment Hostilities in country Contract cancellation Cancellation of export of import permits Moratorium on debt Transfer and Convertibility Restrictions no set maximums Up to 90% of losses (costs incurred or receivables), no stated maximum Pricing is based on a number of factors including policy liability, length of policy, payment terms, buyer risks and other contract-specific risk factors. Surety Bond Insurance Overseas investments that are beneficial to Canada Entities that would like a surety company to issue a contractual or performance bond on their behalf. Contracts in all industry sectors and in non-traditional surety markets. Unfair bond calls 138

139 Maximum tenure Maximum amount or cover Fees Instrument type Eligible investments, borrowers, and projects Eligible beneficiaries No information No information Based on the associated risks and the duration of the bonds. Foreign Buyer Financing (Customer Financing Guarantee, Loans, Bank Guarantee Program) Loans : Foreign buyers purchasing capital goods and/or services which are typically financed over at least two years Guarantee : Medium-long term export credits to buyers in emerging countries Customer Financing Guarantee : creditworthy customers buying from Canada and requiring up to $10 million to finance their purchases Loans and Guarantee : transactions larger than $10 million Contract with foreign buyers purchasing capital goods or services from Canada Eligible forms of investment Risk types covered Insolvency of customer Default on payment Maximum tenure Flexible, two to five years Maximum amount - Customer Financing Guarantee : 100% Guarantee cover or cover - Loan - Bank Guarantee Program: 90% cover on 85% of the export contract, 100% cover when the bank is financing, on an uncovered basis, the down payment or local costs; the uncovered bank financing is repayable not fewer than two years subsequent to the repayment start date of the guaranteed facility; and the uncovered bank financing is at least equal to 15% of the contract value. Fees Guarantee fee: OECD minimum premium rate To view the whole suite of financial solutions EDC provides to its clients visit their website. 139

140 Annex Export Finance and Insurance Corporation (EFIC) Summary Export Finance and Insurance Corporation (EFIC) is an Australian export credit agency, member of Berne Union and wholly owned by the Commonwealth of Australia. EFIC supports Australian exportation and investment abroad by providing finance and insurance products to Australian companies that are seeking to develop their business internationally or that are already operating overseas. EFIC s main objective is to help small-medium enterprises and larger domestic companies exporters, exporters focused on global chain and Australian businesses that expand their activities in emerging and frontier markets. In order to do so, EFIC issues loans, guarantees, bonds and insurance products. The Australian export credit agency has also developed partnerships with various public and private institutions such as the Australian Trade Commission (Austrade), the Department of Foreign Affair or Chambers of Commerce. These partnerships help facilitating exports and investments. Institution type Ownership Head office Rating Major instruments Information Export Credit Agency Wholly owned and guaranteed by the Commonwealth of Australia Level 10, 22 Pitt Street, Sydney, NSW 2000, Australia AAA Export finance and insurance, project financing, political risk insurance, bonds, sureties and guarantees Tel: info@efic.gov.au List of EFIC products : - Direct loans - Export Finance Guarantees - Bonding and guarantees facility - Bond insurance - Political risk insurance - Overseas Direct Investment - Documentary credit guarantee - Export payments insurance Example of relevant products for private infrastructure investments Instrument Instrument type Eligible investments and projects Overseas Direct Investment Guarantee Guarantee Overseas expansion of Australian companies that generate an economic benefit for Australia. Expansion can take the form of a new or green field investment, expansion of an existing facility or an acquisition or joint venture. Companies 140

141 Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Fees Instrument Instrument type typically have an existing relationship with a participating bank, a company turnover of at least $2.5 million and have been operating for at least 2 years, preferably with export experience. Investors and financiers Loans Commercial risks (default on payment) No stated maximum tenure Minimum guarantee amount: $100,000 Investors and financiers: EFIC s premium depends on factors such as the location and type of the investment or project, the term of the policy and the risks insured Contractors: EFIC s premium depends on factors such as the location and type of the investment or project, period of insurance and type of cover. Political Risk Insurance Insurance Eligible investments and projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Fees Investors for overseas investments by Australian companies Contractors for plant and equipment used by Australian companies overseas Lenders for debt financing in support of Australian exports or involvement overseas Hedge banks for hedge providers of commodity price hedge facilities associated with debt financing that support Australian exports. Australian companies and exporters Debt and equity Expropriation Political violence Currency inconvertibility and transfer risks Additional cover also available for other political risks like breach of contract No stated maximum No stated maximum Fee and charges vary depending upon a number of factors including Efic s risk assessment, security, the location and type of the investment or project, the term of the policy and the risks insured 141

142 Annex Export-Import Bank of Malaysia Berhad (MEXIM) Founded in 1995, Export-Import Bank of Malaysia Berhad (Exim Bank of Malaysia or MEXIM) is a wholly state owned Malaysian export credit agency and member of Berne Union, ADFIAP, Aman Union and AEBF. MEXIM is mandated to promote Malaysian investment and exports in priority sectors such as capital goods, infrastructure projects, shipping or value added manufactured products. MEXIM plays the role in financial assistance for domestic companies to enter new markets abroad. Besides banking facilities, MEXIM provides a broad range of insurance/takaful products including trade credit insurance/takaful, political risk insurance or overseas investment insurance/takaful to cover exporters and investors against political and commercial risks. Institution type Ownership Head office Rating Major instruments Information Export Credit Agency 100% owned by the Ministry of Finance Export-Import Bank of Malaysia Berhad ( K) Level 1, Exim Bank, Jalan Sultan Ismail, Kuala Lumpur, Malaysia Moody s A3, Fitch A- Conventional banking, Islamic banking, export finance (medium and long-term guarantees), short-, medium- and long-term insurance/takaful, bonds and guarantees communications@exim.com.my Tel: (+603) List of MEXIM products : Short Term Credit Insurance/ Takaful - Trade Credit Insurance/Takaful (Export/Domestic/Import) - Bank Letter of Credit Policy - Bank Trade Credit Takaful - Multi Currency Trade Financing Scheme - Indirect Exporters Financing Scheme - Bankers Trade Credit Insurance (BTCI) Medium-Long Term Credit Insurance/Takaful - Political Risk Insurance (PRI) - Overseas Investment Insurance/ Takaful - Specific Policy (Contract/Constructional Works/Services) - Buyer Credit Guarantee - Bond Risk Insurance 142

143 Example of relevant products for private infrastructure investments Instrument Instrument type Eligible investments, customers, and projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Fees and Premium/Contribution Instrument Instrument type Eligible investments, customer, and projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Fees and Premium/ contribution Political Risk Insurance (PRI)/Takaful Insurance/Takaful Malaysian companies/contractors, as well as Malaysian investors raising funds overseas Lenders/financiers, private sector companies Equity, shareholder advances, shareholder guarantee, commercial bank loans/financing, movable assets Transfer restriction Expropriation War and civil disturbance Breach of contract Medium/Long-term Coverage up to a maximum of 15 years covers up to 90% of losses Processing fee of 1.0% of insured amount subject to minimum RM1,000 and maximum of RM20,000 (or foreign currency equivalent)payable upon accepting Letter Offer. (applicable to non-smes)) Premium/contribution is calculated based on the Risk Based Pricing Model (RBPM) and payable in advance on a one-off basis in Ringgit Malaysia equivalent. Specific Policy (contracts/ constructional works/ services)/takaful Insurance/Takaful Malaysian exporters who undertake contracts for export of capital goods, or turnkey project, or construction works, or rendering services abroad or local, against the risk of non-payment by the overseas buyer/malaysian buyer. (Local project or Malaysian buyer must have export element). Lenders/financiers, private sector companies Contracts that are: i. A one-off project/contract but may be repetitive in nature project or revolving during the contract period. iii. Lengthy in terms of manufacturing/project period Commercial (buyer s insolvency, default in payment, others) Economic risks (blockage or delay in transfer of payment, imposition of import and export restriction, cancellation of import license) Political risks ( war, revolution or other similar civil disturbances in the buyer s country) Medium/Long-term Coverage up to a maximum of 15 years Up to 90% Processing fee of RM1,000 per application or foreign currency equivalent. (applicable to non-sme s) Premium/contribution is calculated based on the Risk Based Pricing Model (RBPM) and payable in advance on a one-off basis in Ringgit Malaysia equivalent. 143

144 Other conditions Instrument Instrument type Eligible investments, borrowers, and projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Premium Premium/contribution rates primarily depend on EXIM Banks grading of the market with which the business is done and terms of payment. In general, the premium/contribution is dependent on market risk and credit terms. Bond Risk Insurance Insurance Malaysian contractors Lenders, private sector companies Bonds i. Unfair calling by government/public buyer ii. Unfair calling by private buyer (selective cases) iii. Fair calling, but following political impediments: - Import/Export Restriction - contractor is unable to fulfill its obligations under the contract caused by: - The implementation of any law or of any order, decree or regulation of having the force of law, which in circumstances outside the control of the contractor, prevents the import/rendering of the goods/services specified in the contract, or - The cancellation, in circumstances outside the control of the contractor, of a previously issued and currently valid authority to import/render the goods/services specified in the contract. - War - contractor is unable to fulfil its obligations under the contract caused solely and directly by the frustration of the contract or termination due to the occurrence within the country of the principal, of war, civil war, insurrection, rebellion and/or revolution which directly prevents the due performance of the said contract in whole or in part. 5 years Up to 90% of losses Premium rates primarily depend on EXIM Bank s grading of the market with which the business is done and terms of payment. In general, the premium is dependent on market risk and credit terms. 144

145 Annex Export-Import Bank of Thailand (EXIM Thailand) Summary Export-Import Bank of Thailand (EXIM Thailand) is a financial institution wholly-owned by the Royal Thai Government under the supervision of the Ministry of Finance. It is also a member of the Berne Union. EXIM Thailand s main objectives are to protect domestic businesses in their overseas transactions against investment and trade risks and to promote good corporate governance and social responsibility. EXIM Thailand strives to help small and medium enterprises to expand their business internationally. EXIM Thailand pursues these goals by providing various insurance instruments. These products include export credit insurance and investment insurance. Export credit insurance cover Thai exporters losses that are incurred due to commercial and political risks. Institution type Ownership Export Credit Agency 100% owned by the Royal Thai government Head office EXIM Building, 1193 Phaholyothin Road, Samsen Nai, Phayathai, Bangkok Rating Major instruments Information Moody s Baa1, Fitch BBB+ Export finance, investment finance, short-term export credit insurance, investment insurance Tel: (66) info@exim.go.th List of EXIM Thailand products : - Short-term Export Credit Insurance - Medium- and Long-term Export Credit Insurance - Investment Insurance Example of relevant products for private infrastructure investments Instrument Instrument type Eligible transaction, investment and projects Eligible beneficiaries Eligible forms of investment Risk types covered Investment Insurance Insurance Project that has a Thai national or Thai company as a shareholder Lenders, private sector companies Equity: assets, profits or other monetary benefits derived from the insured investment Loans: the original principal and interest amount according to the repayment schedule under a loan agreement Political risk Inconvertibility, transfer restriction, or exchange blockage Expropriation by host government War and civil disturbance in host country 145

146 Maximum tenure Maximum amount or cover Fee Instrument Instrument type How it works Eligible projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Fee Breach of contract by host government From 3 to 15 years Cover up to 90% of actual losses An application or information analysis fee of 0.1 percent of the maximum amount of insurance but not exceeding 100,000 Baht will be applicable. This fee will be deductible from the premium when the policy is issued. Premium rate will be specified as a percentage of the yearly amount of insurance. This premium is charged on the current amount of insurance of collected up-front each year when the policy is issued and renewed. Medium- and Long-term Export Credit Insurance Insurance Project or transaction that has a company which registered in Thailand Supplier of goods and Services Financial institution providing overseas credit Exporter that has a Thai national or Thai company as a shareholder All export transaction such as sales of capital goods, construction contracts, service contracts, or sale of consumer durable goods, etc. For export of services transaction, the term of payment or contract period could be up to 5 years. For export of goods transaction, the term of payment or contract period should be more than 6 months to 5 years. Political and commercial risks No stated maximum Cover up to 90% of the actual loss Premiums based on type of risk covered (credit risk, construction risk, securities), coverage (political risk, commercial risk), country risk, financing structure, duration, buyer, and the like 146

147 Annex Indonesia Exim Bank Summary Indonesia Exim Bank, the Indonesian export credit agency, is a wholly state owned agency that helps to foster Indonesian economic development through its activities. Indonesia Exim Bank s main objectives are to encourage national export growth by providing financial instruments such as export working capital financing. In addition Indonesia Exim Bank financially supports projects that could increase national exports but that lack financial support from banks. It also protects exporters and investors against political and commercial risks by providing insurance products such as Security and Insurance for development not provided by local commercial banks or other financial institutions. Institution type Ownership Head office Rating Instruments Information Export Credit Agency % Government of Indonesia Gedung Bursa Efek Indonesia Menara II, Lantai 8, Sudirman CBD J1. Jend. Sudirman, Kav Jakarta 12190, Indonesia Kav. 2-3 Jakarta INDONESIA Moody s (Baa3), Fitch (BBB-) and S&P (BB+) Export credit guarantee/ insurance Tel: (+62-21) corpsec@indonesiaeximbank.go.id List of Indonesia Exim Bank products : Domestic - Export Working Capital Loan - Export Investment Loan - Warehouse Receipt Financing - Export Bills Purchasing - Trust Receipt - Project Financing Overseas Financing Guarantee - Export Working Capital Credit Guarantee - Import L/C Guarantee Insurance - Insurance - Guarantees Example of relevant products for private infrastructure investments Instrument Instrument Instrument type Eligible investments, and Insurance Insurance: provides protection for Indonesian Exporters and Indonesian investors overseas against any possible losses due to any commercial or political risks. Guarantee and insurance Indonesian exporters 21 ASEI is a state-owned company, established in November 1985 with the main purposes to promote national non-oil and gas export. 147

148 projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Instrument Instrument Instrument type Eligible investments, and projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Indonesian investors overseas Lenders, private sector companies Equity, loans, debts, bond issues Export risk insurance Payment risk insurance Investment insurance Political risk insurance (for exports) No set maximums No information Guarantee Guarantees for third parties 22 for the obligation of fulfilling the performance of the guaranteed parties 23 - Guarantee for Construction Services and/or Goods Procurement Services Guarantees for banks - Credit Guarantee Guarantee Banks/ financing institutions (Credit Guarantee) Project owners with contracts with Indonesian companies (Third Party Guarantees) Lenders, private sector companies Equity, loans, debts, bond issues - Counterparty default risk No set maximums Maximum value is 70% of the total financing provided by the Beneficiary Security Maximum value is 70% of the total invoice to the obligor. 22 Project Owner/ Bouwheer /Guarantee Recipients 23 Principal/Contractor/Guaranteed 148

149 Annex Indonesia Infrastructure Guarantee Fund (IIGF) Summary Founded in 2009 by the government of Indonesia and the World Bank, Indonesia Infrastructure Guarantee Fund (IIGF) is a bilateral agency owned by the state. IIGF was established as the single window to appraise, structure, and process claim payment and providing guarantees to public private partnerships projects on the behalf of the government. It aims to support private participation in infrastructure provision in Indonesia to foster economic growth. In addition, IIGF enhances the bankability of PPP projects by improving governance, transparency and consistency of the guarantee process through its Single Window policy. IIGF guarantees an indemnity payment if contracts are not honoured. To reduce risks, IIGF also provides capacity development and interaction with the local government and contracting agencies (CA). The IIGF covers political risks on the sub-sovereign level and provides direct technical assistance to local contract agencies. Institution type Ownership Head office Rating Instruments Information Bilateral agency for the support of public-private partnership (PPP) Project in Indonesia 100 % Government of Indonesia Sampoema Strategic Square, North Tower, 14 th Floor JL. Jenderal Sudirman Kav Jakarta 12930, Indonesia Fitch BBB- Guarantees for Government Contracting Agencies Tel: (+62) info@iigf.co.id List of IIGF products: - IIGF Guarantee - World Bank-Supported IIGF Guarantees Example of relevant products for private infrastructure investments Instrument Instrument Instrument type Eligible projects Eligible beneficiaries Eligible forms of investment IIGF Guarantee Infrastructure Guarantee Guarantee (either joint guarantee by the Ministry of Finance and IIGF or solely IIGF) Public private partnership (PPP) projects in infrastructure in Indonesia Lenders, investors debts, loans, equities(participations in PPP projects), including earnings and revenues, mezzanine financing 149

150 Risk types covered Maximum tenure Maximum amount or cover Fee Other conditions Political risks Delay/ failure to grant licenses, permits, and approvals Delay/failure of financial close Change in law/ regulations Breach of contract Integration with network Competing facility risk Revenue risk Demand risk Expropriation Risk Currency inconvertibility & non-transfer Risk Sub-sovereign or Parastatal risk Force majeure risk affecting credit agency Interface risk Depending on projects For projects above IDR 500 billion, the guarantee is a maximum of 50% of the project value The maximum amount of guarantee for one project is 25% of IIGF s available capital The application of guarantee fees is, in principle set based on the following consideration: The value of financial compensation for the types of infrastructure risk being guaranteed; The amount expended to provide the guarantee; A reasonable profit margin. IIGF can charge guarantee fees to the party that has the most interest or that most requires the infrastructure guarantee The application to obtain IIGF s guarantee must be submitted by the relevant authority which is by law responsible for providing such infrastructure ( Contracting Agency ) prior to the tender process to the investor. Each PPP project proposed to receive a guarantee through IIGF must meet the following criteria: Criterion 1: The project must be a PPP project, which complies with Perpres 67/2005 j.o. Perpres 13/ Criterion 2: The project complies with the relevant sector regulations and the procurement plan is through for a transparent and competitive tender process. Criterion 3: The project must be technically, economically, financially and environmentally viable, as well as socially desirable. Criterion 4: The PPP Agreement shall have suitable provisions for binding arbitration. 24 Infrastructure guarantee can be provided to infrastructure projects that are implemented under PPP scheme as regulated under Presidential Regulation No. 67/2005 ( Perpres 67/2005 ) on Government Cooperation with Enterprises, as revised by Presidential Regulation No. 13/2010 ( Perpres 13/2010 ). Perpres 67/2005 as revised by Perpres 13/2010. Stipulates the provision of infrastructure guarantee by the Minister of Finance ( MoF ), which can be implemented through a State Owned Enterprise ( SOE ) mandated to process and provide infrastructure guarantee (Infrastructure Guarantee Entity or Badan Usaha Penjaminan Infrastrucktur/ BUPI ) 150

151 Annex International Enterprise Singapore (IE) Summary Founded in 1983, International Enterprise (IE) Singapore is a state owned company whose goal is to support Singaporeans exportations and promote international trade. It provides services such as the Global Company Partnership and Market Readiness Assistance framework which help Singaporean companies to expand their business abroad and enter new markets. Instead of offering state-linked guarantees and insurance, IE Singapore supports the payment of monetary costs (i.e. premiums) for Singapore companies in acquiring insurance products from third parties. Institution type Ownership Head office Rating Instruments Information Export and investment promotion agency Government agency 230 Victoria Street, Bugis Junction Office Tower, Singapore No independent rating, Government of Singapore rating (S&P AAA Moody AAA) Premium support for Political Risk Insurance Tel: List of IE Singapore products : - Loan Insurance Scheme (LIS) - Trade Credit Insurance Scheme (TCIS) - Political Risk Insurance Scheme (PRIS) Example of relevant products for private infrastructure investments Instrument Instrument type How it works Eligible projects Eligible beneficiaries Political Risk Insurance Scheme (PRIS) Insurance premium support Companies can approach any Singapore-registered PRI credit insurer for a PRI policy cover. Should the company qualify for premium support under PRIS, the PRI credit insurer/intermediary will assist it in the submission of its application for PRIS premium support to IE Singapore. Overseas businesses that complement the Singapore company s core operations and result in economic spin-offs to Singapore Singapore--based enterprises with An annual total business spending of at least 250,000 Singapore Dollar in Singapore for each of the past three years A minimum paid-up capital of 50,000 Singapore Dollar At least three managerial staff who are Singaporeans or PRs Global HQ anchored in Singapore25 An annual turnover not exceeding S$500 million 25 Refers to global (not only regional) management control and decision making functions (e.g. strategic global planning and management, HR, sales and marketing, finance and treasury) are based in Singapore. 151

152 Eligible forms of investment Risk types covered Maximum amount or cover Fee Instrument Instrument type How it works Eligible projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum amount or cover Fee Depends on insurer Expropriation Currency inconvertibility and transfer restrictions Political violence Breach of contract by host government Non-honouring of sovereign financial obligations. International Enterprise (IE) Singapore supports 50% of the premium, up to the first three years of each PRI policy, subject to maximum support of S$500,000 per qualifying Singapore-based company No fee for PRIS, residual premium fee depends on insurer Trade Credit Insurance Scheme (TCIS) Insurance premium support Companies can approach any Singapore-registered TCI credit insurer for a TCI policy cover. Should the company qualify for premium support under TCIS, the TCI credit insurer/intermediary will assist it in the submission of its application for TCIS premium support to IE Singapore. Overseas businesses that complement the Singapore company s core operations and result in economic spin-offs to Singapore Singapore--based enterprises with An annual total business spending of at least 250,000 Singapore Dollar in Singapore for each of the past three years A minimum paid-up capital of 50,000 Singapore Dollar At least three managerial staff who are Singaporeans or PRs Global HQ anchored in Singapore26 An annual turnover not exceeding S$100 million Depends on insurer Risks such as the insolvency and protracted default of end buyers. IE Singapore support of up to 50% of the premium for Trade Credit Insurance policies held with Singapore-registered credit insurers, subject to maximum support of S$100,000 per qualifying Singapore-based company. No fee for TCIS, residual premium fee depends on insurer 26 Refers to global (not only regional) management control and decision making functions (e.g. strategic global planning and management, HR, sales and marketing, finance and treasury) are based in Singapore. 152

153 Annex Japan Bank for International Cooperation (JBIC) Summary Founded in 1999 in replacement of the Export-Import Bank of Japan (JEXIM), Japan Bank for International Cooperation (JBIC) is a financial institution wholly owned by the government of Japan that operates under control of the Ministry of Finance. The Japanese export credit agency s main objectives are to promote international trade, support and secure domestic companies in their international development while preserving the global environment. JBIC conducts lending, investment and guarantee operations to complement private sector financial institutions services. JBIC provides guarantee facility for loans extended by private financial institutions, bonds issued by governments of developing countries or overseas Japanese companies, and currency swap transactions. JBIC covers also guarantees from export credit agencies in other countries. Moreover, JBIC provides equity participation to companies or funds where Japanese companies are involved. Institution type Ownership Head office Representation in SEA Rating Major instruments Information Bilateral agency for the support of Japanese exports and imports, Japanese economic activities overseas, and stability of international financial order Government of Japan 4-1, Ohtemachi 1-chome, Chiyoda-ku, Tokyo , Japan Indonesia, Singapore, Thailand and Viet Nam, Philippines Moody s Aa3, S&P AA- (as of May 2014) Direct funding: Export/import loans, overseas investment loans, united loans, equity participation Indirect funding: guarantees Tel: T List of JBIC products : Guarantees - Guarantees for Imports of Manufactured Products - Guarantees for Corporate Bonds Issued by Japanese Affiliates - Guarantees for Co-financing, Overseas Syndicated Loans and Public Sector Bonds - Guarantees for Currency Swaps - Counter Guarantees for Export Credits Loans - Export & Import Loans - Overseas Investment Loans - United Loans - Equity Participation Example of relevant products for private infrastructure investments 153

154 Instrument Instrument type Eligible projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Fee Other conditions Instrument Instrument type Eligible projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Fee Other conditions Guarantees for Co-financing, Overseas Syndicated Loans and Public Sector Bonds Debt Guarantees Projects supporting economic activities of Japanese companies both for importing and exporting goods and services, investment activities, and promoting economic activities Projects with JBIC loan participation under co-financing; and projects without JBIC loan participation Private financial institutions (nationals of Japan or Japanese branches of foreign financial institutions) Sovereign, public, and private entities (for bond guarantees) Loans (e.g. Overseas Investment Loans) and bonds Political risks, including: Currency convertibility and transfer Expropriation and repossession Political violence Breach of contract by a sovereign obligor Depending on projects, general up to 15 years Up to 100% of debt (both principal and interest payments) Depending on project Depends on individual structure, tenure, borrower credit risk, country risk For covering political risk or credit risk of non-sovereign public borrowers, may require government guarantee on case-by-case basis Nonfinancial conditions of guarantee operation (for example, environmental policies) are, in principle, same as those under the loan operation Currency Swap Guarantee Currency swap guarantee Infrastructure projects undertaken by Japanese companies Private financial institutions providing loans to relevant infrastructure projects (i.e. projects with Japanese company participation) Currency Swap Counterparty Local currency loans Commercial risk: foreign exchange risk Depending on projects, general up to 15 years Up to 100% of debt (both principal and interest payments) Depending on project Depends on individual structure, tenure, borrower credit risk, country risk For covering political risk or credit risk of non-sovereign public borrowers, may require government guarantee on case-by-case basis Nonfinancial conditions of guarantee operation (for example, environmental policies) are, in principle, same as those under the loan operation 154

155 Annex Korea Trade Insurance Corporation (KSURE) Summary Founded in 1992 by the Government of the Republic of Korea, the Korean Trade Insurance Corporation (Ksure) is the Korean Export Credit Agency and a member of the Berne Union. Its main goal is to promote international trade and support Korean exports and investments by providing a broad range of insurance instruments. These financial products include short-term and medium-long term products and foreign exchange risk insurance: Medium-Long term products, including overseas investment insurance or interest rate risk insurance, cover domestic exporters in their overseas transactions against political and commercial risks. Ksure provides foreign exchange risk insurance to small and medium enterprises lacking foreign exchange capabilities. This instrument protects domestic exporters against currency fluctuations in their overseas transactions. Ksure also provides credit services such as credit research and credit information management, and debt recovery services such as collection of overseas receivables for Korean enterprises. Institution type Ownership Head office Rating Major instruments 27 Information Export credit agency 100% state-owned 7 th Floor, Seoul Central Bldg. 136 Seorin-Dong Jongro-Ku, Seoul, Korea No independent rating, Government of Korea rating (Moody s A+, S&P AA3, Fitch AA- as of July 2014) Export credit insurance, working capital guarantee, investment insurance, bonds and guarantees Tel: (+82) / For more information see NEXI s product brochure: _e.pdf 155

156 List of KSURE products: Short-term products - Export credit insurance - Import credit insurance Medium and long term products - Overseas investment insurance (Investment Financing) - Overseas investment insurance - Interest rate risk insurance - Overseas business financing insurance - Overseas construction insurance - Export bond insurance - Natural resources development fund insurance Foreign exchange risk insurance Foreign exchange risk insurance Others - Product Reliability Insurance - Service Export Credit Insurance - Importer Credit Search - Overseas Debt Collection Service Example of relevant products for private infrastructure investments Instrument Instrument type Eligible investments, borrowers, projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Instrument Instrument type Eligible investments, borrowers, projects Eligible beneficiaries Overseas Investment Insurance (Investment Financing) Insurance Korean developers of overseas projects in the areas of natural resources, property, M&A, etc, that normally require a large-scale long-term financing. Korean investors Stocks, properties, debt (loans, bonds) Political risks - Wars - Expropriation - failure to execute agreements - Transfer risk - Force majeure Commercial Risks - Bankruptcy of the main stakeholder of overseas developers, bankruptcy of domestic developers and defaults. No information No maximum stated Overseas Investment Insurance Insurance This product covers Koreans making overseas investment in stocks, properties, and other rights, or as loans and surety obligations to promote Korea s overseas investments. It covers investment principal, dividends, and interests that cannot be recovered due to political risks Korean companies and financial institutions 156

157 Eligible forms of investment Risk types covered* Maximum tenure Maximum amount or cover Instrument Instrument type Eligible investments, borrowers, and projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Instrument Instrument type Eligible investments, borrowers, and projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Instrument Instrument type Eligible investments, borrowers, projects Stocks, properties, and other rights, or as loans and surety obligations Expropriation War and political violence Transfer and Convertibility risk Force Majeure No maximum stated No maximum stated No maximum stated Interest Rate Risk Insurance Insurance Financial institutions that are covered under Ksure s medium and long-term export insurance and have extended or will be extending export financing for those transactions with a payment period exceeding two years. Financial institutions covered under Ksure s medium and long term export credit insurance, Korean companies Fluctuating interest rate risk No maximum stated No maximum stated Overseas Construction Insurance Insurance Depends on the duration of risks based on shipment, insurance of certificate of performance, payment by construction project owner Contractors of overseas construction projects No information Construction and technological services : Political and commercial risks Construction equipment : political risk ( expropriation, war and money transfer) No maximum stated No maximum stated Natural Resources Development Fund Insurance Insurance Overseas investors 157

158 Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Instrument Instrument type Eligible investments, borrowers, projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Overseas investors Loans: - Loans extended to foreign enterprises developing overseas resources for Korea - Acquisition of loans and private loans extended to borrowers developing overseas resources for Korea Stocks: - Investment in joint stock companies of overseas local subsidiaries and foreign enterprises - Investment for management participation of foreign resources development companies Beneficial interests: - Acquisition of beneficial interests of contract counterparties in revenue transactions Political risks - War - Expropriation - Transfer and Convertibility risk - Breach of contract - Force majeure Commercial risks - Bankruptcy or default of the counterpart - Price volatility risk No maximum stated No maximum stated Foreign Exchange Risk Insurance Insurance No Information Exporters by K-sure indemnifying losses or benefiting gains from foreign exchange where export transactions were paid in advance in the Korea won - Currency fluctuation risk No maximum stated No maximum stated 158

159 Annex Nippon Export and Investment Insurance (NEXI) Summary Founded in 2001, Nippon Export and Investment Insurance (NEXI) is a Japanese public agency wholly-owned by the Japanese government through the Ministry of Economy, Trade and Industry. It is a member of the Berne Union. NEXI s main objective is to promote international trade and support Japanese companies exports by providing various types of trade and investment insurance products to protect their overseas transactions against political and commercial risks that are not covered by private insurers. NEXI provides trade insurance products, including export credit insurance or trade insurance. It also provides investment and loans insurance, including buyer s credit insurance or overseas investment insurance. Export credit insurance is the main insurance product issued, representing more than half of all insurance products provided by NEXI. Medium-long term export credit insurance remains as the major export credit insurance issued by NEXI. Institution type Ownership Head office Representation in SEA Rating Major instruments 28 Information Export credit agency 100% by the government of Japan through Ministry of Economy, Trade and Industry Chiyoda First Building, East Wing 3 rd Floor, Nishikanda, Chiyoda-Ku. Tokyo, Japan NEXI, Singapore c/o JETR0 16 Raffles Quay#38-05, Hong Leong Bldg. Singapore No independent rating, Government of Japan (Moody s Aa3, S&P AA-, Fitch A+) (as of July 2014) Export credit and trade insurance, investment insurance, reinsurance Tel: 81-(0) List of NEXI products : Trade insurance - Export Credit Insurance (General and for SMEs) - Trade Insurance for Standing - Export Bill Insurance - Comprehensive Export Insurance with Simplified Procedure - Prepayment Import Insurance Investment and loans insurance - Buyer s Credit Insurance - Overseas Investment Insurance - Overseas Untied Loan Insurance - Investment and Loan Insurance for Natural Resources and Energy 28 For more information see NEXI s product brochure: _e.pdf 159

160 Example of relevant products for private infrastructure investments Instrument Instrument type Eligible borrowers and projects Overseas Investment Insurance Insurance Japanese company with subsidiary or joint venture in a foreign country, longterm loans or surety obligations; real estate and mining rights investment Eligible beneficiaries Eligible forms of investment Risk types covered Private companies, commercial banks, foreign governments Bonds, debt, equity Political risk: - Political violence (War, terrorism, or force majeure) - Transfer and Convertibility restrictions (inability to remit dividends to Japan because foreign currency exchange are banned or suspension of remittance) No information Maximum tenure Maximum amount Political risk 95% Fee Depending on country risk Instrument Instrument type Eligible borrowers and projects Eligible beneficiaries Eligible forms of investment Risk types covered Overseas United Loan Insurance Insurance Foreign government or company that provide long-term business funds or guarantees to exports from Japan, or purchase of foreign government or company bonds by Japanese firms Private companies, commercial banks Debt, bonds Political risk: Political violence (War, terrorism, or force majeure, such as a natural disaster) Currency Conversion or Transfer Commercial risk Bankruptcy/default of the borrower or the bond issuer Maximum tenure No information Maximum amount Political risk: 97.5%, commercial risk up to 95% Fee Depending on country risk 160

161 Annex Overseas Private Investment Corporation (OPIC) Summary Founded in 1971, Overseas Private Investment Corporation (OPIC) is the US government development finance institution. Since its inception, OPIC has supported more than $200 billion of investments in emerging markets. OPIC is a member of Berne Union that promotes American private sector s investments in projects related for instance to infrastructure, power, food, health or access to finance in developing or post conflict countries. In order to do so, OPIC supports investors and projects by providing financial products including loans, loan guarantees, and political risk insurance. OPIC can also provide assistance in the creation of private investment funds in emerging countries. Institution type Ownership Head office Rating (implicit) Major instruments Information Investment agency 100% state-owned, the Corporation is governed by a 15-member Board of Directors, of whom eight are appointed from private sector and seven from the Federal government 1100 New York Avenue, NW, Washington, DC , USA US Government Moody s Aaa, S&P AAA, Fitchs AAA Political risk insurance, loans and loan guarantees Tel: Contact Person: Alison Germak, Director, Corporate Development alison.germak@opic.gov List of OPIC products : - Direct loans - Loans funded by OPIC Investment Guaranties to U.S. capital markets investors - Investment Guaranties to Third Party Lenders - Political Risk Insurance Example of relevant products for private infrastructure investments Instrument Instrument type Eligible investments, borrowers, and projects Eligible beneficiaries Political Risk Insurance (PRI) Insurance U.S. investors, lenders, contractors, exporters, and NGOs investing in eligible developing countries 29 in a form of new ventures, expansions of existing enterprises, privatisations and acquisitions with positive developmental benefits U.S. citizens; Corporations, partnerships or other associations created under the laws of the United States, its states or territories, and beneficially owned by U.S. 29 For the full list of the countries see: 161

162 Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover 30 Other conditions Instrument Instrument type Eligible investments, borrowers, and projects Eligible beneficiaries citizens; Foreign corporations that are more than 95% owned by investors eligible under the above criteria; and Other foreign entities that are 100% U.S.-owned Equity investments, parent company and third-party loans and loan guarantees, technical assistance agreements, cross-border leases, consigned inventory or equipment and other forms of investment, contractors and exporters exposures Political Risk Currency Inconvertibility Expropriation and other forms of unlawful government interference (including creeping expropriation) Political Violence, war Specialty products: contractors and exporters; institutional loans; capital markets; breach of contract; non-honouring of a sovereign guarantee; reinsurance; natural resources (excluding oil and gas); leasing Equity coverage: 20 years Loans, leases and transactions: equal to the duration of the underlying contract or agreement Ability to cover up to $250 million per project 90% of eligible investment 180% to cover future earnings 100% of principal and interest for loans and capital leases from financial institutions to unrelated third parties Insurance rates may fall outside of the rages shown in the table above, depending on the particular risk profile of the project The ranges shown also could be adjusted and affect rates for potential insurance contracts. However, once an insurance contract is executed, the rates in that contract are fixed for the contract s term. OPIC insurance may not be available for certain coverage, or there may be limitations for underwriting or other reasons. Investors should consult the country list page regarding availability in particular countries. Investors must comply with U.S. economic environmental, worker rights, and anticorruption practices Investment Guaranties to Third Party Lenders Loan guarantees Projects or transactions in eligible countries that are commercially and financially sound, and are within demonstrated competence of proposed management, which has a proven success record and a significant financial risk in project Guarantees are issued to US or host country financial institutions. OPIC expects the U.S. participation in the underlying investment to be the value equivalent of at least 25% of the equity of the project 30 Coverage amounts may be limited for investments in countries where OPIC has a high portfolio concentration 162

163 Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover 31 Fee 32 Other conditions Loans, guarantees (parent company and third-party loans) Default on borrower payment for any reason Tailored to the economics and financials of the investment, and may exceed 15 years in the case of infrastructure and power projects OPIC generally will not support more than 75 percent of the total investment or $250 million per project. The base interest rate (usually a US Treasury-based rate) and any administrative spread are negotiated between the TPL and the Borrower. OPIC adds a risk premium called a Guaranty Fee to the base rate. A host country guarantee is normally not required for a loan guarantee. Investors must comply with U.S. economic environmental, worker rights, and anticorruption practices Annex Philippine Export-Import Credit Agency (Phil EXIM) Summary Founded in 1977, Philippines Export Import Credit Agency, (PhilEXIM) is the Philippines export credit agency. It is a state-owned agency under the auspices of the Department of Finance. PhilEXIM s main objective is to ease international trade and support domestic companies exports in priority sectors such as infrastructure, agrimodernization and power generation. To do so, PhilEXIM provides financial instruments including guarantees, loans and export credit insurance, particularly to small and medium enterprises (SMEs). Institution type Ownership Export Credit Agency 100% owned by the Ministry of Finance Head office 17/F Citibank Tower, Citibank Plaza, Valero St. Salcedo Village, Makati city, 1226 Philippines Major instruments Information Guarantees, export lending, export credit insurance List of PhilEXIM products : - Guarantee Program for Large Accounts - Guarantee Program for SMEs - Short term direct lending program for SMEs - Medium to long term direct lending program for SMEs - Wholesale direct lending program for SMEs 31 Coverage amounts may be limited for investments in countries where OPIC has a high portfolio concentration 32 Investors should contact OPIC directly for information on pricing for Non-Honouring of a Sovereign Guarantee and Oil and Gas Coverage 163

164 Example of relevant products for private infrastructure investments Instrument Instrument type Eligible borrowers and projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount Fees Other conditions Guarantee Programme for Large Accounts Guarantees on loans to direct and indirect exporters, firms involved in priority projects of the National Government and import substitution industries Guarantees on investments Any entity, enterprise or corporation organised or licensed to engage business in the Philippines Focus on 6 strategic tourism, information and Communications Technology (ICT), agri-modernization, infrastructure, energy and mining Lenders, private sector company Project financing (loans, debt, equity, credit), CAPEX inclusive of land acquisition, Working capital Short term: up to 1 year Medium term: More than 1 year up to 3 years Long term: more than 3 years (no set maximum) Up to 90% of the principal of the approved loan Application Fee: P100,000 plus GRT, payable up-front upon application, nonrefundable Processing Fee: 1/8 of 1% of the guaranteed amount plus GRT, payable upon receipt of Notice of Approval Guarantee Fee: Maximum of 2.5% per annum, plus GRT Amendment or Extension Fee: P5,000 plus GRT per amendment or extension For projects in the above-mentioned priority sectors, PhilEXIM provides financing with less than market rates and longer tenures from bilateral and multilateral lending institutions or foreign export credit agencies (ECAs) Annex UK Export Finance Summary Founded in 1919, UK Export Finance UKEF is the operating name of the Export Credits Guarantee Department (ECGD); a government department that reports to the Minister for Trade and Investment, and the Secretary of State for Business and Innovation and Skills. It is the UK s official export credit agency and a founder member of the Berne Union (the International Union of Credit & Investment Insurers). UKEF s statutory purpose is to support UK companies that export and investment overseas. It does so by providing various types of products such as loans, guarantees, insurance and reinsurance. Institution type Ownership Head office Rating Export credit agency Part of UK government 1 Horse Guards Road, London SW1 2HQ No independent rating, UK sovereign rating (Moody s Aaa, S&P AAA, Fitchs AAA) 164

165 Major instruments Information Export credit loans guarantees and insurance and overseas investment insurance Tel: List of UK Export Finance products : - Overseas Investment Insurance - Bond Insurance Policy (BIP) - Bond Support Scheme - Buyer Credit Facility - Supplier Credit financing facility - Export Insurance Policy - Export working capital scheme - Export Refinancing Facility - Direct Lending facility Example of relevant products for private infrastructure investments Instrument Instrument type Eligible investments, borrowers, and projects Eligible beneficiaries Eligible forms of investment Risk types covered Maximum tenure Maximum amount or cover Fee Overseas Investment Insurance Insurance The investor must be carrying on business in the United Kingdom and not simply acting as a conduit for investment from outside the United Kingdom The investment must be made in an enterprise outside the United Kingdom where cover is requested for a guarantee given in respect of an investment in an enterprise, the person giving the guarantee must have an interest in that enterprise Investors (direct or indirect) Any investment of resources may be considered for cover, including loans or subscriptions for shares Indirect investments and guarantees given to other investors may also be covered Political risks war, civil war, revolution and insurrection in the host state expropriation or nationalisation of the enterprise in which the investment is made (or of its property) contrary to international law restrictions on remittances, including exchange controls, imposed by the host state 15 years (may be renewed annually on the same terms and premium rate) Up to 90% of losses No application fee, a risk premium is determined on a case by case basis, and paid annually upon renewal of the policy 165

166 Instrument Instrument type Eligible investments, borrowers, and projects Eligible beneficiaries Eligible forms of investment Risk types covered* Maximum tenure Maximum amount or cover Fee Instrument Instrument type Eligible investments, borrowers, and projects Eligible beneficiaries Bond Insurance Policy (BIP) Insurance Where a UK bank issues a bond on their behalf to an overseas buyer, or a counterguarantee to a bank in the buyer s country, as a condition of an export contract. UK exporters All types of bonds for export contracts, except tender or bid bonds. The unfair calling of the bond (or any related counter-guarantee) The fair calling of the bond (and any related counter-guarantee) due to certain political events such as government actions (including the cancellation or non renewal of export licences), war, hostilities, civil disturbances and similar events outside the UK No maximum stated 100% No application fee, a risk premium is determined on a case by case basis Export Insurance Policy Insurance - buyer must carry business overseas - if the risk period is less than 2 years, UKEF along with other EU ECAs is unable to offer credit insurance if the buyer is within the European Union, or other high income countries (Australia, Canada, Iceland, Japan, New Zealand, Norway, Switzerland and the United States of America). This restriction does not currently apply to Greece - exporter must be carrying business in UK - contracts must contain a minimum of 20% UK content Eligible forms of investment Risk types covered Commercial risks : - Insolvency of the buyer - Buyer default or inability to pay any amount due under an export contract Political risks : - political, economic or administrative events outside the UK that prevent payments from the buyer under the export contract being converted into sterling or transferred to the UK - hostilities or civil disturbances outside the UK that affect performance of the an export contract Maximum tenure Maximum amount -up to 95 % is provided to the exporter or cover Fee No application fee, a risk premium is determined on a case by case basis 166

167 Glossary Absolute vs Relative value for money: Absolute value for money concerns the question whether the benefits of the project exceed the costs, while relative value for money concerns the question whether procurement through PPPs outperforms Traditional Infrastructure Procurement (TIP) in terms of value for money. Brown-field infrastructure projects: The concessioning of already existing facilities, such as toll roads, to a private sector operator for operation, maintenance, and direct revenue collection (by end users). Compared to greenfield projects, brownfield projects have a lower risk, including no construction risk, and lower returns. Concession contract (including BOT, BOO etc.): the private sector operator (Concessionaire) is responsible for the full delivery of services in a specified area, including construction, operation, maintenance, collection, management, and rehabilitation of the system. Although the private sector operator is responsible for providing the assets, such assets often remain publicly owned and are returned to government at the end of the Concession period. The public sector is responsible for ensuring that the Concessionaire meets performance standards and regulates the price and quality of service. The Concessionaire collects the user fees directly from the system s customers, usually at a set tariff (although in certain cases the government may provide some financing support). Specialised forms of concession contracts include Design Bid Build (DBB), Build Operate Transfer (BOT), Design Build Finance Operate (DBFO), and Build Own Operate (BOO). Contingent Liabilities: Obligations that have been entered into, but the timing and amount of which are contingent on the occurrence of some uncertain future event. They are therefore not yet liabilities, and may never be if the specific contingency does not materialize. They are mandatory for the state in case of the occurrence of certain events. Examples: government loan guarantees, government insurance programmes, and legal claims against the government. Contractual agreement: A contract is a voluntary, deliberate, and legally binding agreement specifying the rights and obligations of the two or more parties to the contract. Credit Default Swaps (CDSs): A CDS is a financial swap contract between two parties where the seller of the CDS commits to compensate the buyer if a third-party/ debtor defaults on a loan. In case of default, the buyer receives compensation - generally the loan s face value - and transfers the possession of the defaulted loan to the seller of the CDS. Credit enhancement: Credit enhancement is an approach to improve the debt or credit worthiness of a structured financial transaction, like loans and bonds. Applied instruments reduce credit/default risks with the aim to improve the credit rating with positive impacts on access to finance and financing conditions. External instruments include: insurance, guarantees, surety bonds or letter of credits. Internal instruments include: senior/subordinated structures, overcollateralization and reserve accounts. Derivatives: Derivatives are contracts whose value derives from the performance of an underlying asset. The underlying asset could be stocks, bonds, commodities, currencies, interest rates and market indexes. Derivatives could be used to insure against price movements of input/raw material or currency fluctuations (hedging). Derivatives are traded on futures markets and over-the-counter markets. Export Credit Agency (ECAs): ECAs are public or quasi-governmental institutions that provide domestic exporters, lenders and investors with financing services, such as guarantees, loans and insurance, to mitigate their exposure to commercial and political risks of exports to and investments in overseas markets. ECAs have the primarily aim to support the national economy. Financial Closure: Closure occurs when a legally binding commitment of the private party to mobilize funding or provide services is in place. 167

168 Internal rate of return: The growth rate that a project is expected to generate. It is also the discount rate often used in capital budgeting to make the net present value of a project s cash flows equal to zero. Monoline Insurance provides credit enhancement, whereby the monoline insurer ensures principal and interest payments. The ratings of the debt issues reflect often the provider s credit rating. Most Favoured Nation: MFN treatment under investment agreements is generally understood to mean that an investor from a party to an agreement, or its investment, would be treated by the other party no less favourably with respect to a given subject-matter than an investor from any third country, or its investment. National treatment: It requires governments to treat foreign-owned or -controlled enterprises no less favourably than domestic enterprises. Needs assessment: A systematic process that identifies the gaps in the current infrastructure stock.. It ususally takes place before a project procurement process is initiated. Net present value (NPV): The NPV method is used in capital budgeting to analyse the profitability of a project. It is the difference between the present value of cash outflows and inflows, taking inflation and returns into account through the discount rate. Optimism bias: The tendency for ex ante assessments to underestimate the cost and time it will take to complete a project) Payback period: Refers to the amount of time required to recover the cost of an investment, with better investments having a shorther payback period. It is an important determinant of whether or not to undertake a project. Project sponsor: Sponsors are private entities that have an equity participation in the SPV/Project Company. Public Participation in Infrastructure (PPI): PPIs encompass four types of infrastructure projects with private involvement: management and lease contracts, concessions, Public-Private-Partnerships (PPPs) and divestitures/private ownership Public-Private Partnerships (PPPs): Private sector participation in infrastructure can occur through full or partial privatisation i.e., the sale of shares or assets held by SOEs to the private sector or through public procurement processes, which can take the form of PPP agreements (see Table 1 above). The OECD defines PPP agreements as long-term contractual relationships between a public body and a private partner (or a consortium of private firms) under which the latter may be tasked, to a varying degree, with the design, construction, financing, operation and management of a capital asset to deliver a service to the government or directly to end users. Under a PPP scheme the asset is typically owned by the private co-contractor while being operated, but there are usually provisions in the contract for the transfer of its legal property to the public sector at the end of the contract. For the purposes of this questionnaire the PPP concept includes both pure PPP, i.e. projects where the main source of revenue for the private partners is government (in the form of regular payments or a unit charge), as well as concessions (see definition above where the main source of revenue are user charges levied by the private partners on the beneficiaries of the services). While there are several variations to this basic definition, compared to more traditional forms of procurement PPPs generally imply greater participation of the private sector as they transfer both the construction and the operation of the asset, and involve private contractors over lengthier periods of time. 168

169 Therefore, the main distinction between PPPs and more traditional forms of public procurement is the allocation of risk. Public-Private Partnerships (PPP) Unit: An organisation that has been set up with aid of the government to carry out any of the following functions with regard to PPPs: Policy guidance, Technical support; capacity building, PPP Promotion, quality check of specific PPP projects, approval of specific projects. Public Sector Comparator (PSC): In principle the PSC provides a benchmark for the PPP bids based on a reference project. The reference project is the most likely and efficient form of public sector service delivery that could be employed to satisfy all elements of the project specification. It must reflect the same performance requirements that the PPP contract bidders are asked to deliver. The PSC does not have assumed that everything will be done by the private sector. Often elements of contracting out and outsourcing of certain services will be included in the PSC. The creation of the PSC reference project calculation feeds into the actual determination of output criteria in the bidding material. (see Partnership Victoria, Public Sector Comparator, Technical Note July 2003). Put-or-Pay or Pass-Through: Put-or-Pay contracts transfer the supply risk to the supplier, as the supplier guarantees to the project company to deliver the inputs. In case the supplier fails to honour the contract, indemnity payments would compensate for the project company s higher cost of purchasing the input goods on the market or for foregone revenue. Pass-through contracts transfer the risk of fluctuating prices of input goods from the project company to the off-taker by linking the input prices of the supply contract with the offtake prices. Residual income: The income generated by a firm or project after accounting for its true cost of capital. It is the return earned in excess of the minimum required return. Special Purpose Vehicle (SPV) or Project Company: A corporate entity created to manage the private infrastructure project. Traditional infrastructure procurement (TIP): the acquisition by government of infrastructure such as roads and buildings (i.e. hospital buildings, school buildings). Usually government specifies the design requirements of the capital asset. A private company builds and subsequently transfers it to government, who then operates the asset (see Service Contrat below). Service contract: under a service contract, the government hires a private company or entity to carry out one or more specified tasks or services for a period, typically one to three years. The public authority remains the primary provider of the infrastructure service and contracts out only portions of its operation to the private partner. The private partner must perform the service at the agreed cost and must typically meet performance standards set by the public sector. Under a service contract, the government pays the private partner a predetermined fee for the service. Single-buyer model: this consists in the legal separation of power or water generation from transmission and distribution functions (a first step towards unbundling these sectors see definition below). The single-buyer model first appeared in developing countries power sectors in the 1990s, to relieve capacity shortages. Private investors are authorised to construct power plants independent power producers, or IPPs to generate electricity which they sell to the national power company (the state-owned single-buyer which retains monopoly over transmission and distribution functions). The single-buyer model preserves a key role for the sector ministry in decisions on investments in generation capacity; it also helps to maintain a unified wholesale electricity price, simplifying price regulation. However there are several downsides which include (among others): a lack of competition in transmission and distribution; contingent liabilities which are placed on governments engaged in power purchase agreements with IPPs; and possible inadequation between electricity prices and demand. State owned enterprise (SOE): Enterprises established according to Company or statutory laws, where the State has significant control, through full, majority, or significant minority ownership. Some SOEs have a mainly commercial objective, with an expectation to earn profits and bring in a revenue stream to the government 169

170 budget (these are not funded/subsidised by the government/state budget and fully use their own sources of revenue). However more frequently in infrastructure markets where end-user affordability and access is also a concern, SOEs do not always operate on a full cost-recovery basis. They might be partially funded/subsidised by the government or state budget, and partially use their own sources of revenue. Nevertheless some of their objectives retain a strong commercial character therefore holding potential for competition with/from the private for-profit sector. Value for money: Value for money is a concept that includes both qualitative and quantitative aspects and typically involves an element of judgment on the part of government. It can be defined as what government judges to be an optimal combination of quality, features and price, calculated over the whole of the project s lifetime. 170

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