SUPPORTING INFRASTRUCTURE DEVELOPMENT IN ASEAN ECONOMIES: THE ACCESS TO RISK MITIGATION INSTRUMENTS Knut Gummert, OECD Southeast Asia Division UNESCAP EGM meeting 25 November 2015
Outline i. OECD projects and reports on PPPs ii. Project risks and applied risk mitigation instruments iii. Demand and supply of political risk insurance / guarantees in Southeast Asia iv. Report findings 2
OECD PROJECTS AND REPORTS ON PPPS 3
OECD projects and reports on PPPs and the collaboration with Southeast Asia OECD work on PPPs OECD Reviews of PPP frameworks on Indonesia, Germany, Russia etc. OECD Dedicated PPP units: A survey of institutional and governance structure OECD Principles for the Public Governance of PPPs PPPs: In pursuit of Risk Sharing and Value For Money OECD Investment Policy Reviews OECD Southeast Asia Regional Programme Established 2014; Establish OECD Jakarta office in 2015 Regional Policy Network meeting on connectivity and PPPs ASEAN Principles for PPP Frameworks (2014) Workshops in ASEAN countries on Principles Review of the PPP centre in the Philippines Project on Access to Risk Mitigation Instruments for Private Infrastructure Investment in Southeast Asia 4
Project on Access to Risk Mitigation Instruments for Private Infrastructure Investment in ASEAN Purpose: The project aims to foster infrastructure development through improving the understanding of risks and the access to risk mitigation instruments (RMI) in the ASEAN region. Report on access to financial risk mitigation instruments in PPPs 1. Identify main commercial and political risks in private infrastructure investment; 2. Applied Risk Mitigation Instruments (RMI), with a focus on 3. Demand and supply of Political Risk Insurance and guarantees from private insurance companies, bilateral and multilateral agencies. 4. Assessment of legal framework for investment protection Risk Mitigation Database 1. The database includes project findings on main project risks and most effective RMIs to cover commercial and political risks. 2. Overview of insurance and guarantees to mitigate main political and commercial risks 3. The database is developed by the ASEAN secretariat, supported by the OECD. 5
PROJECT RISKS AND APPLIED RISK MITIGATION INSTRUMENTS 6
Political and legal risks are main constraints for private infrastructure investment in ASEAN Limited market opportunities Bribery and corruption Shortage of economic infrastructure Land acquisition Access to permits, licences, authorization Access to debt and equity financing Capacity of the governmental counterparties Lack of clear and stable legal and regulatory framework Political risks Access to skilled labour/staff Macroeconomic instability Source: Project Risks and Mitigation survey Respondents 0 5 10 15 20 25 7
Main commercial and political risks: Main political risks: - Adverse Regulatory Changes - Breach of Contract - Non-Honouring of (Sovereign) Financial Obligation Main commercial risks: - Construction risk - Exchange rate risk Followed by - Counterparty risk - Demand risk - Social and environmental risk Source: Project Risks and Mitigation survey The constrain of commercial and political risks on access to equity and debt financing varies among ASEAN Member States. 8
Political risk insurance are mentioned as the most effective instrument to mitigate political risks and Invested gradually while developing Joint venture or alliance with local company Risk analysis Political Risk Insurance Credit Default Swaps Consultations with government and Consultations with local communities and Contractual allocation of political risk to Use of third-party consultants Operational hedging No mitigation strategies used Respondents Source : Author s calculations based onoecd Project Risks and Mitigation survey Note : Multiples answers of up to 3 options 0 5 10 15 20 9
bilateral agencies issue largest share of political risk insurance and guarantees Legal & regulatory framework on investment protection Loan, subsidies, guarantees Government Project Company Government provides guarantees Financing Beneficiaries Commercial banks, project sponsors, institutional investors Commercial and political risk insurance Investment, export insurance Private insurance companies / Lloyds Bilateral agencies (ECAs, EXIM) Loan, grants, guarantees Partial Risk / Credit Guarantees Multilateral Institutions (WB MIGA/IFC, ADB, CGIF, AIF, IsDB) Loans, equity provision Co-insurance and Risk participation agreements 10
DEMAND AND SUPPLY OF POLITICAL RISK INSURANCE / GUARANTEES IN SOUTHEAST ASIA 11
Demand for PRI in ASEAN increased since the global financial crisis Political risk insurance eases the access to equity and debt financing (longer tenures, lower financing costs). Demand for PRI in ASEAN after the Global Financial Crisis Decreased 0% Demand for PRI cover differs among SEA countries: Low demand: Brunei, Malaysia and Singapore Increased 66% Do not know 34% Medium demand (for certain infrastructure projects): Thailand, Philippines and Indonesia Higher demand: Lao PDR, Cambodia, Myanmar and to a lesser extent Vietnam. Source : Project Risks and Mitigation survey (2015) 12
PRI supply decreased in 2008, but increased strongly from 2009 on Background: Global Financial Crisis increased risk awareness. Financial institutions stopped issuing monoline insurances in ASEAN & private insurance companies reduced exposure, tenors and capacity. Private insurers and banks reduced exposure to ASEAN Member States after the global financial crisis (2007/08). Bi- and multilateral providers increased the provision of Political Risk Insurance (PRIs) and develop new products. Governments increasingly provide financial support (VGF, grants, subsidies, guarantees) Private insurers increasingly provide coverage for political risks, but limited market capacity and tenor. Increasingly but still low collaboration between private and public providers (mainly reinsurance). 13
Global and ASEAN new business and exposure to Political Risk Insurance increase but 30 25 In billion USD 20 15 10 5 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 New business (ASEAN) Exposure (ASEAN) Source: Author's calculation based on data from Berne Union 14
constraints persist in Southeast Asia High perceived risk levels in certain Southeast Asian economies Limited Political Risk Insurance (PRI) cover: Access to 4 point PRI limited in countries with higher risk perception. Limited access to insurances against Breach of contract (BOC) insurances limited (e.g. require off-take agreements, sovereign guarantee) and adverse regulatory changes. Long period before claim and disbursement Premiums decreased but can be still high for countries with a higher risk perception. Perceived lack of knowledge on risk allocation and mitigation instruments Private insurers do not match the tenure and capacity of infrastructure projects. Increased collaboration between providers. 15
REPORT FINDINGS 16
REPORT FINDINGS Strengthen legal and institutional framework Establish a transparent, stable and predictable legal and regulatory framework on investment protection with the aim to reduce investors and lenders risk perception. Strengten the institutional framework by, for example, establishing sufficiently resourced and appropriately mandated PPP units and independent regulators. Guarantee a efficient legal and court system. Develop track record of successful PPP projects Increase access to insurance and guarantees Open the insurance sector for foreign investors to increase supply of insurance against political and commercial risks Increased collaboration between private and public insurance providers Facilitate data collection and common performance measures on PPP Public risk mitigation tools (ensure Value for Money, contingent liabilities) 17
For further information, please contact: Knut Gummert Policy Analyst OECD Southeast Asia Division Knut.GUMMERT@oecd.org 18