Infrastructure has long been touted as the cure-all sector that will spark a new period of prosperity for law firms. But are expectations now running too high?
A familiar refrain is reverberating in legal practices throughout Asia. It goes something like this: yes, the economy is in recession; yes, there may be worse to come; but help is at hand in the form of government stimulus packages. Upgraded investment in infrastructure and resultant legal work will provide a much needed boost for firms.The optimism is to an extent well founded. With governments and their partners sinking billions into infrastructure, it is inevitable that a demand for legal services will be generated as a result of these project and firms will take their share. But some regions may benefit more than others and the inevitable question persists: where will the private sector funding come from?
Regional overview
The Singapore government put a PPP program in place in 2004 and has since been successful in getting a number of projects off the ground. "In Singapore, the public sector construction demand is expected to increase to between S$17bn and S$19bn this year with projects slated to proceed this year such as the MRT [railway] projects, including the Downtown Line, the North-South Line Extension and Jurong East Connection,” says John Brells, Asia-Pacific managing director of Hill International.
Lovells Lee & Lee managing partner James Harris says that there has also been a reasonable amount of infrastructure activity, particularly in the transport and power sectors, in Indonesia, Vietnam and the philippines. “In Vietnam there is a port capacity shortage, which led the government to look at ports and related infrastructure such as roads and rail. There is a strong potential for work there, however, I’m not sure that the projects proceeded as far as many would have liked before the financial crisis hit,” he says.
The financial crisis will also have an impact on attempts to raise capital to fund infrastructure in India.
The India Infrastructure Finance Company, a government SPV which provides funding assistance for infrastructure projects, was recently authorised to conduct multi-billion dollar capital raisings via the issue of tax-free bonds. However, some estimate that the country faces the challenge of raising close to US$190bn over the next three years to fund key infrastructure projects – a considerable feat, particularly given the liquidity crisis.
Local rivals
Singapore and Hong Kong are naturally better placed than their developing regional neighbours to secure funding for projects. However, Hong Kong has lagged somewhat behind Singapore. “There has been talk of projects such as hospitals, prisons, new bridges, but these have been slow to get started,” Harris says. It is a shortcoming with which the Hong Kong government seems to have come to terms. “In its policy address in 2007, the Hong Kong Government admitted that it had neglected infrastructure development,” Brells says. “Given the huge budget surplus, the government decided to push ahead with major infrastructure development to redress this imbalance.” He says that this commitment has been stepped up following the economic crisis, with a string of major projects such as the West Kowloon to HK Border express link and the Hong Kong-Zuhai-Macau Bridge currently under way.
And Sam Farrands, managing partner of Minter Ellison’s Hong Kong office, disagrees that Hong Kong is lagging behind Singapore in terms of infrastructure projects investment. “The only aspect [where there might be a lag] is with respect to significant private sector participation over the last five years. That lack of private sector participation is set to change with projects such as the West Kowloon Cultural District, Hong Kong-Zhuhai Macau Bridge and the Kai Tak Development, including the East Cruise Terminal,” he says.
Minter Ellison has recently enhanced its infrastructure team with the addition of Hilary Cordell and Fiona Connell, along with their team, from Hong Kong boutique firm Cordells. Minters will be particularly looking to leverage the combination of Cordells’ expertise in planning, development and environmental law with Minters’ major projects and infrastructure focus. “Planning and environmental law has not been a big practice area in its own right in HK, and there are few dedicated practitioners in these areas,” Farrands says. “The combined strengths will help secure our involvement in major development projects.”
Financing
Harris states that the finance aspect of infrastructure projects has changed: “There is a significant liquidity problem. A lot of the project finance banks have had to be bailed out by governments and have their own issues,” he says. “Also, the Royal Bank of Scotland, which was involved in quite a few Asia projects, has announced that it’s closing its project finance business.”
The result, Harris says, is that it has become more challenging for lawyers to create a loan structure that will work: “The terms for credit are very different now. Previously, the tenor of a loan might have been 15 to 25 years, but now that has shrunk to typically five to seven years. Fees have increased and interest margins have shot up,” he adds.
Has the funding situation put any projects in jeopardy? Harris says he is not aware of any deals which have been cancelled as a result of a lack of liquidity, but he notes that some international have been put on hold for restructuring. And while he says that recent government commitments to boost infrastructure spending will help, he believes the real key to getting banks involved again is the involvement of multilateral agencies such as ADB and IFC in transactions.
Ironically, the fact that Hong Kong has had less resort to private funding to date means that its projects are better insulated from the vagaries of the economic downturn. “The vast investments of the [announced] infrastructure projects are government funded, so there should not be a significant issue for Hong Kong,” Farrands says.
Other infrastructure work
While buyers of infrastructure assets have been cautious of late, Harris says there is still a significant potential deal flow in infrastructure M&A. “In the first half of this year, buyers seem to be taking time to identify good assets and acquisition activity will likely pick up in the second half of the year,” he says, adding Minter Ellison that China and possibly Japan are likely to be the source countries for this kind of deal activity.
Farrands, meanwhile, believes that infrastructure M&A is less buoyant than in the past. “There is a clear appetite for investment in infrastructure, but with asset prices still decreasing we do not see transactions increasing until its asset prices are seen to be at the bottom,” he says.
Another area Harris tips to pick up is the need for political risk insurance. “It’s becoming an integral part of many infrastructure projects in emerging markets such as southeast Asia,” he says. “People are looking at the risk profiles of projects, their home jurisdictions and issues such as the capacity to exchange currency freely– Indonesia and Vietnam are two countries where political risk insurers could become active again.”
Dispute resolution
Unsurprisingly, disputes and arbitration work is on the increase. “There is an increase in tensions between joint venture partners and parties to contracts,” Harris says. “There’s a lot more instances of parties trying to get out of contracts or taking a harder line as a result of the current economic situation.”
Needless to say, prevention is the best cure for disputes and Brells says it is important to implement an
effective management of the contract as well as the project. “Both sides of a project need to be aware of the ‘ins and outs’ of their contract. They need to be aware of where their particular risks lie within the contract, and to manage those risks as best as possible, and what their entitlements are under the contract. For instance, if there is a notice provision in the contract, be aware of its time limitations and your responsibilities to meet it,” he says.“If there are project control requirements, use them and anage
the project with them. They have been included for a reason. So often we see where the focus has been on getting the project built and contract administration takes a back seat.” ALB