Project Finance in Asia Pacific: Practical Case Studies

A new book published in 2002 by Euromoney Books.

Preface

 The requirements for project finance in Asia Pacific are at least US$200 billion per annum according to the International Finance Corporation, Washington, DC, or the Asian Development Bank, Manila.  This figure is about half the pre-1997 level when Asia was regarded as the world growth model to match -- the ‘Tiger Economies.’  However, the decade of the 1990s drew to a close with these economies reeling from severe indigestion caused by too much foreign-currency exposure which rippled through Asia in 1997.  Australia/New Zealand managed to escape unscathed.

When United States bankers turned their project teams loose in the 1960s, it was Asia Pacific resources developments that saw the early ‘big deals’ in the world of bank project financing as we now know it.  Asia Pacific seemed a refuge from the Latin American debt crisis of the 1970s/early 80s and the American bankers turned to Europe as well at that time, again with the pioneering deals being offshore oil projects in the North Sea.

 The power industry is a sector where contractual cashflows or a concession position can be obtained.  The classic Power Purchase Agreement (“PPA”) -- a long-term contract -- passes through the key fuel-cost risk to the power purchaser.  Electricity generation was the first to the line with deals that stretched debt levels (up to 80-90% on the funding required); longer term (loan life), and tested country-risk appetite. 

 Any view of Asia Pacific soon focuses on the infrastructure sector as the major requirement for development and growth.   The heart of any project-finance structure is the packaging of risk, which requires future cashflow certainty, which is not easy to achieve for infrastructure transactions. 

 Governments saw the headlines blaring about BOOT, BOO, BTO, and all the acronyms for getting other peoples’ money and risk shedding.  Privatisation was seen as a neat way to raise cash; hand off the growth problems to the private investors/operators; while perhaps cleaning up the labour, maintenance, or environmental risks that were flagging because of the lack of money in governments’ coffers.  Some surprising bidding frenzies were orchestrated by governments in the region.

 The leverage for these deals came from project-financings where the bankers came to rely on consultants to judge markets.  No one is contracted to use an infrastructure system or service, such as tollroads or telecoms.

 However, the pursuit of urban mass transit could not attract project finance unless government was willing to provide a capital grant or revenue subsidy.  Governments soon discovered that in the UK the Private Finance Initiative had (slowly) developed a way to bring private investment through the provision of targeted services such that the business model moved to a ‘Public-Private Partnership,’ although to the public ‘partner’ that still did not mean spending any money.

 The Asia Pacific region is quick to pick up any international trends in structuring or angles in funding a project-finance transaction.  In part, this is a result of expensive local-currency interest rates, certainly when compared to US$ borrowing rates.  This required some US$-dollar indexation in tariffs as the means to pass through the US$ lending exposure to the ultimate customer.  This currency indexation meant that many Asia-Pacific infrastructure and power project financings were chronically exposed to FX risk.  Local forward cover was thin or very short term – six to 12 months at the most.  When the 1997 currency crisis -- the ‘Asian Contagion’ -- hit, many of these projects were instantly in default. 

 But some of the projects had managed to secure advantageous long-term facilities by designing the transaction to suit the 144A debt placement market in the USA.  Indeed, Asia-Pacific project-finance deals consistently were the largest and longest maturities in that market, capped off by the Ras Laffan project, one of the cases in this book.

 The variety of funding and deal architecture is at its innovative best in Asia Pacific.  The 16 cases in this book have been selected to display the wide range of expertise and deal development for the key sectors and funding sources.  Asia-Pacific project sponsors recognise that project financing not only offers a cheap and clean technique for risk transfer, especially for political risk, but that the project-financing discipline itself makes for a more robust project in any event.  It can also help focus the government ‘partner’ on a sensible allocation of risk. 

 The resilience of project financing has been stress tested by the Asian Contagion.  The author is not surprised that the Asia-Pacific region has and will rebound as a leaner, meaner deal engine for the project finance world as a whole.

Richard Tinsley, President

International Advisory & Finance

Hay St Centre, 2 Hay St,

Sydney, Australia, 2031

iaf@compuserve.com