The heat is on in Thailand for contractor Hopewell dubbed Hopeless by some Bangkok cynics as it struggles to complete an ambitious 60km road and rail system amid continued concern about the Hong Kong-based company's financial health. The job has to be finished by 1998 when Thailand hosts the Asian Games. Five years after the concession was granted, however, the $3.2 billion project is just 20% complete. Running the company is Gordon Wu, who is struggling to juggle government and commercial pressures and to raise money to fund the project.
The Hopewell saga is perhaps an extreme example of Asia's infrastructure problems but it is by no means an isolated case. The region as a whole is fighting to keep its infrastructure up to speed with economic growth. Although some countries notably Hong Kong and the Philippines seem to have got the hang of project financing, there are plenty of latecomers scrambling up a steep learning curve. The question is whether financing problems and political wrangling will drive their utopian visions off the rails.
The World Bank estimates that between $1.2 trillion and $1.5 trillion will need to be invested in infrastructure during the next decade in the developing east Asian countries alone. That implies 7% of the region's gdp going towards transport, power, telecommunications and water projects. Others believe the actual figure invested could be nearer half that. "Despite the activity and brainpower," says one adviser, "when you look at what's been done, it's a drop in the ocean."
The sheer scale of the region's infrastructure needs means there is an almost bottomless pit of deals for the banks. The biggest spoils, however, will go to those with project finance teams skilled enough to distinguish the good from the bad and capable of perfecting the art of structuring a deal. "The turkeys outweigh the good deals by quite a bit," says Robin Earle, associate director at Deutsche Morgan Grenfell. "A number of project sponsors have not yet realized that for raising limited-recourse debt finance there is a threshold in terms of security which banks will not go below, however much money is thrown at them."
Overall the banks are upbeat about infrastructure prospects. "It's not such a negative story," says JP Morgan Thailand representative John Crane. "Our perception is that project finance works very well for good projects. There is so much that needs to be financed in Asia. Capital is a scarce resource and it is going to be the weak ones that will have a hard time."
The different pace of regulatory and economic change has meant that some countries offer more attractive projects than others. "It is probably a misnomer to talk about the Asian market, as each country is in itself a different market," says Conor McCoole of BZW in Singapore. "The Philippines is now like Indonesia was five years ago, which itself is now like Thailand was five years ago. They will progress to greater and greater creditworthiness."
The growth of demand for infrastructure projects has thrown doubt on funding capacity. "The consensus is that no-one knows where all that finance is going to come from," says Crane. "The need is greater than the available finance." But Simon Moules, head of project finance and syndications at HSBC Investment Bank Asia, believes there is a long way to go before funds are exhausted, particularly as US capital markets are playing an increasingly important role. Export credit agencies have also shifted in the last three years from lending with sovereign and quasi-government backing to taking greater project risk. And more banks are entering the field, forcing increasingly aggressive pricing of deals.
Public to private
Some observers, though, reckon there's an element of hot air in the business. "There is a great deal of talk and a lot of money but not much activity," says a long-term specialist. "The fundamental issues which host governments need to address are policy issues the trade-offs of getting private-sector participation involved in projects which have a very great social and economic benefit. It has to do with expectations. The governments cannot expect a free lunch, they must compromise."
The gap between state and private-sector expectations is a central issue exacerbated by political culture in many trade-based economies where long-term issues are neglected. The political environment is different in every country but in Thailand, for example, infrastructure projects that may take years to put together are suffering because of a lack of continuity. "You cannot build a subway in two years, and there haven't been many governments that have lasted longer than that in Thailand," says a Bangkok-based banker. Nevertheless the opportunities are there and governments cannot, or will not, use public money to fund projects in future. "Rapid economic growth has seen infrastructure growth lag behind," says Moules. "There is a clear need for these facilities and a clear recognition that it is not the role of governments to fund these projects any more."
With private funding now the favoured path, a well-developed legal and regulatory framework would be the ideal. But this is lacking in most countries. Advisers are therefore having to become more inventive in order to tackle the issues and get the deals done. "Because of the lack of a clear regulatory framework or government intervention," says Moules, "there are some projects which are fundamentally economically sound but never come to fruition." Toll roads and railways are classic examples of projects financiers want to be sure are going to be free from government interference. "Banks are only going to lend to projects where they are confident about cashflows," says Crane. "The key to effective project finance is structure, and it is made much easier if the sponsors are strong and we can approach the market with a name that is known, even if there is no recourse."
Political risk
The reliability of sponsors is a problem for many Bangkok financiers. Here the government and private sector are still battling over the capital's chronic traffic problems with the saga of Gordon Wu's road and rail scheme grinding on. The Hopewell project was always doomed to become bogged down, because it was too complicated and a proper feasibility study was never conducted. In addition, though, the problems in Bangkok are an extreme example of one of project finance's biggest headaches: politics.