Financing Southeast Asia's Economic Development

5. Opportunities and Trends in the ASEAN Project Finance Environment

Gary S. Wigmore and Giles Kennedy 162© 2003 Institute of Southeast Asian Studies, Singapore 1. Introduction: Project Financing Opportunities in ASEAN Prior to 1997 Prior to 1990, project financing did not play a significant role in the raising of capital for infrastructure projects in the ASEAN countries (or indeed, in any of the countries in East Asia). Historically, sponsors and developers of East Asian infrastructure projects had either relied on traditional forms of commercial bank loan financing (generally with full recourse to the sponsor or developer), or had obtained sovereign guarantees to backstop the credit risk associated with the project. The Singapore government, for example, fully funded the development and construction of both underground mass rapid transit (MRT) light rail 5 OpportunitiesandTrends intheASEANProject FinanceEnvironment GaryS.WigmoreandGilesKennedy Reproduced from Financing Southeast Asia’s Economic Development, edited by Nick J. Freeman (Singapore: Institute of Southeast Asian Studies, 2003). This version was obtained electronically direct from the publisher on condition that copyright is not infringed. No part of this publication may be reproduced without the prior permission of the Institute of Southeast Asian Studies. Individual articles are available at 163 5. Opportunities and Trends in the ASEAN Project Finance Environment© 2003 Institute of Southeast Asian Studies, Singapore system and Changi International Airport. In this environment, opportunities for highly structured project-financed transactions were rare. However, as a result of the boom years of the 1980s, the record high economic growth rates that many ASEAN countries experienced caused a dramatic increase in the demand for new infrastructure projects. By the end of that decade, the continued ability of ASEAN governments to fund the required infrastructure developments was being severely tested. Many governments simply did not have the ability or the reserves to support additional infrastructure projects through the issuance of sovereign debt guarantees and were reluctant to increase domestic borrowing to fund such projects directly. This environment created the opportunity for alternative methods of financing to emerge and the structured project finance model was soon seen to offer a viable alternative to the traditional forms of financing Asian infrastructure projects. By the early 1990s, strong interest in the project finance model had developed throughout East Asia (mirroring a similar trend in other parts of the world) as sponsors recognized that the structured financing arrangements utilized in project financing could provide a useful mechanism to both leverage investment capital and reduce residual longterm risk exposure. Developers in diverse infrastructure sectors such as telecommunications, mining and minerals, power, transportation, petrochemicals, water, oil, and gas soon began courting project finance investors and financial institutions. By the mid-1990s, almost every ASEAN country had infrastructure projects under development that were financed using the project finance model. Privately sourced funding provided through project-financed transactions allowed many Asian countries, including Indonesia,Thailand, and the Philippines, to rapidly implement projects that would not otherwise have been possible or economically viable. 2. The 1997 Economic Crisis and Its Effect on Project Financing Opportunities Through the mid-1990s, enthusiasm across East Asia continued to grow as project financing techniques were successfully utilized to raise debt Gary S. Wigmore and Giles Kennedy 164© 2003 Institute of Southeast Asian Studies, Singapore for a wide range of infrastructure projects, most notably in the power sector. In 1996, international lending institutions closed a record number of project-financed infrastructure deals in ASEAN countries. So heady was the optimism of developers that among the many projects being proposed was the world’s longest bridge — a 95-kilometre (60-mile) tollway linking the island of Sumatra and peninsular Malaysia across the Straits of Malacca. President Soeharto’s daughter Siti — whose interests led a consortium of sponsors — announced that the developers were confident that much of the US$3 billion cost of the bridge’s construction could be funded by raising capital on the international market, using the project finance model. During the second half of 1997, the situation changed quickly and dramatically. As various East Asian countries were affected by the spreading monetary crisis, exchange rates fell against the U.S. dollar, economic growth rates plummeted, and countries around the region sunk into recession. As a result, a wide range of infrastructure projects were delayed, with most of those ultimately cancelled. Within the first few months of the crisis, sponsor and investor enthusiasm for projectfinanced development waned. In Indonesia alone over US$10 billion of power plant development (some 15,000 MW) was suddenly put on...