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Roundtable Meeting of Chief Justices and Ministers of Justice
Legal Frameworks for Private Sector Development in the Asia Pacific RegionBruce Purdue I. The Importance of the Legal Framework for Private Sector DevelopmentWhy do we care about the development of the private sector in our developing member countries (DMCs)?A number of aspects of this question are being debated here in the Bank and elsewhere throughout the Asia-Pacific region. What is the proper role of government? What businesses should the government hold, and what government businesses should be divested? Is the much-vaunted BOT/BOOT transaction a means to an end, or is it simply an end in itself? What is the appropriate role of the private sector in responsible economic development? But, above this debate, one trend seems to emerge: our DMCs, from the transitional countries, such as China, Mongolia, Viet Nam and Laos, to the liberalizing countries, such as India, Indonesia and others, are actively seeking to invigorate the private sector input of economic development, and governments at all levels, national, provincial, local and municipal, are increasingly entering into a cooperative dialogue, and actually doing deals, with a growing and, in most cases, stronger private sector. There is much evidence in the experience of some of the Bank's regional members which have enjoyed higher levels of economic prosperity - such as Japan, Hong Kong, Korea, Taipei,China, and Singapore - that a strong private sector is the sine qua non of true development. The Bank's seminal "Emerging Asia" study, published this year, contains the latest scholarship on this, and other aspects of Asia's economic development. Among some commentators, there seems to be an assumption that an adequate legal framework to foster a vigorous private sector will simply exist or can evolve over time; however, in our experience, governments must take active steps, often exercising strong political will, to bring that legal framework into existence. This may happen in a number of ways. Governments can enter into a cooperative dialogue with the private sector to address key industries and sectors; governments can play an active part in "demonstrational projects" which highlight the role of the private sector; and governments can simply encourage the role of the private sector in economic development. But a government must do more - it must set out deliberately to provide the enabling environment for a vigorous private sector. I will use this expression, "enabling environment", throughout this paper to describe the framework of laws, regulations and decrees which, together, promote confidence in the financial, commercial, business and legal system of the country concerned, of the "host jurisdiction" for foreign investors, and which encourages the fuel for private sector action namely, investment of risk capital. It is that framework which will facilitate a confident private sector and which will help to reduce the perception of sovereign risk. (I will return to sovereign risk later in the paper). In short, the "enabling environment" is the framework to be provided by government for doing business. The Bank considers that it has a particular role, perhaps even a special capacity, for assisting DMC governments to come to terms with the new and changing interface between public and private sectors. We see this as part of the natural evolution of the Bank. What are the features which we say give the Bank this special mandate?It may be self-evident to say that the Bank is an international finance institution established and constituted by its member governments. But, this does give us a unique relationship with each of our DMCs and tremendous credibility when working with our members on the promotion of a legal framework which will contribute to economic development, generally, and the fostering of the private sector, in particular. As a development finance institution, we have a strict mandate in our Charter for the economic development of our members and we are guided by the highest principles of international economic cooperation. We are the honest broker. Unlike some international institutions, such as the World Bank, our Charter permits the Bank to develop, fund and invest in both the public sector and the private sector as part of this one institution. (Due to its Charter restrictions, the World Bank is not able to undertake direct private sector projects; therefore, the Bretton Woods group had to create a separate international institution, International Finance Corporation or IFC, to handle private sector work). Due to the composition of our membership and, again, as part of our Charter mandate, the Bank can focus on regional and sub-regional cooperation: for example, the Bank has been working closely as principal adviser to the APEC Finance Ministers on the difficulties of cross-border transactions and the prospects of establishing a truly regional capital market. Finally, the Bank has the ability to bring together the best in local and international expertise to help focus and foster the development of the enabling environment: this expertise extends from our own in-house capability in research and analysis, to the mobilization of technical assistance from external consultants and advisers. In the remainder of this brief paper I will address the importance of efforts to build the enabling environment and the contributions to these efforts which the Bank has endeavored to make, and then to present some questions or topics for discussion. II. Modalities of Assistance in the Establishment of the Enabling Environment for Private Sector DevelopmentFrom the Bank's perspective, we see that our member governments must tackle numerous tasks to create the enabling environment. Governments must embrace general policies and procedures, as well as enact or reform the key laws critical to private sector development, such as corporate and securities' regulation, business and commercial law, bankruptcy laws, land law, administration of financial intermediation and, in appropriate cases, assistance in the corporatization and privatization of state-owned enterprises, whether by structural reform or contracting-out. In almost all cases, this will mean the introduction of higher standards of corporate governance and capital market behavior, improvements in the various systems of public registration of legal interests generally, the better regulation of commercial and business transactions and, eventually, consumer protection. These steps will all contribute to the nourishment and strengthening of the private sector. One of the most significant impediments to the contributions which can be made by the private sector is access to reliable sources of long-term local capital, both debt and (what we may call) institutional equity. Here we see a very important need to help in the development of, say, the domestic bond market, particularly the introduction of instruments which can lead to the establishment of reliable benchmark interest rates, and the necessary legal reforms which will help make available investment funds from institutional investors. Encouraging the domestic private sector is one side of the coin: there is another side. In the global marketplace, there can be no doubt about the importance of foreign direct investment, or FDI. The private sector providers of FDI harbor fundamental concerns about sovereign risk. No matter how we characterize "sovereign risk" - availability of foreign exchange to service obligations, reliable and timely performance of government obligations, history or tendency of capital flight, restrictions or prohibitions on remission of income or repatriation of capital, or the risk of outright nationalization of industry - I think it is important to emphasize that the Bank sees an important role in helping DMC governments reduce actual or perceived sovereign risk.To put it simply, the Bank can help mitigate sovereign risk. To encourage private sector FDI and help ameliorate sovereign risk, the enabling environment will, again, need to entail commercial laws and accounting standards commensurate with international practice: fair, transparent and reliable dispute resolution techniques, especially those involving FDI, and the protection of intellectual property rights. From our experience, the enabling environment will also need to be able to accommodate some of those practices familiar to international business transactions, such as the freedom of choice of law or choice of jurisdiction to apply to an international contract. So, how does the Bank go about the encouragement of the private sector and assist in the creation of the enabling environment? Broadly speaking, the Bank can utilize four types of operations: projects, technical assistance, policy dialogue, and regional cooperation. ProjectsIn our public sector lending, where funds are lent directly to the DMC, or to a public executing agency with a government guarantee, it is quite common to find extensive covenants calling for legal or regulatory reforms in the sector concerned. These days, we are increasingly finding that, in our traditional public sector areas of operations, there is now much stronger emphasis on public sector reform, corporatization and prospective privatizations. Executing agencies are now being earmarked for privatization, and we are having to draft new types of covenants which seek to deal with the situation we will face following the introduction of the private sector entity or operator. Some of you may already be familiar with the very active privatization campaigns underway in DMCs such as Pakistan (in fields like banking, oil and gas, telecommunications and power generation) and right here in the Philippines with the recent private sector concessions awarded by one of our public sector borrowers, Manila's Metropolitan Waterworks and Sewerage System (MWSS). In these cases, the Bank has had to respond to a changing environment - to recognize the needs of our DMCs, yet protecting the interests of the Bank under existing loans. The Bank provides very large loans called program loans which are most relevant to this discussion. A program loan is a loan which, unlike a regular loan, is disbursed in just two or three tranches. The disbursement of each tranche, which can be as much as $100m or more at a time, is conditional on the DMC undertaking and implementing key policy, legal or regulatory reforms. Tranches are released against achievement of measurable reforms. Program loans have been, and continue to be, used very effectively in helping to bring about significant capital market development and financial sector reforms, particularly in countries such as Pakistan, India and Bangladesh. These developments and reforms have been pivotal to the strengthening of the private sector in the recipient countries. Over the last two years, the Bank has embarked on the expanded use of our guarantee power to target private sector activities. The Bank can provide partial risk or partial credit guarantees for financial intermediaries and in connection with private sector projects. These guarantees go directly to the mitigation of sovereign risk. For example, in the very recent past, a $50m Bank guarantee was critical in the successful capital raising for the first time on the international markets by a major Sri Lankan financial intermediary. The funds which we have guaranteed will be used for much-needed credit for small and medium private sector businesses. Without the Bank's guarantee, it is unlikely that the intermediary could have gone to international lenders. The Bank also has a very active commercial co-financing scheme, or CFS, which operates on the basis of the Bank as lender-of-record, but with underlying participations by commercial banks. Once again, a clear example of a Bank instrument which effectively mitigates the sovereign risk which would otherwise be faced by the commercial lender and thereby helps to overcome their country lending limits. When talking about the role of governments, I mentioned that they can play a part in "demonstrational projects". I also referred to the Bank's Charter power to undertake private sector operations. Since 1983, the Bank has had an active program of equity investments, private sector loans without government guarantee and heavy involvement in both regional and country-specific investment funds. These have been the Bank's "demonstrational projects". Apart from industrial projects, the Bank has helped establish commercial banks, insurance companies, rating agencies, leasing companies and other non-bank financial intermediaries in a number of our DMCs. The Bank has also been a lead financier of some of the important private sector infrastructure projects in the region, such as the Pagbilao and Batangas power stations in the Philippines, the Bangkok Expressway in Thailand, the Fauji Oil Terminal in Pakistan and the Fauji Kabirwala power station in Pakistan. We have also been developing private infrastructure transactions in Indonesia, India, China and Vietnam. Apart from assisting the private sector participants in the specific projects and the sectors concerned, we think that our role as a financier in these projects contributes generally to the mitigation of the perceived sovereign risks. Technical AssistanceThe Bank provides advisory (ADTA), project implementation (PITA) and regional (RETA) technical assistance. These have been, and continue to be, important instruments in the creation of the enabling environment and the encouragement of the private sector. Other papers which will be presented to you today by my colleagues will go into some detail in relation to the technical assistance which is such an important part of the Bank's law and development and law reform efforts. I would just like to highlight some of the assistance which contributes to the strengthening of the private sector. In Mongolia, for example, the Bank is working to help the government strengthen its legal framework with a focus on economic and business laws. In Kazakstan the Bank is assisting the government's review and strengthening of the policy framework for the industrial sector, including legislative elements (TA No. 2313-KAZ). In China, the Bank is supporting the development of insolvency laws and procedures for state enterprise reorganization and liquidation (TA No. 2271-PRC) and is training government officials and legal professionals in state enterprise insolvency law and practice (TA No. 2748-PRC). Another area is privatization and restructuring of enterprises, including the privatization process, restructuring of public enterprises, transfer of liabilities, public finance, state immunity and related issues. Again, the Bank has been active in this area, also through technical assistance. In Bangladesh, the Bank is assisting with the development of procedures for privatization and divestment of shares in public sector manufacturing enterprises. In India, Bank technical assistance is also supporting the restructuring of public sector enterprises (TA No. 2530-IND/2740-IND). A regional technical assistance project is also under consideration that would focus on the privatization of state enterprises, encouraging mutual learning and cross-fertilization of ideas among participating countries, both transitional and non-transitional. We undertake technical assistance in financial law, including capital markets, securities, banking, supervision, and credit and security, at both national and regional levels. A regional technical assistance project is supporting the study of securities market regulation and supervision in Asia (TA No. 5477-REG), while another regional activity is training financial institution executives and regulatory agency officials (TA No. 5430/REG and 5485-REG). At the country level, for example in India, we are working with national partners to strengthen the regulatory and enforcement capacities of securities authorities and to improve the regulatory framework for mergers and acquisitions (TA No. 2049-IND). In the Philippines, similar work is underway to strengthen the regulatory and enforcement capacities of securities authorities. In Thailand, we are supporting reforms in capital markets (TA No. 1324-THA). The strengthening of the legal framework for private sector development is also emphasized in several other kinds of Bank actions in the law and development area. Our efforts to support and institutionalize training of government lawyers at the regional and country levels, for example, focus heavily on legal training relevant to market-oriented economic development. The Bank's technical assistance project for training of government lawyers in China, Cambodia, Lao PDR, Viet Nam, Mongolia, Nepal and Vanuatu focused on economic law training (TA No. 2049-IND). And the potential technical assistance project for training of government lawyers in Viet Nam, now under discussion with the Vietnamese Ministry of Justice represented here today, would certainly focus on legal training for private sector development. Policy DialogueOn an ongoing basis, the Bank engages in policy and legal dialogue with DMC partners on the development and strengthening of the enabling environment. Such dialogue can take place during regular project processing, especially of program loans, during our annual country programming exercises (when the Bank and the host DMC agree on the pipeline of projects and technical assistance for the year) and during other discussions with our DMCs covering the Bank's strategic planning and medium-term plans. Such policy dialogue also occurs at donor coordination meetings, co-financing discussions and sector-specific meetings. Regional CooperationOn a number of occasions in this paper, I have mentioned that the Bank is regularly involved in a variety of regional activities which can directly and indirectly serve to enhance private sector participation in economic development. This may also involve sub-regional activities. For example, we are currently undertaking a due diligence analysis of a proposal which would involve the export raw materials from India, where these materials may have limited use and presently generate little value, to Bangladesh, where they will become a critical ingredient for the project in question. It is conceivable that this project may not have proceeded without the Bank's involvement. I have already cited our work on the regional capital markets for the APEC Finance Ministers. One of the Bank's significant private sector investments has been the creation of a bond insurance company, ASIA Ltd, based in Singapore, but operating on a truly regional basis. ASIA Ltd. has two purposes in life. First, as a rated entity, it can provide insurance to the holders of bonds issued by Asian issuers. This type of credit enhancement, called monoline bond insurance, had not been previously available to help private companies to raise capital in the region. Second, ASIA Ltd is working on a regional basis to introduce the concept of securitization to a number of countries in the region. Finally, in one of our most exciting areas of regional work for private sector development, the Bank has been instrumental in mobilizing large amounts of investment capital from capital-rich regions, such as North America and Japan, to this capital-hungry region. We have been doing this through the structuring of very large investment funds with like-minded institutional investors, often seeking direct exposure to the Asia Pacific region for the first time. III. Issues in the Strengthening of Enabling Environment for Private Sector DevelopmentWhat are some of the issues we need to confront, along with our partners in your governments, in working on strengthening the enabling environment? An important issue is the balancing of our DMC-specific role, as against our role at the sub-regional and regional levels. In this area, should we remain primarily active at the DMC level? Or, does the Bank really have a special role to play in bringing, say, transitional and non-transitional DMCs together for sub-regional and regional dialogue and learning - and perhaps even model law processes - on the crucially important area of developing the enabling environment for market-oriented economic development? Are other donors able to work as effectively as the Bank at the sub-regional and regional levels? Based on our comparative advantages, are we deploying resources in this field as effectively as we might? There has been a large amount of law-making activity relating to private sector development in many DMCs since 1990, most notably in the transition economies. Are participants satisfied with the pace, process and substance of reform for private sector activities in their countries? Has there been sufficient public consultation and discussion? What improvements might be made in the process, institutions or personnel engaged in such law reform activities? Are there any particular problems in facilitating a dialogue on reform between the legal establishment (e.g. law societies, lawyers and Justice ministries), on the one hand, and the Finance ministries, on the other? We look forward to your views on these and other issues in our work to support development of legal frameworks for private sector development and investment.
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