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Roundtable Meeting of Chief Justices and Ministers of Justice
Legal Frameworks for Private Sector Development of Infrastructure in the Asia Pacific RegionJeremy Hovland I. The Importance of Legal Frameworks for Private Sector Development of InfrastructureMy colleague Bruce Purdue has reviewed the role of a vigorous private sector in each of the countries in which the Bank works in the development of physical infrastructure, social infrastructure, and national economic and commercial policy. He has also reviewed the role of government in providing an enabling environment for a vigorous private sector, a framework of enabling laws and regulations, and effective protection of property and contract rights as part of governments' broader responsibility to provide a regulatory and administrative framework for doing business. It is crucial that government and business have a common understanding of the limited but vigorous role of legal regulation in private sector development. My topic leads from Mr. Purdue's discussion of the development and strengthening of legal frameworks for private sector development, to discuss an area of special importance throughout Asia and to the Bank's work - the strengthening of legal frameworks for private sector development of infrastructure. This is a complex topic, for it involves many different, and sometimes conflicting, roles of host governments, government enterprises, project sponsors, lenders and others involved in large infrastructure projects. In particular, a clear legal framework for the private sector development of infrastructure is required to address the confusing and complex problems that arise when governments act as regulators, when government enterprises behave as commercial actors, when governments and government enterprises serve as customers and when, in addition, government also establishes the legal and regulatory framework for the development of infrastructure. This topic is of increasing importance today because of the scale of infrastructure needs and the scope and complexity of infrastructure development throughout our region. The Asian Development Bank estimates that, in order to achieve sustainable economic growth in the next decade, the 5 percent of gross domestic product (GDP) which is presently invested annually in infrastructure by the Bank's developing member countries (DMCs) must increase to around 7 percent of GDP over the next decade in order for supply to keep pace with demand. The Bank has estimated that the power sector alone will require investments of around US$75 billion a year through the year 2000 (which is a very short time horizon). Telecommunications could require a further $40 billion a year. Transport could require another $75 billion annually for the same period, while water supply and sanitation could need between $25-35 billion each year. In the power sector, the Bank estimates that electric power has yet to reach 2 billion out of the world's 5.5 billion people. Although Bank lending to the energy sector totalled almost $1.8 billion last year, this represents only about 2 percent of our DMCs' requirements. The task of finding sufficient financing for necessary capacity expansion in the power and other sectors is, therefore, truly daunting. But the economic penalties that accompany failure to meet power demand are worse. Bank economists estimate that around 20 percent of all industrial equipment in the region is lying idle due to lack of power. Moreover, the economic and social costs of unmet energy needs in Asia are calculated at up to 30 times the cost of supply. As you know, infrastructure development has been the responsibility of governments. This is reflected in the vocabulary with which we grew up: we speak of public utilities, public power, and public roads. But in each country of our region, infrastructure investment has failed to keep pace with the requirements of expanding economies, and in many countries that infrastructure gap is now an infrastructure crisis. Governments around the region have come to realize that infrastructure requirements cannot be met or financed by the public sector alone. Accordingly, the private sector development of infrastructure throughout our region is being encouraged within a broader policy framework of economic liberalization, which contemplates a more limited public sector role in the economy, the opening of the economy to international trade and foreign investment, and the development of deregulated domestic financial and capital markets. That trend began with the first private sector projects in power generation in the People's Republic of China and the Philippines in the late 1980s, and has now spread to Malaysia, Thailand, Indonesia and elsewhere. It is important to note that in Asia, the primary focus of these efforts has been on private sector development of new projects. In other parts of the developing world, the focus has been on the privatization of existing public sector monopolies providing infrastructure services. Development of effective legal frameworks to meet and regulate this accelerating trend is a major focus of a number of the Bank's DMC governments. The factors of opportunity, uncertainty and complexity that have spawned the increasing private sector investment in infrastructure present a particular mixture of risks and a particular challenge to governments, the private sector, project finance specialists and others that only a clear legal framework can help to sort out effectively. The legal environment for private sector development of infrastructure at each national level must be transparent, consistent, effectively enforced, and nondiscriminatory. The government's roles as regulator and as market participant must be separated, and national regulators must be independent. In many, if not most, of the countries of our region, there is a need for new or improved regulatory regimes governing the power, transport and other infrastructure sectors. In many countries there is a need for generic or umbrella reforms, such as new build-own-transfer (BOT) laws. And in many DMCs there is a need for more basic legal reforms - especially in the contracts and project finance areas, and particularly in the transitional economies. Legal problems emerge from these new forms of investment and construction with great frequency and great intensity. The controversial and troubled Dabhol project in Maharashtra State of India, for example, has sparked numerous arbitral and judicial proceedings. Given the complexity of the projects and legal issues involved, domestic government agencies, lawyers and dispute settlement institutions will inevitably be hard pressed to handle such matters. In the Dabhol case, for example, the range of legal issues in dispute included the mixed legal responsibilities of state and federal regulators, complex problems of tariff subsidies, procurement and competitive bidding issues, environmental law problems, collateral security, consumer protection, corruption, damage and lost profits measurements, and other legal problems. Sovereign risk and the reluctance of many commercial lenders to finance these complex projects is a theme linking many of these issues. All of these problems and more complicate the implementation of these protracted, multi-party projects, for which many national and local governments, legal professionals, and judges are often ill-prepared. II. Modalities of Change in Legal and Policy Frameworks for Private Sector Development of Infrastructure at the Asian Development BankTraditionally the Asian Development Bank has been a major lender for public sector infrastructure development. But as infrastructure development increasingly moves toward significant involvement by the private sector, and with the private sector as the main engine for growth, the Bank has several new roles. First, the Bank participates directly as lender and shareholder in financing major infrastructure development projects promoted by private sector sponsors, as well as indirectly through investment funds and guarantees. Second, the Bank assists in the creation of legal frameworks for utilizing private resources, through components of loans, technical assistance and in other ways. Some examples of each method may be useful. As a lender, the Bank finances major infrastructure development projects sponsored by the private sector. Bank financing has included private sector BOT projects, including thermal power and hydropower projects, and water supply, waste water treatment, highways, ports and other projects. In the Philippines, the Bank had a role in financing the first BOT power projects, the Navotas, Pagbilao and Batangas power projects. The Bank has also been involved as lender in early projects relying on significant private inputs, in Nepal (the Khimti Khola hydropower project), Pakistan (the Fauji Kabirwala power project), and Thailand (the Bangkok Expressway project). The Bank also attempts to mitigate sovereign risk and encourage other investors and lenders to invest in projects through a number of channels, including co-financing arrangements, guarantees, and investment funds it helps to establish. The Bank developed a Complementary Financ ing Scheme (CFS), a form of participatory co-financing similar to the IFC's "B loan" program that involves the prearranged sale of participations in a Bank loan to commercial lenders, but without credit recourse to the Bank. The Bank has also expanded the range of guarantees it may offer to support projects in which the Bank is participating, including partial credit guarantees and partial risk guarantees. In August 1995 the Bank approved a $20 million investment in a new company called Asian Securitization and Infrastructure Assurance Limited (ASIA Limited), based in Singapore, that is providing bond insurance to purchasers of long-term debt instruments issued by private and public sector entities in the Bank's DMCs and assisting in the securitization of existing loans and other receivables of financial institutions and commercial banks in the region. The activities of ASIA Limited provide greater access to debt funding for infrastructure, lower borrowing costs and the cost of capital, boost the marketability and liquidity of Asian debt securities, and provide assistance and flexibility for both state-owned entities and banks and other financial institutions. The Bank's efforts to mobilize greater third-party funding for private infrastructure projects in the region are also demonstrated by the infrastructure funds it has helped to launch, such as the Asia Infrastructure Fund and the Asian Infrastructure Development Company (AIDEC). These and other funds have mobilized several billion dollars for investment in infrastructure projects. The Bank has also participated actively in the establishment of new Asian investment funds, such as the new fund for Asia being jointly undertaken by the Bank and La Caisse de Depot et Placement du Quebec (CDPQ) and the Greater Mekong Fund. The Bank is also directly assisting in the creation of legal frameworks for utilizing domestic resources, through components of loans, technical assistance and in other ways. Often the Bank works through relatively broad spectrum assistance for the private sector development of infrastructure. In Malaysia, for example, Bank technical assistance is helping to strengthen the regulatory framework for private sector infrastructure (TA No. 2498-MAL), and in Kazakstan a technical assistance project is assisting in the reform of industry and state enterprises (TA No. 2313-KAZ). The Bank also works extensively on BOT laws and other specific aspects of the legal frameworks necessary for the promotion and strengthening of private sector development of infrastructure - securities laws and markets, domestic rating agencies and related companies. The problems in implementing the large Dabhol energy project in India, which I mentioned earlier, are indicative of the wide range of assistance that is often needed. In particular, the negotiation, implementation and resolution of disputes relating to these protracted, complex and multi-party projects present significant and difficult challenges to local and national governments, local legal professionals and the courts. DMCs and the Bank have drawn the lesson that training is an important need in this new field. A new Bank-supported regional technical assistance project is supporting training in the negotiation and drafting of BOT contracts in India, Indonesia, and the PRC. Other examples of support for BOT laws and related institutional strengthening include technical assistance projects in China, where the Bank is helping introduce BOT concepts for the Shanghai Wangaoqiao Stage II power project (TA No. 2170-PRC), and in India, where Bank technical assistance is helping the institutional strengthening of the Gujarat Infrastructure Development Board (TA No. 2716-IND). The Bank is also active in specific legislative and regulatory reforms in a number of sectoral areas. In the power sector, a Bank technical assistance project is helping to develop the policy and regulatory framework for direct foreign investment in the PRC power sector (TA No. 2510- PRC). In India, another technical assistance project is supporting a review of electricity legislation and regulations in Gujarat (TA No. 2740-IND). In water supply and sanitation, the legal component of a Bank loan is supporting BOT development of the water supply in Chengdu, Sichuan Province in the PRC, and a Bank technical assistance project is funding a seminar on BOT contracts in the water supply sector. Bank technical assistance is also supporting private sector participation in urban development, including water supply and solid waste management. In the gas sector, Bank technical assistance is supporting mixed development of a liquefied natural gas terminal in India (TA No. 2752-IND) and a study on establishing and strengthening gas regulatory frameworks in Indonesia (TA No. 2344-INO). In the transport sector, the Bank is supporting private sector participation in transport development in Indonesia through technical assistance (TA No. 2527-INO), among other projects. Legal frameworks for private sector development are also addressed, albeit in less detail, in regional and country technical assistance projects that focus on continuing legal education and training for legal professionals, including judges. Thus the Bank's regional training workshops for government lawyers from China, Cambodia, Lao PDR, Viet Nam, Mongolia, Nepal and Vanuatu. New potential technical assistance to Viet Nam for training of government lawyers would include components on the legal frameworks for private sector development of infrastructure. III. Issues in the Strengthening of Legal Frameworks for Private Sector Development of InfrastructureHere at the Bank, and in our ongoing discussions with DMC
governments interested As the Bank works with you and your governments and courts on these important issues, we must discuss other important problems as well. Which types of regulatory issues need to be addressed at the country level? What resources are required by governments and the courts to administer these kinds of projects and to interpret and resolve disputes arising from them? What kinds of training are needed by justice and law ministry personnel, legal personnel in other ministries and regulatory agencies, and legal personnel in the courts, to deal with BOT projects? I leave you with those issues, although there are no doubt many others that could be discussed. I look forward to hearing your views on this important topic in the economic development and legal reform work of your governments and courts.
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