Governments in the region are investing in infrastructure projects to stimulate activity, yet just how much of this stimulus is now translating into business for law firms?

The global financial crisis has triggered an outpouring of trillions of dollars in stimulus packages in the Asia-Pacific region. Aggressive reactions from many south-east Asian governments are pushing economies forward, slowly lifting the burden of a global economy stifled by recession. It’s no secret that governments are looking to invest in major infrastructure projects to stimulate activity in local economies. In some countries, such as Vietnam and India, creating infrastructure is not just a step towards economic recovery – it is vital to continued growth and development.

Regional overview

As reports of trillions of stimulus dollars flooding the markets in the Asia-Pacific region come in, there is an expectation that building & construction, infrastructure and project finance legal practices have now been thrown into overdrive – but just how accurate is this perception? “The difficulty with stimulus packages is that there is this perception that you decide you’re going to spend, for example, two trillion on infrastructure and suddenly you can turn a tap on and everybody is going to be gainfully employed. That simply is a fallacy,” says Ian Laing, a Hong Kong-based partner at Pinsent Masons.

“It takes time to bring an infrastructure deal to market – sometimes it takes years. You can’t just decide to build a tunnel and expect that six months later you’ll have a spade in the ground. It’s just not realistic.” Laing and his team have had a busy six months, in which they have acted for the bidding of the US$1.763bn privatisation of Power Sector Assets and Liabilities Management Corporation (PSALM), the government agency responsible for handling the sale of the Philippines’ National Power Corporation’s assets. It has also advised on the groundbreaking US$5.6bn Hong Kong/Zhuhai/Macau Bridge project, where a Pinsent Masons’ consortium won appointment through a public tender over eight consortia comprising 23 law firms.

Laing’s point, however, is that infrastructure projects require significant investment from all the parties involved and they also take time to develop. A stimulus package introduced earlier this year – or even late last year – may not have had sufficient time to take effect in the infrastructure sector in the Asia-Pacific region. “Certainly within South-East Asia there’s always been a push to develop infrastructure with varying degrees of success… but from the lawyer’s perspective, [the stimulus] hasn’t really changed the landscape for us,” says Jeff Smith, a partner of Norton Rose with experience in Singapore and Bangkok.

However, this does not mean that there is no activity in the infrastructure sector. On the contrary, Norton Rose has been busy with public/private projects (PPPs)in Singapore and working with PLN, Indonesia’s state-owned electric utility company, on new electricity projects.i

Need for investment

Emerging economies, particularly in South-East Asia, have a huge need for infrastructure. The developing economies in East Asia alone require an estimated total of US$162bn annually between 2006–2010 for electricity, telecommunications, major paved interurban roads, rail routes, water and sanitation. And India is estimated to require US$1.7trn in financing to meet its infrastructure needs over the next 10 years. “Even without the stimulus package, there are parts of the [Asia-Pacific] region in such obvious need of infrastructure and development. There’s enough to keep me going for the rest of my career,” says Smith. “Even in developed nations, such as the United Kingdom or Singapore, which are highly developed in terms of infrastructure, there’s a constant quest for new infrastructure and for refreshing old infrastructure. This is something which will never change.”

Considering the need for vital infrastructure in some South-East Asian countries, there is also a great demand for private investment. “The local government [in Vietnam] is very eager to invite investors. They are more aggressive and are pressing us to find investors for them. We have a client database and we search the news and other information. We are trying to find out [who are] the best investors suitable to meet the needs of the local government,” says Eric Eunyong Yang, a partner in the Vietnamese office of Yulchon.

So much so that a successful tender may turn on just how much ‘development capital’ a foreign construction company will bring to an infrastructure project. “It’s not uncommon for governments in Vietnam, Indonesia and Thailand to look at this factor in the tendering process,” says a Hong Kong-based construction lawyer. “These governments will often look for, say, a Japanese construction company to bring JBIC [Japanese Bank for International Cooperation] money along with them, or a Korean company to come to the country along with the KDB [Korean Development Bank] capital, or a private contractor to have the backing of an infrastructure-focused private equity fund … it’s a big part of the industry.”

It’s big as some developing countries still face difficulties in attracting private investment. “In the less developed nations, sometimes the laws and regulations are slightly less clear, which creates an element of uncertainty in how things are interpreted… it is a less clear environment in which to operate. You might find that bureaucracy can slow things down and developers and financiers can find this a bit frustrating,” says Norton Rose’s Smith.

Of course, private investors are also wary of corruption issues and the uncertainty surrounding government interference with decisions.

NEXT: The role of law firms

Role of law firms

Firms can bring added value to an infrastructure deal. “The reality is that a well-structured deal brought to market in the right way will close quickly and be on the ground much quicker than something that is less well-considered and conceived before it’s brought to market,” says Pinsent Masons’ Laing.

Those international law firms with expertise in large-scale infrastructure projects in a variety of jurisdictions will be able to assist local law firms and their clients with identifying risks and structuring deals to ensure compliance. “If you can bring an international dimension – for example, if you’re operating in Indonesia but can speak articulately on how issues have been resolved in the Philippines, Vietnam or other developing nations – that sometimes helps to bring context to a problem and it allows people on the ground who don’t have experience to see things through a different prism,” says Norton Rose’s Smith.

Lawyers are now getting involved in an infrastructure deal earlier. “Transactions post-GFC are more complex. It’s not as straightforward as the old days when liquidity was available – the state didn’t need to get involved,” says Chris Redden, a partner in the Hong Kong office of Norton Rose. “When you start introducing the state, a lack of liquidity and different funding options, you introduce complexity in these transactions.” However, it’s not all about complicated legal structures and legal advice. Investors will also look to law firms to assist with basic requirements. “One of the characteristics of infrastructure projects in South-East Asia is a lack of information. The investor doesn’t have enough information about countries like Vietnam, Cambodia, Myanmar and the Philippines. So one of the important rules for a law firm is to provide information about the local site and connect local government officials with the investors,” says Yulchon’s Yang.

Gain local expertise

Law firms that are operating in the Asia-Pacific region have recognised the importance of investing in non-billable work, to assist local governments in developing legislation and regulations. “We have spent a fair bit of time working with various ministries in Singapore, Thailand and Indonesia, talking about international best practice, procurement practice, and changes in legislation that would help to bring about more successful PPP projects.There is an ongoing dialogue with government bodies around the region,” says Smith.

Yulchon is also involved in preparing seminars and educating the local government through providing books, references and legislation used by more developed countries. “If we sit in the office and wait for clients then there will be a limit to our role in helping them,” says Yang. “Sometimes we invite [members of the government] to Korea and other countries to attend a conference or a seminar. Through these activities we are trying to connect opportunities with potential investors.”

The direct aim of these activities is to generate further legal work. Norton Rose has been successful in generating billable work from their relationship with governments in the region. The firm is currently working on a confidential project in South-East Asia to assist a government to bring their PPP program in line with international best practice.

However, it’s not just about gaining new clients. Taking the time to develop laws and regulations in a developing country is an investment in acquiring local expertise. “By gaining an understanding of the practices and policies and the way a particular government works, you make yourself a more marketable commodity for people hoping to work with these governments,” says Smith.

Future trends

Stimulus or not, the infrastructure sector in the region is a source of significant work for project finance lawyers. “Asia will be the engine room for the global recovery. That is a view that has been expressed by many people and a view we agree with,” Norton Rose’s Redden says. “We will see some of the biggest infrastructure projects in the world [originate] from this region.”
Given the anticipated growth of economies here, law firms are investing in their infrastructure practices to ensure that they are in a position to reap benefits later on. “You need a deep understanding of government views, ambitions, ideals and pressures. You need to have been embedded in it for many years – you can’t become an infrastructure lawyer overnight,” says Pinsent Masons’ Laing. “There are not that many people who have decades of experience in Asia doing infrastructure investment work.”

Those law firms able to demonstrate experience and depth in their infrastructure practices will be rewarded not only with opportunities to become involved with deals, but also with ongoing relationships. “Infrastructure investment clients who invest and set up an organisation to last 25 to 30 years are long-term business clients,” says Laing.

The whole world is now looking towards Asia hopefully. “In the next five years I think we will see more  work from India in the power sector, roads, transport, infrastructure, airports, ports and telecoms,” says Norton Rose’s Smith. “Indonesia will also require a broad range of power and basic infrastructure…Vietnam will see more power-based infrastructure.”

China is steadily marching on with the development of a range of projects required to support a rapidly developing populace, and Chinese banks will play a large role encouraging investment out of the country. “The support that Chinese sponsors receive from Chinese banks is superb,” says Redden. “For example, banks like China Development Bank play a big role in projects in the region. This assists the ability of the projects to get up and also assists Chinese contractor involvement, another benefit.”