With the One Belt One Road initiative as an ignition point, infrastructure investment is on the uptick around the region, and with it the legal challenges that accompany these big projects. Penelope Macrae investigates
The Asian Development Bank calculates Asia needs US$750 billion a year to fund infrastructure capital through to 2020. The region has drawn strong interest from yield-hungry investors but stumbling blocks abound, from land acquisition and environmental hurdles to opaque regulation and corruption. “Key challenges remain a lack of familiarity with the local political and commercial scene – and identifying the right local partners can be a challenge,” notes Matthew Bubb, a partner at Ashurst in Tokyo. “For greenfield projects, structures and documentation, a high degree of patience, flexibility, cultural sensitivity and adaptability is important.”
Without a considerable investment step-up, the ADB estimates Asia’s infrastructure gap could hit US$8 trillion by 2020, crimping economic growth and demand.
On the upside, across Asia and around the world, law firms are eyeing rich opportunities from China’s ambitious One Belt, One Road (OBOR) initiative to boost trade with ASEAN, Central Asia and Europe through ports, railways, pipelines, power grids and highways. Heralded by Beijing as the new Silk Road, the financial architecture is underpinned by a US$50 billion Chinese state fund to finance projects and the US$100 billion capitalization of Asian Infrastructure Investment Bank (AIIB).
China Development Bank has also promised to plough about US$890 billion into more than 900 projects across 60-plus countries, although it has given no timeframe.
OBOR “is potentially the most significant foreign-policy initiative of China since its entry into the WTO in 2001 … and likely to reshape the global economy”, says David Olsson, China practice consultant for King & Wood Mallesons (KWM), based in Melbourne. Building the infrastructure will create a long list of work possibilities for law firms, from advising on legal, tax, commercial and cross-border issues, to dispute-resolution, project finance and the formation of joint ventures. And “it is not a one-year initiative, it will run for decades”, says Olsson.
But there are questions about how long it will take for Beijing’s bold development strategy to get into full swing, whether there will be a sufficient and credible pipeline of productive, bankable, investment-ready projects offering acceptable risk-adjusted returns, and crucially, whether longstanding political or commercial tensions could up-end some plans.
Still, OBOR offers multiple opportunities for law firms, says Shivanshu Thaplyal, a principal associate at Mumbai-based law firm Khaitan & Co. “The practice areas focusing on infrastructure will primarily benefit from OBOR,” he says. “However, as the scope of work will be broad, we also expect other areas such as corporate/M&A, banking and finance, and dispute resolution to draw significant opportunities from OBOR.”
Pinsent Masons has already served as adviser on one of the first projects to be financed under OBOR, the Thar Block II coal mine in Pakistan, and two associated 330-megawatt power plants. The firm worked with the two project companies, the mine company (a joint venture of the Government of Sindh, Engro Corp, various Pakistan and Chinese investors, and China Machinery Engineering Corp) and the power company (a joint venture of Engro, CMEC and a Pakistan investor).
The deal represented CMEC’s first major overseas investment project. The two financings comprised a mix of Chinese credit from Sinosure with additional conventional and Islamic Pakistan rupee tranches. Pinsent Masons was led by a cross-border team working from Beijing, Hong Kong, Singapore and Dubai. “This is genuinely a trailblazing project for China’s energy and infrastructure industries,” says David Platt, a lead partner advising on the deal.
As might be expected, outbound investment from China “has significantly increased in OBOR-related countries”, adds Lin Zhong, a partner at Shanghai-based EY Chen & Co. Law firm, and director of its international practice.
Specific details are still emerging on projects that will be included in the initiative in countries China has identified as partners, but a significant number are already under way or in development, says Sam Boyling, a Beijing-based infrastructure specialist and partner at Pinsent Masons. “This approach may well be by design, in order to allow flexibility in implementation across the very different economic and political landscapes along its routes.”
Singapore, with its well established logistics and infrastructure sectors, is well positioned to reap benefits from OBOR. “The progress of Singapore’s infrastructure and logistics capabilities positions it to partner with Chinese investors in tackling the broader region’s infrastructure deficit,” say Singapore-based Huang Xuhua and Guangzhou-based Mo Haibo, both partners at KWM.
Australia is also teeing up to tap opportunities, setting up the Australia China OBOR Initiative – known as ACOBORI – a non-profit NGO to serve as “a vital link” in helping Australian and Chinese industry leaders realize OBOR opportunities. In October, Australia mounted its biggest Chinese trade mission to promote commercial ties. OBOR will be “important to MinterEllison, given our infrastructure credentials and presence in China”, says Andrew Rentoul, a partner at the firm’s Brisbane office.
India holds huge potential. In May 2015, Thaplyal notes, China committed to making investments in India worth more than US$22 billion in sectors including telecoms, steel and solar energy “that would certainly enable companies to build new client bases around OBOR infrastructure initiatives”.
From a geographical perspective, Indonesia stands to be the biggest beneficiary among ASEAN economies, with about US$87 billion identified in OBOR-related infrastructure projects, roughly double the US$42 billion each that the Philippines and Vietnam may host, according to a survey conducted by the Economist Corporate Network on behalf of Baker & McKenzie. But for all the lucrative possibilities, there are problems that pose potential legal, regulatory and sovereign risks – all of which require careful examination by investors and legal advisers.
“Dispute resolution can be a concern as each region prefers its own arbitration, sitting along with the domestic law,” says Sujeet Karkala, an associate based in Phnom Penh at SokSiphana and Associates, a member of ZICOlaw. “OBOR, in order to be implemented, needs to keep this in consideration. It may not be easy, as the practice of law changes drastically over various regions.”