Project Risks & Mitigation

There is high demand for infrastructure investment in the ASEAN region that is not being met, thereby hampering sustainable economic and social development. The demand is amplified by strong economic growth, a growing population and rapid urbanisation. National development plans and the regional Master Plan on ASEAN Connectivity (MPAC) reflect this demand and call for increased private participation in infrastructure investments.

Commercial and political risks, however, constrain access to debt and equity financing, thereby limiting private infrastructure investments. To foster private participation, the assessment aims to improve the understanding of the investment climate for private infrastructure in Southeast Asia. It is based on analysing the legal framework for investment protection, identifying the main project risks and reviewing access to financial instruments in order to mitigate the main risks.

Main constraints in private infrastructure investment

The main constraints for private infrastructure investment are political risks, lack of clear and stable legal and regulatory framework and capacities of governmental counterparts, according to our survey on Project Risks and Mitigation.

  • Weak legal framework: Private investors will only commit to commercially viable infrastructure projects that are supported by a credible legal framework for investment protection. To reassure investors’ concerns over the protection of their investment, legal frameworks should lay down the legitimate protection of investors’ properties.
  • Commercial and political risks: Commercial viability can be endangered by excessive levels of commercial and political risks, which diminish investors’ and lenders’ willingness to provide equity and debt financing. As infrastructure projects are often financed through limited or non-recourse project finance structures, lenders rely on the security of the asset and revenue streams.

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Main risk mitigation instruments

  • Political risk is often mitigated through political risk insurance, guarantees and direct interactions with policymakers.
  • Commercial risk is often mitigated or transferred to third parties through contractual arrangements, insurance and guarantees.

Insurance and guarantees are the main instruments used to mitigate risk. Both transfer risk to third parties better able to manage them. Given the relative importance of these financial risk mitigants, this project analyses in detail their supply in ASEAN Member States. A central research question has been whether or not a potential gap in the availability of these mitigants hampers access to equity and debt financing for infrastructure projects.

Limited availability of financial risk mitigants persists for certain risks as well as for certain countries. Their availability is crucial for private project sponsors to cover risks and ease access to equity and debt financing.

 

Objectives of the project

  • For public and private stakeholders in PPP projects to access a central overview of available insurance and guarantee products.
  • For private and public issuers of insurance to expand their coverage to sectors and countries with existing demand but limited access.
  • For public authorities that are involved in developing, tendering and managing PPP projects, to have access to an overview of the main risks. Taking a private sector perspective of risk into account for their risk allocations could ensure appropriate risk sharing. This would increase private sector interest and competition in the tender of PPP projects.
  • For policymakers in countries with less reliable investment frameworks and investment incentives to learn from good practices.

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PROJECT RISKS

These are risks that affect the commercial viability of a project. Through conducting a survey and expert interviews, the project identifies the major commercial and political risks in private infrastructure projects.

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RISK MITIGATION INSTRUMENTS

These enable public and private stakeholders to mitigate and transfer commercial and political risks. The main instruments applied include insurance, guarantees, contractual arrangements and hedging instruments.

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LEGAL FRAMEWORK

Sound, transparent and predictable legal frameworks for regulating and protecting investment are critical to reducing risks. This section includes a description of the existing institutional framework, domestic legal frameworks and International Investment Agreements (IIAs).