Main commercial risks in Southeast Asia

Main commercial risks in Southeast Asia

The main commercial risks in private infrastructure projects in Southeast Asia are Construction Risks and Exchange Rate Risks, followed by Social and Environmental Risks, Credit Risks and Demand Risks, according to the Project Risk and Mitigation survey (Link to information on survey).

  • Construction risks, such as engineering and technical feasibility risks, time delays, cost overruns and performance-related risks, are common challenges faced during large infrastructure projects. Transferring these risks onto the private side is critical to achieving efficiency gains and higher value for money.

Commercial risks of most concern in private infrastructure investment in ASEAN countries

Southest_Asia2

Click to enlarge

  • Exchange Rate Risks are particularly prevalent in infrastructure projects in some ASEAN countries. Large infrastructure projects are often (co-) financed on the international capital market in USD, Euro or Yen denominated loans, as domestic capital markets are not sufficiently developed. Exchange rate risks are sometimes high, since revenue streams, as well as end user fees, public subsidies or availability payments, are often in local currencies, whereas debt services are often denominated in USD, Yen or Euro.
  • Demand Risks are usually determined by factors outside the direct control of private stakeholders, who are therefore frequently reluctant to bear these risks, though will be more willing to do so in countries with a strong track record of successful PPP projects.
  • Credit Risks are especially important in PPP projects, which are usually financed with a high proportion of debt, often exceeding 70%. Project finance is often arranged on a limited- or non-recourse basis, with the only collateral available for lenders being the project’s revenue, assets and contractual rights. While such a financing structure benefits sponsored companies by capping their exposure to paid-up capital, it does increase credit risks for lenders.
Public and private stakeholders in PPPs apply a diverse range of instruments and strategies to mitigate or transfer commercial risks: please see here for more information.