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The Finance Lawyer
WIROT POONSUWAN
The Japan International Co-operation Agency (Jica) has recently incorporated the public arm of The Japan Bank for International Co-operation (JBIC) as part of it in a merger and has taken over all JBIC's soft loans to the Thai government. This government-to-government financing is transformed into the construction of electric train projects, resulting in the new Jica becoming the preeminent infrastructure lender to Thailand.No new subway or elevated train projects locally are proceeding without Jica as a key financier. A less complicated procedure for applying for a project loan from this bilateral agency implies the loan can be disbursed into the hands of Thai contractors more quickly than those of multilateral agencies, in particular the World Bank and Asian Development Bank or conventional large-scale commercial syndicated project financing for a private-sector project, funding from all of which continues to be crucial.
Thai contractors and workers as beneficiaries: Even as a commercial export credit loan from the new JBIC is restricted to financing a purchase of machinery and services from Japan, the new Jica loan agreement is flexible and open to contractors and suppliers from all countries, with Thai contractors, suppliers and workers wound up as ultimate beneficiaries.
Jica loans are in large part crafted to improve infrastructure, yet they can also bolster long-term public spending to sustain economic growth. Aside from jobs created by train construction, residential sites and shopping malls inherently prop up along the train routes to set off a chain of knock-on effects of divergent economic activities.
In the event a loan disbursement is made fast enough to catch the current economic slump and rising unemployment, the Jica loans can be used as part of a fiscal-stimulus package to bail out those troubled contractors and jobless workers. How much of this supplementary purpose can be achieved depends on how soon the project construction gets started and the hurdles to the milestone overcome.
Amazingly simple loan agreements: Huge project finance loans are substantiated by large documentation of more than one hundred pages containing complicated clauses covering protection of margins and against financial market disruption. Embedded into these commercial financing agreements is an exit for the lenders from the obligation to lend and their ability to get their money back before repayment dates through loan acceleration, should their risk be heightened.
The Jica loan agreement, though worth hundreds of millions of dollars, is amazingly fewer than 10 pages long owing to the fact that it is based on trust, a great convenience for the borrower's loan negotiators. On top of that, terms are very favourable: the interest rate is fixed at a very low level with the borrower totally having no risk of interest-rate fluctuations or increased costs. The whole financing cost encompassing interest and other fees is in the range of 1% to 3%, much cheaper than the central bank's policy interest rate.
As long as the Thai government complies with basic terms and conditions, Jica's exit is very narrow. In the real world, the agency is not known to have called off its obligations to lend or accelerated the loans to immediate repayment.
Risk of asset enforcement: In lending to the Thai government represented by the Ministry of Finance, Jica accepts the regulatory risk of enforcement upon the Thai government's assets if finally the loan is in default. Thai law permits the G-to-G loan agreement to be enforced in court and a government agency to be sued.
Nevertheless, when the legal enforcement reaches the stage of execution of judgment by means of seizing the state property for forced sales to satisfy the debt, it can't be done. Thai law prohibits a transfer and seizure of state property. You can have a favourable court judgment but you can't execute it.
This being said, the reach of local law can go only so far as the Thai borders. With the exception of Thai embassy assets, the law doesn't cover government assets overseas, opening up the possibility for the lender to file a lawsuit with a foreign court against state property located in that country. All this is a legal avenue that has never been used - a Thai government agency never has and never will allow its loan to default.
A commercial syndicated project financing agreement to a Thai state enterprise would spell out all the details of this foreign legal option down to the point where a representative of the borrower in London must be appointed to receive court documents from the court in England, a popular venue. The Jica loan agreement specifies none of this and the lender, well-versed in how Thai law operates, accepts the risk of asset enforcement.
Wirot Poonsuwan is a former chairman and managing partner of Clifford Chance Wirot as well as a former partner of Baker & McKenzie in Bangkok. He now has his own firm, Poon&Poon, Attorneys-at-Law, and can be reached at wirotp@poonandpoon.com
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