Risk and Reward

Better communication between governments and investors is the best way to ensure that costly projects don’t get sidelined by risk factors.

The developing Southeast Asian region has never been so attractive to investors. From the opening of Myanmar, to hydropower in Laos or the rise of Indonesia, compelling cases exist for pouring money into the region.

Protesters who fear the Xayaburi dam on the Mekong River in Laos will ruin the fishery demonstrate in Bangkok.

But where there are opportunities, there are also risks and uncertainties, particularly in developing countries. Billions of dollars can go for naught at the end of the day because of changes in government, changes in regulations or arbitrary decisions. Opaque legal systems and corruption are also major headaches for foreign investors.

For small and medium enterprises, a loss arising from an unforeseen risk event can be fatal, which may explain why most feel safer at home. But even large corporations with strong financing, connections and access to legal expertise are not immune when they go abroad.

Just ask the Thai coal miner Banpu Plc, which in 2011 had to divest all of its shares in the Daning mine in China for US$669 million, after the Beijing government decided it wanted coal mines to be operated and owned by Chinese companies.

The Daning coal mine was operated by Shanxi Asian American Daning Energy Co, in which the Banpu subsidiary AACI SAADEC (HK) held a 56% stake. The company has two coal mines, Gaohe and Herbi, left in China.

A Chinese company faced a similar fate when there was a change in policy in Myanmar. In 2011, the Myanmar government suspended the construction of the Myitsone hydropower dam on the Irrawaddy River for environmental impact reasons.

The project worth $3.6 billion was being built by China Power Investment Corporation (CPI) and had been touted as the 15th largest hydropower dam in the world.

Italian-Thai Development Plc (ITD), Thailand’s largest contractor, last year had to suspend plans to build a 4,000-megawatt coal-fired power plant in Dawei in Myanmar, also on environmental grounds.

The Myanmar government is likely to change the fuel source of the plant to natural gas, but a decision has not yet been made.

Environmental concerns also surround the Xayaburi hydropower dam on the Mekong River in Laos. Green activists, villagers living downstream on the Mekong, as well as the government of Vietnam, all believe the dam could do irreparable harm.

The project is still going ahead but operator CK Power, a subsidiary of SET-listed Ch. Karnchang, has faced delays and costs of billions of baht for additional construction. The work includes a fish ladder and special channels to help reduce environmental impact.

Contract enforcement is another risky area for businesses, as the German company Walter Bau found in Thailand. A shareholder in Don Muang Tollway Plc, it sued the Thai government for breaching the expressway operating contract after the government ordered the company to cut tolls to 20 baht and constructed a local road as an alternative to Vibhavadi Rangsit Road, resulting in reduced revenues. Walter Bau won the arbitration award and the Thai government has to pay around 30 million euros.

The long legal battle between the Laotian government and the Thai company Thai-Lao Lignite (TLL) is another case. The Laotian government terminated power plant development contracts with the Thai company in 2006, citing a lack of progress. The company contested the case and an arbitrator ruled in 2010 that the Laotian government had terminated the contract improperly. It ordered Vientiane to pay US$57 million in compensation to the Thai company.

The Laotian government appealed by submitting new evidence to the court in Kuala Lumpur (arbitration cases often are handled in neutral third countries). The Malaysian court ruled that the arbitrators had exceeded their jurisdiction. The case is likely to drag on for some time yet.

James Berger, the lawyer representing TLL, said the improper termination of concessions would hurt foreign investors’ confidence in Laos, which badly needs large sums from abroad to develop its resources.

When all is said and done, however, opportunities in this part of the world appear to outweigh the risks, if statistics are any guide.

Foreign direct investment (FDI) inflows in East and Southeast Asia in 2011 totalled $335.5 billion compared with $294.1 billion in 2010, according to the World Investment Report 2012 by the United Nations Conference on Trade and Development (Unctad). It has forecast FDI of between $440 billion and $520 billion in the region this year, and $460 billion to $570 billion next year.

Some observers believe risks and uncertainties are easing in Southeast Asia, though there will always be isolated cases.

Noppol Milintanggoon, president and CEO of Ratchaburi Electricity Generating Holding (RATCH), Thailand’s largest private power producer, says proper contracts are a key. “If we secure contracts and the details are clear enough, it is safer for both the public and private sectors,” he said.

However, he admitted that even when contracts with state entities exist, it is businesses that take the risks, so they need to think about solutions.

RATCH is a partner with ITD in the Dawei power plant and it is still waiting for the Myanmar government to clarify what kind of plant can be built and what kind of fuel it will use.

“I don’t see this as an uncertainty but as a challenge for us,” he said. “Myanmar has just opened up and is in the developing process. We have to wait for a clear policy and development direction of this country.”

As a power producer, RATCH is always looking at new power projects in the Greater Mekong Subregion (GMS), particularly in Laos and Myanmar. Mr Noppol said the risk factors include laws and regulations, investment incentives and promotion, tax treatment, government understanding, and acceptance from local residents.

“The risks and uncertainties do exist. We have to evaluate these and find ways to mitigate the risks that might affect the projects,” he said.

Mr Noppol said his company spent a lot of time communicating with government officials to ensure that everyone understands its plans. The Asian Development Bank agrees that this is one of the best ways to reduce risk.

The more both sides collaborate and commit to completing investment projects, the fewer risks and uncertainties the projects will face, said Arjun Goswami, director for the Regional Cooperation and Operations Coordination Division in Southeast Asia for the ADB.

“Collaboration and commitment are the key words to mitigate risks and uncertainties in investment elsewhere,” he said. “The public-private partnership scheme can be used to complete development projects. I do believe that the situation is better than in the past.”

In his view, the GMS countries need investment from outside to develop energy and infrastructure, so their governments should support and smooth the way for private companies.

At the same time, private companies have to evaluate their risks and factor them into their investment budgets.

Mr Goswami said the involvement of international organisations such as the ADB and the World Bank, sometimes with financing aid, could help secure investments  in some cases.

He cites the successful example of the Nam Theun 2 hydroelectric dam, in which the main players were the Laotian government, a Thai contractor, the ADB and the World Bank. The two international organisations guaranteed the project, citing development needs. The 1,070-MW plant costing $1.4 billion began supplying electricity to Laos and Thailand in 2010.

A region-wide commitment is also crucial to safeguard the projects. At an ADB-sponsored conference in Nanning, China last month, GMS ministers agreed to establish a Regional Power Coordination Centre. The agreement will lead to investments that will strengthen the regional power grid, providing backing for any projects that meet this goal, added Mr Goswami.

PTTEP keeps close eye on conditions in Algeria

The violent end to a hostage taking this month at a gas plant in Algeria is a stark reminder of the risk that terrorism poses, with energy and resource companies often seen as targets.

Thailand’s PTT Exploration and Production Plc is among the energy companies with operations in Algeria, though they are far from In Amenas, the scene of this month’s deadly events.

PTTEP will not invest in any high-risk areas unless it is satisfied that it can deal with all eventualities, says president and CEO Tevin Vongvanich.

“Having a risk management solution is the key factor for us. … If we can’t have measures to cope with extraordinary situations such as terrorism in risky areas, we will not risk our human resources and our money,” he said.

Islamist militants on Jan 16 seized hundreds of hostages at the Tigantourine gas field, operated by Statoil of Norway, BP and the Algerian state oil company Sonatrach at In Amenas, 1,300 kilometres south of Algiers. By the time the Algerian military routed the militants four days later, at least 38 foreign hostages were dead along with 29 extremists.

Mr Tevin says that before PTTEP starts any new projects, it assesses the risks not only to its own personnel and investment, but also the country, community and environmental risk.

All of the risks are evaluated to determine whether there is a management solution. If it is confident that it can manage risk, only then will it begin an economic value assessment.

PTTEP he says, purchases security information from two or three sources and uses it to rate the security levels in the area where it operations.

It divides security risk into two parts: risk in the country and in the project area. The latter has four levels: green if the area is considered safe; yellow for possible risk; orange if there is danger but not directly affecting PTTEP’s project site; and red if there is direct danger to the site.

“The security levels are assessed routinely and can be adjusted depending on the current situation,” he said.

PTTEP has two onshore exploration and production blocks, 433 and 416b covering 5,378 square kilometres, in the Hassi Bir Rekaiz Permits in eastern Algeria. PTTEP and Sonatrach hold 24.5% each and China National Offshore Oil Corporation holds 51%.

Mr Tevin said the company’s operations were currently rated orange as the area where the hostage crisis took place was 500 kilometres away. Its security measures meet international standards, he said.

He could not elaborate on the measures, citing security reasons.

“Some of our jobs are in dangerous zones,” he said of the company’s worldwide operations generally. “Our staff know this well. It is our duty to do whatever we can do to safeguard our people and make them confident to work in such areas.”

About the author

Writer: Nalin Viboonchart