East Asia & Pacific Private Investors in Infrastructure: Perception Survey

East Asia & Pacific Private Investors in Infrastructure: Perception Survey Prepared for Bali Workshop Infrastructure in EAP: The Way Forward June 2004

Objectives of study • To gauge level of interest in infrastructure investment (power and gas, telecom, water and sanitation, transport) in East Asia & Pacific among a sample of infrastructure companies from Asia, Australia, Europe, New Zealand and the US. • To identify the evaluative criteria companies use to assess whether a country is appropriate for infrastructure investment. • This study represents only the views of operators in the private sector. Based on issues that emerged, it may be worth exploring similar issues with: government, portfolio investors and others in the financial sector, legal and regulatory experts, civil society.

Methodology • In order to meet the objectives, 50 in-depth interviews were conducted with executives from 48 infrastructure companies* from Asia, Australia, Europe, Japan, US, NZ. Interviews were conducted by telephone except those in Japan (face-to-face). • Study overseen by public opinion specialist at World Bank. Interviews conducted by independent consultants. • Names of companies came from Private Participation in Infrastructure (PPI) database (drawn from a variety of public domain information sources), World Bank Group staff and JBIC staff. • Potential participants were randomly selected from sample frame. • Individuals in 91 companies were contacted. • Interview included qualitative and quantitative components. * Two companies requested that two individuals be interviewed.

Methodology (continued) • Energy: 17 • 8 from companies headquartered in East Asia • 9 from companies headquartered in the West • Telecommunications: 18 • 13 from East Asia • 5 from the West • Transport: 10 • 5 from East Asia • 5 from the West • Water: 5 • 2 from East Asia • 3 from the West Note: ‘East Asia’ includes companies from China (including Hong Kong based companies)Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Thailand. ‘West’ includes Australia, Europe, New Zealand, US

Key Findings • Research indicates enthusiasm among investors for infrastructure investment in East Asia & Pacific region. However this enthusiasm, and ultimate intent to invest more, is contingent upon a number of factors. Local infrastructure investors (within their own countries) appear marginally more confident about investing than other Asian investors. Asian investors appear marginally more confident than Western investors. • Investors assess the strengths and weaknesses of the region similarly as related to infrastructure investment. • Predictability emerged as the critical factor for successful investments – particularly related to policies and institutions. • Investors report that they want governments to work more aggressively to ensure a certain level of predictability. • Research suggests that a level of caution may result from foreign investors’ perception that they are less than welcome in developing countries in EAP.

Clear interest in infrastructure investment • Nearly all infrastructure investors reported that the region is one of the most attractive places to invest. Key assets identified are: • Economic growth • Large and growing populations • Increasing demand • Under-penetrated markets • Most respondents report that their focus is on developing countries because they are seeking higher returns, and their home markets are saturated. In EAP their focus is primarily on a handful of developing countries.

Clear interest in infrastructure investment “Do you expect your company to increase, sustain, or decrease your total sector investment portfolio in developing countries in the region in the next two years?”

Attractiveness of countries for investment “Which two countries do you consider the most attractive in terms of investment in EAP?” * *Not all respondents provided two answers. Question was open-ended. Some answers reflect a respondent’s experience in just one country. Numbers column reflects times that the country was mentioned by all respondents who answered.

Clear interest in infrastructure investment • Research indicates that while investors have ‘moved on’ from the East Asia Crisis, for many it still influences the ultimate decision to move forward with an investment. Interviewees tend to look through the prism of the East Asia crisis to evaluate a country’s attractiveness. • The perception of a country as a place to invest results, in part, from how it weathered the crisis. Hence, the reputation of Vietnam and China were not affected, while perceptions of the Philippines, Indonesia, and Thailand were • As a result of the crisis, investors demand greater predictability in a country before making large investments. “We demand transparency. We’ll walk away without it.” • Research suggests that the crisis has made investors far more selective. • “Our perspective on investing has changed considerably. In the early ’90s East Asia looked great. But we’re far more discriminating now. We’ve learned lots of sobering lessons.”

Consistent views of the assets/challenges investors face in region • Respondents identified strengths in the region that engender interest in investing there: • Growth (economic/population/demand) • Increasing availability of funding • Increasing transparency • Hard working/educated labor force • Labor costs still reasonable • Regulatory environment (while still problematic, better than other developing regions) • Some improvement in contract predictability

Consistent views of the assets/challenges investors face in region • However, respondents consistently identified concerns that temper their enthusiasm: • Judicial/legal framework • Regulatory inconsistency • Political instability • Currency instability • Respect for contracts • Predictability • “We’re never sure of our contracts – we live with constant insecurity.” • “China is awash in FDI and is making clear that foreign investors in power are on their own with clear cut contracts a thing of the past.” • “The lack of respect for contracts and renegotiation is a problem throughout the region.” • “Corruption is rampant everywhere.”

Predictability: The key to a successful investment • Predictability in the investment environment emerged consistently as a critical concern. While respondents reported a willingness to assume a basic level of risk, caution drives the landscape. There is little sense of urgency to ‘make a deal.’ • “It’s not worth it to mess around in countries that don’t know what they’re doing or change the rules or make it hard for foreign investment.” • Non-commercial factors that may affect predictability in a country are critically important to respondents. • “[We want to] make a profit in predictable and reliable circumstances.” • “A change in the rules is the one thing we dread.”

Predictability: The key to a successful investment • Research suggests that predictability is measured through a number of indicators. These are: • Contracts • Regulatory and judicial/legal environments • Political stability • Currency controls • Research indicates that the ultimate decision to invest will rely as much on whether the environment appears ‘predictable’ (based on indicators listed above) as it will on the economic growth/market potential benefits.

“Please tell me how important each factors is when determining whether a country is appropriate for investing, on a scale of 1-6, 1 meaning not at all important, 6 meaning extremely important.” Predictability: The key to a successful investment

Partnerships in country: establishing greater predictability in the environment • Partnerships emerged spontaneously as another critical factor to ensuring successful business investments in developing countries in EAP. • Partnerships are perceived as often necessary although it means giving up a degree of control. • “The most important thing is finding a partner who is well-educated and who understands your business. The job goes best when you have the right relationship.” • “We leave it to the local partner and want no knowledge of what goes on.” • Foreign investors in a country expressed hesitancy about their ability to navigate the partnering dynamic. • “We must become more indigenous and tap into local capabilities more than in the past in terms of partnership andsub-contracting.”

Expectation from governments: Create more predictability in the investment arena • While investors recognize governments’ limitations, research suggests that they would be more likely to invest if governments worked to create more predictable and consistent business environments. • “Governments have to be pro-active. The problem is they don’t bother. We have to chase them begging for cooperation.” • “Changes in the rules are the one thing we dread.” • “They need to promote transparency so we’re not broken by rules, regulations and corruption. We need a level playing field – predictability and reasonable tax rates.”

Expectation from governments: Create more predictability in the investment arena • Respondents’ believe governments can do more to engender consistency in key areas: • Regulatory frameworks • Legal/judicial frameworks • Currency fluctuation • Respect for contracts • Respondents also indicated that while capacity at the government level is evolving, improved capacity is critical. • “Bureaucrats need to bebetter trained, quicker and more positive in their attitudes… Ignorance is a big issue among officials.”

Expectation from governments: basic level of support • While governments in EAP are perceived as more supportive than in the past, respondents say that many still do not welcome foreign infrastructure investors. Respondents indicate this may result from: • Sense of pride/nationalism • Desire for control • Without support from government, investors are not optimistic about investment results. • “When we fail it’s a failure to judge the level of government commitment.” • “Governments have to be supportive of private sector investment…But the private sector has to make money and government has to understand this.” • “We want governments to stand by us. It’s…the most difficult issue we face.”

Role for official agencies: bilaterals, multilaterals, export credit agencies • Respondents spontaneously discussed the role that official agencies could play in navigating the investment environment in developing countries in EAP.* Areas of emphasis would include: • Help governments improve regulatory/legal environments • Help countries develop local currency and debt markets • Build capacity of public sector/government officials • Assistance in navigating the partner dynamic • Help to resolve disputes • “We expect more help from JBIC, ADB and the World Bank in case we have problems.” • Respondents were not terribly familiar with the exact role these agencies could play but expressed positive views about the organizations. *To avoid interview bias, the study was designed to explore broader issues with investors, rather than the perceptions of official agencies.

In sum…. • Growing enthusiasm: • “We have come to the realization that it’s really the best region from a development point of view for us.” • “Over the next fifteen years or so, this will be a very dynamic part of the world.” • “Twenty or thirty years from now, East Asia will be the center of gravity for the whole world.” • Mitigated by the need for predictability in the investment environment: • “It’s about the basics. The rule of law first. Second, providing safe and secure environments so we can do our business normally.” • “There needs to be well defined policies and a stable regulatory framework. If it’s not there, we won’t operate. We need to be welcomed with all that that implies.”

East Asia & Pacific Private Investors in Infrastructure: Perception Survey