East Asia & Pacific Private Investors in Infrastructure: Perception Survey

1. East Asia & Pacific Private Investors in Infrastructure: Perception Survey Prepared for Bali Workshop Infrastructure in EAP: The Way Forward June 2004 Prepared by Sharon Felzer – World Bank

2. Objectives of study • To gauge level of interest in infrastructure investment in East Asia & Pacific among infrastructure companies from Asia, Australia, Europe, New Zealand and the US. • To identify the 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.

3. Methodology • 50 in-depth interviews were conducted with executives from 48 infrastructure companies*. 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.

4. Methodology (continued) • Energy: 18 • 8 from companies headquartered in East Asia • 10 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: 4 • 1 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

5. Key Findings • 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 government policies and institutions. • A level of caution may result from foreign investors’ perception that they are less than welcome.

6. Clear interest in infrastructure investment • The region is considered by investors one of the most attractive places to invest. Key assets are: • Economic growth • Large and growing populations • Increasing demand • Under-penetrated markets • Focus is on developing countries because respondents say they are seeking higher returns, and their home markets are saturated.

7. 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?”

8. 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?”

9. 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.

10. Clear interest in infrastructure investment • Research indicates that while investors have ‘moved on’ from the East Asia Crisis, for many it still influences the decision to invest. 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. • 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.”

11. Consistent views of the assets investors face in region • Strengths that engender interest to invest: • Growth (economic/population/demand) • Increasing availability of funding • Increasing transparency • Hard working/educated labor force at still reasonable costs • Regulatory environment (while still problematic, better than other developing regions) • Some improvement in contract predictability

12. Consistent views of the challenges investors face in region • However, respondents consistently identified concerns that significantly 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.” • “The lack of respect for contracts and renegotiation is a problem throughout the region.”

13. 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 who change the rules.” • “A change in the rules is the one thing we dread…”

14. Predictability: The key to a successful investment • Predictability is measured through a number of indicators – and these are as critical as the economic growth/market potential benefits in a country. • Contracts • Regulatory and judicial/legal environments • Political stability • Currency stability

15. “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

16. “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

17. Partnerships in country:critical to successful investments • 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.

18. Expectation from governments: Create more predictability in the investment arena • While investors recognize governments’ limitations, 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.” • “They need to promote transparency so we’re not broken by rules, regulations and corruption.”

19. Expectation from governments: Create a more predictable investment arena • Respondents’ believe governments can do more to engender consistency in key areas: • Regulatory frameworks • Legal/judicial frameworks • Currency fluctuation • Respect for contracts • And governments can be more welcoming of investors. • “When we fail it’s a failure to judge the level of government commitment.” • “We want governments to stand by us. It’s the most difficult issue we face.” • 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.”

20. 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.* • Help governments improve regulatory/legal environments • Help countries develop local currency and debt markets • Build capacity of public sector • 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 primarily to explore broader issues with investors, rather than their perceptions of official agencies.

21. In sum…. • Growing enthusiasm: • “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.”