In one of the most ambitious plans in railway history, China and Thailand jointly proposed last year the construction of a high-speed railway between Bangkok and Kunming, capital of southwestern China’s Yunnan province.
The 873-kilometer railway project is the first and foremost step of developing a pan-Asia railway network connecting China and South East Asia. Upon completion, travel time between Bangkok and Kunming will be shortened by more than 75% to about six hours from 26 hours by bus.
Too good to be true? Perhaps. The project hit a snag in May last year after the two governments ran into disagreements over the total cost, the construction and operation model, and land rights along the path of the railway line.
This was a high-profile example of a dispute arising from cross-border infrastructure investment in Asia. But it was far from an isolated case. As infrastructure spending rises across the region, the number of disputes and the level of complexity increases, adding risks for the funding parties — and often causing projects to be delayed or even cancelled altogether.
According to Baker McKenzie's latest Asia Pacific Business Complexities Survey — based on interviews with 150 business leaders of large multinational corporations — 67% of respondents think commercial disputes will rise amid changing country-specific laws and increasing competition. Some 80% believe energy, mining and infrastructure is the top sector where they will see a rise in dispute resolution and litigation.
Reduced project financing risk
“In the not too distant past, the main source of difficulty for project participants was one of securing a sufficient level of funding, especially for the larger projects," said Paul Teo, a construction lawyer and head of Baker McKenzie’s arbitration practice for Greater China. "This problem now seems slightly less acute, given that multiple new sources of dedicated infrastructure development funding have become available over the last few years.”
Teo is specifically pointing to some newly-formed inter-governmental organisations that provide massive capital for infrastructure development. China has played an active role in their establishment, spearheading the development of the Asian Infrastructure Investment Bank and establishing its own Silk Road Fund in 2014.
China is also one of the founding nations of New Development Bank, formerly known as BRICS Development Bank, which has a $10 billion lending facility ready to be deployed over the next five years.
This has gone some way to reducing the funding burden in the sector. But while conflicts over funding issues have become less trying, the number of dispute cases arising from political and legal differences has been increasing.
According to Teo — who focuses on post-contract advisory and disputes services in the energy, mining and infrastructure sectors— the situation affects Asia more than other parts of the world because Asian countries are more segmented in terms of their varying stages of development and different political and legal systems.
“In Asia there are common law jurisdictions; and there are civil law jurisdictions. There are different legal systems and traditions [and] hence different approaches to interpreting and enforcing rights and obligations on the ground,” Teo told FinanceAsia.
Such differences give rise to a long list of hurdles for companies looking to invest in overseas infrastructure projects. They include different entry requirements, corporate registration models, capital and labour requirements, environmental issues and land use rights. The list goes on.
Depending on the openness of the government, there are also substantial risks relating to capital flow and supply of materials into the project nation. For instance, China’s recent firmer capital controls mean that funding parties may find it harder to withdraw their funds out of the country.
The funding parties, contractors and local governments can also run into dispute in the event of unforeseen circumstances. For instance, many project owners and contractors entered into arbitrations over losses arising from the outbreak of SARS in 2003, which caused countries to impose labour control and severely impacted manpower supply for cross-border infrastructure projects.
Another area that may give rise to difficulties in practice is the interaction between the form of engineering and construction contracts chosen and the local law. Sometimes, issues can arise as to whether certain provisions of the contract can be fully applicable and enforced in certain jurisdictions.
For example, FIDIC, the internationally-recognized contract form for international projects, provides for arbitration as the final method of dispute resolution in many jurisdictions. But Thailand does not permit arbitration for PPP projects and concession agreements, unless cabinet approval is obtained.
Teo believes this is a key risk area to watch for as it could potentially add another layer of complexity in resolving the dispute.
In one of the most recent examples of contractual dispute, Inpex Corporation was forced to delay in March its $37 billion Darwin natural gas project, which is by far Japan’s largest single investment into Australia. The Japanese company ran into a dispute with British contractor Laing O’Rourke over payment terms, causing the UK firm to fire 800 workers due to funding difficulties.
Project disputes reduce overall effectiveness, drain resources and can eventually lead to failures and delays. But they are hard to avoid — especially in very large infrastructure projects.
To minimise the chance of running into disputes, Teo suggests that parties should engage in risk assessment and due diligence at the very outset, assessing the potential risks that could arise during the course of the project implementation, and finding appropriate ways to mitigate those risks, including proper contract drafting and insurance.
In the ideal situation, all possible sources of dispute should be stated in the contract, which will be referred to when dispute arises. It is also important to engage local partners that understand local cultures and customs, and states clearly the responsibilities and liabilities between various parties.
Teo also pointed out that some Asian nations, including Hong Kong and Singapore, are preparing to introduce third-party funding for arbitration and related proceedings, which could potentially potentially alter the dispute resolution landscape in Asia.
This development, which has been drawn from similar long-standing regimes in countries such as the United Kingdom and Australia, allows the parties who are in a dispute to obtain funding for arbitration, mediation and related litigation proceedings from a third-party funder.
In January, the Hong Kong Law Reform Commission proposed amendments to the Legislative Council and the bill could be passed within the next few months.
In an area that promises huge growth but plenty of headaches, this is good news. Should the bill be passed, Asian project owners and contractors will have a new way of mitigating their project dispute risks.