This week we feature the second of a two-part look at the challenges facing global infrastructure finance. Corrs CEO John Denton, who is First Vice Chair of the International Chamber of Commerce and Co-Chair of the B20 Infrastructure taskforce, sits down with Senior Associate Melanie Bond.
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David Hastie: Commentator
Melanie Bond: Corrs Chambers Westgarth Senior Associate, Construction
John Denton: Corrs Chambers Westgarth - CEO
DAVID: Hello and welcome to part two of our two-part series of Corrs High Vis. My name is David Hastie and I am joined again by Corrs Senior Associate Melanie Bond and Corrs’ CEO John Denton. In part two there is an underlying theme and that particular theme I would say, Mel, is the need for regulatory consistency.
MELANIE: That is right David, in part two we are going to discuss two areas of controversy in the infrastructure investments market. The first is looking at the role of multi-lateral development banks and how effective they are at facilitating private sector infrastructure investment. The second thing we are going to discuss is regulation of infrastructure investment. The period since the GFC has been a regulator’s dream, there has been so much regulatory activity in the financial system and what lessons are there from this activity for infrastructure investment?
DAVID: Fantastic, Mel. Okay, let’s get to it.
MELANIE: So we talked a bit about the rolls of governments in facilitating infrastructure investment. I thought it might be useful to turn to multi-lateral development banks because they have been key players in project financing. Some people say that the banks are actually crowding out private sector involvement in infrastructure projects. Do you have any thoughts on that?
JOHN: Well I have thoughts about multilateral development banks and their role. In fact, it was an issue we discussed and truly on the agenda of B20 and the particularities about what can we do to improve the prospects, I guess you are talking about Malawi and Madagascar, Kenya and Tanzania but I can broaden out a little bit. What can we do to improve the prospects to enable greater private sector investment particularly in merging developing countries and part of that is helping the MDBs to realise that part of their role is to actually to prepare an environment which enables the private sector to invest and by that it is investing in supporting the capability bill in those economies that gives people more confidence about investment regimes and that is actually one of the recommendations that came out of B20. It is pleasing that I think the World Bank is recognising that now and is doing something about it and the Asian Development Bank is doing something about that. What is interesting I think will be where the Asia Infrastructure Investment Bank will play in this space which is you know the Chinese originated idea and they had a different mandate to the world and other bank. They are not actually looking for necessarily environmental and sustainable projects they are using for commercially viable projects. I am over simplifying their mandate but that is quite a different place so it would be quite interesting to see how they participate in this as well, I mean as you know on one level one of the great opportunities for participation for the Asian Infrastructure Investment Bank will be to support the $1.00 Development Road Initiative and we will see how that plays out as well. The challenge I think for us all particularly merging equalities to attract private sectors rather than be crowded out by the MDBs contract the private sector, the MDBs do have to recognise that one of their roles is to improve the capability and the environment for private sector investment and that that I suppose my earlier comments around the World Bank etc, I think that is recognised so that was a specific element of the B20 task force that I was on the recommendations.
MELANIE: I suppose you mean in terms of helping to educate or?
JOHN: Legal capabilities.
DAVID: Or building the capability of public service, building the capability for our probity on tender processes, all these things. Ultimately enforceability of contracts is very important. East Africa for example operates as an east African community. Holding that together having coherent regulatory frameworks east Africa, this is Africa etc, it is one of the big growth areas for the 21ST Century.
MELANIE: So I guess that brings me to my next question we do talk a lot about the need for regulatory consistency and consistency of implementation. We have had a lot of test cases for this since the GFC. There has been a lot of financial system reforms. Do you think there are any lessons to be learnt from the process that we have been through in the last 10 or so years?
JOHN: I think consistency is hard, coherence would help. Regulatory coherence will help and one of the lessons we have learnt is the danger of unintended consequences. So, if you actually look about this issue about re-waiting capital risk which comes out of the FSB Project process, there are unintended consequences. One has been the way in which trade finance is weighted as a risk. Trade Finance underpins, SME-based economies. Principally, if you look at Asia Pacific economic community one of its remarkable features is the dominance of SME’s and what is called micro enterprises. They often operate as very, very small trading plays or farms or etc. The way in which they finance there trade export section through Trade Finance what we are seeing is one of the consequences of the deliberations of the FSB is that those instruments are waited the same level of risk probably as complex derivatives and so what that means is the cost of them goes up and the access goes down and so that is to squeeze on trade that was underpining the agents of the economic community is the trading economy as well and if this is the critical component, I mean I am drawing a very big picture and with very broad strokes here but the SMEs and micro SMEs or whatever you call them - This is an unusual feature of this region in particular the dominance of that as an economic component. Anything you do that impedes its capacity to grow will impede growth in Asia Pacific.
MELANIE: So it is striking that appropriate balance between stability and growth.
JOHN: Well actually it is a name on the prime section anticipating those discussions as to those regulatory coherence is sought rather than bunch of wise gnomes in Basel sitting down and determining these things. There needs to be lightening days with the primary sector. More broadly based than just the financial services sector.
MELANIE: So giving business a seat at the table and then …?
JOHN: Well this is just a thermaseat at the table so it has to bring ideas and also has to act in the broader interests but I think it is fair to say and if you look how the G20 has shifted over time the business community understands that this concept of inclusive growth which is critical to actually enable political capital to be developed by leadership because inclusive growth means that you are acting in the best interest of the whole of your community is very important because actually without it you would undermine your licence to operate which is why the Sustainable Development Goals under the UN is so critical. Interestingly Australian business is not fully engaged and don’t fully understand what is going on there and I think that is a challenge for the business community more broadly to understand the Sustainable Development Goals could really be called the “Business Development Goals” resist helps political leaderships to actually get the political capital by focussing on things that would actually improve the lives of all their their citizens, so getting on board is very important…
DAVID: Melanie, John thank you very much for your time for your time and your insight. Thanks for joining us. My name is David Hastie and thank you all for listening. We look forward to joining us for the next episode in 2018 where I will be joined by Corrs Construction partner Ben Davidson for a look ahead at the short, mid and long term forecast for Australia’s construction and infrastructure industry.
This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain advice about your specific circumstances.
This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.
The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication.