Changing Nature of Risks and Challenges for Developing Countries
Total Page:16
File Type:pdf, Size:1020Kb
View metadata, citation and similar papers at core.ac.uk brought to you by CORE provided by ScholarBank@NUS FOREIGN DIRECT INVESTMENT FOR INFRASTRUCTURE DEVELOPMENT: CHANGING NATURE OF RISKS AND CHALLENGES FOR DEVELOPING COUNTRIES ASANGA GUNAWANSA LL.M (WARWICK); ATTORNEY-AT-LAW A THESIS SUBMITTED FOR THE DEGREE OF DOCTOR OF PHILOSOPHY FACULTY OF LAW NATIONAL UNIVERSITY OF SINGAPORE 2005 DEDICATION To the three persons I hold dearest to my heart, whose, love, laughter and inspiration gave me the passion, endurance and patience to succeed. To all indigenous communities who suffer the most due to exploitation of their traditional homelands and whose traditions, rights and culture are compromised in the race towards development. II ACKNOWLEDGEMENT I would like to acknowledge the following persons: My Supervisor, Professor M. Sornarajah, for his advice, guidance, diligent supervision and for facilitating the undertaking and completion of this research. My Co-Supervisor, Professor Robert C. Beckman, for his technical advice, supervision and guidance. Professor Dora Neo, for encouraging me to accept a professional appointment with the United Nations Compensation Commission and assisting and facilitating the conversion of my studentship to a part-time candidature during the period August 2001 to July 2004. Normah and Zana of the staff of the Faculty of Law, National University of Singapore for their various assistance during my studentship. Mr. and Mrs. Jayantha Gunawansa and Mr. and Mrs. Gamini Kannangara, my parents for all their love, encouragement and support. Malitha, Donata, Juliya, John and James for their friendship, love and support to endure and complete this task. III Table of Contents SUMMARY......................................................................................................................VIII LIST OF TABLES AND FIGURES .....................................................................................XIII TABLE OF CASES ...........................................................................................................XIV CHAPTER 1- INTRODUCTION ............................................................................................. 1 1.1. General Statement ................................................................................................... 1 1.2. Purpose and Justification of the Study.................................................................... 7 1.3. The Scope of the Study........................................................................................... 10 1.4. Definition of Key Concepts used in the Thesis...................................................... 12 1.4.1. “Infrastructure Development” ......................................................................... 12 1.4.2. “Developing Countries”................................................................................... 13 1.4.3. “Sustainable Development”............................................................................. 15 1.5. Methodology.......................................................................................................... 16 1.6. Organisation of the Work...................................................................................... 17 CHAPTER 2 – FDI: DEFINITION, NATURE, HISTORICAL ASPECTS AND CURRENT TRENDS............................................................................................................................. 19 2.1. Definition and Classification of Foreign Investment ............................................ 19 2.2. The Growth of FDI and its Effects on Development during the Pre- World War 2 Period .................................................................................................................... 27 2.3. The Growth of FDI and its Effects on Development during the Post World War 2 Period .................................................................................................................... 29 2.4. Importance of FDI for Development..................................................................... 38 IV 2.5. The Emergence of Project Finance as an Innovative Technique for FDI............. 42 2.5.1. Failure of Traditional Sources of Finance ........................................................ 42 2.5.2. Emergence of Project Financing....................................................................... 48 CHAPTER 3 - PROJECT FINANCING: THE NEW FACE OF FDI ........................................ 52 3.1. What does “Project Financing” mean?................................................................ 52 3.2. Key Features of Project Financing ....................................................................... 57 3.2.1. “Non-Recourse” or “Limited Recourse” Nature of Project Financing............. 57 3.2.2. Public Sector and Private Sector Partnership ................................................... 59 3.2.3. Syndicated Debt and Equity Contributions ...................................................... 62 3.2.4. Multilateralism.................................................................................................. 65 3.3. Identification and Mitigation of Risks Associated with Project Financing........... 78 3.3.1. Risks Associated with the Development Phase ...................................................... 81 3.3.2. Risks Associated with the Construction Phase ....................................................... 84 3.3.3. Risks Associated with the Operation Phase............................................................ 95 3.3.4. Risks Spread Across the Whole Project Cycle ..................................................... 106 3.4. Structure of Project financing ............................................................................. 110 3.4.1. Considerations for Selection of the Structure ................................................. 110 3.4.2. Project financing Structures widely used by Developing Countries ............. 114 3.4.3. Main Contractual Arrangements in a BOO/BOT Project ..................................... 118 3.5. Key Advantages and Disadvantages of Project financing .................................. 127 CHAPTER 4 - CHANGING FACE OF SOME TRADITIONAL RISKS ASSOCIATED WITH FDI ........................................................................................................................................ 130 4.1. Changes and Reasons.......................................................................................... 130 4.1.1. How the use of Project Financing have Contributed to the Changes ............. 131 4.1.2. How the Changing Political and Economic Culture have contributed to the Changes .......................................................................................................... 135 V 4.1.3. The Key Political Risks that have changed their traditional Outlook............. 139 4.2. Risk of Decentralisation of Political Power........................................................ 140 4.2.1. Demand for Decentralisation and Levels of Decentralisation ........................ 140 4.2.2. Current Trends in Political Decentralisation .................................................. 143 4.2.3. Risks to Infrastructure Development Projects due to Decentralisation .......... 145 4.2.4. Conflicts between Central Governments and Provincial/Local Authorities... 148 4.2.5. Measures for Mitigating Risks due to Decentralisation.................................. 157 4.3. The Risk of Political Instability........................................................................... 161 4.3.1. Risks due to Internal Political Instability........................................................ 163 4.3.2. Risks due to External Political Instability....................................................... 167 4.3.3. Measures for Mitigating Risks due to Political Instability ............................. 179 4.4. Risks due to Succession of States and Creation of New States ........................... 181 4.4.1. Nature of the Risk........................................................................................... 181 4.4.2. Current International Legal Position on State Succession.............................. 183 4.4.3. Powers of the New State after Succession...................................................... 186 4.4.4. Status of Investment Contracts and Succession of States............................... 188 4.4.5. Measures for Mitigating Risks due to Succession or Creation of States ........ 193 4.5. The Risks of War and Foreign Invasions ............................................................ 194 4.5.1. Nature of the Risk........................................................................................... 194 4.5.2. Inadequacy of Current Risk Underwriting Measures to Protect Developing Countries......................................................................................................... 197 4.5.3. Measures for Mitigating War and Invasion Related Risks ............................. 200 CHAPTER 5 - SOCIAL AND JUDICIAL OBSTACLES TO THE USE OF FDI FOR ..................... INFRASTRUCTURE DEVELOPMENT ................................................................................ 202 5.1. Social Obstacles: Nature of the Problem............................................................ 202 5.2. Main Social Objections ....................................................................................... 205 5.2.1. Case Studies...................................................................................................