Khon Kaen University International College

Business in the Greater Mekong Sub-region 

Course number 050 451 - Second semester 2013

Wednesdays at 9:00 in room 823

 Lecturer: Michael Cooke

office room 817E-mail: Michco@kku.ac.thWeb: KKU.AC.TH/Michco

Business In GMS Final ExamThursday Feb 27th at 9:00

Room 926Paper dictionaries allowed

30% of Course GradeRecommended Study: Review your

Presentation Material

GMS Projects Find a successful industry in GMS, or one which shows potential

to be successful (13 Nov) Explore reasons the industry located in GMS What is the nature of the business (capital or labor intensive, etc) Any spillover effects? What was the mode of entry for the businesses?

Study a GMS country in which the industry is successful (4 Dec) What are the strengths of that country from a business perspective? What are the weaknesses? Look for barriers to further business success in the country

How do you see the business evolving (5 Feb) Effect of ASEAN or other alliances (trade, labor mobility, etc) Relevant demographic, economic, trade projections Infrastructure, education, and other changes as a result of government

or business initiatives Advice you would give to government units to encourage industry growth

Feb 12th – SchedulePresentations

Rai and YannickMarion and Philipp

AssessmentsBest presentationsWhat should an instructor change? What

worked?Laos business and listing on the stock

exchangeBuild Operate Transfer (BOT)

General principlesWhy they are relevant

Mekong Watershed36% of the River’s Volume is from Laos

Mekong River Commission Secretariat

SE AsiaTrade routes from East Asia to South Asia, the Middle East, and the Suez Canal pass through the Straits of Malacca, northwest of Singapore. The area is a haven for pirates. In November two large tankers were hijacked there. The East-West corridor would connect East Asia to the Indian Ocean well north of the Straits.

GMS Corridors – High Level

Source: Chiang Mai UniversityUSER 2007

GMS Corridor Map – East-West

Growth of a Laos Business From http://www.daoheuanggroup.com/history/ Dao-Heuang was founded in 1991 by Mrs. Leuang Litdang as a small

import-export company in the Laos PDR The original company specialized in importing wine and perfume from

France, as well as alcohol and cigarettes from Singapore.The company also handled a wide range of household goods imported from

Thailand. Dao-Heuang Group (DHG) was organized in 1998.

It began to diversify into other products and begin exploring opportunities for producing coffee, tea, agricultural products and industrial goods.

In 2008 DHG began new service industry businesses for hotels and food and beverages establishments. Duty Free shops in Pakse and Savannakhet Bottled water, fruit drinks

In 2010 the company signed international partnership agreements to grow, refine, and package its coffee through all production steps in-country (Pakse) for the first time.

DHG planned to join the new Lao Securities Exchange in 2011, and opened a hotel in Pakse.Rebranding effortsExpansion of Duty Free in Vientiane

Why Planned Listing Did not HappenThe LSX opened in late 2010 and by June 2013 had only two

listed companiesA power company and a bank joined in 2011Laos World Plc was added in December 2013

Founded by a Thai businessmanOperates convention and exhibition facilities under a BOT agreement

Laos limits foreign share ownership to 5%Few companies will disclose the information required for

listingThe Korean head of the LSX said company owners don’t

understand why they have to reveal their financial statements to the public.

Company leaders need to understand the mechanism of the stock market, as well as the need for compliance and transparency in trading.

International Business Times 25-6-2013

Common Features of Project Finance• Often used in developing countries to fund

infrastructure projects • Success depends on the performance of

several parties• Government is often a party to the

agreements• Project is set up as a separate company.• Equity is held by contractors and plant

managers• The company is highly levered (70% debt). • Debt is supported by cash flows• Lenders have no recourse against the

parent companies• Since governments can unilaterally break

agreements, powerful banks may be brought in as debt guarantors.

• In a Pakistan power project the involvement of the World Bank was essential after change of government.

Parties In Project Finance

Contractor Supplier(s)

Equity investors

Government Projectcompany

Equity sponsor

Lenders

Purchaser(s)

Brealey, Myers, Allen 2011

Bond TerminologyRestrictive covenants - Limitations set by

bondholders on the actions of the Corporation

Puttable bond – A provision that allows the bondholder to demand immediate payment. This was a feature of loans to Asian companies in 1997

Poison Put - a clause that obliges the borrower to repay the bond if a large quantity of stock is bought by single investor, which causes the firms bonds to be down rated

CovenantsDebt ratios:

Senior debt limits senior borrowingJunior debt limits senior & junior borrowing

DividendsEvent riskPositive covenants:

Working capitalNet worth

Covenants

Covenant Restrictions

Percentage of bonds with covenants

Type of covenant Investment-grade bonds Other bonds

Merger restrictions 92% 93%

Dividends or other payment restrictions 6 44

Debt covenants 74 67

Default-related eventsa 52 71

Change in control 24 74

a e.g., default on other loans, rating changes, or declining net worth

Percentage of sample of bonds with covenant restrictions. Sample consists of 4478 senior

bonds issued between 1993 and 2007. Source: S. Chava, P. Kumar, and A. Warga,

“Managerial Agency and Bond Covenants,” Review of Financial Studies

Event Risk: An ExampleOctober 1993 Marriott spun off its hotel management business worth 80% of its value.

Before the spin-off, Marriott’s long-term book debt ratio was 2891/3644 = 79%.

Afterward almost all the debt remained with the parent (renamed Host Marriott), whose debt ratio therefore rose to 93%.

Marriott’s stock price rose 13.8% and its bond prices declined by up to 30%.

Bondholders sued and Marriott modified its spinoff plan.

Philippines Build Operate Transfer LawUnder Philippines law RA 6957 a BOT scheme is defined under as

a contractual arrangement whereby the contractor undertakes the construction, including financing, of a given infrastructure facility, and the operation and maintenance thereof.

The contractor operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and charges sufficient to enable the contractor to recover its operating and maintenance expenses and its investment in the project plus a reasonable rate of return thereon.

The contractor transfers the facility to the government agency or local government unit concerned at the end of the fixed term, which shall not exceed fifty (50)

RA 6957 is envisioned to generally mobilize local and foreign private capital, technology and expertise in order to develop and implement major and capital intensive infrastructure projects

http://www.up-ncpag.org/main/pdf/kapsfairness.pdf

The NAIA Terminal 3 ProjectWork on a new Manila airport terminal began in 1997 under

President Joseph Estrada and was intended to start operations in 2002. The US$640 million facility was designed by Skidmore, Owings and Merrill (USA)

Fraport AG, the German partner of the Philippine International Airport Terminal Co. (PIATCo), got the build-operate-contract in 1997. A month before the terminal’s scheduled completion in 2003, the

contract was nullified by then President Arroyo, which was upheld by the Supreme Court.

Criticism of the PIATCo contract came less than three months before the new terminal was to open. The controversy rapidly developed into a crisis of sorts for the Arroyo administration which was vigorously pushing for similar BOT investment projects.

The terminal opened in 2008 after being mothballed for six years.In August 2012 the Philippines Court of Appeals said the

government should pay Philippine International Air Terminals Co. Inc. (Piatco) the $371.43 million, or roughly P16.2 billion, as “just compensation” for expropriation of the terminal.http://business.inquirer.net/137987/govt-mulling-options-on-ca-piatco-or

der#ixzz2t0aCjVUD

Myanmar-China Oil and Gas Pipeline projectThe Sino-Myanmar oil and gas pipeline project was finalized between

China National Petroleum Company (CNPC) and Myanmar’s Ministry of Energy in December 2009 during Xi Jinping’s visit to Myanmar

With a total investment of $2.54 billion construction began in summer 2010 and the gas pipeline was completed in May 2013.

The multinational nature of the Sino- Myanmar gas pipeline may have partially shielded the project from pressure and government decisions.

The oil pipeline is a joint venture between China National Petroleum Corporation’s Hong Kong-registered entity (51%) and Myanmar's national petroleum company.The gas pipeline involves six stakeholders from four countries and aims to

deliver gas from a Daewoo-led (South Korea) consortium operating in the Shwe field. Three UK banks are involved. CNPC operates the pipeline.

The participation of other countries helps mitigate the risks for China alone.

Controversy over the pipelines’ environmental and social impact occurs in Myanmar, and in China (residents of Kunming object to refinery plans).

Will this Mega-Project Happen?

Myanmar's Ministry of Rail Transportation and the parent company of China Railway, signed a memorandum of understanding in April 2011 outlining a 50-year BOT (Build-Operate-Transfer) agreement.

China will build and run the railway and eventually hand it back to Myanmar after 50 years.

Since 2011, Chinese investment in Myanmar has plummeted over concerns about political instability and unreliable protection as local groups in Myanmar protest lack of transparency and participation in business deals.

China’s investment authority advises Chinese businesses to seek joint ventures with other foreign companies to diversify reduce risks in Myanmar. Most major projects have been suspended.

Five Years Ago

The greater danger is deflation – advocating monetary stimulus for the USA.

How Do These People Influence Business in the GMS?

“Market for Lemons”: Rejected by four prestigious journals in 1970. Now one of the most widely cited economic papers. Dishonest dealers tend to drive the honest out of business. Local lending rates in less developed countries are high. Graduates of poor quality schools lack opportunity.

What is a yield curve? And why not fund projects with short term (cheap) money?

Wall Street Journal 7 Feb 2014. Ryan index is a portfolio of 2-30 year maturities.

Investor Perceptions of Emerging Markets From BRICS to the Fragile Five

BRIC acronym from 2001 by an economist at Goldman SachsFragile Five invented by Morgan Stanley in 2013

South Africa, Turkey, India, Indonesia and Brazil Viewed as fragile because the economies are dependent on foreign

investmentSome economists see these emerging economies as vulnerable if the USA

raises interest ratesAnother point of view about emerging markets fragility *

Some emerging markets encouraged foreign investment when funds were cheap

Cheap short term funds lead to unproductive investmentLoose regulation and corruption, and political turmoil now affects

foreign investment flows Which of the GMS countries are vulnerable? Worries today

focus on Indonesia, not the GMS.

* Bloomberg: Dani Rodrik and Arvind Subramanian - Jan 31, 2014

Risks Associated with Foreign Borrowing

Exchange rate risk – domestic currency depreciates relative to foreign currency denomination of loans

Maturity risk – too much short-term debt or hot money relative to payoff periods for investments

Interest rate risk – international (e.g., LIBOR) rate volatility

Service risk – domestic contractions, export volatility, or investment project failures increase burden of debt service

Panic/Speculative risk – events trigger speculation against the domestic currency and flight of hot capital

http://emlab.berkeley.edu/wp/mcfadden0204/hotmoney3.pdf

GLOBAL CAPITAL MOVEMENT ANDFINANCIAL CRISES IN EMERGING

ECONOMIES “The international capital market today resembles in many respects the U.S.

credit market 150 years ago, with virtually unregulated free flow of capital across borders that fuels innovation and economic growth, but also creates volatility and financial panics that hinder economic development and damage people’s lives. “

“The pattern is now familiar. Opening the borders of an emerging economy and liberalizing or deregulating its financial institutions, combined with insufficiently developed financial regulation, aggressive promotion of economic development, or loose government fiscal policy, leads to heavy international borrowing, with loans denominated in dollars or other industrialized country currencies.”

“Then, some triggering event occurs, perhaps the insolvency of one or more large banks, a run by depositors, a drop in export demand, or sudden and tumultuous pressure on a fixed or crawling peg exchange rate, and a currency crisis starts. Hot capital flows out of the country, loans from foreign institutions are not rolled over, and if the currently is not released to float freely, it comes under speculative attack.”

“Banking crises were more severe (than currency crises), typically lasting 3.1 years and resulting in total lost output of 11.6 percent of annual GDP.”

Wall Street Journal, 12-Feb-2014: ‘Weak currencies in Asia are worsening inflation and forcing central banks in several countries to raise interest rates even as economic growth slows’

“Hot Money and Cold Comfort” Daniel McFadden, 2004

SE Asian Currency Volatility Affects Airline ProfitCurrency is a defining issue for SE Asian

carriers because $US costs exceed $US revenues

Most airlines in SE Asia will report 2013 losses if $US keeps rising relative to their home currenciesFor Indonesia’s Garuda Airlines

Rupiah fell 14% versus $US from June to September, 2013

50% of revenue is in rupiah (travel originating in Indonesia)

60% costs are in $US (fuel and aircraft leases are in $US)

Garuda lost $11.4MM in the 3rd quarterIn late September Indonesia’s government began to

allow hedging (losses on hedging would be considered normal business risk)*

The $S has been relatively stable versus the $US.Singapore Airlines 3rd quarter profit was

$161M

*Jakarta Post 26 September, 2013

What are the Implications of an FTA?Thai exporters response to FTAs are limited

by rules of origin requirementsCost of compliance with rules of origin

paperwork is effectively a tariff of 2-7% (a)Use of an FTA is highly concentrated among a

few productsThe costs of ROO compliance varies among

partners Importing countries may create obstaclesUtilization of FTAs is often lowPart of the low utilization arises from overlap,

such as ITAFTAs are rarely utilized outside of existing

trade relationshipsPrimary users of FTAs are large local firms (not

global firms)FTAs mostly benefit large companies due to

COO costs

(a) Kohpaiboon, Archanun 2010 “Exporters' response to FTA tariff preferences : evidence from Thailand”