The numbers can be overwhelming. The expected investment from China and other participants in the One Belt One Road (OBOR) infrastructure initiative between 2015 and 2025 could hit US$ 5.3 trillion, and in 10 years will represent approximately 60% of global infrastructure investment. Too, Asia will likely represent two thirds of the world’s middle class population by 2031. Australia has a significant opportunity to expand economic engagement with the entire Asia-Pacific (APAC) region and provide products, skills and services to meet the inevitable demand for them. For something so significant there has arguably been less coverage of OBOR in Australia than elsewhere in APAC. As part of Asia Law Portal’s continuing coverage of the opportunities presented by OBOR, here’s an interview we conducted with Brent Henderson of Australia’s Sparke Helmore Lawyers — on his views on regional infrastructure development and the substantial opportunities for Australian industry which will flow from OBOR.
As an infrastructure-focused lawyer in Sydney – what’s the view of China’s Belt and Road Initiative from Australia?
“No doubt that this is an opportunity that Australia must not miss. We risk however being late to capitalise on the interest and demand for our infrastructure experience and expertise. Australians have a unique opportunity to get involved in OBOR, both in the region and in northern Australia as the gateway. The complexity and sheer scale of the second pillar of the OBOR policy – facilities connectivity – should not be underestimated. The opportunities to expand and modernise ports and transport infrastructure in Australia and the region will be great. Increasingly we are seeing projects to streamline distribution networks, and to improve all of the key infrastructure dynamic economies need to rely on (roads, rail, ports, pipelines and communications). OBOR will reshape the global economy, and should be a catalyst for increased investment and transformation here in Australia.
The major players in the infrastructure space already have key experience and a proven track record in major infrastructure projects throughout much of South East Asia. When we consider the significant momentum following recent free trade agreements including the China Australia Free Trade Agreement in late 2015 and the trend of significant Chinese investment in our real estate, construction, transport and infrastructure sectors (including CCCC’s investment in John Holland and foreign interests in some of our ports), the proposition has already been made. But there needs to be more participation from Australian businesses given the magnitude of the projects which will be in the pipeline, in particular the smaller and boutique players with unique expertise and flexibility in the way they can partner with others. Foreign firms are already taking advantage of the situation, including through joint ventures with local companies, but there is more than enough to go around.
Unfortunately the Australian government has been slow to recognise and drive Australian enterprise towards the opportunities, over concerns that closer ties may damage relations with the US at a time when there is a push to see broader US involvement in the region. To be part of OBOR is to properly take our place investing in Asia and the buying capacity of what will be our biggest trade partners in the future, and this time we are being invited.
The Australian services sector has so far demonstrated most interest in OBOR, particularly in the areas of project finance and law. The big banks and the global engineering firms (Worley Parsons, SMEC and Norman Disney & Young) are already involved, combining their efforts in the Australia China OBOR Initiative earlier this year. Projects on the scale and complexity as proposed for OBOR need expert advisers. Australian advisers can bring their technical experience and delivery skills to bear. We understand the region and the different tailored approaches which are required between governments and regional industry sectors. Getting these infrastructure projects right will not be easy, particularly given the need for innovative financing solutions from the private sector (given that two thirds of the ‘Belt and Road’ countries have sovereign credit risk below investment grade) and an appropriate balance of risk against return.”
Asia-Pacific infrastructure is booming. China’s investment has been matched by Japan, and regional governments and multilateral investment banks are also spending. As a practitioner viewing this from Australia — how can you get involved in the work related to this infrastructure boom?
“There are exciting opportunities for specialists in the professional services sectors in Australia, and not just in the legal market. In my view it will be increasingly necessary for Asian investors to find partners to undertake complex projects in unfamiliar jurisdictions. An example is the successful joint bid for the purchase of the Port of Newcastle by China Merchants Group and Hastings Infrastructure Fund. This exemplifies the connectivity focus of OBOR. John Holland is another example, where we are now seeing a company with strong Chinese backing being pre-qualified for projects across the region for the longer term, which before such investment might not have been possible.
OBOR projects will be many and varied, but the initial focus will be on infrastructure (procurement approaches, finance and delivery models). Implementation over the long term will require substantial skills in sectors in which Australia has recognised global strengths, including infrastructure, energy and resources, advanced manufacturing, education, procurement, project management, environmental protection, and banking and project finance. Bankers will no doubt be busy because OBOR needs to create a framework for China and Japan’s outbound investment policy. There will be demand for foreign exchange, risk management, bonding and finance services. In Australia we are experts in the design-fund-build-operate system of infrastructure delivery, especially in public-private (PPP) funding arrangements and getting the balance right in risk apportionment.
For projects and infrastructure lawyers, much of our involvement will be made possible by the clients we align with, mostly multinational clients that are already positioning themselves to play a key role, while also demonstrating that we have the experience and expertise to be a valued partner in delivering successful complex projects. Australian law firms will continue to produce reports about OBOR initiatives and risks. They can also provide knowledge from their experiences of the key factors that will ensure projects are delivered successfully . Opportunities to interface and develop relationships with investors, financiers, advisers and key decision makers in the process needs to be a focus. OBOR will see increased integration of infrastructure, both within participating countries and between them, so that the ultimate outcomes will be on infrastructure development and operation as a system serving broader social, economic, and perhaps geo-political functions, rather than as individual stand-alone projects. If we want to be able to provide the level of capability required to support Governments and project participants, we need to think about alliances with local firms, consultancies and influencers that strengthen and deepen our service offerings, increase our jurisdictional understandings and extend our geographical reach.”
Are there any jurisdictions within the Asia-Pacific region (e.g. Indonesia, Malaysia, etc) — or any project types (e.g. energy, transport, etc) that offer most opportunity for Australia-based infrastructure lawyers?
“I think we can and should expect there to be more progress made by Governments towards more supportive and standardised polices which support investment and recognise the rule of law, particularly those who are members of China’s Asian Infrastructure Investment Bank (AIIB). Clearly Indonesia (a member) has focused on encouraging infrastructure investment and China has and will have sustained domestic demand. India (a recent member) has a young population to support its own period of longer term economic growth. Malaysia (a member as of May this year), is pretty sophisticated in its infrastructure delivery and funding and has been working with Singapore (a member) for a high speed rail project. The challenge will be working through the traditional difficulties posed by differing jurisdictions and financier concerns over sovereign risk issues andregulatory environments and attitudes. Ultimately it would seem that the benefits of integration between communities and markets of OBOR will overcome these challenges.
As mentioned already, infrastructure which supports economic growth and connectivity with other markets will be an initial focus. But there will also need to be like for like investment and development of all the ‘roots and branches’, social infrastructure such as schools, hospitals, universities, technical institutes and aged care facilities, modernisation of power networks and stations, telecommunications, water storage and distribution / treatment infrastructure and waste treatment and recycling.”
What do you see as the greatest challenges to Asia-Pacific region infrastructure development – and what benefits will this development bring local communities and nations within the region?
“I see the greatest barrier to more private involvement in public infrastructure is the relative absence of a credible pipeline of productive, bankable, investment-ready projects offering acceptable risk balanced returns to both public and private investors. The management of legal risk is key to this. Legal risks will always be faced when investing in infrastructure projects, including risks associated with differing levels of local regulation, labour and industrial relations, and increasingly environmental compliance. But when it comes down to what makes projects successful, typically it’s not so much regulatory issues or availability of finance, but more about how those risks are shared. In Australia we’ve learned from past experience, and when you look at the misunderstandings and mistakes in financing and delivering infrastructure in Australia and around the world, it’s the risk apportionment that those involved get wrong. What part of the PPP assumes which risks and what is the premium to be paid for those risks? If patronage risk in a road PPP is to be borne by an operator, what impact does that have on the appetite for projects? Or on the value of the assets themselves? Modelling needs to be done to come up with the best ways to manage risk and value it appropriately so that it stands up.
The inevitable development of social infrastructure alongside economic infrastructure can improve the lives of communities, provide access to jobs, clean water, education and health services. We must be aspirational about the role that massive initiatives like OBOR can play in raising standards of living on a large scale, and consequently, demand for Australian exports of goods and services.”
What’s your advice for any law students interested in a career in infrastructure-focused legal practice?
“Go for it. We are often told that our economic future lies in Asia, and this has never been more true. The opportunities are there for anyone who wants to get involved in building something that will drive significant connectivity and integration between Australia and economies and communities throughout the 65 countries involved in the OBOR initiative.
Infrastructure, and project finance are immediate areas that will be increasingly in demand globally, not just in less developed countries. Economies will continue to grow and transition, and in either case, there will always be opportunities for those with skills and experience in delivery of critical infrastructure.
Look to broaden and internationalise your skills as much as possible in university and practice, learn languages, travel and work in Asia, and strive to learn from the different approaches that can or might need to be brought to the same challenges, in different cultures or jurisdictions. It is the experience and perspective you will gather from immersing yourself in diversity that will always be a valuable commodity down the track. The Old Silk Road is a good example of this, being a place where ‘western’ and ‘eastern’ cultures met, traded and took away influences and ideas that would serve as a launching pad to new advancements. In law we often focus on the differences between jurisdictions but I think we will see increased commonalities as we trade and interact on a more globalised basis and in a more integrated way. The more we travel and trade the more we break down those boundaries, and the more we break down those boundaries, the less important our differences become.”
Brent Henderson is a Special Counsel in Sparke Helmore’s Construction, Projects and Infrastructure group in Sydney. Brent advises government, major contractors and developers on infrastructure projects, with a focus on roads, telecommunications and rolling stock.