4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4 X : ;0 "M<.v5''-W.8-,1.'--,.'.,'RC.5Ğ'2 .., ,Ar.., T . . 4new wL ! Ww Iw I! .~ ~ ~ ~ ~ ~ ~ ~~ ~~~~~~~~ f f Ci~~~~~~~~~~~~~~~~ :,--. . - ,ii X, h:fA0000 ; EiS lli ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~4 2 . .r '! a S t ,,;@w The:;X Comeback Begins how much control they will have over their wrk force. So he touts recent legislative moves easing the way for layoffs, in a cul- 0X0Seoul0|;;g f;:; 0: :j 0f;:; 0 i0;;0; ; ;ture with a militant trade union tradition and a belief in lifetime employment policies. As proof, he cites the summer's peaceful res- "the society concerned has the ability to aksorb the conflbt. w olution of strikes at the country's largest automaker, Hyundai Motor Co., whose union accepted mass layoffs for the first time in The seaker is Young-Soo Ahn. He is vice minister of labor in history. With first-half car sales drastically down, Hyundai let Korea, where consensus, not conflict, has long been king. He is roughly 10,000 workers go, in the process contributing to the addressing the investors attending the country's first "Summit on year's tripling of unemployment. Times are undeniably tough. But Private Equity Investment." One thing, at least, is clear to all in the race to attract foreig private equity capital Korea leads present: Korea has taken its worst economic downturn in 45 years over all other Asian nations," reports Hong Kong's Asia-Pacific as a cue to enact monumental change, opening up its long-closed Private Equity Bulyeti. industries to foreign capital as never before. With domestic sources of capital all but dried up, local businesses from the biggest Local business leaders say the current openings mark the biggest chaeols indutria grops) n don hae adpteda comon transformation in Korea since the Yi Dynasty fell in 1910, begin- chaebols (industrial groups) on down have adopted a common nig3yerofJpesTue.Dpteiayoemmresf survival strategy, putring unprecedented numbers of assets up ning 35 years of Japarnese rule. Despite many sore memories of for sale and seeking new joint venture parmers from abroad. that era, the country has industrialized since the 1960s on a large- The vice minister understands that his listeners want to know Iy Japanese model, embracing heavy state direction of the private economy and a highly protected local market while recording 30 Three Baht a Share SVI works in one of emerging Asia's foundation industries, out- sourced electronics assembly. Its clients are European original- Bangkok equipment manufacturers: Germans who make smart card readers, Danes who fabricate pay phone control boards, and others. "Made In Thailand, say the brown paper cartons the workers at Comtetoadnvlu,SIferthmsealeig Semiconductor Ventures International (SVI) load and ship for Committed to adding value SVI offers them several design options, then assembles the final choice of customized circuitry at =3 export to Europe. Although the past 18 months have seen the worst economic downtum in Thailand's modern history, including costs far lower than if they did it themselves. ISO 9002 quality- a doubling of unemployment, these workers' jobs are safe. The assurance certification and technical relationships with Imperial > athriving small business they work for has not only maintained College (London) and Mahanakorn University (Bangkok) boost Xz o t at sa cosies ten throughot thes hardtaime the foreigners' considerable confidence in this Asian "total solu- 0O operattons at a consistent level throughout these hard times but to rvdr hthsbe nbsns ic 95 X recently received a major capital infusion from US high-tech tion provider that has been in business since 1985. investors as prestigious as any in the field. investors as prestigious as any in the field. Today's undeniably positive atmosphere at the company is hard to That capital, however, could be raised only after SVI's existing believe since only two years ago it was on the brink of collapse, That capital, however, could be raised on-ly after SVI s existing management had successfully restructured a debt burden of $24 plundered by unscrupulous owners motivated solely by greed. million in local currency equivalent -debt that would otherwise The problems began in early 1995, SVI Managing Director Peter have killed the company. Tepolm ea nery19 V aaigDrco ee Liave killed the company. Roskam recalls, when a manipulative Indian financier named Rakesh Saxena arranged for the now-defunct Bangkok Bank of Many Rivers to Cross Looking up into a vast array of empty seats, one foreign diner has a suggestion: "Tonight let's just sell tickets, fill up the stands, then Jakarta let 'em run in from opposite sides and fight it out - Debtors vs. The luncheon takes place in an Indonesian sports arena. It's part Creditors, just like the gladiators in ancient Rome." of the same cavernous convention center where a minor White Remembering that 8,000 angry student protesters had been House sex scandal figure named Kathleen Willey once, made an camped out in front of the parliament only a few days before, his House~ ~ ~ ~ ~ ~ ~ ~~~~~~ ~uc parne thenda recomend thee postfight entrtinmnt anemaea undeserved appearance as an "observer" with the US delegation to lunch partner then recommends the postfight entertainment an international biodiversity conference. But this time the endan- special screening of The Year of Living Dangerousvy. gered species are neither fish nor fowl. They are the private com- . . . . . r panies of the world's fourth most populous country, companies Less than six months earler, riots clatmed more than 500 lives i . whose inability to pay the roughly $80 billion they owe foreign this city,hastening the end of President Suhartops notorously cor- * banks has prompted record unemployment and is the largest com- rupt 32-year rule. More than 1,200 business people, including banent ofhas promptional recorde P u loygent tand Meico thetart c most of Indonesia's troubled companies and the bankers who gave ponent of a national debt/GDP ratio targer than Mexico had them the nonperforming loans, have now gathered under World when it sparked the last great debt crisis in 1982. Nearly 80/ of Bank auspices to seek a solution. The after-lunch speakers make it thiem are now basically broke. It is not an amusing situation, clear that this is no time for jest. A World Bank lawyer sets the Nevertheless, the gallows humor begins, mood by recalling his grim conversation with a local real estate tycoon a few months before. Impact .9 Winter 1999, Vol. 3, No. I consecutive years of booming 8.2% annual Corporate Restructuring 101 growth. But ever since the crash of Korea December 1997, when only a $57 billion When business people hear a company is undergoing a IMF-led package could rescue the countrv restructuring, they know right away it is in grim financial 8- from potential bankruptcy, the "Japan, shape. It has either defaulted on some of its outstanding 7- Inc." approach that long seemed so suc- debt or is about to, and needs major changes to survive. 6- cessful has been questioned as never More often than not, there have been warning signs that the 5- M before. firm's owners ignored for too long: high indebtedness, declin- P" w a ing sales, debt arrears, or a worsening local economic con- th > "It was a big mistake," says Chong S. Lee, text. Rather than take all the painful steps necessary, at this 3 ~ - executive vice president and head of cor- point they often merely seek debt rescheduling. Their 2- porate restructuring at one of the largest lenders (usually banks, but sometimes also bondholders) then 1- chaebols, LG Group. "We should have usually form a creditors committee and consider various 'modeled ourselves more on Western busi- unpleasant options in hope of recovering some or all of the O ness, or at lea rstis moe bance bestwen Easts money they lent. The more the debt and the more the credi- -1 ness, or at least a balance between East tors, the more complicated the process is, since conflicting 1996 1997 1998 and West. Look at Japan today -Japan, and competing motivations often get in the way. Inc. is in trouble, and so is Korea, Inc." Reschedulings, though, are not the same as restructurings, Last October his highly leveraged company the full-scale revamps that save troubled companies. The lat- ter usually result from the pressure of one or more lenders acting under a fair burden-sharing principle. In Asia there are several unresolved negotiations currently underway Commerce (BBC) to lend $60 million to where more than $1 billion of corporate debt is at stake. foreign investors seeking to buy the corn- The easiest option for creditors often is to extend maturi- Thailand pany Leading the consortium: Saudi bil- ties, giving the company more time to pay. But at the same lionaire Adnan Khashoggi, the shadowy time - or instead, if that's not enough - creditors can try 6 arms merchant whose complex dealings a debt-equity swap, converting their unpaid debt into and CIA ties lay at the heart of the 1980s shares. This move usually brings them no immediate cash 5 - Iran-Contra scandal in Washington. gain but offers hope of selling the new shares at a profit later 4 Subject of a 1987 biography titled The if the company recovers, as frequently occurred in Latin 4 - Richest Man in the World, Khashoggi has America in the early 1990s. The least-favored alternative is to _ Richest Man in the World, Khashoggi has take a "haircut," writing off some interest or even principal - 3 led a legendary lifestyle ccntered on the forever so the company can at least make some reduced pay- 2 86-meter yacht named for his daughter, ments. Lenders don't like that, though. It requires provi- the Nubila, which he eventually sold to sioning, or using some of their equity to cover expected 1 Donald Trump after it had appeared in the loan losses. It's bad for their profitability, and if too much of James Bond film Never Say Never Again. it occurs without new equity being raised, the banks them- L-0 _ One look at this apparent new boss was selves can go bankrupt. 1996 1997 1998 enough for Roskam, a frugal Dutchman in If after considering all these steps the parties cannot reach a his sixties who has devoted a decade of his deal, the company can choose, or be forced by its creditors, life to SVI. "Our first meeting was at the to go into bankruptcy. But it can occur only if there's a Ritz in Paris," he quipped ruefully. "He local tradition of that complex legal process that puts matters in the hands of an independent overseer and often leads to a worse outcome for both sides than one they could have -- ----------- - - negotiated themselves. Bankruptcy is just now being intro- duced in parts of developing Asia. But it's important. The lack "As he began talking to me, he started to of its threat has enabled some near-broke companies to stay cry," the official says. "He said, 'What I've in business while blithely ignoring their creditors' demands Indonesia learned in the last 40 years is how to be for restructuring talks. rich, and now I no longer know how to be 9 poor. I've always borrowed whienever and The first step to a successful deal is reaching a viable stand- wherever the rates were best and directed still agreement. Here the lenders, despite their different 6 - _ 1 r l 1. 1 , . repayment schedules, agree among themselves to temporari- the funds to whichever of my various ly stop trying to collect on unpaid loans. The company also 3 - companies seemed to need it at the time, vows not to do anything major affecting its financial health, / c and now I don't even know how to such as asset sales to raise cash. After that, the goal is to h 3 account for it all - but there's a lot of it. move on to a workout, overhauling the firm's operations, r3 - The very same sense that made me a management, and sales in order to get on with things. If -6 -wealthy man in the first place has now done well, near-dead companies can then sometimes pay off g9 - - completely eluded me.' And as I talked to their debts and come back to life, especially if they raise new -9_ complte elude me An as to equity from an outside investor attracted by the chance for -12 him, the image that came tome was that a good turnaround opportunity cheap. The cost of raising W15 of a rabbit sitting in the middle of the new equity, though, is often dilution of the existing owners' -15 highway with its ears up and its eyes stake and ouster of the old boss. Credit Lyonnais Securities 1996 1997 1998 bright, just waiting to be run over." Asia estimates that Asian companies will need $200 billion of new equity to recover. And since so little is available local- ly at this point, most of it must come from foreign investors. - Rob Wright m sold 23.5% of its Personal Commtnications Services counterpart at the powerful Federation of Korean (PCS) business to British Telecom for $400 million. Industry. Such a move would never have happened a year ago but is now an "absolute survival issue," Lee says, After not being needed in Korea for a decade, IFC l I * since "in today's environment, there's no way you has thought long and hard in the past year about * ~~~~can compete globallv with just your own resources, how it can best support the country's recovery. The and our first priority is looking for reliable partners to emphasis has been on choosing model transactions enhance our general competitive strengths." whose effects can ripple far beyond the mere money invested. So far three transactions stand out: one of I * He articulates the new watchwords in Korea's busi- the first recapitalizations of a viable local bank, sup- I * ness world: competitiveness, focus, shareholder value, port for an investment fund targeting restructurings, *0 0 6 and corporate govemance. Many firms realize, he and direct investment in a midsize corporate turn- - says, that their confusing cross-guaranteed loans and around. less than transparent financial statements con- tributed heavily to the collapse and must be phased Last June IFC took a $22.8 million equity stake in out to attract world-class investors. "Building trans- Hana Bank, a midsize local financial institution that parency is the most important thing that can be done Warburg Dillon Read analyst Yong-Chul Yoon calls in our economic reform," adds Byung-Woong Lee, a the "best-run bank in Korea." It was first set up under offered me a cognac that was five years older than I THAILAND was. I don't know what it cost - probably at least my entire salary." T he Company: zN _. Semiconductor ventures Enforceability of the assets Khashoggi put up as secu- rity for the BBC loan did not deter Saxena, who had Internatdonal climbed high in the Bangkok financial world since his arrival in 1985 as a Cambridge-educated Electronics 11 Ele Deal: unknown, After marrying the daughter of a local comprehensive workout logging baron and becoming a financial columnist fo based on extension of the Bangkok Post, he built on his fast-talking ways maturities and potential and undeniable mastery of the markets to begin for debt-equity swaps; advising BBC on a rash of high-risk corporate prestigious new investors takeovers. They made him a wealthy man, so much attracted by low purchase so that he reportedly once price, strong manage- bought his own corporate jet In High Demand: ment, and potential for outright with cash. "He played SVI's Thai-made capital gain it like a piano," Roskam said. semiconductors. Roadkill seems an apt comparison, for in one horrific grade in October 1997 now carries a scary CCC+ nine-month period, rupiah-dollar exchange rates from Standard & Poor's. "No country in recent histo- plunged from 2,400.1 to 16,000:1. Although they ry, let alone one the size of Indonesia, has ever suf- have since improved, the descent dealt a near-fatal fered such a dramatic reversal of fortune," a World * blow to the local legions who had borrowed heavily Bank report says. It warns that a country that had cut in dollars from euphoric foreign lenders. By official poverty from 50% to 10% of the population since estimates Indonesia's corporate debt stock is $67 bil- 1970 may now see it double again in a few short -ilI_ | lion, although press reports have put the number at years. - is3 _ - $130 billion. But whatever the case, it has brought on one of the century's most frightening economic Making matters worse is the fact that, in Indonesia as crises. opposed to Korea and Thailand, virtually no corpo- * 0 -, rate restructurings occurred in the first year of the * 3 | 6 0After 30 virtually uninterrupted years of rapid crisis. With no history of bankruptcy law, creditors growth, the economy is in the midst of a 15% con- had no leverage over debtors, who were free to sit on traction, seeing the local stock market drop by 85%, mountains of unpaid debt so long as they could keep along with skyrocketing inflation, joblessness, and enough cash flowing to stay in business at some level. capital outflows. Sovereign debt rated investment Reports of fraud were widespread. There was also no 99, Vol. 3, No. I In Good Shape: Shinmoorim Paper -~~~~~ ~~Company's restructuring points the way for others in Korea. E I. -; a different name in 1971 with 40% foreign owners, including IFC, Bankers Trust, and Goldman Sachs, and has operated ever since as a small "I'w _;iisland of international standards in a _ financial sector that tried, and failed, to ignore them. In mid-1997, when virtually no one saw the coming cri- sis. Hana declined to join its peers in lending to number-three automaker - * S 1[ 1i l 2 ^ Kia Motors - later the cotntry's most t !vX 1,, .. - -i, l l | - - t2- -94 j celebrated bankruptcy with the local > .;. @currency equivalent of $9.3 billion in unpaid debts. In a country where nonperforming loans are at least 15% Saxena saw to it that Khashoggi's group got the loan from his friends year before had brought down Britain's oldest merchant bank, at the bank, who showed no more concern for credit analysis than Barings. many others of their peers at the time in Thailand's freewheeling financial system. Fun while it lasted perhaps, but the day of reckon- With the phantom investors now gone for good and the loans in ing finally came in 1996, upon Roskam's discovery that Khashoggi's default, the Stock Exchange of Thailand suspended trading of shares group had never actually made a promised $10 million equity invest- in SVI, a company now with huge debts, no equity, and no owners ment used to secure loans for new equipment purchases. - yet with strong operating fundamentals and holdover manage- ment. It could survive only by finding new investors, and they would At the time, SVI was carrying a heavy short-term baht debt burden have to be technology specialists with a strong appetite for risk. So at 18% interest. Like so many others in Southeast Asia, it assumed in November 1996 Roskam turned to H&Q Asia Pacific (H&QAP). this debt could be rolled over almost indefinitely. Not so, though, An IFC client in other Asian countries, it is the $700 million when the Thai authorities closed down BBC and Saxena fled the autonomous regional venture capital arm of San Francisco invest- country the next day. He was blamed for provoking approximately ment bank Hambrecht & Quist, renowned for its role in arranging $3 billion in cumulative BBC losses by arranging fraudulent loans to financing for the global knowledge economy's nerve center, Silicon SVI and 21 other local companies in which he reportedly had hid- Valley. den interests. It was the biggest financial scandal in Thai history, and Saxena was soon being compared to Nick Leeson, the rogue H&QAP had the right profile. It had been in Bangkok since 1990, trader in Singapore whose $1.3 billion in hidden trading losses the liked turnarounds at the right price, and had money to invest from a regulatory basis for debt-equity swaps - one of the keys to the end Agreements of this kind are considered fundamental to the corpo- of the 1980s Latin American debt crisis. In any case, these were rate restructuring process in developed countries, enabling a troubled often seen locally as a ruthless attempt by foreigners to seize control debtor company to pledge not to sell assets or take other major of long-established companies at fire-sale prices. As the squabbling actions affecting its finances in return for its creditors' vow not to dragged on, any hope of renewing the private capital flows on which force it into bankruptcy or liquidation. Without such a pact, there the economy had so long depended grew more and more remote. It can be little hope of orderly recovery acceptable to everyone was a lose-lose situation, resulting in unemployment that fueled the involved; with one, companies that once appeared almost dead can rise in social tensions. sometimes be successfully revived. Realizing that there was no time to waste, IFC worked at a feverish BDF is a publicly traded company whose primary business is leasing pace with its Indonesian clients throughout 1998 to produce an ini- heavy equipment to small and medium enterprises. It was formed in tial corporate restructuring that could serve as a model for others to 1982 as a joint venture between Thailand's largest bank, Bangkok follow. A vital breakthrough finally occurred on November 6 when, Bank, and the financial services arm of a vast Indonesian conglomer- after eight months of IFC-led negotiations, a midsize nonbank finan- ate, Dharmala Group. Its most recent annual report showed a leasing cial institution, BBL Dharmala Finance (BDF), reached a landmark portfolio worth Rp 404.6 billion (approximately $170 million at the "standstill agreement" that will allow it to stay in business and honor time), with branches in 11 major Indonesian cities and steady prof- its debts. itability between 1993 and 1996. But the unforeseeable economic Impact Winter 1999, Vol. 3, No. I of the average bank's portfolio, Hana's are less than 4%. Its return Hana as the merger partner for an insolvent provincial institution, on its roughly $1 billion equity is likewise a healthy 7.4%. Chungohong Bank, one of the five banks it had to close as part of the IMF package. The authorities first transferred Chungchong's bad "Our bank is a little bit different," says Hana Bank CEO Byung loans into the new governmental bailout agency Korean Asset Chul Yoon. "Our lending was always based on credit quality and Management Co. and gave Hana an equity infusion so the good cash flow when everyone else made their decisions based on collat, loans it assumed would not dilute its equity. In addition to setting an eral. Our corporate governance system was also always completely early precedent in the country's financial sector restructuring, the different, with independent directors who are solely accountable to transaction enabled Hana to enter a potentially lucrative new retail shareholders. The reason we'rc sound today is that we've stuck with market. It carried no cash cost, merely the assumption of our principles, which originally came from IFC." Chungehong's liabilities. The new IFC investment in Hana has so far had its desired effect: On September 7 Hana then acted on its own to buy another trou- rebuilding confidence in Korea and its financial institutions. Only a bled local institution, Boram Bank, thus becoming Korea's seventh- month after approval of the investment, the government chose largest bank. It has since passed the all-important market test: well-performing $278 million regional venture fund backed by US allowed me to get the restructuring deal done with my creditors," bluechips like New York Life, Metropolitan Life, Eli Lilly, and oth- Roskam said. ers. But it didn't like sleeping in unmade beds. Before it would con- sider a buyout, the firm demanded that SVI completely resolve its Attracted by the success of the workout and SVI's willingness to crippling debt overhang. And there was leverage to do so, since the write off all preacquisition losses, the reputable new investors then lack of true bankruptcy laws in Thailand meant creditors could not acquired 95% of the firm for only $1.2 million, in April 1998. They force action on the company. Once the July 1997 baht devaluation paid the company's temporary trustees at the Thai central bank but sent shockwaves through the system, the local banks saw they could 3 baht (less than 10 US cents) a share, while making a simultaneous only hope to recover anything if H&QAP came in and kept SVI commitment to invest another $6 million along the way to rebuild from closing shop. By the end of that year they agreed to forgive all the company. interest, stretched maturities of the principal out to eight years, and took an option to connect some of the debt to up to 10% equity in When last heard from, Saxena was in Canada fighting extradition, SVI down the road. "It was the name of Hambrecht & Quist that and Khashoggi was said to be involved in a great game of oil and collapse put it under extreme duress, even though it had been well managed and had maintained conservative debt-equity ratios of roughly 3:1. The exchange rate spike and worsening client repay- ment record quickly threatened its ability to service its $140 million of dollar-denominated debts, including $50 million owed to IFC and its participant commercial banks, $40 million to Dutch development finance company FMO, $20 million to the London-based ...*"'.^^c -A *M. "'- Commonwealth Development Corp., and others. But having worked closely with BDF since 1993, prospects of the company are good. Although the deal would be IFC took the lead in coordinating the combined creditors once the considered routine in the US or Europe, it is believed to be the first crisis began on options for restructuring the company's debt and of its kind in Indonesia, which had no true bankruptcy laws until eventually developed a strategy for survival that enabled it to stay last August and little tradition of either protecting shareholder current on interest payments to all creditors. rights or enforcing creditors' security arrangements. And while rela- tively small, the agreement makes an important contribution by Although BDF's standstill is only the first step in an ongoing corpo- being first to the table. The country's largest companies have yet to rate restructuring process expected to continue for several more do anything of the kind. months, both the firm and its combined lenders now believe the Impact ,i Winter 1999, Vol. 3, No. I becoming the first Korean bank since the crisis to get commercial history of working with IFC in the Philippines. While the deals will funds by securing a $50 million three-year loan from an internation- clearly be difficult to structure, the new opportunities for previously al syndicate ted by Standard Chartered, This money will in turn unthinkable controlling positions astound fund manager Ta-Lin Hsu. complement an upcoming $1 00 million seven-year loan that IFC is He recently tapped other resources to buy one of the top retail bro- assembling, with the overall package doing its part to ease the coun- kerages, Ssangyong Securities. Once worth $1.2 billion, his fund try's credit crunch and restart private sector growth. bought it for only $120 million. "I've never seen anything like this in 30 years," exults the usually low-key Hsu. But working through local banks is only one way to help Korea's cor- porate restructuring process. Knowing that companies abound that The big turnaround deals are important. But so are the small ones, must rebalance their books by raising new international capital, IFC which are less likely to draw the attention of major foreign investors. last year contacted Hambrecht & Quist Asia Pacific about the possi- For that reason IFC has put together a $48 million package for bility of starting a new venture capital fund targeting small and mid- Korea's largest manufacturer of the coated paper used in catalogues size Korean companies. H&QAP was an ideal partner, with a track and magazines, Shinmoorim Paper. As a precondition, the family- record of 13 funds in the East Asia-Pacific region and a successful (continued on page 29) politics in the volatile Caspian Sea region. SVI has nothing to show Such explosive growth is always possible in the technology sector, for its involvement with Saxena and Khashoggi and has spent the H&QAP Chairman Ta-Lin Hsu has learned after 13 years of invest- past three years rebuilding the good name they tarnished. But with ing and a previous career at IBM. In 1997 his same fund also bought the debt burden resolved, it has recovered from their misdeeds and is out Hewlett-Packard's 50% interest in a money-losing company that back in good health today, showing monthly profits again for the manufactures computer disk drive components in China and then first time in three years and reporting annual revenues of $17 mil- made a few changes and watched its revenues climb from $25 mil- lion. For unlike the previous owners, H&QAP brings not only capi- lion to $175 million within two years. tal but also extensive industrial expertise and strategic guidance as a way to increase the value of its investment targets. It is currently "There's no reason SVI can't do the same," Hsu said. "No reason at recruiting new marketing personnel to help the company diversify all. Once they get into the market, there's as much work waiting for into the US market, a move it projects will soon enable SVI's sales them in the US as they want to take on." N to jump to $100 million and make it an attractive property for sale in a few years. Going Ape: In October, for example, Indonesia's as part of Indonesia's comprehensive IMF agreement. The new sys- Corporate restructuring biggest automaker PT Astra International tem aims to hold recalcitrant debtors accountable, calling for tight in Indonesia? It's a told its creditors with full transparency 30-day deadlines for court rulings, and introduces 45 new interna- jungle out there. that it had declared a unilateral 90-day tionally trained judges as well as independent receivers for liquida- debt service moratorium, immediately tion. But it will be only as good as its track record in a country with ceasing payments on $1.4 billion in outstanding interest. A month no tradition of an independent judiciary. Regrettably, the initial before, in the absence of a standstill agreement, it had moved on its results leave investors disappointed. own to sell its "noncore" microchip assembly plant near Singapore to the US investment fund Newbridge Asia for $90 million. It was After exhausting all attempts to reach an agreement with another the first major asset sale in Indonesia since the crisis and a sign to Dharmala Group unit, integrated poultry producer PT Dharmala Astra's new president, Rini Soewandi, that under the right condi- Agrifood, IFC and its colenders ING Bank and Bank Niaga took the tions "foreign investors want to come to Indonesia." But it still company to the new court over more than $35 million in unpaid raised only a tiny portion of the money needed to pay off the parent loans. But in December the court denied the bankruptcy ruling that company's enormous debts. And country specialists see few bluechips IFC and the other petitioners had sought, leaving no verdict on like Astra that have the wherewithal to make such transactions hap- whether the system can work as planned under such difficult condi- pen, leaving a clear role for IFC to play as a neutral party able to tions. help the many smaller companies that do not. "There's an old saying, 'Capitalism without bankruptcy is like Astra had been one of few local big companies to stay current on its Christianity without the devil - it just doesn't work,"' says Tim debt until this fall despite the death of demand for its cars. Many Ferdinand, an astute watcher of the corporate restructuring process others had enraged creditors by taking advantage of the lack of tradi- at Credit Lyonnais Securities Asia in Hong Kong. "I don't know who tion of bankruptcy laws to simply stop payment and go incommuni- said it, probably some economist, but it's true. Without a threat to cado. For this reason, IFC felt compelled to present one of the first make you behave, you won't behave. If your creditors won't force test cases to the new bankruptcy courts that were created in August (continued on page 29) Impact .Winter 1999, Vol. 3, No. I X -~~~~~~~~~~~~~f a reTS jc. Do ylt e GlOver TF Fergus0l and Hugh E Morris, Impact c Winter 1999, Vl0 3 No 1 he nectrorlc Economy WI Force Change wbhtn Nation States. The modem nation state remains the most prevalent unit of govemance in the developed and the developing world. The concept has, in the last 50 years, been extended rather than retracted. There are now more than 200 hugely different nation states, with different legal and reg- ulatory systems, existing in the world. In this context, we define a nation state as a coherent territory circumscribed by defined borders over which the single national government has legitimate jurisdic- tion. During its 200-year history, the nation state has endured many changes. However, the advent of the electronic economy is con- fronting the nation state, with intimations of a future in which its relevance to its citizens and enterprises will be challenged. The apparatus of economic regulation and taxation through which nation states operate was developed to support and facilitate an industrial economy. That economy produces tangible goods and location-bound services that are sold and distributed within and between fixed borders. In that familiar world of national and inter- national trade, nation states have a variety of tools at their disposal to achieve their economic ends: They can levy tariffs on imports, raise taxes, protect consumers' rights, punish economic criminals, set commercial standards, and provide guarantees of monetary pay- ment. Until recently, these tools werc supported by governments' majority control over communications networks and information dissemination. Because of the emergence of global communications networks, the nation state is gradually losing monopoly control of information and financial flows. Private individuals and enterprises and groups now have the ability to source, package, and transmit information in compressed time and space. Through "digitization," currency, ser- vices, and even some goods can be conveyed immediately, transact- ed invisibly across the globe. Interactive networks are creating a new, network-linked world without borders, in which many com- mercial transactions are beyond the reach of national jurisdictions, " / ' \o, g | ] ,7_ laws, and taxation systems. As a result, many of the economic instruments and processes of the nation state need to be reexam- ined in the light of these new challenges. Is the nation state powerless before this new global economic sys- tem? As electronic commerce grows, there is some risk that those nation states that have not fully embraced the changes could become marginal to the creation of economic value and irrelevant to their citizens and enterprises. Is the nation state threatened by the electronic economy? Could the changes erode the individual's sense of national belonging, undermine tax bases, bypass national laws and undermine the rights of citizens? Impact Winter 1999, Vol. 3, No. I - What Is eCommerce? eEnterprises conduct eCommerce in the eEconomy. Scenarios New forms of capital - primarily the information and In answer to these questions, there is a "dark side" scenario, which knowledge created through the flow of value through foresees an unregulated, electronic economy promoting a wild and the global electronic network - are driving fundamental lawless frontier where electronic crime is rife, government regula- economic transformation. tion of markets is inconsequential, intellectual property rights are disregarded, and consumers are left without effective protection. In An eEnterprise is an enterprise prepared to conduct com- this scenario, the nation state is dead. merce in this new economy. This means it has created and embraced a business strategy informed by changing But there is also a "bright side" scenario, which foresees vast economics, new opportunities, and new threats. It has opportunities for wealth and job creation, individual learning, and laid down the necessary technology infrastructure to sup- international cooperation. Legislators and regulators who seek the port new business processes. It has used information benefits of this optimistic scenario need to develop appropriate poli- technology to hone internal processes such as human cies and invest resources in their implementation. In this scenario, resources, work flow management, and training. the nation state adds value. Thus prepared, the enterprise is able to conduct Despite the undoubted challenges that the nation state will face in eCommerce: "the commercial exchange of value navigating toward the future, we would argue that it has a central (money, goods, services, or information) between an role to play in the technological revolution that is transforming the enterprise and an external entity (an upstream supplier, a world economy. Indeed, many nation states have formulated strate- partner, or a down-stream customer) over a universal, gies and concrete policies to embrace and to exploit the potential of ubiquitous electronic medium." the electronic economy. They (often in concert with other nation states or multiple groupings) have assumed that the advent of the To conduct eCommerce, enterprises must achieve a new electronic economy is inevitable, and are starting to develop the level of openness, connectivity, and integration. Few exec- means, tools, and frameworks to exploit it for the benefit of their utives set out to buy eCommerce. Instead, most are seek- citizens. ing the kind of new results, strategies, business processes, and organizations that eCommerce capabilities enable. Nation states have a responsibility for assuring a balance of peace, Likewise, no business will realize these goals by simply prosperity, and liberty for their citizens. If they are to continue to acquiring new technology capability. meet these time-honored obligations in the next century, they can- not afford to be bystanders at the birth of the electronic economy. Creating value through eCommerce also entails: They need to find ways, as many are, to exert some degree of pro- ductive influence that underwrites and supports the electronic econ- Opening the enterprise to encompass partners, omy. Failure to do so will impair economic growth and, in the suppliers, and customers. historic sense, their "national interests." For example, if their con- Connecting the new, expanded enterprise through a sumers and enterprises are unable to trust interactive commercial universal electronic medium. networks, which will continue to offer them a bewildering array of I Aligning and integrating technology, strategic intent, complex choices, they will be loath to use them, and their full processes, and human performance. potential will remain unfulfilled. In other words, most commerce will soon be eCommerce. No nation state has either the means or the jurisdictional rights to At current projections, the electronic economy will over- regulate fully the complex global nexus of commercial transactions. take the industrial economy by the year 2003. Several Each nation has different laws governing taxation, electronic com- factors are responsible for this phenomenon; each factor merce, privacy, consumer and individual citizen protection, crime, reinforces the above three: and intellectual property. Each has numerous regulatory and enforcement authorities. Each has different cultural perspectives and The technology infrastructure is in place and expand- interests. If each nation state attempted to impose its own unilateral ing. Consumers are increasingly open to conducting frameworks, the result would either be electronic balkanization or, business electronically. more likely, a migration of business toward those nations with the The regulatory environment has become weakest regulatory regimes. Flight of digital enterprises and services cooperative and encouraging. from one nation to another can be immediate and undetectable. The business value is compelling. eCommerce is a pervasive, global force. As interactive networks have a global presence, they require a glob- Electronic commerce transcends geographic bound- al, rather than a national, response. Workable regulatory systems aries, cultural biases, and political differences. can only be imposed through a multilateral framework of appropri- : eCommerce is an inevitable, irresistible force, ate laws and enforcement structures. These laws should have provi- sions for international dispute resolution as well as regulatory -Andersen Consulting enforcement. We believe that this would provide a balanced regime - Impact Winter 1999, Vol. 3, No. I within which electronic trade, commerce, education, and creative of the problem, one only has to consider the case of a commercial communities could flourish without harming the consumer of digital Web site whose owner is registered in one country, whose server is services. physically located in a second country, and whose customer transac- tions are conducted in a third. Current commercial laws are useless Historical precedent, however, does not inspire great optimism. in the face of such a multidimensional scenario. Nation states have enjoyed only limited success at creating global treaties and frameworks that are universally applied in practice. Completely New Moreover, multinational treaties and accords are notoriously slow to While nation states have had to contend with offshore-registered negotiate and complete. Given the pace of current technological corporations with myriad national representatives for decades, never change, it is possible that such a regulatory framework would forever before have they had to address companies being able to separate limp behind economic reality. and "digitize" the various components of a product or means of pay- ment, or try to trace a product's transmission down multiple digital Approaches lines and its reassembly in a single location (as they will be able to The least workable approach would be to impose unreformed do when selling, for instance, digitized music or artistic works). national laws and regulatory protection in defense of national eco- nomic interests. Inevitably, this would provoke constant litigation In creating an international framework to address the issue of taxes between nation states, the cost of which would be a heavy burden and tariffs on eCommerce, national governments should adopt a on enterprises and consumers. positive position that focuses on the commercial benefits that accrue from mass use of interactive networks, rather than showing The most practical approach, perhaps, would be for nation states to undue concern for potential losses within the traditional economic adapt national legal and regulatory regimes on an ad hoc basis to model. meet the new challenges as they arise, constantly negotiating with other nation states through the multiple international bodies and Some advocates of laissez faire would go further, urging nation states frameworks that already have an interest in these matters. This to declare by treaty that the Intemet is a completely tariff-free envi- would be a practical approach and would encourage cooperation ronment for the buying and selling of all goods and services that can among nation states. Rather than creating a whole new be delivered digitally. This, however, fails to meet the criterion of generation of laws, it would also facilitate the sharing and adoption fairness. Citizens may well ask why those who trade digitally operate of best practices. tax-free, while those who trade physically bear the nation state's fiscal burden. However, this approach, while superficially attractive, does not cre- ate arbitration and dispute resolution mechanisms with global legiti- Whether nation states choose interven- macy, nor does it provide a framework for dealing with law tion or laissez faire, the inescapable enforcement across multiple jurisdictions. The fundamental problem reality is that workable tax systems of legal incompatibility between nations could remain, and transna- appropriate to electronic trade can only ' tional cooperation easily could be undermined by nations choosing be imposed through a negotiated, multi, to opt out. lateral framework of laws and regulation. \ While a few nation states have started to address these large choices The lack of such a multilateral framework car- in terms of legality, regulation, autonomy, and authority, very real ries significant risks for individual security and intellectual problems are now proliferating. They reach deep into every aspect of property. These dangers could undermine one of the nation economic life, and their resolution must become a priority for all state's most fundamental guarantees: the protection of its citi- nation states if the full benefits of the electronic economy are to be zens and their property. realized. Tariffs and taxes are an area of disjunction and complexity. In cyber- space there are no customs posts or tax-collecting services. On the surface, it would seem reasonable for nation states to attempt to regulate and tax trade flows over interactive networks in an effort to stanch the loss of receipts from digitized goods and services. - 4 However, the problems of tax and tariff /i collection in cyberspace are legion and growing, given the difficulty of identifying the exact geographic location at which value has been added or a transaction conducted. To appreciate the scale Impact r Winter 1999, Vol. 3, No. I T - F~I:; Currently, there is no internationally agreed framework for the Ten Wvaysi Na i ndetection and prosecution of crime facilitated by comnputers and Can Participate in thiF interactive networks. Nor are there any mechanisms for the creation Electronic Econom - of intemationally agreed standards and guarantees about the securi- Y ty of financial payment systems operating over digital networks. In e *...uuu.mm.mumumummmum.mmmmumuuuuauum e e e e e e e v *the absence of such standards and guarantees backed by national governments, the growth of digital networks is likely to be inhibited 1. Educate government officials, top civil ser- by consumer anxiety. The absence of any effective internationally vants, and voters on the nature of the elec- agreed protection of intellectual property rights, trademarks, and tronic economy. consumer rights represents a further barrier to development. 2. Cooperate internationally to regulate con- Nation states can indeed prosper in the interactive age, as we have sumer protection and develop a priority list of already seen, if they have the foresight and courage to change. We network crimes and agreed punishments. should remember that it was the nation state that brought the 3. Invest or encourage investment in the physical enabling networks of the electronic economy (global telecommuni- inifrastructure of the electronic economy, such cations networks and the Internet) into being. Just as many busi- as interactive networks and terminal access nesses have had to transform their operations in order to survive equipment. and prosper in global markets, so also must nation states undergo a 4. Equip citizens with the means to log on to the process of reinvention. global network of wealth, information, and In a global, increasingly electronic, economy, the stakes are high. power, recognizing that there will be a direct Groups of nation states that successfully evolve international laws relationship between network access and the and regulations appropriate to the electronic economy will realize wealth of nations. large economic returns and other benefits for their citizens. Those 5. Replace the measures and statistics of the nation states that opt for more short-term or shortsighted approach- es will be treated like an outage in the Internet: Economic activity industrial economy with the measures and! statistics of the electronic econohly. Official I will find an alternative route around them, or worse, relegate them s perpetually to the margins. The starting point for nation statcs must statistics, which form the basis of trade | be education. Within every government, there are those with the negotiations, are derived from an outdated vision to see that the future world will be interconnected, digital, data collection model. and borderless. Work can start with them on evolving and aligning 6. Provide individual consumer and citizen access the nation states' processes and instruments with the new economic to information networks as a right rather than reality, while developing that which is enduring and valuable from to information networks as a right rather than th nainsaeshsoiXeay . . ~~~~~~~~~~~~~~the nation state's historic legacy. a privilege. 7. Appoint a chief public information officer Above all else, the challenges of eCommerce will reqtiire nation empowered to act as a champion of public states to cooperate more closely and more creatively than ever information used to support consumers' and before. In pursuit of gains in which all could share, the loss of eco- citizens' rights. nomic autonomy is inevitable. The risk is increasing marginaliza- 8. Use electronic tools to support government tion; the reward is contributing in an integral way in the electronic processes such as social pro-vision, education economy. U services, and public procurement. Andersen Consulting is a global management and technology 9. Develop inward investment programs to consulting organization with $6.6 billion in annual revenues attract and develop knowledge industries whose mission is to help its clients change to be more success- based on electronic networks. Make location- ful. With more than 59,000 people in 46 countries, it helps bound resources (connectivity, network infra- clients from a wide range of industries to link their people, structure, taxation regime, price of bandwidth, processes, and technologies to their strategies. education and information services, etc.) Charles J. Doyle directs AC's Global Image Development team attractive to these enterprises. from London. Glover T Ferguson, who works out of Chicago, is 10. Intervene directly to guarantee and regulate codirector of its Worldwide eCommerce Program, while Hugh the digital exchange of money. F. Morris, based in London, is responsible for global capability in the company's Business Process Management group. This -Charles J. Doyle, Glover T. Ferguson, arnd article represents the views of the individual authors. It is Hugh F. Morris, Andersen Consulting reprinted with permission from Outlook, Andersen Consulting's .magazine on changing to be more successful." Impact Winter 1999, Vol. 3, No I Peter Woicke P eter L. Woicke officially having had opportunities to work took the reins as IFC's in different regions and in different new executive vice presi- jobs," he said this fall. "But in the dent January 1, though end, the aim of every position I he was here familiarizing himself have had was to improve the lot of with the surroundings for most of shareholders. That's OK, but there December. He succeeds Jannik is a time in your life when the Lindbaek, who has stepped down objective or mission of an organiza- after five years and returned to his tion like IFC - to reduce poverty native Norway. and improve the living conditions in the developing world -are Woicke, a 55-year old German more appealing than the share- national, has worked for 29 years holders' lot." with J.P. Morgan. For the past three years, he has been chairman Yet with his background in emerg- of J.P. Morgan Securities Asia ing markets, Woicke is well aware based in Singapore, while also of the pressures he will face in serving as a member of the global apportioning IFC's limited be huge demand for IFC investment banking firm's man- resources. As lenders pull out of resources," Woicke told the agement group. Under his leader- risky Asian markets, even compa- Journal. "Commercial and invest- ship, Morgan's revenues for Asia nies in countries once considered ment banks are trying to reduce and the Pacific more than dou- to have "graduated" from IFC's their exposure in emerging mar- bled. Prior to that he comanaged programs are again seeking help kets. There is tremendous pent-up the global markets operation of from IFC and other multilateral loan demand in these countries Morgan, following a two-year institutions. That demand poses and the demand for multilateral assignment to reorganize informa- risks, Woicke told the newspaper institutions is going to be big." tion technology support for the Emerging Markets: "We will have company. Other management to be careful in the face of massive In announcing Woicke's appoint- roles that he held during his peri- demand that we do not ignore the ment, World Bank President James od at New York headquarters frontier countries." Wolfensohn expressed confidence between 1987 and 1995 included in the new EVP's ability to handle managing the brokerage and cus- In both the Emerging Markets the demands of the job, saying: tody departments and heading the interview and another with the "Peter is the right kind of leader to company's activities in Latin Wall Street journal, Woicke said he guide IFC through these challeng- America. Additional foreign would like to see IFC leverage its ing times." assignments with Morgan have staff expertise, prestige, and repu- posted him to Beirut and London. tation - as well as its financial Welcome, Peter, we look forward resources and relationship with the to working with you! V The new EVP said he welcomes World Bank - to expand its the move to working for a develop- activities in the developing world. ment institution. "I've had tremen- "If I look at what is happening in -Linda McCormick dous fun working for J.P. Morgan, the world market, there is going to Impact .: Winter 1999, Vol. 3, No. I Stormn of the CentLury Hlot D)ogi A New Partner IFC money will soon be at work helping busi- Raif Dzafic's $1.7 million meat-processing plant IFC has found a new way to stretch its small nesses in Nicaragua and Honduras recover from a few miles outside of Sarajevo was destroyed business development efforts in sub-Saharan the devastating blow of Hurricane Mitch. during the 1992-95 war in Bosnia-Herzegovina. Africa a little further: teaming up with The loss was a terrible blow to Dzafic, an entre- PROPARCO, the private sector lending arm of In mid-October, working with the region's preneur who had successfully built his company Agence Fran,aise de Developpement (AFD), largest private lender, BAC International Bank, from a chain of butcher shops and retail food the French development agency. IFC agreed to provide US$30 million in long- stores since 1980. But he did not give up. term financing for small and medium enterprises Under the $20 million agreement, PROPARCO in Central America. The two countries most Even while the war was still raging in 1993, will become the agent for IFC in some 20 sub- affected by the hemisphere's deadliest storm in Dzafic began to rebuild his company, Akova Saharan countries where IFC has a limited pres- 200 years, Honduras and Nicaragua, had Impex, by importing fresh and frozen beef, ence. PROPARCO will identify projects, conduct already been designated to split the first $10 poultry, and other food products from outside appraisals, and close and supervise the IFC million in loans before sustained 180 mph winds the region. He was eventually able to take over investments. It will also match each IFC invest- and 75 inches of rain pounded them at the end and partially refurbish a huge but empty gov- ment with money of its own under terms similar of the month, causing widespread destruction ernment-owned warehouse, turning a portion of to IFC's. and at least 11,000 deaths. The damages in it into a cold storage facility for ripening fruits Honduras alone are estimated to have amount- and vegetables. The French organization has a staff of 40 and ed to $4 billion, or roughly the size of the coun- relies heavily for its operations on AFD's 30 field try's gross domestic product, setting develop- Now, with the help of IFC, Dzafic's company offices in Africa. In 1997, it approved 64 new ment efforts back by as much as 50 years. has substantially refurbished another section of investments with a value of $230 million. IFC the warehouse to accommodate a new meat hopes the coordinated effort will help to reach "Although this certainly could not have been processing facility. A $2.2 million IFC loan has the kinds of small and medium enterprises that anticipated, IFC was in the right place at the provided approximately half the money needed play vital roles in social and economic develop- right time. Because of Mitch, the need for for the new plant, with the remainder to come ment in the region. An initial agribusiness investment in Nicaragua and Honduras is going from private investments and a US Agency for investment in Burkina Faso has already been to be enormous," said Mario Alonso, who International Development commercial loan approved, helping launch a factory to peel recently stepped down as an IFC investment facility channeled through local banks. organically grown sesame grain for the export officer to return to his home country of market. This first IFC-PROPARCO joint Nicaragua and work in the private sector. The new plant will start commerdal operations investment will amount to about US$1 million in March 1999 with an annual production equivalent. In a region where years of economic stagnation capadty of 2,500 tons of processed meat. It will and civil war had already made it difficult for employ about 70 workers, who will produce "PROPARCO is a very good fit for IFC because owners of small and medium businesses to chops, salami, hamburger, and hot dogs. The it has a dense network in parts of Africa where access private capital, IFC's program aims at . company is expected to regain its position soon IFC's presence is small, and has a proven track providing new money for expansion, modern- as the second-largest meat-processing plant in I record," said IFC's Antoine Courcelle-Labrousse. ization, and financial restructuring. Its funds will Bosnia-Herzegovina. I "It provides a very economical way for IFC to be channeled through BAC, which has a strong expand its efforts in Africa. On the other hand, presence in each of the target countries. i The project also breaks ground In another I we assist PROPARCO in assessing the environ- way - it is the first joint venture between mental and social impact of the projects. This BAC will direct IFC's money to borrowers prnvate investors and a state-owned company partnership has created a real synergy." through its regional subsidiary banks. The first (Sipad-Komerc, owner of the warehouse site) to $10 million will go to businesses in Nicaragua receive a long-term loan from an intemational Although the initial agreement between the two and Honduras, with the other $20 million to be institution. institutions is for only three years, Courcelle- invested in El Salvador, Costa Rica, Guatemala, Labrousse hopes the partnership will be contin- and Panama. IFC will closely monitor the invest- The project is expected to help in the rebuilding ued and perhaps even expanded, as it provides ments and provide environmental expertise. of the country by making the food supply more ! such a good way for IFC to invest in sub- stable, easing the need to use hard currency Saharan Africa without incurring substantial reserves for expensive imported items, and administrative costs. The agreement to coordi- adding desirable skilled jobs into an economy nate efforts with PROPARCO was signed during racked by approximately 33% unemployment. the World Bank-IMF Annual Meetings, in the presence of World Bank President James D. Wolfensohn and Dominique Strauss-Kahn, the Meaty French minister of finance. Solution: Akoua tmpex's - Reporting by Linda McCormick Raif Dzafic (right), IFC VP and General Counsel Carol Lee (center. i and 5thes met in 1olNo.I Impact zo Winter 1999, Vol. 3. No. I nfrastructure Ban kok's Mass Transit Solution: Ta e the SkyTrain Rob Wright, IFC Corporate Relations Unit Bangkok -for Bangkok has few transportation skyline now is essentially only a slightly options to offer its 10 million residents smaller, more stretched-out version of New rm r he first thing to emphasize beyond its local streets. York's. * about this project is that it is private," the chairman says, Some expressways run in from the out- Bangkok has long been infamous for these v "totally private." skirts, of course. But within the central traffic woes. Routine trips often deteriorate business district it's a competition for lim- into bumper-to-bumper agony, and the The chairman is Kasame Chatikavanij, ited space among cars, buses, taxis, and the business climate inevitably suffers for the former chief of Thailand's national power traditional motorized rickshaws called tuk- constant waste of its most precious utility EGAT and now head of the first tuks. OK for a secondary city perhaps, but resource, time. Residents tell of occasion- new mass transit system to be built in not for a high-energy metropolis whose ally being stuck in their cars for three recent memory in the country's capi- nightmarish hours, keeping food, reading tal, a classic example of out-of- -.*_. material and the local equivalent of control urban sprawl. As chamber pots at hand just in case. he talks, the traffic rages outside. And i The city's air pollu- rages. And rages, tion is equally noto- just as it does ,,. '2 - rious, considered by every day experts to be as bad as any in the world. It often . forces traffic cops and people lined u Up at bus stations to wear surgical - ; F ! 1lllllr f i | rr - :Sy masks to avoid noxious fumes. And while resi- dents of Bangladesh's capital city JJ\ ~~~~~~~~~~~~~of Dhaka I ' -z .- breathe in a lot more lead, anyone with lungs L J ! ; can sense the awful = truth of Bangkok's problem. By the gov- ernment's ,<, - ~ estimate . ~~~~~900,000 Courtesy: Impact u Winter 1999, Vol. 3, No. I people, or almost 10% of the Willpower shareholder and a lender It also is city's population, seek medical Getting this far has been quite a very hetpful in our negotiations treatment each year with air pol -G ey in itself. with the bankers and the lawyers, lution-related respiratory illnesses. and let's face it, we're kind of "For 10 years before we got green at this sort of thing." "The police, street vendors, and involved, the govemment little children who play by the looked at building its own ele- The Crisis street every day are exposed to vated train, but in the end they Who wouldn't be? BTS is in all such a high level of pollution suchat theeigh avely ofgh proll n had no money," Chatikavanij likelihood the largest urban mass bilithatf their isverhingchprobc recalled. "They were trying to do transit system ever built on a bAiiy of their getting chronic , , ~~~a much larger project, where the fully private basis anywhere in emphysea andisoters, mace rese land acquisition costs would the world. Were that not a big piratory disorders, maybe even lung cancer," says one speciaist., have been huge. But they had enough challenge, the project "They will definitely all die no real willpower to do it. has also had to survive the local Eventually, though, a new prime currency's steep July 1997 deval- sooner than they would normal- minister came in and washed his uation, first of many dominoes to ly. What they are doing is basi- hands of the whole thing and fall in the Asian financial crisis. cally sucking on an exhaust pipe put it out to tender, using con- day in and day out, but just at day inan ayot,btut cession rights to existing roads With a flair for understatement, lower levels." to which the Bangkok Chatikavanij well recalls the day For too many years the govern- Metropolitan Administration the baht dollar exchange rate ment did nothing about the already had complete control." that had long been 25:1 fell to problem, even though traffic 50:1. "That scared us," he says. volumes grew by 35% a year and "Even so," he added, "the govem- "For a while we thought we average road speeds dropped to ment was always full of skepti- might really have problems." average~ ~ ~ ~ ~~~rngn ina expecas whope sai less than 10 km per hour - just cism, bringing in experts who said above the pace of a brisk walk it could never be done. That He credits the unique financial and about a third less than the made our starting point very diffi- package IFC helped structure in norm in thewrld'othrc cult. Without IFC we would 1996 with allowing the project norm in the world's other cities. But in 1992 the authorities never have gotten this far. Talking to survive. The baht collapse finally decided to tum to the to the government here is not will only have a "serious, but not private sector, offering potential easy, but IFC, as a part of the World critical" effect on the project, he operators 30-year concessions so Bank Group, has the ability to says, stressing that it will not long as they brought their own liase with the government due to delay completion and in the end fmancing theybouhth taleir on re established areas of cooperation. I probably reduce his consortium's financing to the table. In retun, think we definitely made the right eventual return on investment to all fare and advertising rev- decision to bring in IFC as both a only slightly. enues. It is on that basis that the win- ning bidder, a Thai-led consor- tium called Bangkok Mass Transit System Corp. (BTS), has forged ahead to build the $1.2 billion, 23.5 km elevated rail system that is expected to l open in December 1999. $100 million of IFC support has played an important role in the project's financing. IoIling Stock: Pedestrians will not be disrupted by the quiet Bangkok Transit System trains running overhead. Impact:-, WVinter 1999, Vol. 3, No. I Straightway: IFC support helps work on rallbeds of the Bangkok Transit System (left) to proceed a '0Y31;; despite the Asian financial crisis. -i Eli - mu RME M .. J 1 ............ Transportation, and Utilities rfEt * _ - = = ! w-L; J - 11 Department director Declan Duff. "First, all three lead agents did a tremendous job in under- standing and mitigating the pro- *C I mu mum... w w ject's risks. But also the financial I C- - w,# .pli rjR-plan provided for most of the = I * . ' ~ L - -. equity to come up front, while the cost-overrun and ramp-up risks were well provided for, which gave lenders confidence H -4, ii -to continue disbursing. Also, * - ~~~~~~~~~~~~~~~~some of the risks were shoul- -- - , . -2 F w dered by the contractors, and when the crisis started, IFC and the other lead agents worked -~proactively with the sponsor to put together a new financing t_ *X>>Ps | ll _ package to mitigate the risks posed by the financial- and liq- , i _ 4e o uidity-related problems of some of the members of the Thai syn- dicate. That helped insulate the project from serious turmoil." High Profile Few developing countries have private sectors strong enough to build a project of this size pri- 4 marily with their own sponsors and banks. But the formula is a There were several financial with the dollars that once winning one in Thailand, whcrc keys that have enabled the pro- flowed so freely throughout BTS has about as high a profile ject to survive the severe eco- Southeast Asia. And even as it could have. BTS is led by nomic downturn. One was the though baht interest rates were Tanayong, a major local devel- gutsy move by the BTS consor- higher than dollar rates, the fact oper with real estate and hotel tium to pay for the start of con- that the revenue was in baht projects across the country. And struction out of its pocket in and could be adjusted in line the November 3 test drive of the February 1995, 18 months before with local inflation and interest system's first Siemens-built, loan agreements were signed rates provided a natural hedge. Porsche-designed train was cov- with the banks. Another was BTS is also not yet required to ered by 300 local journalists, the high reliance on baht debt make any repayments, enjoying including live broadcasts on from Thai banks for a project a grace period that does not national television and front- generating revenues exclusively expire until 2002. page treatment the next day in in local currency. As it stands, Bangkok's major newspapers. baht financing accounts for 59% "There are four key reasons why The country's much-revered of the total, meaning BTS is far this major project has stayed on royal family is expected at the less vulnerable to devaluation schedule despite the problems in system's formal opening, just as risk than it would be had it the Thai economy," says IFC it was at groundbreaking in opted to fund itself more heavily Telecommunications, 1994. Impact o Winter 1999, Vol. 3, No. I r Elev/ate! The sleek and quiet SkyTraini system is similar to the highly Name of Project: Bangkok efficient ones in Hong Kong and Mass Transit System Public Singapore that also use state-of- Company, Ltd. (BTS) the-art Siemens trains. Each air- Concept: Private, for-profit conditioned, 22x3-meter car can 23.5-km elevated rail line in carry about 350 passengers, most downtown Bangkok of whom will stand. The design Total Cost: $1.2 billion also allows for Tokyo-style Concession Period: 30 years "crush loading" at rUsh hour of Debt-Equity Ratio: 61/39 eight passengers per square Lead Shareholders: meter. Not completely pleasant Tanayong (Thailand, perhaps, but well worth it never- 65.1 %); Italian-Thai theless. It will take only 30 min- Development (Thailand, utes to cover a route that 8.8%); Land and Houses currently takes about 90 minutes (Thailand, 3%); IFC (2%) by car or bus - on a good day. Lead Lenders: IFC; KfW (Germany); Siam BTS's "Green Line" is only the But after much squabbling with He Likes It: BTS Chairman Kasame Commercial Bank (Thailand) first leg of a 200-km system the the govemment, it saw its con- Chatikavanif (center) test-rides the Lenders' Independent government hopes to build with cession agreement canceled and system's first train. Analysis: Ridership forecasts a combination of public and pri- was expelled from the project to confirm revenue projec- vate money over the coming earlier this year, after spending tions done by Asia's largest decades, and the Tanayong-led what it estimates as $724 million the land acquisition costs would independent traffic consult- group already has an extension of its own equity funds on initial iust be too high and the impact ing firm, MVA (Hong Kong); in mind. Meanwhile, the gov- development. of relocating people just too dif- technical and environmental ernment is using Japanese aid ficu,, studies and monitoring of money to begin work on an BERTS's unfinished pylons dot fcult. sponsors' construction underground system, a far cost- the city today. Counterparts at When the Green Line officially progress reports done by lier construction proposition BTS, though, hope BERTS can Electrowatt (Switzerland) that all sides agree could never still somehow eventually be fin- model of privately financed Total Financing Currency be viable on a for-profit basis- ished, since as a commuter line urban mass transit for all to see. Mix: 59% in Thai baht, and whose completion schedule carrying suburbanites in and out 41 % in US dollars continues to be a question mark. of the city it would complement "The lesson to be drawn from Source of Revenue: their own intracity distributor BTS," says IFCs Duff, "is the Projected flat fare of 30 What Next? line. The two systems would importance of old-fashioned rig- baht (approximately 80 US The big question, though, is share a transfer station, and the orous analysis, consistent super- cents); sale of advertising what will tiltimately happen to combination would make a far vision, and of course the ability space the city's mega-mass transit pro- more powerful dent in the city's to carry forward ever-divergent Construction Contractors: ject. Hong Kong-based traffic congestion than juLst BTS views of different lenders, equity Siemens (electrical and Hopewell Holdings, a key pio- alone -by all accounts only an holders, and regulators to mechanical works); italian- neer of Asia's privately financed important first step in tackling a achieve the common goal. The Thai Development (civil infrastructure, has ambitious huge problem. SkyTrain project is almost 80% works) plans for a $4 billion, 60-km complete now and stands as an Development Impact: First Bangkok Elevated Road and "I think eventually BERTS will excellent symbol of cooperation mass transit system to be Train System (BERTS). They be built," says ETS Senior Vice between all the numerous stake- operated in a city often con- envision a triple-decker combi- President Surapong Laoha- holders."E sidered to have world's nation: a toll road built above Unya. "The goverment is try- worst traffic congestion; will tracks for both new light rail and ing to find other investors and carry more than 650,000 existing State Railway of work out a compromise, but a passengers per day Thailand trains, running in turn solution has to be found because Planned Opening: above existing streets with new the impact on Bangkok's traffic December 1999 shopping plazas whose revenues would just be so great. In a city Financial Advisers: IFC, would flow to the concession- of this size, you need to have a Salomon Brothers, Siam aire. Hopewell won the conces- mass transit system. There is no Commercial Bank sion in November 1990 and had way to solve our problem with- hoped to open key portions of it out diverting road users to other by the time of the Asian Games means of transport, because in Bangkok in December 1998. there is also no way to build new expressways inside the city - Impact < Winter 1999, V1l. 3, No. I A ient Perspectives -~ ~~ X U 4 L] I Name: J. Mark Mobius y his own admission his investment funds have recently declined in Title: Managing Director, value by $2 billion, for now at least. But you'd never know it by Templeton Asset Management Ltd., talking to J. Mark Mobius, the widely hailed grand guru of emerging Singapore Age: 62 f| Jmarket investing. He looks to developing-country stock markets' County: USA future, not their past. Assets under Management: Approximately $13 billion invested in developing-country stock markets Having lived in the Far East since the early 1960s, long before anyone talked worldwide of a Pacific Century or Asian Miracle, Mobius is known for his shrewd long- Investment Funds Overseen: term perspective on opportunities in developing countries. It is one that led Templeton China World Fund, Templeton him to list a multi-developing-country investment fund on the New York Developing Markets Trust, Templeton Stock Exchange amid the cold war and the Latin American debt crisis in 1986, Dragon Fund, Templeton Emerging Markets Appreciation Fund, Templeton when few could foresee that within five years every major global financial Russia Fund, Templeton Vietnam and institution in the world would have an emerging market department. It is also Southeast Asia Fund Background: Ph.D. in economics and one that has kept most of his Templeton clients with him despite the many political science from Massachusetts ups and downs along the way, allowing the portfolio he and his staff of 30 Institute of Technology (1964); has spent manage to grow by more than a factor of 100 over 12 years. And the press working in emerging markets, with exten- never loses interest: in October New York-based Money magazine put him on sive experience in economic research and its list of "the world's most powerful financial players, " writing that "despite analysis; ran his own consulting company in Hong Kong for 10 years, then was a the carnage, Mobius, whose look and manner are somewhat reminiscent of a research scientist for Monsanto Overseas mysterious James Bond character, remains as bullish as ever about emerging Enterprises Co. and a director at interna- markets' long-term potential. ,,tional securities firm Vickers da Costa, also in Hong Kong; joined Templeton in 1987 with responsibility for all its emerging Mobius has long been a valued partner of IFC, serving as an adviser to the markets investments (which then totaled $87 million) and started the Templeton Corporation's indexes of emerging stock markets - indexes he says are one of Emerging Market Fund, the world's first the tools he uses in making his own investment decisions. When he visited fund dedicated to investments in multiple IFC headquarters this fall he was as good-humored and relaxed as ever, emerging markets to be listed on a stock despite the uncertainty in the market and his largest fund's 23.8% drop in Investment Philosophy: "Buy when value over the past five years. He repeated his loud calls for improving capital others are despondently selling and sell when others are greedily buying" market infrastructure so both foreign investors and host countries can maxi- Lately Bullish On: Thailand (invested mize the contribution of portfolio capital flows. And he offered some pre- approximately $300 million there in 1998) dictably unpredictable analysis on countries such as China and Japan. He Number of Days Spent Traveling in Developing Countries Each Year: 200 showed no sign of worry. After all, he said, it's a "new era, " one marked by Top Five Holdings: Telefonos de the need to "embrace volatility. " Mexico; Cemex (Mexico); HSBC Holdings (UK); Eletrobras (Brazil); Telebras (Brazil); Electricidad de Caracas (Venezuela) IFC Ties: Member, IFC Emerging Market Data Base Advisory Panel Impact Winter 1999, Vol. 3, No. I OIF-C How do the current Asian We are in a different era, and [i2cz But what about the argu- and Russian financial crises we are hoping and praying that ment that says emerging market compare with others you've this kind of thinking does not investors such as you and others seen before? spread. At this critical juncture, are partly at fault for pouring in all of us must get together and too much money too fast? Mobius: This is actually the find solutions to these problems. third crisis we've been thtrough. Mobius: No one is really to In 1987, wc had the big crash in OFC: How do you suggest we blame, because things got ahead New York that affected the six find a long-term solution? of all of us. But, sure, we had markets we were in then: Hong too much money, and the mar- Kong, Philippines, Thailand, Mobius: The bottom line: a kets were not ready in many Malaysia, Singapore, and lot of people talk about the cases. Now we are catching up. Mexico. In that one we lost shortages of money, the lack of And we will catch up, there's no 30% of the fund in a very short liquidity, and the problems of question about it. We've been time. getting finance. But there is no through this before. The leads, shortage of money globally! We the tags - it's all part of the Then in the 1994 Mexican cri- are at this time sitting on $1 market. sis we lost 30% of our fund billion of cash looking for places again. It seems that 30% is to invest. There is no shortage. We've got to remember that we always the number that we are That is not the question. knew that this was possible. losing on these downturns, but And we know that it is possible of course anyone who had OFC- What is? in the future. Volatility is with bought at that time would be in us. We must leam to embrace it. pretty good shape today. And Mobius: The question is the that's the problem we are facing: global infrastructure for capital p:(C Why? the confidencc factor. You have markets: is there a liquid market to buy when things are cheap. available for us mutual fund Mobius: Because that is the But it's a very difficult thing to investors? We have to price our value of the market. The market do. You have to live through securities on a daily basis and sends messages to all of us. these crises. meet the demands of our own When we get emotionally securities commission, which involved, eventually it hits us Or-C. But what about now? says that unless the stocks we over the head and says, "You own can be sold within a five- made an error. You did not use Mobius: We are in a new cri- day period, then we have illiq- reason. You used emotion." And sis, which is bigger than the uid securities, and once we get then we learn. Mexican crisis and is covering to 15% illiquid, we are in trou- more countries. Templeton is ble -we are breaking the law. 01C. But still the crisis goes on... now in 40 countries around the The question of liquidity is world, and they all seem to be extremely important. That's the Mobius: A lot of people keep affected with the exception of a reason I was happy to learn that talking about a crisis. But in my few like Portugal and Greece. the World Bank and IFC are view this crisis is over, because Plus, we have the real threat looking more and more at insti- crisis comes only when every- that countries like Malaysia will tution building in the capital thing is uncertain. We now say, "Hey, we arc not going to markets in these countries. It's know that companies are bank- play this game anymore. We critical. rupt. Whenever uncertainty have decided to close down the ends, then the crisis is over and playing field - and we've got IF-M What would you tell coun- new money begins to come in. our own game: we're going to tries their priorities should be in grab your assets and not let you this regard? P5F What does that mean for out." This is a real threat to the you? future of emerging markets. Mobius: You must have a cen- tral depository, a central clear- Mobius: If you don't know lPF: Why? ing system, and a computerized anything else, you know that stock exchange, which allows you've got to be in the game. Mobius: Because, if people for transparency and a level You've got to be invested, and begin to question the idea of playing field. The good news is it's those long-term investors capitalism and doubt the validity that as a result of this crisis who stay in the market, who of open capital markets, then these questions are finally being continue to invest, and who, by we're really in trouble. addressed. the way, are optimistic and not pessimistic, who will win in the E Impact Winter 1999, Vol.3, No. I end. And that's basically our IPC. What does it take in gen- prises still need a tremendous accept reform because they didn't stance. We are aggressively eral to be good at finding oppor- cleaning up, and we don't see want disclosure of this terrible investing in these emerging mar- tunities in equity markets? that happening. That is why loan book they had. But in the kets, and we are very happy to their domestic B-share market is end the banks did bite the bullet, know that IFC is there alongside Mobius: That's a good ques- so sick, because the companies, and all is now being revealed. us. I think that IFC's influence tion. I think one requirement is one after the other, are just That's a giant step forward. in advising as a disinterested a very eclectic mind. You have poorly managed, poorly run. It's third party - a referee if you to be open-minded, interested in a real problem, especially if you i U, Why? will, advising govemments on many different things, and con- consider some of the estimates how they can best use this stantly learning new things. And that the state-owned enterprises Mobius: If you recognize the finance that is coming at them then, finally, you have to be able represent 80% of the bank loans problem and it's known, then at great speed - is making a to make some judgments about and 20% of the economy. And you can deal with it. And that's tremendous contribution. what's good and what's bad. You by extension, the banking sys- what's finally happening in _ _ _ _ tem is in trouble because these Japan. I don't think people real- state-owned enterprises are not ize the degree to which Japan being reformed. has gone through reform - the pain that they've experienced, lL