Khon Kaen University International College
Business in the Greater Mekong Sub-region
Course number 050 451 - Second semester 2013
Wednesdays at 9:00 in room 823
Lecturer: Michael Cooke
office room 817
E-mail: Michco@kku.ac.th
Web: KKU.AC.TH/Michco
Business In GMS Final Exam
 Thursday Feb 27th at 9:00
 Room 926
 Paper dictionaries allowed
 30% of Course Grade
 Recommended Study: Review your Presentation Material
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Find a successful industry in GMS, or one which shows potential to be
successful (13 Nov)
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Explore reasons the industry located in GMS
What is the nature of the business (capital or labor intensive, etc)
Any spillover effects?
What was the mode of entry for the businesses?
Study a GMS country in which the industry is successful (4 Dec)
 What are the strengths of that country from a business perspective?
 What are the weaknesses?
 Look for barriers to further business success in the country
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How do you see the business evolving (5 Feb)
 Effect of ASEAN or other alliances (trade, labor mobility, etc)
 Relevant demographic, economic, trade projections
 Infrastructure, education, and other changes as a result of government or
business initiatives
 Advice you would give to government units to encourage industry growth
Feb 12th – Schedule
 Presentations
 Rai and Yannick
 Marion and Philipp
 Assessments
 Best presentations
 What should an instructor change? What worked?
 Laos business and listing on the stock exchange
 Build Operate Transfer (BOT)
 General principles
 Why they are relevant
Mekong Watershed
36% of the River’s Volume is from Laos
Mekong River Commission
Secretariat
SE Asia
Trade routes from East Asia
to South Asia, the Middle
East, and the Suez Canal
pass through the Straits of
Malacca, northwest of
Singapore. The area is a
haven for pirates. In
November two large tankers
were hijacked there. The
East-West corridor would
connect East Asia to the
Indian Ocean well north of
the Straits.
GMS Corridors – High Level
Source: Chiang Mai University
USER 2007
GMS Corridor Map – East-West
Growth of a Laos Business
 From http://www.daoheuanggroup.com/history/
 Dao-Heuang was founded in 1991 by Mrs. Leuang Litdang as a small import-export
company in the Laos PDR
 The original company specialized in importing wine and perfume from France, as well
as alcohol and cigarettes from Singapore.
 The company also handled a wide range of household goods imported from Thailand.
 Dao-Heuang Group (DHG) was organized in 1998.
 It began to diversify into other products and begin exploring opportunities for
producing coffee, tea, agricultural products and industrial goods.
 In 2008 DHG began new service industry businesses for hotels and food and beverages
establishments.
 Duty Free shops in Pakse and Savannakhet
 Bottled water, fruit drinks
 In 2010 the company signed international partnership agreements to grow, refine, and
package its coffee through all production steps in-country (Pakse) for the first time.
 DHG planned to join the new Lao Securities Exchange in 2011, and opened a hotel in
Pakse.
 Rebranding efforts
 Expansion of Duty Free in Vientiane
Why Planned Listing Did not Happen
 The LSX opened in late 2010 and by June 2013 had only two listed
companies
 A power company and a bank joined in 2011
 Laos World Plc was added in December 2013
 Founded by a Thai businessman
 Operates convention and exhibition facilities under a BOT agreement
 Laos limits foreign share ownership to 5%
 Few companies will disclose the information required for listing
 The Korean head of the LSX said company owners don’t understand
why they have to reveal their financial statements to the public.
 Company leaders need to understand the mechanism of the stock
market, as well as the need for compliance and transparency in trading.
International Business Times 25-6-2013
Common Features of Project Finance
• Often used in developing countries to fund infrastructure
projects
• Success depends on the performance of several parties
• Government is often a party to the agreements
• Project is set up as a separate company.
• Equity is held by contractors and plant managers
• The company is highly levered (70% debt).
• Debt is supported by cash flows
• Lenders have no recourse against the parent companies
• Since governments can unilaterally break agreements,
powerful banks may be brought in as debt guarantors.
• In a Pakistan power project the involvement of the World
Bank was essential after change of government.
Parties In Project Finance
Contractor
Supplier(s)
Equity investors
Government
Project
company
Equity sponsor
Lenders
Purchaser(s)
Brealey, Myers, Allen 2011
Bond Terminology
 Restrictive covenants - Limitations set by bondholders on the
actions of the Corporation
 Puttable bond – A provision that allows the bondholder to
demand immediate payment. This was a feature of loans to
Asian companies in 1997
 Poison Put - a clause that obliges the borrower to repay the bond
if a large quantity of stock is bought by single investor, which
causes the firms bonds to be down rated
Covenants
 Debt ratios:
 Senior debt limits senior borrowing
 Junior debt limits senior & junior borrowing
 Dividends
 Event risk
 Positive covenants:
 Working capital
 Net worth
Covenants
Covenant Restrictions
Percentage of bonds with covenants
Type of covenant
Investment-grade bonds
Other bonds
92%
93%
Dividends or other payment restrictions
6
44
Debt covenants
74
67
Default-related eventsa
52
71
Change in control
24
74
Merger restrictions
a
e.g., default on other loans, rating changes, or declining net worth
Percentage of sample of bonds with covenant restrictions. Sample consists of 4478 senior
bonds issued between 1993 and 2007. Source: S. Chava, P. Kumar, and A. Warga,
“Managerial Agency and Bond Covenants,” Review of Financial Studies
Event Risk: An Example
October 1993 Marriott spun off its hotel management business worth 80% of its value.
Before the spin-off, Marriott’s long-term book debt ratio was 2891/3644 = 79%.
Afterward almost all the debt remained with the parent (renamed Host Marriott), whose
debt ratio therefore rose to 93%.
Marriott’s stock price rose 13.8% and its bond prices declined by up to 30%.
Bondholders sued and Marriott modified its spinoff plan.
Philippines Build Operate Transfer Law
 Under Philippines law RA 6957 a BOT scheme is defined under as
a contractual arrangement whereby the contractor undertakes the
construction, including financing, of a given infrastructure facility,
and the operation and maintenance thereof.
 The contractor operates the facility over a fixed term during which it is
allowed to charge facility users appropriate tolls, fees, rentals, and charges
sufficient to enable the contractor to recover its operating and maintenance
expenses and its investment in the project plus a reasonable rate of return
thereon.
 The contractor transfers the facility to the government agency or
local government unit concerned at the end of the fixed term,
which shall not exceed fifty (50)
 RA 6957 is envisioned to generally mobilize local and foreign
private capital, technology and expertise in order to develop and
implement major and capital intensive infrastructure projects
http://www.up-ncpag.org/main/pdf/kapsfairness.pdf
The NAIA Terminal 3 Project
 Work on a new Manila airport terminal began in 1997 under President
Joseph Estrada and was intended to start operations in 2002. The US$640
million facility was designed by Skidmore, Owings and Merrill (USA)
 Fraport AG, the German partner of the Philippine International Airport
Terminal Co. (PIATCo), got the build-operate-contract in 1997.
 A month before the terminal’s scheduled completion in 2003, the contract was
nullified by then President Arroyo, which was upheld by the Supreme Court.
 Criticism of the PIATCo contract came less than three months before the new
terminal was to open. The controversy rapidly developed into a crisis of sorts
for the Arroyo administration which was vigorously pushing for similar BOT
investment projects.
 The terminal opened in 2008 after being mothballed for six years.
 In August 2012 the Philippines Court of Appeals said the government
should pay Philippine International Air Terminals Co. Inc. (Piatco) the
$371.43 million, or roughly P16.2 billion, as “just compensation” for
expropriation of the terminal.
http://business.inquirer.net/137987/govt-mulling-options-on-ca-piatco-order#ixzz2t0aCjVUD
Myanmar-China Oil and Gas Pipeline project
 The Sino-Myanmar oil and gas pipeline project was finalized between
China National Petroleum Company (CNPC) and Myanmar’s Ministry of
Energy in December 2009 during Xi Jinping’s visit to Myanmar
 With a total investment of $2.54 billion construction began in summer
2010 and the gas pipeline was completed in May 2013.
 The multinational nature of the Sino- Myanmar gas pipeline may have
partially shielded the project from pressure and government decisions.
 The oil pipeline is a joint venture between China National Petroleum
Corporation’s Hong Kong-registered entity (51%) and Myanmar's
national petroleum company.
 The gas pipeline involves six stakeholders from four countries and aims to
deliver gas from a Daewoo-led (South Korea) consortium operating in the
Shwe field. Three UK banks are involved. CNPC operates the pipeline.
 The participation of other countries helps mitigate the risks for China alone.
 Controversy over the pipelines’ environmental and social impact occurs in
Myanmar, and in China (residents of Kunming object to refinery plans).
Will this Mega-Project Happen?
 Myanmar's Ministry of Rail Transportation and the parent
company of China Railway, signed a memorandum of
understanding in April 2011 outlining a 50-year BOT (BuildOperate-Transfer) agreement.
 China will build and run the railway and eventually hand it back
to Myanmar after 50 years.
 Since 2011, Chinese investment in Myanmar has plummeted
over concerns about political instability and unreliable
protection as local groups in Myanmar protest lack of
transparency and participation in business deals.
 China’s investment authority advises Chinese businesses to seek
joint ventures with other foreign companies to diversify reduce
risks in Myanmar. Most major projects have been suspended.
Five Years Ago
The greater danger is deflation – advocating monetary stimulus for the USA.
How Do These People Influence Business
in the GMS?
“Market for Lemons”: Rejected by four prestigious journals in 1970. Now one of the most widely
cited economic papers. Dishonest dealers tend to drive the honest out of business. Local lending rates
in less developed countries are high. Graduates of poor quality schools lack opportunity.
What is a yield curve?
And why not fund projects with short term (cheap) money?
Wall Street Journal 7 Feb 2014. Ryan index is a portfolio of 2-30 year maturities.
Investor Perceptions of Emerging Markets
 From BRICS to the Fragile Five
 BRIC acronym from 2001 by an economist at Goldman Sachs
 Fragile Five invented by Morgan Stanley in 2013
 South Africa, Turkey, India, Indonesia and Brazil
 Viewed as fragile because the economies are dependent on foreign investment
 Some economists see these emerging economies as vulnerable if the USA raises
interest rates
 Another point of view about emerging markets fragility *
 Some emerging markets encouraged foreign investment when funds were
cheap
 Cheap short term funds lead to unproductive investment
 Loose regulation and corruption, and political turmoil now affects foreign
investment flows
 Which of the GMS countries are vulnerable? Worries today focus on
Indonesia, not the GMS.
* Bloomberg: Dani Rodrik and Arvind Subramanian - Jan 31, 2014
Risks Associated with Foreign Borrowing
 Exchange rate risk – domestic currency depreciates
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relative to foreign currency denomination of loans
Maturity risk – too much short-term debt or hot money
relative to payoff periods for investments
Interest rate risk – international (e.g., LIBOR) rate
volatility
Service risk – domestic contractions, export volatility,
or investment project failures increase burden of debt
service
Panic/Speculative risk – events trigger speculation
against the domestic currency and flight of hot capital
http://emlab.berkeley.edu/wp/mcfadden0204/hotmoney3.pdf
GLOBAL CAPITAL MOVEMENT AND
FINANCIAL CRISES IN EMERGING ECONOMIES
 “The international capital market today resembles in many respects the U.S.
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credit market 150 years ago, with virtually unregulated free flow of capital across
borders that fuels innovation and economic growth, but also creates volatility
and financial panics that hinder economic development and damage people’s
lives. “
“The pattern is now familiar. Opening the borders of an emerging economy and
liberalizing or deregulating its financial institutions, combined with
insufficiently developed financial regulation, aggressive promotion of economic
development, or loose government fiscal policy, leads to heavy international
borrowing, with loans denominated in dollars or other industrialized country
currencies.”
“Then, some triggering event occurs, perhaps the insolvency of one or more
large banks, a run by depositors, a drop in export demand, or sudden and
tumultuous pressure on a fixed or crawling peg exchange rate, and a currency
crisis starts. Hot capital flows out of the country, loans from foreign institutions
are not rolled over, and if the currently is not released to float freely, it comes
under speculative attack.”
“Banking crises were more severe (than currency crises), typically lasting 3.1
years and resulting in total lost output of 11.6 percent of annual GDP.”
Wall Street Journal, 12-Feb-2014: ‘Weak currencies in Asia are worsening inflation and
forcing central banks in several countries to raise interest rates even as economic growth slows’
“Hot Money and Cold Comfort” Daniel McFadden, 2004
SE Asian Currency Volatility Affects Airline Profit
 Currency is a defining issue for SE Asian carriers because
$US costs exceed $US revenues
 Most airlines in SE Asia will report 2013 losses if $US keeps
rising relative to their home currencies
 For Indonesia’s Garuda Airlines
 Rupiah fell 14% versus $US from June to September, 2013
 50% of revenue is in rupiah (travel originating in Indonesia)
 60% costs are in $US (fuel and aircraft leases are in $US)
 Garuda lost $11.4MM in the 3rd quarter
 In late September Indonesia’s government began to allow hedging (losses
on hedging would be considered normal business risk)*
 The $S has been relatively stable versus the $US.
 Singapore Airlines 3rd quarter profit was $161M
*Jakarta Post 26 September, 2013
What are the Implications of an FTA?
 Thai exporters response to FTAs are limited by rules of origin
requirements
 Cost of compliance with rules of origin paperwork is effectively a
tariff of 2-7% (a)
 Use of an FTA is highly concentrated among a few products
 The costs of ROO compliance varies among partners
 Importing countries may create obstacles
 Utilization of FTAs is often low
 Part of the low utilization arises from overlap, such as ITA
 FTAs are rarely utilized outside of existing trade relationships
 Primary users of FTAs are large local firms (not global firms)
 FTAs mostly benefit large companies due to COO costs
(a) Kohpaiboon, Archanun 2010 “Exporters' response to FTA tariff preferences : evidence from Thailand”