The Upshot with Jonathan Guwe: Examining Infrastructure Development from a Legal Perspective
The Upshot is a content series by Infrastructure Asia to profile key leaders in the industry. We dive deep into their areas of expertise to present expert opinions and thought-provoking perspectives on the most pertinent aspects of sustainable infrastructure development.
Navigating the legal landscape of infrastructure development requires a keen understanding of complex regulatory frameworks and multifaceted stakeholder interests. From project conception to completion, legal considerations play a pivotal role in shaping the success and sustainability of infrastructure initiatives.
To unpack these considerations, Infrastructure Asia spoke with Jonathan Guwe, partner at Dentons Rodyk’s Finance practice group and Co-Head of the Energy practice and the Vietnam desk. With more than 15 years of experience in Asia-Pacific's Banking and Finance space, Jonathan has successfully steered numerous complex cross-border transactions in emerging markets, across a wide range of infrastructure projects, including hydroelectric, solar and wind. His deep involvement in these projects, from conception to commercial operation, equips him with a unique perspective on the challenges and opportunities inherent to such ventures.
Balancing viability factors during project conceptualisation
When conceptualising an infrastructure project, multiple viability factors across economic, technical, environmental and social considerations must be carefully weighted. “Which one takes precedence will often depend on the context and purpose of the project,” Jonathan noted.
If he had to prioritise one, financial viability would be one of the most important criteria to establish from the get-go. This refers to a project's ability to generate sufficient revenue and cash flow to cover its operational costs and debt obligations over the long term. From Jonathan’s experience, unless governments have a vested interest in subsidising the project's funding, most developments will need to demonstrate a sound financing model that can sustain operations throughout the asset's lifecycle in order to be deemed viable.
Technical feasibility is also crucial. This aspect focuses more on whether the proposed construction methods, materials and technologies are suitable for the project site and requirements. “For instance, with a light rail system, it’s essential to determine whether the landscape allows for building the rails in a certain way. Thorough engineering and feasibility studies must be conducted early in the planning process; and similar to financial viability, projects cannot progress without technical viability,” he elaborated.
However, in recent years, environmental and social viability are gaining greater importance. Jonathan observed that while these aspects received less emphasis early in his career, environmental, social, and governance (ESG) factors play a major role today in determining whether a project moves forward. “Now, consultations with stakeholders—including local residents and individuals who use the area—are a standard part of the process,” he explained. Projects risk future challenges if they fail to address environmental and social viability as local communities may raise concerns, and prominent environmental groups, such as the World Wildlife Fund, may question the impact on endangered species.
Accounting for legal and regulatory considerations during project planning
When it comes to project planning, Jonathan shared that local labour requirements are an important consideration that is often overlooked during this phase. “Many countries have requirements where most of the workforce or contracted companies involved in a project must be local. This is typically the case unless there is a specific reason you are not able to do so. In such cases, foreign expertise may be allowed for specific aspects of the project,” he added.
Furthermore, land ownership is also restricted in certain countries for foreigners, where only lease arrangements are allowed. “This limitation means that it is not easy to simply acquire all the land you want to buy. Project planners must consider whether to lease from individual landowners for each parcel or to collaborate with a local partner who can acquire all the land parcel and then lease it to them,” Jonathan advised.
Reflecting on a past experience with a capital-intensive Public-Private Partnership (PPP) project that faced significant delays, Jonathan shared, “The project stalled for four to five years due to challenges in acquiring sufficient land due to resistance from landowners. The introduction of compulsory land acquisition with fair market compensation enabled us to finally move forward." This challenge was a common roadblock for many PPP projects at that time, and progress was only made after the law was amended to allow the government to manage the acquisition process. He encountered another similar challenge previously, where foreign-owned companies can only lease land. As he puts it, “why would someone invest in the time to acquire land to lease to you?” To address this obstacle, an innovative financing and security structure was developed. This approach involved using payment milestones to incentivise a local partner to take on the upfront risk to acquire land first. By doing so, the local partner could secure the land on behalf of the foreign investor, mitigating the challenge of land ownership restrictions.
Although these land ownership restrictions remain in effect, based on his observations in the industry, Jonathan believes legislative changes could be on the horizon that might eventually simplify land acquisition processes for foreign-owned companies.
Keys to success in project construction and delivery
Moving on to project construction and delivery, Jonathan identified several key factors that influence the successful completion of this stage, which begins with planning ahead of time. This includes:
- Having a thorough understanding of the local regulatory environment
- Anticipating potential regulatory challenges and devising suitable backup plans to address them
- Collaborating well with a knowledgeable and compatible local partner
"Having these elements in place helps establish clear milestones and project objectives that align with the financing model," he noted. "From defining precise funding needs to setting a disbursement schedule for loans or investments, these steps are crucial in mitigating potential cost overruns and delays." The second key factor is strong project management. "The Engineering, Procurement, and Construction (EPC) contractor and project owners need to be able to effectively handle issues that arise and keep the project on track," Jonathan emphasised. Flexibility is also crucial, as investors, project managers, and EPC contractors must adapt to unforeseen challenges.
He shared an example from a hydroelectric project where an unexpected issue emerged mid-construction regarding the movement of orangutans. Although the area was not a habitat for orangutans, it served as a migratory corridor. "To mitigate the environmental impact, the shareholders, project manager, EPC contractor and government collaborated to find a solution," he explained. This involved hiring experts to study the migration patterns of endangered species and implementing measures to facilitate relocation.
Jonathan stressed that the most effective approach often involves parties working collaboratively to address issues, as their interests are aligned towards solving these problems. Many challenges that arise during project execution are difficult to anticipate and may not be explicitly addressed in contractual terms. However, when parties cooperate, they are more likely to overcome construction issues and keep the project on schedule.
Ensuring a smooth transition during project handover
Lastly, to help prepare for a smooth project handover, one of the main things is to ensure that all parties are aligned on what performance standards need to be met and what the acceptance criteria are. Jonathan explained that most of the time, if a project is well thought out and the documentation is done well, there are very clear performance standards as to what needs to be done.
For example, he highlighted, "The testing and commissioning process must be clearly defined, including who has the approval authority during commissioning." Procedures should also be in place for identifying and addressing any defects that arise. "The entire performance testing process leading up to the Commercial Operations Date (COD) should be well-defined," he added.
“Thorough documentation is key for a good and smooth project handover. Records related to building, testing, commissioning, warranties, shared use, project documentation and technical specifications must all be well prepared in advance for the handover.”
Finally, Jonathan emphasised that there needs to be a clear dispute resolution process established. For example, it must be clearly stated as to how and when disputes are to be resolved between the parties, whether that involves good faith negotiations as the first step, followed by arbitration, or direct referral to the courts. The key is to have a pre-determined adjudication process within the project itself.
He also underscored the importance for a pre-determined adjudication process within the project itself, with important considerations including:
- Formation of a dispute resolution board
- Adjudication timeline
- Process for resolving disputes related to testing or performance standards
Having all these in place can help to facilitate a smooth project handover.
As infrastructure development continues to evolve, especially with an increasing emphasis on environmental and social impact, success depends on effectively balancing these various factors. By taking a comprehensive approach that addresses legal, regulatory and practical considerations at every stage, stakeholders can better position themselves to deliver sustainable infrastructure projects that serve both communities and investors.
