The record-setting heat wave that hit Southeast Asia in April and May 2024 had a severe impact on the region. From Cambodia to the Philippines, extreme temperatures closed schools, caused power outages, and threatened crop harvests. A transition to renewable energy has never been more urgent. And while the Association of Southeast Asian Nations (“ASEAN”) governments are committed to adopting renewable energy and reducing carbon emissions, the region must attract a substantial amount of Foreign Direct Investment (“FDI”) to accelerate the renewable energy transition. The World Bank estimates that developing nations will need approximately USD 1.7 trillion annually to meet renewable energy targets. Domestic capital sources alone will not be able to fund enough renewable energy to meet the needs of a growing population, rising living standards, and expanding industrial requirements.
Restrictions on foreign ownership of renewable energy projects serve as a major deterrent to FDI in Southeast Asia’s renewable energy sector. ASEAN countries have a patchwork of regulations limiting foreign ownership. Some jurisdictions have moved towards liberalization of the industry and removed these barriers; others are reinforcing protectionist measures and requiring majority domestic ownership, forcing foreign investors to cede significant control to local joint venture partners.
Recent Policy Developments
Recently, several ASEAN countries have opened renewable energy projects to nearly full ownership by international investors. In September 2023, the Philippines President Ferdinand Marcos, Jr. announced Republic Act 11659 or the “Public Service Act,” which will allow foreign firms full ownership of renewable energy companies. In 2021, Cambodia enacted a Law on Investment that allows foreign firms to own 100% of renewable energy companies. The law included other incentives to attract FDI, including tax holidays, reduced corporate tax rates, and duty-free imports of capital goods. In 2021, Indonesia amended its “Negative Investment List,” which imposed foreign ownership limits on power projects with generation capacities below 10MW. The new “Positive List” allows 100% foreign ownership of power facilities, including renewable energy plants, with generation capacities greater than 1MW. However, small-scale projects, those with less than 1MW capacity, typically still require local company control.
Vietnam and Laos have not placed generalized statutory limits on foreign ownership in renewable energy companies for many years. That said, other, more subtle, restrictions on full foreign ownership still exist. Vietnam is more likely to approve permits or offer guarantees for a renewable energy power project under a build-operate-transfer, or BOT, scheme in which public utility Electricity Vietnam takes possession of the power plant after a period of time. In Laos, there have been instances where the government has required foreign investors to partner with a domestic entity or a state entity.
However, some Southeast Asian countries are moving in the opposite direction, increasing the limits on foreign ownership. Thailand recently announced plans to increase the restrictions on foreign ownership of all electricity companies, including renewable energy firms. As of July 2023, the Energy Regulatory Commission was reviewing draft regulations that would cap foreign ownership at 49% and require that half the directors of any energy company be Thai. Malaysia restricts foreign ownership in renewable energy producers to 49% by regulating how firms can participate in government support programs and schemes. A renewable energy company must have at least 51% local ownership before it can participate in the government’s feed-in-tariff scheme or the Large Scale Solar Program, which procures solar energy through competitive rates.
Forced Partnerships: The Dangers of Foreign Ownership Limits
Foreign ownership limits that mandate joint venture formation and majority control by a local partner pose major challenges for investors in expensive renewable energy projects. The most serious problems arise when local laws force a foreign investor into partnership with an unethical or criminal business. We have encountered numerous corrupt companies in the renewable energy sector; companies that pay bribes to win government contracts, gift politicians corporate shares in return for regulatory approvals, and falsify transactions in company records to conceal improper payments and kickbacks. A Southeast Asian joint venture partner may also have a history of money laundering or fraud convictions.
Even if the local partner has a clean legal history, numerous other complications can arise. ESG risks are a significant concern: many Southeast Asian energy businesses have records of environmental degradation, labor abuses, and mistreatment of local communities. Corporate governance processes may also obstruct a fruitful business relationship. For instance, decision making at international firms may be more hierarchical and centralized, while a local partner might prioritize consensus-building or relationship-based decision-making. These differing approaches can lead to conflicts or delays in reaching agreements on strategic decisions, project timelines, or resource allocation.
Exit strategies can also be challenging, should legal or reputational matters emerge or simple economics dictate that it makes sense to terminate the partnership. We have seen frequent disagreements between the foreign investor and the local partner on the timing or conditions of an exit from the Southeast Asian energy sector. Foreign investors can have a tough time settling exit disputes when a local partner has stronger connections to domestic regulatory authorities and greater experience navigating the court system.
Sidestepping Obstacles through Investigative Due Diligence
Any foreign investor forced to establish a joint venture with a Southeast Asian partner should first perform extensive investigative due diligence on the counterpart, which may have a history of corruption, money laundering, or environmental damage that has been ignored or underreported in international media. In such a case, it is necessary to search local media archives and obtain publicly accessible court records. We recently assisted a foreign investor in the Southeast Asian automotive sector looking to increase its stake in a joint venture with a local partner. Our client, having inherited the joint venture via the acquisition of another company, had a limited understanding of their local partner. A multipronged approach, which included reviewing local language media archives and acquiring court filings, uncovered instances of possible bribery and workplace safety problems that contributed to employee deaths in the local partner’s facilities. This information allowed the foreign investor to fully assess the risks of the joint venture and appreciate the potential for exposure to corruption.
Corporate counterparties in the region are often partially owned by the government or government officials. Sometimes these equity positions are hidden through proxies and layers of shell companies, presenting significant risks under anti-corruption laws, such as the US Foreign Corrupt Practices Act. To address these corruption risks, an investor must identify a counterpart’s ultimate beneficial owners through a rigorous review of corporate filings. Often, researchers must speak to knowledgeable sources on the ground to decipher any proxy relationships. We were presented with such a case when looking into an Indonesian who held a stake in a European infrastructure development company. Extensive conversations with Indonesian business executives, policy experts, and journalists established that some of Indonesia’s most powerful families, which included several former government officials, were using a series of proxies to hide their interest in the company.
To unlock ASEAN’s renewable energy potential, the region must reconcile its foreign ownership regulations with the urgent need for increased investment. By fostering a more transparent and inclusive investment environment, ASEAN can accelerate its renewable energy transition and better address the pressing challenges of climate change and energy security. But with restrictive foreign ownership limits still in place across Southeast Asia, foreign investors will be wise to conduct rigorous investigative due diligence and mitigate the myriad risks presented by joint ventures with local business partners.
