(FORTUNE Magazine) – Q. Quick, now. In what city has a Baby Bell made a 300% return on money it invested about two years ago? A. Bangkok.

BANGKOK? Thailand? That's right. In 1992, Nynex joined the Thai conglomerate Charoen Pokphand Group to invest $300 million in a venture called TelecomAsia. Looking ahead, Joseph Farina, president of Nynex Network Systems, says with complete confidence: "We'll triple our investment in Asia in the next ten years." What gives? Is the pace in New York too slow for Nynex? By comparison, yes: TelecomAsia did an initial public offering in November 1993, and today Nynex's investment is worth -- get this -- $1.2 billion. And how do the returns on your newest venture stack up? In one of the largest privately financed infrastructure projects in the world, TelecomAsia is installing two million digital phone lines in Bangkok. Equipment suppliers include AT&T and Siemens. The project, scheduled to take five years, will probably finish 18 months ahead of plan; TelecomAsia is already accepting applications for telephones 24 hours a day at 7-Eleven outlets. A sweeping new regional economy in the making is history being made. On an unparalleled scale, the countries of Asia are building roads, constructing power plants, and laying telephone lines. Most of this flood of business will be financed the old-fashioned way, and suppliers will continue to bid to win contracts from government utilities. But overwhelmed by the unprecedented sums of money required, governments are also turning to the private sector. Jardine Fleming Securities, the Hong Kong firm, estimates that between now and the year 2000, Asia (excluding Japan) will spend $1.15 trillion on power, transportation, telecommunications, water supplies, and sanitation. But before you join the throngs of Western business people crowding Asia's airport terminals, examine the risks. Many governments still look on private investors with suspicion and seem philosophically unable to compensate risk (political risk, currency risk -- the list goes on) with commensurate reward. For example, the long payback period for infrastructure projects -- often as much as 20 years for builders of power plants and toll roads -- makes it crucial that investors know they will be able to convert local currency into their own to service debt, say, or to pay their equity investors. In countries like China, India, and Thailand, a sort of manic, Clintonesque indecisiveness has driven early investors to distraction -- will this deal ever get done? Will the terms be as originally agreed to? And cronyism and corruption are as much a part of business in Asia as steam turbines and switching systems. Many projects will never even make it to the drawing board. Taiwan offers a cautionary tale. In 1991, the government unveiled a grandiose plan to spend $310 billion on infrastructure projects over six years. Today, the investment has been cut in half. Foreign suppliers, stymied by the bureaucracy and by a convoluted bidding process, have found even the pickings that remain hard to get. Still, the inexorable logic of Asia's demand for services is hard to argue with. E.J. Santos, a director of International Finance Corp., the private lending arm of the World Bank, estimates that two billion people in Asia are without electricity; only 16 in 1,000 have access to a telephone. These numbers are as much the result of money poorly spent as of a paucity of money. Government ownership of utilities in the poorest and most populous Asian countries has been a spectacular failure. More than 20% of electricity generated in Pakistan and India, for example, is lost in transmission and theft. A conga line of financiers would like to help turn the lights on. A fund sponsored by American International Group and another by George Soros's Quantum Group with GE Capital have each raised some $500 million or more to invest in Asia's building boom. Suppliers, too, are swaying with anticipation. During U.S. Commerce Secretary Ron Brown's recent visit to China, AT&T announced that it had received a $500 million order over five years to provide equipment for Guangdong province. Alcatel, the French telecommunications company, says Asia will account for 20% of its total sales by the year 2000, up from 10% today. General Electric expects Asia to place 45% of all new power generation equipment orders over the next ten years. And Hong Kong billionaire Gordon Wu is positioning himself to become the Henry Ford of power generation as he churns out Model T's -- standardized electric plants from the Philippines to Pakistan. ASKED to choose the most promising countries for infrastructure development, Andreas Kley, a member of the board of Siemens's power generation group, says without hesitation: China and India. Moments later, he agrees that they are also the most problematic. Adds Kley's colleague, Juergen Oberg, Siemens's executive director for telecommunications in Asia: "If you want to remain a global player, you have to be in China. You will not be able to cut costs in the long run if your market does not include China." Together China and India have 40% of the world's population. Michel Reveillon, the new chief in Asia for GEC Alsthom, an Anglo-French manufacturer of rail transport and power equipment, suddenly interrupts a discussion of the prospects in China for mass transit systems to ask: "Do you know how many Chinese cities there are with populations of more than one million? Forty." (The U.S. has nine.) General Electric estimates that in the next ten years China will place orders for 168,000 megawatts in additional power generating capacity, and India more than 70,000 megawatts; the corresponding figure in the U.S. is 154,000 megawatts. GE expects foreign suppliers to get only a small share of Chinese business in the short term. Says Sheldon Kasowitz, a director with Jardine Fleming in Hong Kong: "Aside from the Four Tigers and Japan, every country in Asia is facing the same issues and making the same choices. They can't continue to fund these projects on sovereign debt." If Asia is to come close to investing $1 trillion in infrastructure, it needs to construct a reliable regulatory framework. Observes James Blake, Secretary for Works of Hong Kong, a model for building an enduring public- private partnership: "Governments must recognize that once a franchise has been awarded, they have to facilitate the process so the revenue stream becomes available when the debt needs to be serviced. That's the central role of the government." Investors can help themselves by creating deals that are fair. Mere moralizing? Maybe not. Says Frederic Rich, a partner with the New York City law firm Sullivan & Cromwell: "Even if a badly advised government is giving up more than it should, don't take it. It puts you at risk because if you're involved in an infrastructure project, you're going to be involved for ten to 20 years. If you look back at the history of infrastructure development in this century, a lot of it was basically on unfair terms between First World developers and Third World takers. Create a business structure that is fair, that is sustainable." At the same time, protect yourself when you get in bed with the government; the public and private sectors are seldom easily compatible. Vallobh Vimolvanich of TelecomAsia recalls with incredulity that a $5 billion contract the Telephone Organization of Thailand offered his company in 1991 was a mere ten pages long. Says Vallobh: "The TOT is both regulator and operator. There was no clear definition of how it would act." The final contract was much longer and clearly delineated the responsibilities of the TOT. It also allowed for independent consultants to monitor the work being done.

FIND WAYS to put the bureaucracy in a straitjacket, but don't hang your hat on contracts alone. In China, the old joke goes, a contract is a pause in the negotiation. Says Vanessa Chang of KPMG Peat Marwick: "The risk is, you could have a contract torn up or changed. We're just going to have to adjust to that in the West." Adds Robert Broadfoot, who heads the Political & Economic Risk Consultancy in Hong Kong: "Western companies think they can sidestep political risk by putting all the variables in a contract. In Asia there is no shortcut for managing the relationship. Too many Western companies don't have the patience." This doesn't mean graft. It does mean not parachuting in on Monday and flying back Friday. It means not only keeping your avenues open with the Ministry of Posts and Telecommunications in China but also plugging into the Ministry of Electronics Industry and the People's Liberation Army, since they play large roles in Chinese telecommunications. Remember that every time you make an alliance, you are just as likely to make an enemy. Going in where monopolies have ruled isn't simply business. Sometimes it can be like war. Embrace the need to build relationships. Put up with all the unctuous backslapping at Chinese government banquets. (Some people find American small talk wearisome too.) Introduce a government official to a business associate he might need to know. Above all, realize that the biggest business opportunities in a lifetime don't come easy. You have to die a little for them. The main problem is that Asian governments see you, daring investor, as a convenient way of funding an infrastructure project before you turn it back to them to operate. Unlike governments in Latin America, those in Asia (excepting Malaysia) have | shied away from privatization, opting mostly for so-called BOTs, for build- operate-transfer. As the name suggests, a company agrees to build and manage a power plant or a road for, say, 25 years before turning it over to the government. Robert Dewing, a Citicorp managing director in Hong Kong, observes that in reality BOTs are a short sojourn in the quasi-public market before a return to state ownership. BOTs and other ways of private financing in Asia require a mind-numbing analysis and allocation of risk. That's largely because sponsors raise funds secured only by the revenue and assets of the project; lenders have limited recourse to the assets of the parent company sponsoring the project. Says Sullivan & Cromwell's Rich: "It's not 'I will repay you X amount of money on X date.' It's just not that simple." A contractor, for instance, usually takes on the risk of completion of a project and pays stiff penalties for cost overruns or delays. Because lenders share all the risks with equity investors but none of the upside, it has been relatively difficult to raise debt for such financing. There is, in fact, too much equity chasing too few deals at this point. Funding will become easier as bond markets in Asia slowly catch up with equity markets. One example: Malaysia's well-developed capital markets enable independent power producers (IPPs) to fund large projects domestically. YTL, a local company, did a $585 million, 15-year, 10% bond offering to partly finance two private power plants. In September, YTL brought one of the plants onstream seven months ahead of schedule. IPPs are likely to take care of Malaysia's power requirements through the turn of the century, even though the economy grew by more than 8% last year and demand for power outpaced that. In other countries, a heavy dependence on foreign money tends to trip up deals for Westerners because it magnifies the mother of all investor concerns: currency risk. Kevin Files, deputy managing director of Wardley Capital, a Hong Kong investment bank that is part of the HSBC Group, estimates that 50 mainland projects are stalled largely because the Chinese government will no longer guarantee foreign exchange for power plants. "For countries whose currencies are not yet convertible or whose foreign exchange trading systems are not yet mature, governments have to guarantee the availability and convertibility of currency," says Joseph Ferrigno III, managing director of Bechtel Enterprises Asia-Pacific, whose projects include a $400 million tollway in southern China. "A reasonable rate of currency depreciation is a risk the private sector must take."

GETTING the final handshake on a deal is at least as harrowing as rounding up the money. Mission Energy, a subsidiary of SCE Corp., spent two years talking with the Indonesian government before it finally signed an agreement that will make it possible to build a $2.5 billion power plant in Paiton. Robert Edgell, Mission's executive vice president, lived for much of 1993 in Indonesia. But there's ample consolation for Edgell and Mission: By the turn of the century one-third of the company's revenues will come from the Paiton project, and beyond that, half of Mission's revenues will be from Southeast Asia. Indonesia, meanwhile, has created a template: It signed a similar contract last month with Gordon Wu after nine months of negotiation. Houston-based Enron raves about the streamlined approval process in the Philippines, which allows companies to get from bidding to construction in under six months. Once they shake hands, most business people think a deal is a deal is a deal. But that's not necessarily so with some Asian governments, which have a tendency to meddle. Last year, in a pitched battle with a Japanese-led consortium that was building an expressway in Bangkok, the Thai government quarreled over the level of tolls it had previously agreed to, and then over who had the right to operate the road. University of Illinois economics professor Pablo Spiller observes that, say, lowering the toll that can be charged on a road once it has been built is a subtle form of expropriation. Adds Boris Velic, a rangy Croatian who is a manager with the World Bank's Foreign Investment Advisory Service: "You can't pack up a road or a bridge and leave." Last year, the FIAS conducted a two-day roundtable on facilitating infrastructure investment -- held in, of all places, Bangkok. Says Velic: "We spent 99% of our time discussing how to speed up deals and create a regulatory framework that is transparent and predictable." Successive Thai governments have talked a lot about mass transit systems but made it impossible thus far for companies to build one. Frederic Rich describes the problem this way: "The death from 1,000 cuts is when you haven't been expropriated, but it takes ten times longer to do anything. Formal political risk, from ethnic violence, say, or expropriation, is insurable by political-risk insurance agencies. But . increasingly investors are understanding that projects can be derailed by little 'p' political risk." China and India are likely to make Western investors gray before making them rich. In 1992, India sought bids for cellular franchises in its four major cities. The specifications were so vaguely defined and the criteria for evaluation so capricious that the awards were challenged in court. Today there are still no phone-to-the-ear businessmen on the streets of Bombay, but there should be by 1995: The government just recently awarded cellular franchises for India's four major cities. Says Amit Sharma, Motorola's head man in Central and South Asia: "You have to wonder whether some subset of the bureaucracy said, 'If we're going to do this, let's do it on terms that are the least favorable to business.' " Businessmen grow grayer still when Asian governments, paranoid that private investors might take them for a ride, put an arbitrary cap on rates of return. After watching investors queue up to fund power plants, Beijing recently set a ceiling of 12% to 15% on the return that could be earned from all new power projects. Says Alan Epstein, a partner with the New York City law firm of Kelley Drye & Warren: "It's not an untypical reaction on the part of governments new to privatization. Matching risk and reward is a learning process." China is not learning fast enough for Gordon Wu, who says a 12% return is a nonstarter. He has seized the opportunity to take his power company into Indonesia, India, and Pakistan, where he plans to build plants and possibly spin them off on the local market. Sitting in his unpretentious office away from the chrome and glass that dominate Hong Kong's posh Central district, Wu outlines his plans to get economies of scale by standardizing plant design across Asia. Having just returned from India in August, Wu, a Princeton graduate, is all praise for the Indian and Pakistani governments. He repeats like a mantra the Indian Power Minister's remark that "there is no power more expensive than no power." Private participation in the pell-mell rush to build Asia's infrastructure is naturally driven by all the money to be made. But it can be infused with a higher purpose. Companies, after all, are delivering what people desperately need. For all the controversy that surrounded construction of that new tollway in Bangkok, driving it on a good day (traffic jams have not entirely disappeared) can feel like soaring on a rainbow. In a bold move last month, India laid out telecommunications guidelines that are among the most liberal in Asia. It opened up basic telephone service to competition and allowed foreign firms to take 49% stakes in any joint venture. For confirmation of why this was a popular move with consumers, visit the "Public Grievance Cell" at the oppressive offices of the state telephone monopoly in New Delhi. A government employee sitting closest to the entrance has a sign on his desk saying no enquiry please -- directed, presumably, at anyone who walks through the door. On a grimy wall across from him is a faded poster of Gandhi with the words: "A customer is the most important voice in our premises. . .He is not an interruption of our work. He is the purpose of it." OUTSIDE, people seem eager to share their grievances. Katayan Mishra opens a dog-eared file that includes an affidavit the government required attesting that he had, in fact, changed residence. He has been trying for two years to have his phone transferred to no avail. The conversation shifts to the government's decision a week earlier to break up its monopoly and allow private competition. "You'll pay a little more to private companies, but at least you'll get the work done efficiently." Mishra says. "Here they just push you around." His face clouds over with resentment as he rushes off to make his complaint yet again before the imperial doors close at 4 p.m. It seems unkind to tell him that 1,813 miles to the east, TelecomAsia was accepting phone applications 24 hours a day in Bangkok.

BOX:

INDONESIA MISSION ENERGY SPENT TWO YEARS TALKING WITH THE INDONESIAN GOVERNMENT BEFORE SIGNING AN AGREEMENT ALLOWING IT TO BUILD A $2.5 BILLION POWER PLANT IN PAITON. BUT BY THE YEAR 2000, A THIRD OF MISSION'S REVENUES WILL COME FROM IT.

INDIA INDIA IS LIKELY TO MAKE WESTERN INVESTORS GRAY BEFORE MAKING THEM RICH. TWO YEARS AGO IT SOUGHT BIDS FOR CELLULAR FRANCHISES IN FOUR MAJOR CITIES. NOT UNTIL 1995 WILL BOMBAY BUSINESSMEN BE WALKING THE STREETS WITH PHONES.