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Highway to growth

Amala Balakrishner
Amala Balakrishner10/25/2019 07:00 AM GMT+08  • 18 min read
Highway to growth
Infrastructure is the key to economic growth in Asia. Singapore, with its track record, wants to lead the way as a financing and facilitating hub for the sector.
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Infrastructure is the key to economic growth in Asia. Singapore, with its track record, wants to lead the way as a financing and facilitating hub for the sector.

SINGAPORE (Oct 25): Singapore’s container port, one of the busiest in the region, is all set to have a new and bigger home in Tuas. Its existing terminals at Tanjong Pagar, Keppel, Brani and Pasir Panjang are being gradually relocated to the new mega port, freeing up land for new projects such as the Great Southern Waterfront.

The new $20 billion terminal, to be operational in phases from 2021 to 2040 and featuring technologies such as 5G, will double Singapore’s current port handling capacity of 36 million TEUs (twenty-foot equivalent units) a year. “Officially, Tuas is designed to handle 65 million TEUs, but I am sure PSA can squeeze a little more out of it,” said Prime Minister Lee Hsien Loong on Oct 3, when he officiated at the ground-breaking ceremony of Tuas Port.

Singapore’s new port is more than just about size. More importantly, it will be a key node in the global supply chain. From the city state, ships ferry goods to and from 600 ports around the world. And, this seaborne activity is only part of an entire ecosystem backed by financing and insurance companies, maritime law experts, commodity brokers, ship surveyors and shipyards.

At the opposite end of Singapore lies Changi International Airport, which is constructing its fifth passenger terminal. Just like the Tuas mega port, Changi is a hive of activity. Upon completion in 2030, the $10 billion T5 will help bring Changi’s total passenger handling capacity to 150 million a year — double its current capacity.

The airport has also reinvented itself as a lifestyle destination with the recent addition of retail mall Jewel Changi Airport. Since it opened its doors four months ago, it has attracted 50 million visitors. At its official opening on Oct 18, Lee said Jewel was more than just infrastructure — it symbolised “a dream to create new possibilities for [Singapore]”.

Lee’s high regard for PSA and Changi Airport underscores the critical role both play in Singapore’s economy. In 2018, Singapore’s harbours and airport contributed 7% and 6% respectively to the city state’s GDP.

Still, the numbers do not tell the full story of the impact infrastructure has on Singapore’s wider economy. Breaking down the benefits, Sharad Somani, partner and head of power and utilities at KPMG, says, “First, you generate jobs, which in turn will generate a fair bit of economic activity in the country. Second, it leads to good economic growth by improving the quality of life and creating opportunities for the people.”

Professor Phang Sock Yong of Singapore Management University (SMU), who specialises in urban economics, agrees. Since independence, Singapore’s strong growth trajectory has been boosted by key infrastructure such as its ports as well as the constant improvements to the land transport infrastructure, which in turn has improved the standard of living, she says.

Such developments have propelled Singapore to become the world’s most competitive economy, according to the World Economic Forum in its Global Competitiveness Report released earlier this month. The city state also received the top score for infrastructure, one of the 12 categories assessed.

Financing the mega projects

Singapore’s success with infrastructure projects gives it more than bragging rights. As a key financial hub, it wants to play a more active role to support the growing infrastructure needs of emerging Asia. After all, the US$20 trillion ($27.3 trillion) investment needed until 2030 to meet Asia’s infrastructure needs is equivalent to the amount needed to “develop the infrastructure to support the population of one Singapore every week”, according to Indranee Rajah, minister in the Prime Minister’s Office, in her keynote speech at the inaugural Singapore Regional Infrastructure Summit (SRIS) in August.

Singapore is also looking to be Asia’s infrastructure financing hub, as it has “accumulated expertise in planning, executing and operating infrastructure over a wide range of sectors in its 50-year journey of urbanisation”, she added. And if Singapore can facilitate the creation of a better-developed Asean or Asia, there will be a bigger, more prosperous market for the country’s goods and services.

To this end, Infrastructure Asia, a project facilitation office, was set up last October by trade promotion agency Enterprise Singapore and the Monetary Authority of Singapore. IA, managed by a team consisting of former bankers, consultants and trade promotion officials, undertakes advisory work on the entire chain of infrastructure development: pre-feasibility, feasibility studies, planning, construction, building, operation and maintenance (see Chart 1).

In the past year, IA officials have met more than 300 international developers, financial institutions and multilateral development banks to broker deals and share best infrastructure-related practices in the region.

This year, IA is looking to double the number of companies it wants to help and be more relevant to regional markets, its executive director Seth Tan tells The Edge Singapore. Tan, who was formerly with DBS Bank and BNP Paribas, is currently working on 18 cases in seven regional markets: Myanmar, Indonesia, Vietnam, the Philippines, Cambodia, India and Bangladesh.

For example, IA, together with Surbana Jurong, a regional infrastructure and construction firm headquartered in Singapore, is checking out the power and natural gas distribution systems in Myanmar’s New Yangon City.

Another prominent project is the US$500 million China-Singapore Co-Investment Platform announced in April that IA brokered between Surbana Jurong and China’s Silk Road Fund. Surbana Jurong will invest in greenfield infrastructure projects that meet sustainable environmental, social and corporate governance metrics.

Tan claims that with IA’s advice, financiers are now giving certain projects a second look. “We make regional infrastructure cases more viable and attractive to Singapore’s private sector by helping regional government counterparts create an enabling environment through knowledge sharing and capacity building.”

Tan notes that Singapore is well poised to be a financing hub for infrastructure projects. Besides having an idle pool of capital, the city state stands out as a mediation hub too, which comes in handy in the event of disputes among partners in infrastructure projects that can take many years to settle.

Matthew Osborne, partner at law firm White & Case, says: “Singapore’s transparent body of law ensures predictability in terms of regulation of projects.” For example, the country can play the role of legal adviser on streamlining the process of tendering for a project and ensuring that contracts are fairly drafted — with full disclosure of the true cost of the project and the laws governing it. This would help bridge the project funding gap and encourage greater participation from private investors, he notes.

Meanwhile, on the financial front, Subash Narayanan, deputy head of project finance at DBS Bank, says the city state can leverage its strong capital flows to be a financing hub for infrastructure projects in Asia. Already, some 60% of such transactions are advised by Singapore-based banks, thanks to the transparency of the financial system here, he notes. Of these, he says, DBS holds about 7% market share in regional infrastructure project financing, and he expects the figure to grow in the coming years.

But how much more can Singapore do when multilateral development banks such as the World Bank, the Asian Infrastructure Investment Bank (AIIB) and the Asian Development Bank (ADB) are already playing a major role? IA’s Tan says the roles are not mutually exclusive because Singapore can work closely with these institutions to create the net benefit of a stronger system capable of supporting more projects.

Wong Heang Fine, group CEO of Surbana Jurong, agrees. He says Singapore can act as a “big brother” in infrastructure projects, as its “growth story will prove relevant as a learning model to the less-developed Asian countries”. He foresees a knowledge transfer between governments and private companies, which again could bridge the current gaps in funding and information.

Need for partnerships

Indeed, Singapore’s private-sector players have played an active and critical part in building its infrastructure projects. KPMG’s Somani says “focused collaborations” between the Singapore government, which is willing to fund major projects, and the private sector, which is interested in sharing the rewards for taking on economic risks, have been successful in attracting infrastructure investments.

A recent report by White & Case (see Chart 2) shows that 32 of the 100 investors surveyed considered Singapore’s infrastructure opportunities in 2020 “exciting”, making it the Asian country with the most attractive infrastructure offerings. The investors were also asked on their interest in investing in infrastructure in countries in Asia: India, China and Malaysia were the top countries investors were interested in.

However, the survey also showed that with the exception of selected economies such as India, China and Korea, the wider Asian region has not been as successful in luring investors. Complexities in land rights and regulatory approvals, along with the absence of transparency in attracting bidders during the procurement process, were key factors that dissuaded private investments.

A case in point is the delay faced by Singapore Exchange-listed engineering firm ISDN Holdings in completing a hydroelectric plant in Indonesia, which took six years instead of the two years scheduled. Many locals had turned up at the site claiming they owned the rights to the land on which the plant was to be built — after plans to build the plant was announced.

Such instances show the inexperience of some governments in project implementation. This results in delays, which cause apprehension among investors, as they are unsure about the viability of the project, says Osborne, a partner at White & Case who advises on legal issues related to infrastructure projects.

Despite the complexities, there is a pressing need for new investments in infrastructure. According to KPMG’s Somani, infrastructure investments account for a mere 1% to 3% of the total investments committed in several Asian countries. This is the reason why, for instance, only a quarter of the population is connected to the electricity grid in Myanmar. “With so many people not being on the grid, the opportunities for economic growth become very limited,” he says.

Data from ADB shows that Asia requires US$26 trillion of infrastructure investments up to 2030 to meet the needs of a growing population. “If you put this [in] per annum terms, it would mean Asia needs US$1.7 trillion annually, which is more than twice the US$881 billion currently being spent in the region,” said Indranee at the Singapore Regional Infrastructure Summit. “[The growing population] will lead to an increase in demand for power, transport needs, sanitation, telecommunications and water.”

Owing to the significant commitment involved, governments have long been relied on to fund infrastructure spending. The burden is even heavier for Asian governments, which foot 90% of infrastructure spending in the region compared with their counterparts in emerging markets (70%) and worldwide (40%). Indranee calls this level of reliance on public funding “unsustainable”.

“A marriage between the public-sector project needs and private-sector capabilities and expertise is required. Proper feasibility studies and impact analyses are [also] needed to convince both investors and the beneficiary citizens of the benefits of the project,” said Indranee. There is also a need for legal reforms to develop an enabling environment for project development and investment facilitation. “Stakeholders will need assurance that their exposure is within their risk appetite and profile, while financiers need a degree of certainty that they will either get back something or if they don’t, that it is within the acceptable margin of loss,” she added.

Teo Eng Cheong, international CEO of Surbana Jurong, agrees that the “gap between demand for infrastructure development and access to funding” is a challenge that has restricted development. Indeed, Asia’s infrastructure needs are so vast that governments and multilateral development banks cannot fund them all on their own. This is the gap that private companies such as Surbana Jurong can bridge, he notes.

For instance, his company advised on the master-planning of new cities and townships in New Clark City in the Philippines and Dagon Seikkan Township in Yangon, Myanmar. It has also been involved in the development of the Jakarta-Bandung High Speed Rail project and the Bakun Hydroelectric Power Plant in Sarawak, East Malaysia.

Teo admits that the process is not always smooth sailing for private companies, especially when the long gestation period of infrastructure projects casts doubt on their success. A lengthy project also increases the difficulty of managing risks and finances. In addition, disruptions to existing communities lengthen the time taken for projects to turn a profit.

“Infrastructure takes a long time to plan, design and build, and if it is done as a public-private partnership [PPP], the concession period required for payback will take even longer. This implies that whatever legal framework and contracts that infrastructure developers and operators rely on must stand the test of time,” Teo points out.

Challenges in financing

More often than not, infrastructure projects are doomed to fail because of inadequate planning. One example is Malaysia’s Melaka Gateway project. Launched in 2014 with investments from Chinese company Power Construction Corp of China (PowerChina) and support from the government, the project comprised a new port, specialised economic parks and tourist attractions. Backers of the project invoked Melaka’s centuries-old heritage and wanted to revive the city’s role as a trading hub so that it could play a role in the China-led Belt and Road Initiative.

Unfortunately, reminiscing about the good old days is not sufficient for the project to take off. Francis Hutchinson, senior fellow at the Institute of Southeast Asian Studies, notes that additional funding is needed for the entire plan to be implemented. In fact, there is actually no pressing need for Melaka to develop as a port, given its proximity to Port Klang, Tanjung Pelepas and, of course, Singapore.

Data from ADB shows that from 1991 to 2015, out of a total of 6,273 projects worldwide, 259 PPPs projects in developing countries were cancelled while 67 were distressed. About 55% of the cancelled projects were in Asia, particularly from the transport and energy sectors. The remaining projects were in Latin America (40.8%), Africa (2.9%), Europe (1.1%) and the Middle East (0.7%). The problems were due to a mismatch of expectations between the government and private operator as well as a lack of finances.

Lack of political will or indecision on the part of the authorities can also cause a project to be delayed or abandoned. Take, for instance, the Hanthawaddy International Airport in Myanmar. Conceived in 2001, the project was halted several times, owing to a frequent change of airport operators. In 2012, the Myanmar government awarded the project to a consortium comprising Incheon International Airport, Halla Engineering & Construction Corp (now known as Halla Corp), Lotte Engineering & Construction Corp, POSCO ICT and Kumho Industrial Co. Subsequently, in 2014, the project was awarded to another consortium comprising Yongnam Holdings, Changi Airport Group and JGC Holdings Corp. Its completion has now been pushed back to 2022.

Back home, there is the case of SGX-listed Hyflux, a high-profile water and power firm that failed spectacularly. Trading in Hyflux has been suspended since April 2018 when it could not meet its financial obligations following a failure in operating the Tuaspring Integrated Water and Power Project, one of Singapore’s most ambitious desalination projects.

In other scenarios, several S-chips have become penny stocks with challenging financials. And, in one case, water and environmental service provider Bio-Treat Technology could not deliver several projects and had to default on its bonds. It eventually saw several rounds of restructuring, resulting in new shareholders and a name change.

Elsewhere, Hong Kong- and Shenzhenbased Hutchison Port Holdings Trust has seen its share price tank since its listing in 2011 at US$1. This follows lower throughput volumes, as its ports are concentrated near other transshipment hubs. Units in the trust closed at 16 US cents on Oct 24. With infrastructure providers squeezed for profits, this means investors should think carefully before putting their money into such projects (see “Infrastructure a long-term investment that requires patience” on Page 13).

Prioritisation, preparation, process

In any case, KPMG’s Somani suggests focusing on the “three Ps” to minimise the failure of projects, particularly those involving both governments and private-sector players.

The three Ps are prioritisation, preparation and process. By prioritising their projects, governments signal to private companies what they should focus on so that they can plan better. Deals on the projects should also be better structured and made more feasible to ensure a higher chance of success. Lastly, a transparent process with the standardisation of documents by a credible and independent third party, such as ADB, will ensure that projects are better structured and more bankable, he adds.

To prevent this problem, Indranee said the bankability gap — which happens when cash flow is insufficient to meet the obligations of the project — needs to be bridged. Using the example of a PPP for a power plant, she said the project would not be considered bankable if the concession period was too short, or the tariffs were set so low such that the company was unable to recover its capital expenditure and make a decent return on investment. “If a project is deemed as neither bankable nor investible, it means that banks will not lend and investors will not put in the money, as they cannot get back sufficient returns within a reasonable time frame or the risks are just too high.”

But, as Singapore has shown, if done right, the returns are high. And, with data from the United Nations showing that 68% of the world will live in cities by 2050, the city state’s expertise in infrastructure development will enable it to be a facilitating hub to propel urbanisation and infrastructure development in Asia.

Clean and green: The future of infrastructure

Infrastructure players have been trying to shake off the imagery of grey concrete and black bitumen. The buzzword is “green”, and if the industry players are to be believed, giving some attention to building in a sustainable manner is no longer a nice public relations exercise but is needed to mitigate further damage to the environment.

“Infrastructure built should not contribute further to climate change, through deforestation, ecological damage and carbon emissions,” said Indranee Rajah, minister in the Prime Minister’s Office, in her speech at the inaugural Asia Infrastructure Forum on Oct 2.

For this to happen, she said, Asia needed “green infrastructure” that focused on better management of energy, water and land. This would also incorporate innovative solutions and technology along with building materials that were responsibly sourced and durable. Indranee noted that such developments should become “more resilient in times of disruption” as they factored in social, financial, economic and environmental concerns.

A significant proportion of investors are already aware of the risks changes to the climate and the environment pose. In a survey by law firm White & Case earlier this year, 38 out of 100 respondents said they were investing in infrastructure projects in countries where disaster recovery and protection against climate change were a priority (see chart).

However, with the United Nations’ observation in its Global Humanitarian Overview for 2019 that Asia-Pacific is the world’s most disaster-prone region, vulnerable to both sudden and slow-onset disasters, there is a need to change the thinking of the 24% of respondents in White & Case’s survey who said their business model has not changed to accomodate climate change and weather risk.

Singapore is getting ready to play a more active role. Infrastructure Asia (IA), a government agency under Enterprise Singapore and the Monetary Authority of Singapore, is trying to see where it can bridge the “green financing gap” for Asean.

According to DBS Bank and the United Nations Environment Programme, the current annual Asean flow of green finance supply is estimated at US$40 billion ($54.52 billion) against an average annual demand of roughly US$200 billion between 2016 and 2030. This implies that total annual green financing will need to increase by 400% to ensure that Asean green investment needs are met by 2030.

Among the measures taken are IA’s plans to standardise half of the terms in its project finance documents, shorten the timescale for project development and improve transparency in procurement and contracting processes. IA will also design a programme together with the World Bank to help governments and companies build capabilities needed to formulate and implement projects.

On the company level, Wong Heang Fine, group CEO of Surbana Jurong, says companies can “make better use of technology and innovation such as building information modelling, virtual and augmented reality, data analytics, drones and autonomous vehicles to mitigate or resolve the challenges of rapid urbanisation and climate change”.

After all, as Seth Tan, executive director of IA, says, “the infrastructure of the future cannot be the infrastructure of the past”, and this requires projects to be sustainable so that developments can last for generations to come.

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