Sunday, 17 February 2019

Hubbing in Singapore

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Singapore, with its developed infrastructure, has a new offering to its neighbours. It is presenting a platform that will help them address issues on infrastructure development, at the same time encouraging a best-practice approach. By Minerva Lau.

To see the full digital edition of the PFI Asia Best Practice Report 2014, please click here.

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The Asian region has been enjoying good economic growth in the past few years, weathering well the effects of the latest bouts of volatility in the global financial markets. In its latest Asia and Pacific regional economic outlook, the International Monetary Fund (IMF) says the outlook for Asia is one of steady growth and it forecasts that GDP growth will to improve to 5.5% in 2014–15. While economic developments in Asia remain uneven, the region will continue to be among the global growth leaders, it stated. The developing Asia region is expected to extend its steady growth. Indeed, the long-term trend is clear and unstoppable, and the largest amount of growth is going to be in this part of the world.

However, while there has been good progress, infrastructure development in Asia still lags behind its economic growth and international standards in terms of quantity and quality. The rapid growth in several major developing countries has caused huge pressure on infrastructure, and the lack of adequate infrastructure is causing delay to further growth.

The Asian Development Bank and ADB Institute have also published a book addressing infrastructure in Asia and the major challenges in developing regional infrastructure, such as costs and benefits, financing requirements, and infrastructure priorities in the region.

Asia faces new and old risks – geopolitical uncertainty, the exit from unconventional monetary policy in the US and low inflation in the eurozone.

“The main external risk remains an unexpected or sharp tightening of global liquidity. Rapid movements in global interest rates could lead to further bouts of capital flow and asset price volatility. Pockets of high corporate leverage in some Asian economies could magnify the effects of higher interest rates and lower growth on balance sheets and weaken domestic demand,” the report says.

Indeed, with such a scenario, infrastructure development becomes more necessary and urgent in order to sustain economic growth. At the same time, rapid urbanisation and development in Asia has given rise to the need for US$8trn worth of infrastructure investments between 2010 and 2020. Progress has been made, but Asia is still lagging behind the developed countries.

Working together, countries in the Asia-Pacific region can unlock their vast economic potential and achieve sustainable growth, thereby eradicating poverty, the ADB said, adding that nearly two-thirds of the world’s poor live in developing Asia.

Rapid urbanisation

Rapid urbanisation and the unstoppable development in Asia has indeed given rise to the need for an estimated US$8trn worth of infrastructure investment between 2010 and 2020. Asia is projected to add a further 1.4bn urban inhabitants to a significant total of 3.3bn by 2050. Even if only a fraction of this huge infrastructure requirement gets developed, it will generate significant economic activity in Asia, according to 2012 United Nations on World Urbanization Prospects.

And Singapore sees plenty of opportunities to further economic growth.

“We see the next phase of Singapore’s growth shaped by seven game-changing global trends,” International Enterprise (IE) Singapore CEO Teo Eng Cheong wrote in a position piece to celebrate IE Singapore’s 30th anniversary. And the first trend is urbanisation in Asia, which will present tremendous infrastructure opportunities.

Despite large-scale urbanisation in recent times, the proportion of urban population in many Asian countries is still 50% or below, compared with about 70% in most developed economies, he wrote, citing the 2012 United Nations report. With increasingly open economies, rising incomes and technological advances, Asia will continue to urbanise at a fast pace. By 2050, it is estimated that Asia will add a further 1.4bn urban inhabitants to a total of 3.3bn. The bulk of the future urban population is likely to be concentrated in large cities with more than 1m people and mega-cities of more than 10m inhabitants.

With massive urbanisation comes huge infrastructure needs -from public housing to power generation and public transport systems. In addition, there will be economic activity related to infrastructure financing, management and other spin-offs. Consumption is estimated to increase by 1.6% for every 1% increase in urbanisation. Even if only a fraction of this infrastructure gets developed, it would generate a lot more economic activity and business opportunities in Asia, wrote Teo.

The pace of project development, however, has somewhat flattened in the past few years. The demand for infrastructure is still tremendous, resulting in a widening infrastructural gap. Looking alone at PFI’s league tables for the Asia-Pacific region (including India and Australia) during the last 10 years (2004–2013), the amount of project finance loans raised reached a peak in 2010 despite the then ongoing global financial crisis. The PF market was boosted by the predominance of the Indian market at that time, contributing more than half of PF transactions in Asia-Pacific and a quarter of the global market share. The big US$12bn one-time refinancing of Taiwan’s high-speed rail then also added to the huge figure. The PF figures then slid down and last year’s transaction volume was even lower than that in 2008.

”The global demand [for infrastructure development] to a large extend in Asia-Pacific is tremendous. But we also see a significant problem – the realisation rate of infrastructure implementation is very much way below of what is actually required. There are various calculations but this could range between maybe 10% and 15% of that actually being realised,” said Kow Juan Tiang, group director for environment and infrastructure services at IE Singapore. “So there’s a tremendous gap between what is actually required out there in the market and what actually is being realised in past 10 years,” he added.

Everyone knows that the requirement for infrastructure will only go up, not down. The rapid urbanisation in the region and the “rate of people moving from rural population to urban population is increasing and accelerating”, said Kow. Thus, the demand for infrastructure will only go up. “Going forward, it is required even more, so that is a very serious problem,” added Kow.

A platform

Singapore sees a potential to meet the gap by playing the role of the region’s infrastructure hub, where project development, financing and execution can take place. Singapore can play a part in helping reduce this gap. As an infrastructure hub of the region, the city state can offer a platform for discussion among different parties involved in the procurement and development of a project.

Strategically located in Asia, Singapore is well-positioned to be Asia’s infrastructure hub with the presence of a strong cluster of companies involved in various parts of infrastructure development. It is also a leading business centre with many financial institutions and specialists that have the expertise to undertake infrastructure project structuring and financing.

“Singapore is well-positioned to drive infrastructural developments in Asia due to three key areas – one, we have strong engineering capabilities; two, we are a financial hub with wide-ranging financing tools; and three, we have a robust legal framework. These elements are essential for infrastructure projects and we have the ability to integrate them,” said Kow.

The initiative to be the infrastructure hub for Asia is led by IE Singapore, the government agency driving Singapore’s external economy. It spearheads the overseas growth of Singapore-based companies and also promotes international trade.

IE Singapore has so far held two Asia-Singapore Infrastructure Roundtables, providing the platforms for discussions: the first was in October last year and the second was held in March this year. They were not roundtables per se but “more of a congregation of government, policy-makers, banking sector and private developers”. IE Singapore gets all of them to come together to discuss infrastructure issues not only at the macro level, but also at the micro level and issues on specific projects.

IE initiated this roundtable for a few reasons, said Chua Taik Him, deputy CEO of IE Singapore, at the recent roundtable. “The first, is to raise awareness about trends and opportunities in Asia’s infrastructure sector,” he said. ”This is an area that Singapore companies have strong competencies and good track records in. We want to involve more companies across the value chain. This includes asset owners, developers, advisers, lawyers, as well as engineering and construction firms. This roundtable will help companies keep up with market trends ahead of time and capture new opportunities.”

The second goal, he said, was to provide a platform for Singapore companies to meet project owners and developers from around Asia. “We intend to shorten the evaluation and decision-making process. The discussion will be structured, with the relevance and challenges of potential issues being identified earlier. This joint effort will help us advance through such large-scale as well as complex projects. It also allows for the sharing of insights on business models and project viability,” said the deputy CEO.

Not just a talk shop

“We do not want it to be just a talk shop. We want it [to cover] specific projects as well so that policy-makers, developers, and bankers come together to discuss specific issues about a project. We are trying to bring all these people together to discuss these [issues] on a regular basis, both from macro and micro perspectives – that is one major thrust that we are actually doing,” reiterated Kow.

The group director elaborated on two areas that the agency is focusing on to help increase the implementation rate of infrastructure projects. One is providing the platform for discussions on how best to address problems in implementing a project , among the different parties involved in the development of a project – the developers, advisers, financiers, lawyers, engineering and construction firms as well as the policy-makers. Best practices will also be introduced during these discussions. While practices may differ from one country to another, discussions provide more understanding and transparency, so that issues can be addressed and resolved.

IE Singapore believes that there is an ecosystem here where people can benefit – not only are the financial institutions here, but the engineering firms and the university departments specialising in public policies are also present. This creates an ecosystem that allows for the testing of investment ideas and an environment where knowledge can be tapped into and shared.

One of the factors why implementation and realisation of an infrastructure project has been slow is the structuring of the projects, which may not have been comprehensive. Sometimes the delay could be due to government policies or sometimes the lack of understanding of the project itself. Thus IE’s offer of a platform for discussion presents an opportunity for a better understanding of the issues and problems relevant to the implementation of the infrastructure projects, with the relevant parties present.

Sometimes there are other agendas, including politics. The elected government leaders would want votes, and in providing the services, they will be able to garner votes. It may seem straightforward but in reality it is more complicated.

Water supply

An example is water supply, which residents of some countries still think is free. Water is a precious commodity in the city state as it imports a big portion of its supply from Malaysia. One water supply contract expired in 2011 and another is to expire in 2061. Ahead of the date, the country already has put up plans to have its own sources of water supply.

All new water supply plants have been put up for tender under the PPP model. Singapore now has two desalination plants and four newater plants, all developed and operated by the private sector. Newater is high-grade reclaimed water largely for industrial use, and a fifth plant is currently up for bidding.

There is a price for water, and in Singapore it is at a relatively high level. But that ensured the continuous and sufficient supply of potable and industrial water during the recent drought – in January to March. “We have invested in water recycling and water re-use, and we priced water correctly. That is best practice,” said Kow.

A Singapore-based consultant is currently working with the Delhi Water Board, bringing knowledge on water re-use and PPPs. Thus, already, the experience in Singapore of the water sector is being shared with other economies, possibly based on a best-practice structure.

Besides the roundtables, IE has dedicated programmes with the multilaterals. It recently announced the official start of operations of the Asia Infrastructure Centre of Excellence (AICOE), an initiative together with the Asian Development Bank (ADB) to catalyse infrastructure development in Asia, starting with South-East Asia.

The AICOE will work with governments to identify their infrastructure needs and create bankable projects through private-sector participation and investments. It is funded at US$13.5m over three years, jointly committed by the ADB, Singapore government agencies led by IE Singapore, and the Canada Department for Foreign Affairs, Trade and Development.

Heading AICOE is Phillip Crotty, previously an independent director at the Bank of India, and principal and managing director in New Zealand Asset Management. Crotty is a familiar name in the PF world and brings with him expertise in PPP project financing.

The AICOE will support initiatives in areas such as power generation, waste and water management and transport. It will be working with governments in Indonesia, Malaysia, Philippines, and Thailand, to discuss both greenfield and brownfield projects. It will facilitate the sharing of PPP experience and policy-making within the region.

The other focus is on manpower capacity, as there are not enough trained personnel for infrastructure development. IE Singapore has set up an infrastructure development internship (IDI) programme that is a collaboration with the National University of Singapore (NUS). It provides opportunities for students who want to get a foot in the infrastructure door and experience what this booming industry has to offer. 

Singapore indeed is located strategically in the region, and with all the capabilities that it has built up – financial, technical and legal – it can play a role in increasing the amount of infrastructure projects that can be pursued and developed through the platforms that it provides.

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