Singapore: A hub for sports
The Sports Hub project shows that appetite exists for the right projects. By Lynn Tho and Audra Low, directors of project finance, global banking HSBC, and Nick Merritt, partner, and Nicky Davies, counsel, at Norton Rose.
This article was first published in the PFI Yearbook 2011
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Much has been already been written about the Singapore Sports Hub project since it reached financial close in August this year and deservedly so. Procured as a public-private partnership (PPP) project but with a number of unique features, it is the largest sports facilities infrastructure PPP project undertaken globally to-date. But perhaps more importantly, it demonstrates that even in the wake of the global financial crisis, there is appetite to lend to the right projects with a proper structure.
The story behind this project began in 2006 when the Singapore Sports Council (SSC) issued the tender documents for a project to design, construct, finance, operate and maintain a sports, entertainment and lifestyle hub over a 25-year term. The goal was to create the world’s first integrated land and water sports and lifestyle complex with not only world-class sporting facilities but also extensive retail and commercial space.
The project is to be located on a 35 hectare site in Kallang, Singapore, home to the existing national stadium and the Singapore Indoor Stadium. As part of the project, bidders were invited to submit plans for the construction of a new national stadium as well to take over day-to-day responsibility for running the Singapore Indoor Stadium.
Bids were submitted in 2007 and the consortium consisting of Dragages Singapore, HSBC Infrastructure Fund, United PREMAS and Global Spectrum Pico was appointed the preferred bidder by SSC in January 2008.
Financial close, which was targeted for mid-2008, was delayed due to the onset of the financial crisis that destabilised the global financial markets. To add to the challenges of reduced availability of credit during the crisis period, the consortium also had to contend with inflationary pressures on construction costs and downward pressures on sponsor returns resulting from the prevailing more challenging economic conditions, as an element of the return is reliant on third-party revenues generated by the facilities.
During this period the consortium worked closely with the SSC to ensure the financing of the project remained competitive but adapted to post-crisis financing conditions. When financial market conditions improved, a funding competition was subsequently launched in early 2010 that attracted strong interest from the banking market. In August 2010, the consortium signed the concession with SSC and achieved financial close with a club of 11 banks.
With construction now already under way, the new Sports Hub will boast facilities such as a new 55,000 capacity National Stadium with a retractable roof; a 6,000 capacity (3,000 permanent seats with the option to go up to 6,000 with temporary seats) indoor Aquatic Centre that meets world tournament standards; a 3,000 capacity multi-purpose arena that will be scalable and flexible in layout; a water sports centre; the existing 12,000 capacity Singapore Indoor Stadium; and supporting leisure and commercial development
Financing and the impact of the financial crisis
PPP projects demonstrated remarkable resilience during the credit crunch; procuring authorities and project sponsors were able to adapt from the more straightforward long-term financings to mini-perm structures or to incorporate significant cash sweeps, such as the M25, where HSBC also acted as financial adviser, or to tap into government backed financing, such as the Greater Manchester Waste PFI, both of which reached financial close in 2009.
HSBC acted as lead financial adviser to the consortium. It was also one of the mandated lead arranging banks providing both senior debt and a sizeable portion of the equity bridge loan, and is the facility and security agent and account bank for the project loan facilities.
Norton Rose acted as the lead legal adviser to the consortium. The lenders had Ashurst while Hogan Lovells advised the Singapore Sports Council and Ministry of Community, Youth and Sports.
Bank due diligence commenced in early 2010 following the funding competition. The due diligence process, which was completed over a four-month period, was a testament to the collective focus of the banks, their advisers and the consortium. This was especially so given the scope of the project, as it required a number of bespoke subcontracts in addition to the more traditional PPP contracts to be explained and presented to the respective credit departments.
For the project, the consortium worked closely with SSC and the Ministry of Finance to review the financing options, including the provision of a government bridge facility, until market conditions stabilised. The financing was subsequently restructured from a fully underwritten long-term debt facility provided by a group of six banks to a 10-year loan facility, with a balloon at the end of year 10, based on a 24-year notional tenor.
Refinancing risk was shared between the consortium and SSC. The banks that provided the loan on a club basis were BNP Paribas, Bank of Tokyo Mitsubishi UFJ, Credit Agricole CIB, DBS, HSBC, NAB, Natixis, OCBC, SMBC, Standard Chartered and WestLB. HSBC, NAB, Natixis and SMBC also provided the equity bridge facility. The project’s debt to equity ratio remained relatively unchanged at around 85:15.
A unique structure
In a typical PPP structure, the project company will engage a subcontractor to construct the facilities and another subcontractor to operate and maintain those facilities to enable the procuring authority to carry out its business at the facilities. However, this project is unusual as the project company is also charged with running the day-to-day activities at the facilities in a way that complements SSC’s broader objective of facilitating and encouraging sport in Singapore.
To fulfil this requirement, the consortium engaged a wide range of accomplished international players with global experience in such diverse activities as running key infrastructure (including stadia and retail malls), organising and marketing major marquee events and exploiting commercial rights to maximise the project’s revenue generating capability.
The project ultimately incorporated the more traditional PPP contracts, such as the S$1.33bn construction contract and facilities management contract, with entities that had experience in the UK and Australian PPP markets, as well as a range of other contracts with various entities that had little or no experience of the PPP as a procurement model. As a result, the parties within the project team had to work harder to understand the unique aspects of one another’s industries and the parameters within which the contract had to be structured to make each a workable and bankable document.
The diverse nature and number of subcontractors and the interactivity between them provided further challenges in the context of the interface agreement. The key objective of the agreement for the project company was to manage risk and provide a seamless service delivery across each of the various activities occurring simultaneously on site.
Even in the context of plain vanilla PPP deals with only two subcontractors, the interface agreement is often a complex and heavily negotiated document. In the case of the Sports Hub, it was further complicated by the multi-faceted nature of the services being performed by the multitude of subcontractors involved in the project.
Also, the interfaces were not only relevant in the transition period towards the end of construction and during the early operation period, as is typically the case, but also from financial close throughout the project term as the Singapore Indoor Stadium was operational from day one.
By way of example, the parties needed to consider not only the impact of defect rectification works or scheduling of maintenance in terms of the availability of the venues and potential impact on the monthly tariff by way of unavailability deductions, but also on the events calendar and the project company’s ability to accept bookings in any given period.
An added degree of complexity was created within the interface agreement because certain subcontractors would only be appointed at a later date to carry out specialist retail management, catering and ICT functions. The documentation therefore had to anticipate the future involvement of these additional subcontractors with flexibility to adapt at a future date when the terms of those contracts crystallise.
Assuming control of operations at an existing facility
One of the more surprising challenges that presented itself was related to the transfer of the existing activities at the Singapore Indoor Stadium. The challenge was twofold: first, to manage a seamless transition between the SSC team and the project company and second, to anticipate and prepare for the actual date of the transfer.
The nature of the business at the Singapore Indoor Stadium involves accepting bookings and entering into contracts for events sometimes many months in advance. As a result, the existing SSC personnel at the Singapore Indoor Stadium and the project company team needed to work closely together over a period of many months to ensure a smooth transfer from SSC to the project company.
From the project company’s perspective, it not only needed to have a full understanding of the existing commitments at the Singapore Indoor Stadium, but also the contractual requirements and potential risks in relation to events that were booked prior to it taking control but that actually took place after the transfer date as it would ultimately be the project company’s responsibility to deliver those events.
The timing was also critical as there needed to be a physical transfer of certain infrastructure to reflect the change in management – for example, changes needed to be implemented to the existing website (which was linked to the Singapore Sports Council domain) immediately upon transfer to the project company. This necessitated a degree of certainty of timing in terms of predicting when financial close would occur – this was another ball that needed to be juggled simultaneously with the satisfaction of the conditions precedent and swaps to reach a co-ordinated close.
Multiple payment streams and fluid cashflows
Another unique element of the project relates to the fact that the project company not only receives a monthly tariff in respect of the basic steady-state operation but is also incentivised to maximise the usage of the facilities and ensure a vibrant, popular calendar of events. These incentives come in the form of a sharing mechanism with SSC in respect of the third-party revenues generated at the venues, whether through ticket sales, venue hiring income, commercial rights income, car park charges or retail rental fees.
It is not uncommon for PPP projects to include some elements of third-party revenue as a means of defraying the tariff but not on the same scale as the Sports Hub. The dynamic nature of the facilities and the unpredictability in terms of usage of those facilities required some novel thinking in terms of issues relating to budgeting, life-cycle and future investment. In effect, the project company is not just managing cashflows in receiving a monthly tariff and diverting monies to debt service and fixed price O&M arrangements, but actually managing a business with fluctuating incomes and outgoings.
As a result, lenders and sponsors had to approach the issue of lenders security in an innovative way. Typically, lenders will expect to take security over all of the assets of the project company, including cash on account. However, in this instance, in order for the events side of the business to function efficiently and effectively, the parties had to devise a solution to allow the project company to meet its obligations to hold and disburse cash on account – for example to turn over ticket sale proceeds to event promoters.
Developing and promoting sport in Singapore
Another unusual feature of the project was the emphasis on creating an environment that would promote sport at a grass roots level and foster a greater participation in sporting activities within the Singapore community. This was both a key objective from SSC’s perspective in tendering the project but also a fundamental tenet of the consortium’s winning bid.
In order to achieve SSC’s stated desires and objectives, the consortium established a specially created foundation for the purpose of furthering investment in stimulating public interest in sport in Singapore. As the new facilities become more successful in generating revenues, monies will be paid out from the third-party revenues and into the foundation and applied towards projects which promote sport in Singapore and/or continually develop and improve the sporting infrastructure in Singapore, whether at the Sports Hub itself or further afield.
The project marks an important step not only in promoting Singapore on the global sporting stage but also in signalling a return to liquidity and investor confidence in the region. That such a complex and significant project should reach financial close in a turbulent market is a credit to the drive and vision of SSC and the tenacity and creativity shown by the various consortium team members and banking group.
It remains to be seen whether this project will set a benchmark for future projects and will give rise to renewed enthusiasm for similar PPP projects in the region but at the very least, it provides a strong indication that sponsors and lenders are once again ready and willing to invest in projects with appropriate and bankable allocation of risks.