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Continued from
FrontPage of Article
Speech by Mr
Lee Chuan Teck, Executive Director, Monetary Authority of Singapore,
at the Public Lender & Insurer Infrastructure Finance Summit 2006 on
21 Sep 2006
1. Good Morning. I'm
very happy to be here today at the Public Lender and Insurer
Infrastructure Finance Summit 2006. I would like to congratulate
the organizers - IE Singapore, INTOBA and Morrison and Foerster, for
putting together a very interesting program and for drawing such a
good response.
2. Since the crisis in
1998, the economies of Asia (ex-Japan) have sustained an average
growth rate of 6.3% per annum, significantly faster than the global
growth rate of 3.9%. While China and India remained the fastest
growing economies, their import of commodities, capital goods and
services have in turn, spurred the rest of Asia. SE Asia have
benefited from the rise of the two giants, growing by 4.6% in the
last 5 years. With Japan now in an upturn, Asia's expansion looks
set to continue apace. The outlook for Asia is bright. With strong
growth in employment and real income, consumer spending, in addition
to investments and exports will provide the engine for the next
phase of growth.
3. In many countries,
however, a decade of sustained high growth, coupled with rapid
urbanization, is putting increasing strains on basic
infrastructures. To continue to sustain growth, and equally
important to spread growth to a broader populace, infrastructure
development is critical. Whether it's for China to spread growth
from the coast inland, for Vietnam to spread growth from Ho Chin
Minh City up north, or for Indonesia to spread growth to its 18,000
islands, more roads, ports, power generators, water and sanitation
systems and other facilities are needed.
4. We estimate that Asia
will need to spend 250 billion US dollars per year on infrastructure
in the next 5 years. Most of these will be in China and India, but
a number of ASEAN countries - Indonesia, Vietnam and Philippines
will also need substantial amounts of infrastructure development,
between 50 to 60 billion US dollars per year. Even in countries
like Singapore, which is at a relatively more mature stage of
infrastructure development, there is also a need to upgrade existing
facilities and incorporate new technologies.
5. While a large part of
Asia's infrastructure development will be financed from governments'
balance sheet, an increasing proportion of private investment is
desirable, if not critical. And increasingly, public lenders and
insurers will have to design their programs, not just to meet
funding gaps, but also to catalyze and facilitate private sector
participation. But before we get into that, it may be useful for us
to first briefly recap the advantages of private sector
participation in infrastructure projects. I can think of 3 main
advantages.
6. First, lower
financing costs. To fulfill even half the development outlined in
the joint study equates to an expenditure of more than 3% of GDP per
year. In most countries, it would be prohibitively expensive, if
not politically impossible, to do so with pure fiscal funding. It
may also divert precious resources away from equally pressing
priorities such as health care and education. Some measure of
private investment will reduce this burden. Of course, one should
not confuse private investment with charity. Ultimately, the
projects have to be paid for. But private financing is not just a
temporary delay in payments. For countries with weaker credit
ratings, it can also generate real savings through lower financing
costs.
7. Second, sharing of
risks. With private sector participation, risks can be better
distributed to a wider range of participants and to parties which
are best equipped to deal with the risks. Simplistically, banks and
financiers can deal with the financing risks, project developers and
operators can deal with the commercial risks and insurers can deal
with political, legal and environmental risks. I should add,
though, that in many instances, the government may be required to
bear some of the risks through guaranteed purchase agreements,
leases or subsidies. In these instances, we should be mindful of
the possibility of adverse selection, where the public sector
remains holding the most unsavory bits of the risks pool.
8. Third, greater
efficiency. A study by Price Waterhouse showed that in the UK,
almost three-quarters of public projects are late in delivery or run
over budget; compared to only a quarter of PPP projects. It is
mainly for reasons of efficiency, what we termed "value for money",
rather than funding or risks, that Singapore first chose to embarked
on PPP in 2004.
9. So from the public
perspective, there are considerable advantages to having a higher
level of private investment in infrastructure projects. What about
the private investors' perspective? Is there appetite for such
large-scale, long term investments? I believe there is. High
economic growth, coupled with a high savings rate, will create a
large pool of investible wealth in Asia. It is projected that Asian
pension funds, for example, will triple in size in the next 10 years
to US$3.7 trillion. High-net world assets will double to US$14
trillion.
10. These investors will
demand a broader range of investment products, ranging from
conventional instruments like bank deposits, government debentures,
publicly listed bonds and stocks to at the other extreme alternative
investments like hedge funds and private equity. I believe
infrastructure investments - whether in the form of equity or debt
can be an attractive asset class within this investment spectrum.
It is a long-tenured asset class with potentially very attractive
returns. In the middle of last year, Macquarie launched an
infrastructure fund in Singapore, the first of its kind in Asia.
The launch was very successful. More than S$800m was raised and the
issue was over-subscribed 17.9 times at the institutional level, and
12.7 times at the retail level. Following that, they launched
another fund in Korea.
11. So if governments
agree that more private investments in infrastructure are needed,
and private investors want to invest more in infrastructure
projects, why aren't we seeing more of such investments in Asia?
Presently, less than 10% of infrastructure spending in East Asia
comes from the private sector. Even at its peak, before the crisis
in 1997, private investments contributed to no more than a quarter
of infrastructure development. What is impeding private sector
participation? Let me highlight a few factors.
12. First, political
risk. This is arguably the most commonly cited impediment to
private investment. Infrastructure projects tend to be capital
intensive and require a long gestation period of many years before
returns can be reaped. During this time, the economic and political
climate may change; the currency system may change; officials may
change; the political leadership and its priorities may change.
Indeed in some cases, the whole regime could have changed.
Political risks are all the more important in Asia because many of
the projects are green-field in nature. Investors need to know that
the sanctity of the contracts they signed will be preserved even in
the midst of all these changes.
13. Second, commercial
viability. The paradoxical truth is that regions that require the
most infrastructure development are usually those that are least
developed and thus, least able to afford them. As a result, many
infrastructure projects are not commercially viable in their own
right. To attract private investments to these projects,
authorities need to put in place a framework for subsidizing these
projects, either at the operator or user end, or be able to package
them together with concessions in more attractive projects. The
process of allocating subsidies or concessions needs to be
transparent or it may be undermined by corruption.
14. Third, legal risks.
Should investors need to operate with subsidies and concessions from
the government, or should they need to work with local partners, as
is often the case, legal contracts need to be forged. If
disagreements subsequently arise, there should legal avenues to
resolve them. In many developing countries, these avenues are still
not adequate.
15. Fourth, sources of
financing. Infrastructure projects tend to be heavily leveraged -
with an average gearing of around 70%. Thus, they need substantial
amounts of long-term financing. In countries where the financial
system cannot provide this, short-term or offshore financing is
used. However, this may not be ideal has it creates substantial
currency or maturity mismatches for the investor. At best, this is
an additional deterrence to private investments. At worse, as the
97 crisis testified, it can seriously disrupt many projects.
16. Even in countries
whose banking system is equipped to provide project financing, there
is a need to expand this to capital market financing. In this
regard, Malaysia has been successful in developing Islamic bonds for
infrastructure. And I am happy to know that they are here to share
their experiences with us. I think bank financing will continue to
play an important role in infrastructure financing. Even in the US
and Europe, they continue to finance more than 50% of infrastructure
investments. However, the capital markets will provide an
additional channel of financing with a broader set of risk
appetite. As I noted earlier, there is more investor appetite for
infrastructure investments, and increasingly more of these will be
intermediated via the capital markets.
17. The 4 factors
impeding private investments: Political risks, commercial viability
of projects, legal risks, and weak financing channels, are
recognized by many governments and steps have been taken to address
them. Public lenders and insurers, I believe, can also play an
important role in bridging the public-private divide. This could be
in the form of a facilitator, an advisor, an arbitrator or merely as
a reassuring presence. I believe this conference will provide a
good avenue to discuss this further.
18. But let me share
with you how I believe Singapore can contribute to Asia's
infrastructure financing activities. Firstly, there is a sizeable
pool of experience and expertise in Singapore, which can be shared
with governments, developers and investors in Asia. In terms of
domestic projects, the Singapore government has handled several
large scale projects that involved substantial private sector
participation. As I mentioned earlier, we embarked on PPP in 2004.
We have since awarded a number of projects: A desalination plant, a
water-recycling plant, an incinerator and a software project for
Singapore customs. We are exploring PPP in a number of other
projects. Along the way we picked up some valuable lessons on which
projects are more suited for private investment, how to structure a
deal taking into commercial concerns and public needs, how we
organize a tender in a fair and transparent manner and so on. On
the other side of the fence, a number of Singapore-based companies
are active infrastructure developers in Asia and elsewhere. We have
also developed or are developing industrial parks and Special
Economic Zones in a number of countries - Indonesia, Vietnam, China,
India and Russia. This wealth of knowledge and expertise, from both
the public and private perspective, makes Singapore an ideal
location where public officials, supra-nationals and private
investors can gather in conferences like this and exchange ideas and
views on infrastructure development.
19. Second, as a dispute
mediation centre. In any multi-party ventures, disputes will
occasionally emerged. Rather than going through litigation, which
can be expensive and time-consuming, it may be better to go through
an arbitration or mediation process. Im no legal expert but I was
told that the difference between arbitration and mediation is that
in an arbitration process a third party decides on the outcome while
in a mediation process, the disputing parties mutually agree on the
outcome. In seems to me then that the ability to mediate
successfully depends on there being a broad set of behavioral norms
and values that disputing parties subscribed to, and which can then
guide the mediation process. Singapore has a trusted, world class
legal system, with a strong blend of Asian values. Both are natural
advantages for mediating Asian infrastructure disputes.
20. Third, as a
financing centre. Through the Asian Dollar Market, Singapore based
banks have been actively financing Asian projects throughout Asia
since the 80's. We can broaden this to the capital markets. The
REITs market is a useful illustration on how this can be done. We
started developing the REITs market in 2002, by giving certain tax
advantages to REIT structures. At first, the underlying assets were
mainly retail malls in Singapore, placed in a REIT structure for tax
advantages. Then, it was expanded to warehouses and hotels.
Overtime, as investors and developers became more comfortable with
the asset class, it was expanded to overseas assets, including
properties in China, Indonesia and so on. Investors who want an
exposure to a diverse range of Asian commercial properties invest in
the Singapore REIT market. On the other hand, Asian property
developers who need to raise funds efficiently issue a REIT in
Singapore because there is a ready pool of investors there. In this
way, Singapore became the conduit for funneling global investments
to Asian property developments.
21. The same can be done
for infrastructure. Singapore is a leading project finance hub in
Asia. Leading banks such as Standard Chartered, Bank of
Tokyo-Mitsubishi, Sumitomo Mitsui, Mizuho and BNP Paribas having
sizeable on-shore project finance teams to access regional
opportunities. To complement this, last Saturday, we announced a
set of tax incentives to promote the use of Singapore's capital
markets to finance infrastructure projects in Asia through targeting
the investors, issuers and intermediaries. To build investor
familiarity, interest income derived from qualifying infrastructure
project bonds will be fully tax exempt. In addition, we are seeking
to facilitate more asset securitizations via the listed markets.
Currently, an exemption already exists for qualifying foreign
sourced dividends. We have expanded this exemption to interest
received from overseas by infrastructure funds listed on the SGX.
Finally, income from providing project advisory services will be
taxed at a concessionary rate. Details of the tax scheme will be
released in a month's time.
22. To conclude, I
believe Asia is in an exciting phase of growth. To maximize our
potential, much needs to be done to relieve infrastructure
bottlenecks. Public lenders and insurers have a major role to
play. And Singapore is happy to contribute to this process. With
this, I wish you a very fruitful conference ahead.
Source:
www.mas.gov.sg News 21 Sep 2006
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How Singapore can contribute to
Asia's infrastructure financing activities
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