Published Date: 21 September 2006

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 emerge.  Instead of going through litigation, which can be expensive and time-consuming, it may be better to go through an arbitration or mediation process.  I am 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.  It 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 subscribe to, and which can then guide the mediation process.  Singapore has a trusted, world class legal system, with a strong blend of Asian values.  These 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.