Published Date: 10 December 2007

Speech by Mr Kola Luu, Executive Director, MAS, at the Macquarie Asia Infrastructure Conference 07



Good morning, ladies and gentlemen,

1   It gives me great pleasure to have the opportunity to speak to such a distinguished group of infrastructure market practitioners from all across Asia. I would like to thank Macquarie for putting together this conference for participants to gain insights into the infrastructure opportunities and challenges within Asia, the world’s fastest growing region. To our overseas guests, a very warm welcome to Singapore and I hope that you will enjoy your stay here.


2   Over the past six years since the turn of the century, GDP growth in developing Asia has averaged 7.1%. A recent update by the Asian Development Bank (ADB) on the region’s outlook forecasted that the GDP growth will be 8.3% in 2007. The high growth rate is also expected to continue next year, just slowing down slightly, to 8.2%.

3   Two major contributors to this high growth rate are China and India. In the first half of 2007, China’s GDP has already grown by 11.5%. ADB forecasted that China’s full year GDP growth for 2007 will be 11.2% and moderating to 10.8% in 2008. India’s pace of growth is not far behind. It grew by 9.4% in 2006, the fastest in 18 years, and is expected to grow at 8.5% for 2007 and 2008.

4    The rest of Asia is also growing rapidly. For example, Philippines grew at its fastest pace in almost 20 years, growing by 7.3% in the first half of 2007. Indonesia has shown consistent growth and is expected to grow at more than 6% in 2007 and 2008. The growth in the region is fuelled by high global demand for exports, strong prices for commodities, expanding incomes, pickup in domestic consumption and investment spending.

5   Though domestic demand is becoming a major contributor to growth in Asia, the region is not immune to conditions in the global economy. The recent credit market turmoil originating from the US has caused some turbulence in Asian markets. The Asian equity markets fell by an average of 6% in August and have remained volatile. Asia is not immune to the fallout but ADB projections indicate that the effects will be modest and short-lived. If a recession occurs in the US, ADB projected that developing Asia’s growth may be trimmed by up to 2% in 2008 to 6% - 7%.


6   Development of infrastructure in Asia will be key to driving economic growth to achieve Asia’s projected growth rate. The ADB estimates that Asia alone requires US$300 billion worth of investments a year.

7   Besides the abundance of opportunities in financial terms, there are also different investment opportunities within Asia, from green-field opportunities in rapidly developing countries such as China and India to mature-stage opportunities in developed economies such as South Korea and Japan.


8   Asian governments recognise the importance of infrastructure to their economic growth and have been actively exploring solutions to fund the required development. They acknowledge the inadequacies of the traditional mode of infrastructure financing where equity is usually financed by sponsors. Under this mode of financing, the sponsor is only able to take up a limited number of projects depending on the size of its balance sheet, risk appetite and commitments to other projects. This produces a funding gap between infrastructure investment demand and actual development. Most infrastructure projects in Asia are also debt financed through bank loans, but this is limited in tenor and exposes the project to refinancing risks.

9   The private sector has taken a lead in finding capital market solutions to these financing gaps. For example, when compulsory contributions to superannuation was introduced in Australia in 1992, Macquarie identified the opportunity to start a specialised infrastructure fund that marries the needs of superannuation investors for stable long term returns with the immediate funding needs of the government to build infrastructure for economic development. Today, it is estimated by Ernst & Young that the market capitalization of global listed infrastructure sector is about US$2.1 trillion or almost 5% of the global equities market. In addition, there are also unlisted funds with an estimated US$38 billion exploring opportunities in infrastructure. In Singapore, the infrastructure sector forms about 5.8% of the total market capitalisation of companies listed on SGX-ST.

10   Besides equity capital markets, debt capital markets are also increasingly tapped for financing of infrastructure development. For example, the Private Finance Initiative (PFI) was introduced by the UK in 1992 to provide financial support for Public-Private Partnerships (PPP) between the public and private sectors, whereby the private sector develops and runs the infrastructure project for the government in exchange for a performance-based fee. Typically, large PPP projects are funded through the issuance of project bonds that only have recourse to the project. This debt funding mechanism is established in the UK with about 90% of nearly £50 billion invested in UK PFI projects funded from project finance debt. This form of funding is becoming more accepted and has seen adoption in countries such as Australia, Korea, Japan, Malaysia and Singapore to name a few. In Singapore, the public sector is using PPP as an alternative form of procurement to acquire services at the most cost-effective basis, rather than directly owning and operating assets. For example, the construction and management of the Sports Hub is to be handled under the PPP model. It is the first and largest sports facilities infrastructure PPP project in the world. Currently, proposals by three pre-qualified consortiums are being evaluated. Another example is found in Singapore’s education sector. Last month, ITE appointed Gammon Capital as the "preferred bidder" to build its West Campus at a cost of about $270 million.

11   Capital market solutions enlarge the pools of funds which can be tapped for infrastructure development. This removes the constraint imposed by traditional sources of funding such as government budgets, developer’s balance sheet and bank debt. Today, funds from insurance companies, pension funds and even retail investors are made available for financing the infrastructure development needed for any country’s continued economic growth.


12   Singapore is poised to play a significant role in infrastructure financing for the region. We are a natural gateway to Asia due to our developed and innovative financial markets, strong legal system, progressive regulatory framework and ease of funding. Our role as a trusted financial centre has been successful in growing our asset management industry. The funds under management provide a source of capital for investment in listed infrastructure entities and financial products. One such example is the Lion Capital Asia Infrastructure Fund.

13   Singapore recognises the value and the benefits of developing deep and liquid capital markets to facilitate financing of infrastructure development. We have used our experience in the successful development of the Singapore real estate investment trust or REIT market to help develop our infrastructure capital markets.

14   We started developing the REIT market in 2002, by giving tax and regulatory clarity to the REIT structures.  At first, the underlying assets were mainly retail malls in Singapore, but this was expanded to warehouses and hotels.  Over time, as investors and developers became more comfortable with the asset class, it expanded to overseas assets.  Investors who want an exposure to a diverse range of Asian commercial properties invest in the REIT market.  On the other hand, Asian property developers who need to raise funds issue REITs in Singapore because there is a ready pool of investors. Today, there are 19 listed REITs and 1 property trust on the Singapore Exchange with a total market capitalisation of approximately $30 billion.

15   The development of the REIT market achieved a few things. First, sector players have a means to monetise completed projects and take on new projects, thereby re-cycling their capital. Second, widening the investor pool and spreading the risks reduced the cost of funding. Third, the benefits spilled over to the debt market as the commercial mortgage-backed security or CMBS market also developed. Fourth, the REIT market paved the way for cross-border activity, serving as a diversified conduit for funneling global investments to the Asian property market.

16   The success of the REIT model is useful and we have taken steps to replicate its success for the infrastructure sector. We have put in place the necessary framework to facilitate growth of the infrastructure fund and project bond markets.

17   In 2004, we introduced the Business Trust Act to provide infrastructure developers the opportunity to utilize a trust structure to realise full value for completed assets. In 2006, we launched an infrastructure finance tax framework, targeting investors, issuers and intermediaries, to promote the use of Singapore's capital markets to finance infrastructure projects in Asia.

18   These initiatives have started to gain interest from the infrastructure community. In February this year, Singapore saw the listing of CitySpring Infrastructure Trust, our first infrastructure business trust. This complements two other landmark transactions in 2005.  First, the listing of Macquarie International Infrastructure Fund, Asia’s first infrastructure fund.  Second, the pioneer concurrent dual-listing of a stapled infrastructure trust and company called SP Ausnet on SGX and the Australian Stock Exchange.

19   We are encouraged to see that our efforts have produced results with the listing of Hyflux Water Trust on the Singapore stock exchange last week, with an initial portfolio of 13 China-based water treatment facilities.

20   Besides putting in place the necessary regulatory and tax frameworks, we have also continued to push on with the development of our debt capital market to facilitate infrastructure financing in Singapore. In March this year, the Singapore Government issued an inaugural 20-year SGS to extend the government benchmark yield curve and to serve as a pricing benchmark for other long duration Singapore dollar interest rate products such as infrastructure project bonds. The S$2.5 billion auction was well-received, with a bid-to-cover ratio greater than 2, stronger than the market's expectation.
21   REITS listed in Singapore have garnered significant support from investors. Increasingly, we see this trend for infrastructure business trusts as well. Investors are valuing them on a total return basis, taking into consideration both yield and growth potential. Opportunities in Asia provide these vehicles listed in Singapore with strong growth potential and this has helped to lower the yield requirement. For example, Hyflux Water Trust has been trading at a yield between 5% - 6%.

22   In some markets, it is becoming more difficult for fund managers to find quality assets that are able to meet yield requirements of local investors. For example, pension funds in Australia and Canada have relatively high yield expectations ,and there is declining availability of assets that are able to provide the required yield. This is fuelling the drive to explore the rest of Asia for opportunities in infrastructure and real estate.

23   There are several possible entry options available to the fund managers. These include the set up of a new fund focused on Asian opportunities with a view to list it in due course or set up of a joint venture with an existing REIT or infrastructure business trust through mutual contribution of assets. As a natural gateway to the rest of Asia, Singapore is an ideal location for any of these options.


24   There is immense need for infrastructure investments in Asia and the Asian governments understand that infrastructure bottlenecks will restrict their growth aspirations. It is our belief that this desire will play a key role in further opening the Asian infrastructure finance market to regional and global investors alike.

25   Singapore provides the infrastructure community with a strong value proposition as the gateway to raise global capital. Specifically, we believe Singapore offers a conducive regulatory and tax framework for infrastructure companies to finance projects via a trust or fund structure as well as deep and liquid capital markets to enable them to tap a global pool of investor through the issuance of project bonds.

26   The Asian infrastructure sector is undergoing rapid development and opportunities are tremendous. I welcome you to this conference, and wish all participants a productive and enriching experience ahead.