Speech by Mr Kola Luu, Executive Director, MAS, at the Investing in Infrastructure Assets Asia 2008 Conference
Meeting the Challenges to Finance Asia's Infrastructure
Good morning, ladies and gentlemen,
1 It is my honour to speak to such a distinguished group of infrastructure market practitioners from all across Asia and beyond. I would like to take this opportunity to thank Terrapinn and all the sponsors for putting together this conference for participants to gain insights into the infrastructure opportunities and challenges in Asia. To our overseas guests, a very warm welcome to Singapore.
INFRASTRUCTURE REFORM IN ASIA
2 Many of you gathered here will be acutely aware of Asia’s huge infrastructure needs. The Asian Development Bank, the ADB, has estimated that Asia needs about US$300 billion of investments in infrastructure annually. A study conducted by the United Nations Economic and Social Commission for Asia and the Pacific, or UNESCAP, suggests that the infrastructure financing gap in Asia could be US$180 to US$220 billion annually.
3 This infrastructure funding gap in Asia has not gone unnoticed. Many Asian countries realise the importance of infrastructure to economic growth and have begun taking active steps to address the funding gap.
4 One such initiative has been the development of Public-Private Partnership, or PPP, frameworks that establish standard practices for the private sector to fund, develop and run infrastructure projects on a long-term partnership basis for the public sector, in exchange for a performance-based fee paid by the government. This form of funding is becoming more prevalent in Asia and has been adopted in countries such as Korea, Japan, Malaysia and Singapore to name a few. In Singapore, the government is using PPP to acquire services on a cost-effective basis, rather than directly owning and operating assets. A recent example is the construction and management of the Singapore Sports Hub, the world’s largest sports infrastructure PPP project to date. The Singapore Sports Hub Consortium will bear the cost of construction, which is estimated at S$1.2 billion, and operating and maintaining of the new Sports Hub complex for 25 years. The government will pay an annual fee for services rendered over the course of the 25-year contract and the contract is valued at approximately S$1.87 billion.
5 Asian governments have also adopted measures to improve the general investment climate for infrastructure. For instance, Indonesia approved the Investment Law in 2007 that provides more certainty for both local and foreign investments in Indonesia. Vietnam also issued a new rule in 2007, for projects that guarantee returns, to specify in the project contract the means by which returns will be received. Such measures encourage further private sector investments in a country, including its infrastructure sector.
6 Some Asian governments have set up infrastructure finance entities that lend funds to infrastructure projects and act as a local partner to private sector participants. One example is the India Infrastructure Finance Company Limited, or IIFCL, set up by the Indian government. IIFCL funds commercially viable infrastructure projects in India and also works jointly with private sector participants to collectively facilitate large scale capital investments into infrastructure assets in India. One such instance is their collaboration with the Infrastructure Development Finance Company and Citigroup, under the India Infrastructure Initiative. In addition, IIFCL acts as a knowledge partner to private sector participants such as 3i Group and Macquarie to guide the raising of private equity funds for investment in infrastructure projects in India.
MULTILATERALS AND PRIVATE SECTOR INVOLVEMENT IN ASIA
7 Complementing the efforts of Asian governments, multilateral agencies, such as the ADB and World Bank, have also contributed towards the reduction of the infrastructure funding gap in Asia through the provision of loans, equity investments, financial and political risk guarantees, syndication arrangements, co-financing and technical assistance. For instance, the ADB’s private sector operations totaled US$1.7 billion in 2007 with about 44% of the total for infrastructure projects. Besides assisting in the funding for the construction and upgrading of physical infrastructure facilities, the ADB also assists private financial intermediaries such as banks, non-bank financial institutions, and funds so that these institutions can, in turn, finance activities related to the development of infrastructure facilities.
8 Multilateral agencies are also actively working with governments and the private sector on new initiatives to attract more investments into viable infrastructure projects. One such instance is the launch of Asia Infrastructure Project Development Private Limited, or AIPD, in April this year. It is a joint venture by the ADB, Singapore Cooperation Enterprise and three private sector participants comprising Crest Spring Pte Ltd, The Konzen group and United Engineers (Singapore) Pte Ltd. AIPD will leverage on the ADB's strong regional networks to engage municipal governments and use the technical and financial capabilities brought in by the various partners in the private sector to assist municipals to package commercially viable infrastructure projects into PPP projects that can attract funding from commercial banks and private investors.
9 Currently, the majority of infrastructure development in Asia is still funded by public funds. Based on findings from the World Bank, private sector participation in Asia declined significantly post the Asian Crisis in 1997 but there appears to be a reversal of this trend in the past few years. Private sector participation has been increasing with 70% growth between 2004 and 2005, the first substantial increase since 1997. Although, according to ADB estimates, private sector participation accounts for only a fifth of infrastructure spending in Asia; current efforts by the various Asian governments and multilateral agencies could potentially attract further private sector participation in the years to come.
PRIVATE SECTOR TRENDS
10 Several private sector trends of late are encouraging and highlight the potential of the private sector in financing Asia’s increasing infrastructure needs.
11 Asian infrastructure developers and sponsors are now increasingly looking beyond their domestic shores and expanding into the region to invest into foreign infrastructure projects. For instance, India’s Tata Group in Bangladesh intends to invest US$2.5 billion into such areas as power plants. Earlier this year, China Huaneng Group’s acquired the Tuas Power Station in Singapore for approximately S$4.2 billion. From Singapore, Keppel Seghers was awarded S$1.5 billion Doha North Sewage Treatment Works project in September 2007 to build the largest wastewater treatment and water reuse and sludge treatment facility in Qatar and the Middle East.
12 With increased development activity, funding needs grow. Despite the subprime crisis that started last year, Asia’s traditional financiers for infrastructure development continue to be very active in providing financing. Commercial bank financiers are still important participants in funding Asia’s infrastructure by providing the funds and structuring expertise for bank loans, and debt and equity issuance. Asian countries including China, India, Indonesia, Philippines, Singapore and Thailand have seen a rise in project finance bank debt that has been placed out for projects in the region. According to Thomson Financial, project finance lending by commercial banks into Asian projects totaled US$31.6 billion in 2007, a 10 percent increase over the previous year.
13 Besides traditional bank financing, the private sector has also taken a lead in finding innovative financing methods that tap on the capital markets to help narrow the funding gap. These include specialised private equity funds and listed infrastructure business trusts and funds. These instruments offer steady returns and hedge against inflation, appealing to different classes of investors, in particular those with long term liabilities. The steady returns offered by infrastructure assets are also increasingly seen as a good investment alternative to equities and bonds in the wake of the subprime crisis. For example, in 2007, India was one of the countries that received significant investments from private equity infrastructure funds. Even after the onset of the subprime crisis, numerous funds continued to announce that they would set up in India, committing potentially in excess of US$12 billion in funds for the infrastructure sector. Sponsors for these funds include international players such as J.P. Morgan & Chase, Citigroup, Blackstone Group, Macquarie and local Indian players such as ICICI Bank and Kotak Mahindra.
14 Listed infrastructure trusts and funds are also steadily growing in number to supplement the funding required in the region. This phenomenon can be readily observed in Singapore. In 2005, there were 2 listings, the Macquarie International Infrastructure Fund, Asia’s first infrastructure fund, and the pioneer concurrent dual-listing of a stapled infrastructure trust and company called SP AusNet on the Singapore Exchange and the Australian Stock Exchange. In February 2007, CitySpring Infrastructure Trust, Asia’s first infrastructure business trust, was listed. Again, as a testament of investors growing acceptance of infrastructure as a defensive asset class, Hyflux Water Trust, the world’s first pure play water business trust, was listed successfully in December last year amid volatile market conditions caused by the credit market turmoil.
15 Singapore recognises the value and the benefits of developing mature capital markets to facilitate private sector financing of infrastructure development. 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 a project finance tax framework, targeting investors, issuers and intermediaries, to promote the use of Singapore's debt and equity capital markets to finance infrastructure projects in Asia.
16 These developments have started to gain interest from both the local and overseas infrastructure community. To further facilitate the process, we have also recently introduced a new limb to the incentives with a scheme for infrastructure trustee managers and fund managers of listed infrastructure business trusts and funds engaged in qualifying activities.
17 It is noted that a significant part of the funding required in Asia is used in the development of new infrastructure assets. As such, these may not be suitable for immediate inclusion in a listed infrastructure trust or fund as they do not generate cash-flows. However, a listed business trust or fund route may be an option for infrastructure developers and sponsors to monetise their developed assets and recycle the much needed capital back into new infrastructure development projects in Asia. The same is true for private equity infrastructure funds when they want to exit the market.
18 In closing, it is clear to all of us that the infrastructure needs in Asia are great and a large funding gap exists. Asian governments understand that infrastructure bottlenecks will restrict their growth aspirations. This understanding will play a key role in further opening the Asian infrastructure finance market to regional and global investors alike. Current developments in Asia suggest that the investment climate in Asia is already improving with initiatives taken by both the public and private sectors, thereby creating many opportunities for private sector participants.
19. Singapore has also tried to play its part in providing infrastructure solutions for the region. Singapore has a strong value proposition as the gateway to raise global capital. Besides traditional credit facilities, Singapore also offers a conducive legal and regulatory framework for infrastructure companies to finance projects via Singapore based financial institutions and capital markets.
20. The Asian infrastructure sector is undergoing rapid development and opportunities are tremendous. Over the course of the next three days, you will hear about exciting developments in other countries and infrastructure sectors, as well as the latest trends in infrastructure investments. I welcome you to this conference, and wish all participants a productive and enriching experience ahead. Thank you.