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Analysis, E-Government

Overcoming obstacles to PPP in Singapore

By Jianggan Li | 12 December 2006

Singapore is farming out S$1.3 billion (US$843 million) worth of projects to the private sector over the next 3-5 years, allowing it to operate big public projects. Professor Wang Shou Qing and James Tan give us their analysis.

Under the PPP scheme, certain public sector projects worth more thanS$50 million (US$32.4 million)may be outsourced to the private sector, with concessions lasting up to 30 years. Singapore is adopting the PPP approach as part of the government’s move towards better value for money. This is unlike a number of developing countries which are employing PPP for budget reasons. However, there are apparently a number of obstacles to be overcome before PPPs can be widespread in Singapore. This article focuses on the pertinent issues in the Singapore PPP scene and provides suggested solutions where possible.

The tasks of government

The Ministry of Finance in Singapore has commenced a committed promotion of PPPs since its first project in 2003. But apparently, the concept of PPP has not sunk into the consciousness of all the industry players. This group of participants includes lenders, sponsors, construction contractors, facility and operation managers. The government’s lead in pursuing PPP - a method whereby the private sector delivers services and facilities to the government - is still relatively unknown territory to many of them.

It is especially important to educate and not to isolate certain participants such as the construction contractors and facility managers in Singapore whose main expertise manifest in the construction and post completion stages of the project rather than the pre-construction investment analysis phase.

Towards the end of raising the understanding of PPP, the government firstly has to attain some level of expertise in it soonest it can. Many countries have found that the private sector can only add value if the public sector specifies well. This is in addition to having an external consultant experienced in PPP like a legal and/or accountancy firm to advise the public sector. That being said, realistically, it takes time for the public sector personnel to get up to speed about the societal and financial aspects of PPPs.

It may take 4 to 5 years to truly comprehend the fundamentals of PPP and this comes about only by being thoroughly involved in PPP for that whole period of time. Secondly, the government would do well to identify more projects and areas where it wields monopolistic power and to instead allow private partners to play an active role in without compromising the public’s welfare. Thirdly, the public sector can engage the various professional associations like the Institute of Engineers of Singapore, Singapore Contractors Association Limited, Singapore Investment Banking Association and others to help potential players demystify the subject of PPP as well as catalyse a change in traditional mindsets about projects and project finance.

It should be noted that it is important not to blindly import the practices of more established British or Australian PPP methods into Singapore. Major issues still have to be scrutinised to see if they are suitable or must be tweaked to the Singaporean context. This is important as infrastructural polices affect societal, political and cultural sensitivities.

A breadth of projects on offer

The range of projects until now in Singapore has included a desalination plant, a water treatment plant, an incinerator plant, an IT software system project, a sports stadium, a school, a university hostel and a network cabling project. The government has been cautious in the selection of pilot projects to implement to ensure that the PPP scheme does not die a premature death due to a single wayward project. Having said that, the government has recently unveiled the Sports Hub project, which is the world’s largest sports facilities PPP project. This is indeed an indication of the commitment and optimism the Singapore Government has in PPP in the long term.

In reality, it is difficult to define types of project that are high-risk. And whether they work in the local context is another matter altogether. For example, the transportation and the health sectors provide many examples of successful PPP schemes. Many housing, school campuses and prisons adopting the PPP approach have proved effective also. But it cannot be generalized in this manner. Further, it should be noted that very often, a multi-pronged approach to each project has to be adopted. For instance, secondary policy issues such as fare control and land-owning policies have to be tweaked or conjured up to raise the “profitability” prospects of a project so that private players will take it up.

Clarity of PPP documentation

From the above, it is seen that the types of Singapore PPPs implemented so far have differed significantly. Needless to say, the project documentation in important aspects still lacks uniform standards, causing a bottleneck in the documentation process. Standardisation of documents is an issue that every country including Singapore, implementing PPPs is grappling with. Indeed, it is not easily solved. Many states face this same problem after decades of employing PPPs.

Standardisation can only be achieved through time and a body of precedents. Success of PPP would in part depend on the standardisation of documentation for private applications. However, with so many projects underway of different sizes and genre, model documentation is unlikely to happen any time soon. Model documentation is a work in progress. Whilst expending resources on standardisation measures, attention should also be better spent on refining the substantive commercial viability and value for money return of each type of projects.

This is especially so for countries who have only recently embarked on the PPP route. Investors must be confident that the project is bankable and the processes of the deal transparent. Mainly, the critical success factors are that the contract must be well-defined and the terms fair to both the government as well as the investor. Other factors include a robust contract, revenue protection, land certainty and protection against possible changes affecting the public agency buying the service.

The real cost of financing

The cost of financing an infrastructural project in Singapore is still in the healthy range. It has not reached a stage whereby bidders are put off by the financing costs relative to their expected returns.

Nevertheless, Singapore can take a leaf from one of the innovations of the United Kingdom government in achieving further financial incentives for potential players. The United Kingdom government has set up a Credit Guarantee Finance (CGF) scheme whose aim is to reduce up to ten per cent of the costs of PPP projects by using the government’s cheap borrowing costs, while letting the private sector bear the credit risk. Under the CGF, the government issues Gilts (Risk-free bonds) to finance the project and lends the money to the project company. The State then lays off the credit risk to a bank or mono line insurer through a credit guarantee.

Although these institutions need remuneration for taking the risk, savings is likely achievable. Besides cost savings, the CGF also helps to diversify the sources of funding for PPPs. By this way, the CGF does not replace conventional private finance but merely supplements it. The Treasury has been circumspect about the future balance, but market participants believe a successful CGF would finance between a third and a half of PPP projects.

On a regional scale, bond market cooperation can be an important avenue for fostering regional infrastructural development and enhance the region’s position in the global arena. With the private sector being increasingly responsible for arranging financing for public projects, this will also add on to the demand for bond issuances and enlarge the pool of assets available for securitisation.

Combined efforts to facilitate cross border trading and investment within the region is beneficial for the local bond market development as it increases the pool of investors and liquidity. Greater regional cooperation will ensure sustainable development and insulate the region from international financial and capital markets risks.

Inadequate size of deals

It has been remarked that the deals in Singapore are typically not big enough to attract investors, especially overseas ones. Invariably, the big-ticket projects are the ones that will capture the imagination of international sponsors and lenders. Further, there may be an insufficient number of similar-type projects to attract investors.

The market prefers to see a pipeline of similar transactions being developed in an orderly and consistent framework. This is so that the investors can build on their previous experience and achieve greater economies of scale on another similar project. The downside is that this may make one-off PPP projects, particularly small ones, particularly unappetising to potential players.

This may be a reality that Singapore faces, apart from the odd large-scale project that it may put into action. Nevertheless, one solution is to bundle similar projects together. For example, schools, fire stations, police stations, and similar small capital value projects within a PPP project can offer economies of scale to investors. The public sector benefits from a focused and consistent approach to the delivery of the projects objectives. The private sector will naturally be more willing to invest in schemes greater than critical mass, as such schemes bring greater scope too ffer innovation and deliver more cost-effective solutions in terms of finance, capital, life cycle, and operational costs. Further, bid costs per project reduce as the number of projects increases.

A lack of benchmarks

Currently, Singapore PPP tendering is done without employing a Public Sector Comparator. The government’s main reason for PPP i.e. value for money is expected to be delivered without any strict benchmarking. However, benchmarking provides for efficiency gains to be projected from implementing a project during the tendering process. This allows for improved efficiency and cost savings and is an important part of the risk allocation process through competition of the private sector bidders and efficiency gains in the market feedback period.

Further, a team of experts or consultants can be commissioned to assess how services are being delivered and satisfaction levels periodically. As a general rule of thumb, in assessing value-for money on a whole of life basis, the cost of private sector capital(which is typically 1 – 3% higher than public finance) must be offset by the lower running costs over the life of the infrastructure.

Another suggestion to note is that output specifications should be adhered to but not to the letter. Not only must the private sector supplier fail to deliver the service, it must also fail to remedy within a prescribed time before it may suffer remission from the payment it was going to receive. The broad aim of PPP is to incentivise the private sector supplier to remedy or improve its service, not to bankrupt it. It is probably more appropriate to agree to an increasing remission related to the number of criteria which are not being met.

The value of short tender periods

The tender period for Singapore PPPs so far is kept at a relatively short period. This is healthy. Even for a complicated project such as the Singapore Sports Hub, the tender period is a mere one year and four months from pre-submission qualification to appointment of the successful bidder (this is assuming the government is able to keep to its timeline as the tendering remains ongoing at this point in time). For a relatively simpler PPP project such as the student hostel accommodation project, the tender period was only nine months.

The tender period until the service provider is named can range between ten months and three years. If the length of time it takes to bid for a PPP project is too long, it may put off many potential investors, thus reducing the number of bids to make a tender competitive. The extension of the Docklands Light Railway in south-east London to a nearby airport is the type of project that might potentially attract committed bids from many but only has two. Similarly, the Super tram project for the northern English city of Leeds has only two bidders even though nearly 100 companies attended the meeting to launch the tendering process. A major attributing factor is the long tender period. If local contractors are involved in a megaproject where they are expected to carry large bid costs for along time, they may have to stop bidding for other projects. Thus, contractors will invariably be able to participate in fewer projects if the bids are going on for too long. Further, the problem of alack of bidders can be attributed to a perception that private sector capacity can be switched on instantaneously. However, such capacity requires time not only to grow, but also to convince private sector players to develop the capacity in the first place.

Cost of tender

The cost of tender preparation may be prohibitive especially for small projects. In respect of Singapore’s first PPP i.e. The desalination plant project, the cost of tender preparation alone paid out to accountants and lawyers amounted to half a million dollars. This is a significant figure for a S$158.5 million (US$102.8million) project.

The typical fee structure is that the client pays a relatively low fee to each adviser up front and then more if they win the bid. For large contracts, the transaction costs are intimidating but may be justified by the potential earnings of the project.

The fees asked for are reasonable if you consider the amount of work and resources that go into a project. For instance, 40 people at Mallesons were on the job for a year-and-a-half for Connect East, the consortium that won the bid for the Mitcham-Frankston project. The problem is that for smaller contracts, if the bidding costs are S$2-3million (US$1.3-2 million), this can be prohibitive. Clearly, the small to medium sized projects can hurt the pockets of investors and construction companies. The complexity of bidding doesn’t vary that much between projects of different sizes but the transaction costs can be high for some small projects relative to the project value.

Outlook

Countries around the region have all expressed interest in jumping on the PPP bandwagon, albeit motivated by different reasons. Indonesia needs PPP for financial and technical reasons whereas Malaysia’s inclination towards PPPs appears to be more politically and socially motivated. More opportunities in PPP will open up in China, Korea, Hong Kong and the Philippines. However, it remains to be seen if PPP can indeed fulfil Singapore’s aim of value for money. The tangible benefits will take at least several generations of public officials to manifest themselves. So far, the small number of PPP projects implemented in Singapore has all proved commercially viable with potential social benefits.

In the broader scheme of things, Singapore can latch onto its excellent reputation in infrastructural planning and operation and put one more string in its bow by developing exportable PPP skills e.g. Singapore contractors’ experience in doing PPP projects can enable them to export the skills they learn to other countries in the region, just like how the South African and Australian firms are becoming active in their regional PPP markets. Moreover, the PPP concept is a useful counter approach to outright privatisation.

This method marries private initiative and services with the authorities’ need to provide critical social goods, services and distribution to the people. Most importantly, public assets remain in public hands, although its services are farmed out to the private sector through an agreement or partnership. Indeed, Singapore is already aided by its established legal frame work and commercial transparency to help push the PPP movement. It would do well to identify the obstacles along the way and effect strategies to overcome them. Only then would it be able to entrench PPP as a long-term strategy for infrastructure in Singapore.

About the authors Professor Wang Shou Qing is Deputy Head, Department of Construction Management, School of Civil Engineering, and Institute of International Engineering Project Management, Tsinghua University, Beijing, China. James Tan is a pupil with Wong Partnership in Singapore.

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