Why Singapore is the top hub for infrastructure funds

According to a recent McKinsey study, private funds are set to invest over $1 trillion in infrastructure projects across Asia over the next ten years.

However, given the volume of work that needs to be delivered in that period, and the myriad of opportunities on offer across the region, where is this investment likely to be focused?

Will it be in China where a record level of urbanisation is creating a need for better transport, power and water infrastructure? Or will it be in the ASEAN nations, many of whom have already raised concerns that their current infrastructure could constrain their future economic development?

To address this question, EC Harris recently completed a major piece of research that ranked 40 countries across the globe according to how attractive each market was likely to be to infrastructure funds. In order to gauge their appeal we looked at various issues including the ease of doing business in each country, tax rates, GDP per capita, government policy, the quality of the existing infrastructure and the availability of debt finance.

Overall, the research found that Singapore was the most attractive location in both Asia, and across the globe, in which to invest in infrastructure schemes. The country scored consistently highly in all of the key criteria identified as important to funds when they choose where to invest their capital.

Why is Singapore such an attractive market for infrastructure funds?

The key to Singapore’s success is its historic role as a trading nation – this heritage has helped to create a mature business environment, and a market that organizations from most parts of the world feel very comfortable operating within. Singapore today, enjoys a high GDP per capita rate and whilst this may dip below current levels in the coming years, we can still expect a dynamic market with steady and predictable levels of growth over a long-term window.

Compared with many other markets, there’s no doubt that Singapore is an easy place to do business. Transparent and consistent government policy-making offers private investors long-term visibility on decision making, whilst an efficient legal framework, focused on settling disputes quickly whenever they do arise, helps to reassure them that unknown factors will not unduly impact project success.

As with any country, it is not totally immune from terrorism, however compared with other markets it is very low risk and whilst the current inflation rate is not the lowest in Asia, there is still effective protection in place to safeguard investor return.

Furthermore, Singapore’s on-going investment in human capital and commitinnovation, ment to technical
and commercial innovation means there is a talented workforce in place to help deliver successful outcomes on capital intensive infrastructure projects.

Getting the greatest possible value from already successful assets

However, the one thing that’s worth remembering with Singapore is that whilst it will always be attractive to investors, much of the existing infrastructure is already world-class. For funds, this means the biggest opportunities to drive increased profit margins are likely to come in adopting a more innovative approach to how these assets are managed.

This will largely focus on two areas - unlocking untapped revenue streams from mature assets or maximising greater efficiency in terms of how they are operated. Creating added value around income generation, innovation, certainty and life cycle cost reduction will be paramount and is where many funds are looking for insight as they weigh up future investment opportunities.

A look at the market indicates there are some exciting infrastructure schemes coming online in the near future. These include the Downtown MRT rail line, which will be opened in stages from 2013 - 2017, the Marina Coastal Expressway which is due for completion in 2013, and Changi Terminal 4, which is due to be operational by 2017.

Opportunities in the wider ASEAN region

Across the wider ASEAN region there is a massive demand for new infrastructure over the next decade with major projects currently being discussed in multiple markets including the Philippines, Malaysia, Borneo, India and Indonesia. Private finance will be required to fund all this development, though not all of the schemes under consideration will be commercially lucrative for investors.

In the EC Harris study, Indonesia and the Philippines were pinpointed as two of the riskiest markets in which to invest in infrastructure schemes. Whilst there are excellent long-term growth prospects in
Indonesia, concerns around corruption, political stability and global connectivity increased the level of risk facing investors. In the Philippines, public-private partnerships have been identified as key to financing large-scale infrastructure schemes however the immaturity of the legal framework and limited track-record in this space, meant the market remained a risky bet for investors.

In many cases, success will depend on how well risk is identified and mitigated at the outset. Selecting
the right opportunities will require thorough due diligence, a detailed understanding of the local market and links to the right partners, particularly for those infrastructure funds with limited history or existing relationships within the region.