IE S'pore helping local firms build infrastructure value chain potential

Singapore

SINGAPORE'S construction and infrastructure companies need to change their business model as they expand into the region.

From simply doing one-off engineering, procurement and construction (EPC) projects, they need to expand their expertise downstream into asset ownership, operation and management.

This is so that they will not have to build their revenue base from zero every year, but will be able to receive recurring income from year to year - for as long as concession agreements with local governments are in place.

So says Kow Juan Tiang, group director of environment and infrastructure solutions at IE Singapore.

Speaking to The Business Times in a recent interview, he was expanding on what had been announced by the Committee on the Future Economy and in Budget 2017 earlier this year.

Small and medium enterprises (SMEs) are being encouraged to venture abroad to capitalise on the burgeoning demand for infrastructure in Asia. The government on its part has promised to lend its support by sharing risks with financial institutions and helping to groom the needed industry talent.

Mr Kow explained the overarching game plan: "The infrastructure value chain is very long and there are two parallel value chains. One is the real economy value chain - that's the engineering feasibility studies, construction, procurement, and subsequently the operation and management. The other is the financing value chain - where you have the financing feasibility study, business structuring, and you have the debt and equity that you have to put into the project. You may even have a capital recycling mechanism."

He said the industry value chain is very complex, and most companies do not have capabilities across the whole chain, although bigger infrastructure firms - the likes of Sembcorp, Keppel, and Hyflux - do, from engineering to financing to structuring. Here is where the smaller firms lose out in competitiveness.

IE Singapore is thus helping them to build up the capabilities they lack, for example, by helping engineering companies acquire financing know-how through the hiring of suitable talent. This way, these SMEs are able to not just build but also own and manage their own infrastructure assets by structuring them suitably to generate decent returns.

IE Singapore has partnered local universities to expose more students to the infrastructure sector in Asia through internships at companies ranging from developers to engineering firms, banks and infrastructure funds.

The National University of Singapore (NUS) has also added to its Master of Science in Project Management degree a specialisation in project finance to develop professionals with cross-disciplinary skills needed for the infrastructure sector, combining skillsets across faculties from business to civil engineering, finance and law.

Later this quarter, more details on another programme tailored for professionals, managers, executives and technicians (PMETs) to receive on-the-job training and gain exposure to regional infrastructure projects will also be unveiled.

Mr Kow estimates that less than 50 infrastructure firms from Singapore have taken on projects abroad in the past few years. Of the firms that have - such as water treatment firm Memiontec, clean energy provider Sunseap Group, and engineering and construction company Tee International - some had started with EPC works but are increasingly transforming their business models to go into asset ownership, operation and management.

While it is harder for smaller companies to win large municipal infrastructure projects given their resource constraints, SMEs can still participate in smaller-scale power, water and LNG projects, he said.

This will help them to build their track record first in South-east Asia, then perhaps globally. The most promising regional markets for infrastructure development at the moment are Vietnam, Myanmar, Indonesia and the Philippines. Besides, there are still many sprawling provinces and rural areas in these countries that require smaller-scale distributed infrastructure, rather than a single large-scale centralised utility in the city region. This bodes well for SMEs.

He said: "Singapore companies are actively looking at such projects. So it may not be your one-gigawatt power plant, but it may be your 20-megawatt plant, or in the case of water, it could be a 20,000-cubic-metre water facility or wastewater treatment plant catering to a smaller community.

"You don't have to go in with a billion dollar investment; that's not possible. But . . . the world is increasingly moving towards a distributed nature, so there are all these smaller scale infrastructure projects which our firms can participate in."

When contacted, Roger Chua, chief financial officer of Memiontec, said that the company had originally started small with consulting, EPC and operations & maintenance (O&M) projects.

It later ventured into Indonesia and China, and most recently moved up the value chain into the "build-own-operate-transfer" space, meaning it literally builds the infrastructure, owns and operates it and eventually transfers ownership of the project to the government. It thus becomes not just an asset manager but also an asset owner, which allows it to earn steady cash flow over the concession period.

Frank Phuan, managing director of Sunseap, also said that the solar company is integrated across the value chain in that it fully finances, builds, owns and operates the solar systems atop its clients' roofs. Not many solar companies in the industry are integrated.

Having all its capabilities in-house and not having to outsource jobs enables Sunseap to better protect its margins. "It allows us to be more competitive this way. If you depend on an (external) EPC company, margins will be taken away by the EPC contractor," he said.

Mr Kow has no illusions about how long it could take for Singapore's infrastructure companies to become globally competitive, given the long gestation periods of infrastructure projects.

"For a simple, small-scale project like a water treatment plant, it can take 24 months to 36 months from planning to the start of operations. If we are talking three years for companies to set their first track record, and now we are encouraging firms to go (into other countries) . . . for companies to amass a significant volume of infrastructure projects? It could easily take five years or more, maybe even 10."