The Business Times

G-7's B3W: Impacts on Singapore's asset owners and insurers

The Build Back Better World initiative presents risks and opportunities for players involved in large infrastructure projects.

Published Wed, Jul 28, 2021 · 05:50 AM

ONE of the big takeaways from the G-7 meeting in June - the group of the seven largest so-called advanced economies - was broad agreement on plans to set up an alternative to China's Belt and Road Initiative (BRI).

The BRI is a global infrastructure development strategy adopted by the Chinese government in 2013 to invest in ports, skyscrapers, railroads, roads, airports, dams, and railroad tunnels across some 70 countries.

A report from 2017 by the World Pensions Council (WPC) estimated that Asia, excluding China, required up to US$900 billion of infrastructure investments per year through to 2027 - about 50 per cent above spending rates at the time.

The G-7 plan, known as the Build Back Better World (B3W) initiative, aims to help narrow the US$40 trillion needed by developing nations by 2035, according to data from the US government.

While the details of the B3W plan are scant at this stage, it would appear that the objective is to invest trillions of dollars in the "infrastructure needs of low-and middle-income countries".

This infrastructure investment, above and beyond what has already been announced by many governments in Covid-era budgets, is going to increase demand for materials and services.

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This will have direct implications for asset owners as well as insurers, financiers, and brokers in Singapore and beyond.

The details of what will be included within the B3W scheme outlined during the G-7 summit are yet to be fleshed out, but some of the early comments made on the plan by the US government in particular seem to suggest a greater focus on services rather than the heavy focus on infrastructure found in the BRI.

DEMAND MAY EXCEED SUPPLY

In terms of the B3W scheme, we see a number of opportunities for the various stakeholders involved in large infrastructure projects in Singapore as well as the wider region.

For insurers and re-insurers, with large infrastructure projects being funded in emerging markets via both the B3W and BRI schemes, we expect adequate insurance coverage to underwrite those risks during construction and afterwards to be in high demand.

New assets being constructed will include ports, railroads, roads, airports, dams, and buildings, so insurers and re-insurers selling policies to underwrite that risk (including here in Singapore) ought to benefit from substantial premium revenue growth over the next decade.

For Singapore-based financiers investing in emerging markets, there are likely to be opportunities to jointly invest in this new infrastructure alongside the funds provided under the B3W and BRI schemes.

If so, investors will want a clear and transparent view on the value of these tangible assets as they come online and are added to their portfolios.

In the decade ahead, Singapore's construction industry could benefit as demand for construction machinery, engineering and design services, consultants, contractors and materials increases.

We could also see second-hand equipment dealers, shipping, logistics and export credit sectors also benefit as a consequence of this large increase in investment.

Just as there will be opportunities for asset owners, insurers and re-insurers, financiers, and brokers with the planned B3W- and BRI-funded infrastructure projects, there are also a number of risks that parties should be aware of so that they are able to mitigate and manage it correctly.

For a start, we foresee that a broad basket of commodities including cement, steel, copper, zinc, lead, and other metals are likely to be under further inflationary pressure from the planned global public infrastructure spending between now and 2035.

Already, with the release of pent-up demand from some regions, steel prices are now some 70 to 100 per cent higher than they were just a year ago.

The massive government spending in Singapore and abroad announced in recent annual budgets, to provide economic resilience through post-Covid-19 recovery, are acting as drivers for asset inflation and higher costs, as new demand enters the market at the same time as supply struggles to come back online or increase.

It is possible, therefore, that demand for goods and services here in Singapore may exceed supply for an extended period if there is a sudden boom in global infrastructure spending, partly driven by the B3W and BRI initiatives, putting pressure on construction companies and raising costs.

There are also labour market considerations to keep in mind: many global firms are already experiencing tight competition to attract and retain talent.

BUT, ENSURE GOOD RISK ASSESSMENT

To give just one example, PwC has said it will increase its global headcount by more than a third (100,000 jobs) over the next five years as part of a US$12 billion investment in recruitment, training, technology and deals required to capture a booming global consulting market.

Staff and talent shortages in the construction industry may present a challenge to the delivery of these planned investments since the long lead time to increase expertise means construction companies and specialist consultancies may be unable to adequately meet the rising demand.

If there are unprecedented levels of investment in new infrastructure projects, on top of the expected restarting of existing projects, it could be increasingly difficult for deadlines to be met, as a limited number of construction companies in each market are stretched over too many projects.

There's also an increased risk that assets are incorrectly insured.

This is directly tied to commodity and construction costs in that, as costs rise or fall, current replacement costs change with them - meaning asset owners can be left in a risky position of under or over insurance.

In most sectors across Singapore, asset owners may be more at risk of under- or over-insurance if they have not recently carried out an independent appraisal of their sums insured to ensure they are correct.

Inflation across many commodity classes, as well as supply chain factors such as increased shipping costs, could put many large infrastructure asset owners at higher risk of under-insurance.

For insurers operating locally, without adequate information on values at risk, there is a danger that they could misprice the risks they are underwriting for the B3W- and BRI-funded infrastructure projects across South-east Asia, and hence they may find that the policies they sell on these schemes are unprofitable.

  • The writer is executive director at John Foord.

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